Back To CourseFinancial Accounting: Help and Review
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Every business has a variety of expenses and ways of earning income, just as you have different bills and different income streams. Like you, a business may have utility bills, rent expenses, and vehicle repair costs, while its income may come from different places, such as sales, interest from bank accounts, loans, or from selling items that the company owns. You might record these events as they occur in your life in your check register. For a business, all of these financial events, or transactions, must be recorded in their financial books. The general ledger is a company's master account book, with all of the various accounts in one place. The general ledger is used in conjunction with a couple of other accounting tools.
Every financial transaction in which a company engages is first recorded in a general journal (which is different from the general ledger) in chronological order. The journal is the first place where transactions are recorded, so it is organized by date. This is efficient for doing research about transactions that occurred on a particular date, but it makes it a little more challenging to locate, for example, all the transactions that involved cash or just the transactions pertaining to accounts receivable.
As you can see from the image of the general journal in Figure 1, the cash transactions are scattered around on different lines of the journal. This may not seem too bad when there are only four entries, but it becomes a little more difficult to find just the cash entries when there are 54 transactions, or 154! In order to group all the transactions of a similar kind in one place, transactions are rewritten, or posted, to their respective accounts in the general ledger.
The general ledger is where the company records all the information for its various income streams and expense types into separate accounts, so that all the credits and debits relating to that particular type of transaction can be entered in one place and kept balanced. This keeps the information organized not only by date, but also by account type.
This image, which we call figure two for reference, is a general ledger showing a few of the possible accounts a company might use. Let's look at an example: if the general journal shows a cash debit of $500, and cash credits of $65 and $1,500, as shown in Figure 1 above, then these cash transactions are posted to the Cash Account as shown in Figure 3, below. Now, we can easily see what is going on with our cash.
In this example, the cash account started with a debit balance of $2000 on January 1, and ended with a debit balance of $935 on February 7, after posting the three entries listed. When posting to an account in the general ledger, include the date of the transaction, a brief explanation of the transaction, a posting reference, the amount of the debit or credit, and the new running balance for the account. The posting reference indicates where the transaction was originally documented, such as page one of the general journal, which might be written as 'journal, pg 1' or 'J1'.
While most companies use the most common accounts, such as a cash account or an office supplies account, exactly which accounts are included in the general ledger depends upon each individual company and the nature of its business. For example, a landscaping company that owns trucks will usually have a vehicle maintenance and repairs account, where it lists maintenance and other related vehicle expenses, while a service company that does all its business over the phone and owns no vehicles would not. The list of accounts that a company has is called the Chart of Accounts. This list is used to determine which accounts need to be used in the general ledger and in which order.
The general ledger accounts are usually assigned an account number and are listed in the same order that they appear in the chart of accounts. Asset accounts are assigned numbers starting with a '1', such as 10, 100, or 10000. Liability accounts generally start with a '2', owner's equity accounts start with a '3', revenue accounts start with a '4' and expense accounts start with a '5'. Keep in mind that there are various kinds of assets, liabilities, equity, revenues, and expenses, so there will be an account in the general ledger for each asset, liability, equity, revenue, and expense that the company uses. You can see that in Figure 2, the cash account is assigned the number 101, the accounts receivable account is assigned account number 105, and the office supplies account is 110. These are all asset accounts, so they all begin with a '1'. Individual transactions within each account, however, are listed chronologically by the date they occurred.
In addition to corralling all the entries of one kind into their own accounts, the general ledger is also used to create the trial balance, where all the accounts from the general ledger are listed along with their ending account balances, in order to check for accounting errors and unbalanced accounts. For example, if the amount in Figure 3 was the final balance in the cash account it would be listed on the trial balance with the debit column because it is in the debit column in the general ledger.
Let's review. All the accounts that the company has and lists in its chart of accounts are created in the general ledger, generating a sort of master account book, with a running balance. Entries from the company's journals are posted to the general ledger accounts by account type. The posting entry should include the transaction date, description, posting reference, amount, and new balance. The account names and the associated balances listed in the general ledger are then used to create the trial balance document.
|General ledger||a company's master account book, with all of the various accounts in one place and used in conjunction with a couple of other accounting tools|
|Transactions||business records that must be recorded in financial books|
|General journal||every financial transaction in which a company engages is first recorded in chronological order|
|Posted||transactions are rewritten into their respective accounts and grouped in one place|
|Posting reference||indicates where the transaction was originally documented|
|Chart of Accounts||list of accounts that a company has, accounts need to be used in the general ledger and in which order|
|Numbered accounts||asset accounts start with a '1'|
|liability accounts start with a '2'|
|owner's equity accounts start with a '3'|
|revenue accounts start with a '4'|
|expense accounts start with a '5'|
|Trial balance||all the accounts from the general ledger are listed along with their ending account balances, to check for accounting errors and unbalanced accounts|
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Back To CourseFinancial Accounting: Help and Review
18 chapters | 235 lessons