Understanding General Ledger Accounting

Understanding General Ledger Accounting

General Ledger Accounting is a systematic process of identifying, recording, classifying and summarizing the business transitions in a significant manner and interpreting the results.

Business Transaction

A transaction is when sale and purchase incurred between two parties on mutually agreed terms. Business transaction initiates the accounting process of recording in the accounting system.

When you record transactions, you will need to follow certain prescribed accounting rules and formats. Initially, when a transaction happens it, you will need to record it in your accounting journal.

Journal Entries

In your bookkeeping or accounting system, your transactions must be manually entered into a general accounting journal that contains a complete history.

The General Journal, The General Ledger, Trial Balance

The General Journal

The journals are used to keep a chronological record of the financial transactions. In Journal double entry bookkeeping.  Entries are recorded by debiting one or more accounts and crediting another one or more accounts with the same total amount. The total amount debited and the total amount credited should always be equal.

The general journal is the master journal that all company transactions or journal entries are recorded in. A typical general journal has at least five columns: one for the date, account titles, posting reference, debit, and credit columns.

General Journal

Date Account Title and Description PR  Debit Credit
3/5/2015 Inventory         11,000
 -Cash         11,000
To Record Inventory Purchase

The General Ledger

The general ledger is a set of accounts containing all the transactions. General ledger includes the accounts of all assets and liabilities such as cash, accounts receivable, equipment, land, accounts payable and customer deposits. Transactions are recorded in their relevant accounts in ledger taken from the general journal. Journal is the primary document to record the transactions then these operations are recorded in the ledger. The net balances of the all the accounts in the ledger are used to create the trail balance at the specific end to term usually when you need to prepare the financial statements.

The General ledger contains the control accounts and their subsidiary accounts. Control accounts are summary accounts, the details that support the balance in the summary account are contained in a subsidiary ledger. Such as accounts payable could be a control account in the general ledger, and there will be a subsidiary ledger which contains each customer’s activity. Inventory, Equipment, and Accounts receivable could also be controlled accounts and for each, there will be a subsidiary ledger containing the supporting detail.

Difference between General Journal and General Ledger

The general journal is considered as the first book of entry. The journal is the first place where transactions are recorded. In the era of computers and software, this typical method of recording the transaction in the journal is no longer in use. Ledger is the T shape account use to track the record of all relevant accounts. Following is the example of T account or ledger of cash account which is showing the cash transactions. The balance of 11,000 is showing the receipts and, negative balance of 4500 is showing the payments.

Cash
No No
1 1000 2 700
3 5000 5 600
15 2000 8 700
19 3000 10 500
17 1000
21 1000
Total 11000 Total -4500

Trial Balance

The Age Trial balance is a list of all ledger accounts. Total of accounts with the debit balances is equal to the total of accounts with credit balances. This proof of the equality of the debit and credit balance is known as trial balance.

All the balances at the end of specific term when you need to prepare financial statements are transferred in the trial balance. Debit balances in the left column and credit balances in the right column. The total of the both column should be equal. If the total of the debit column does not equal the total value of the credit column then this would show that there is an error in the ledger accounts.

Purpose of a Trial Balance

Trial Balance acts as the first step in the preparation of financial statements. It is a working paper that accountants use as a basis while preparing financial statements.

Trial balance ensures that for every debit entry recorded, a corresponding credit entry has been recorded in the books in accordance with the double entry concept of accounting. If the totals of the trial balance do not agree, the differences may be investigated and resolved before financial statements are prepared

Trial balance ensures that the account balances are accurately extracted from accounting ledgers. Trail balance assists in the identification and rectification of errors. Following is the example of manual trail balance.

 

 

XYZ LTD

Trial Balance as on 30 June 2016
Account Title RF Debit Credit
Cash 5 10000
Debtors 9 15000
Furniture & Fixture 15 40000
Sales 20 25000
General & Admin Expense 25 18000
Creditors 35 8000
Capital 50 50000
Total 83000 83000

 


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