So, you want to learn
Bookkeeping!
by Bean Counter's Dave Marshall

Lesson 5
The General Ledger and Journals


Introduction Lesson 1 Lesson 2 Lesson 3 Lesson 4 Lesson 5 Lesson 6 Lesson 7
Bean Counter

General Ledger

In Lesson 4 we used T-Accounts to record the transactions for ABC, the lawn mowing guys. What you didn't know at the time is that we were actually recording transactions in General Ledger Accounts. A General Ledger is just a formal set of T-Accounts. Each account that we want to track and keep up with has a separate page or pages maintained in a record book called the General Ledger. The book is organized into major sections just like the Accounting Equation that we studied in previous lessons. Do you have any idea what these sections might be ? Come on this question is not that hard. The general ledger's major sections are Assets, Liabilities, Owner's Equity, Revenues, Expenses, and Draws.

For each item (account) in our General Ledger, we record the increases and decreases for a period (usually a month) and calculate its ending balance. The ending balance of the account is easily determined by adding the increases and subtracting the decreases from the account's beginning period balance.

Ending Account Balance = Beginning Balance + Increases - Decreases

If you noticed in my above equation I used the terms increases and decreases. If you also recall in our discussion about debits and credits in Lesson 3, I tried to stress the fact that when applied to bookkeeping these terms need to be associated with the types of accounts.

We also should know by now that the type of accounts have a normal balance that is either a debit or credit balance. So actually the above equation is stated in two ways. The equation is stated one way for debit balance accounts, and another way for credit balance accounts.

Using our bookkeeping terms debits and credits, we come up with the following equations:

Debit Balance Accounts Equation

  • Ending Account Balance for Normal Debit Balance Accounts = Beginning Balance + Debits(Increases) - Credits(Decreases)

    Credit Balance Accounts Equation

  • Ending Account Balance for Normal Credit Balance Accounts = Beginning Balance + Credits(Increases) - Debits(Decreases)

    Simply stated a General Ledger is just a book containing the summarized financial transactions and balances of the accounts for all of a business's assets, liabilities, equity, revenue, and expense accounts.

    One other record that goes hand in hand with the general ledger and that we've touched on before and used in the prior lesson is The Chart Of Accounts. Remember The Chart Of Accounts is simply a listing of all the accounts in the general ledger that contains the account's name, a brief description of the account, and usually an account number assigned to aid in recording and tracking transactions.

    It's chief purpose is to serve as an aid (reference) for looking up accounts and their associated account numbers.

    For this lesson, we expanded our chart of accounts by adding account numbers and grouped the numbers into ranges that represent the major type of accounts.

    Chart Of Accounts For ABC Mowing
    Note:The charts of accounts used in this tutorial were purposely kept simple and used to illustrate what the chart of accounts is and how it's used. For those of you that are curious, I've provided a detailed list of the accounts you might encounter in the "real" world.

  • Balance Sheet Accounts
  • Income Statement Accounts

    You might also want to check out my tutorial So, you want to learn Bookkeeping! - Chart Of Accounts.

    Normally a numbering system is set up with a range of numbers for assets, liabilities, equity, revenue, and expense accounts. ABC Assets have a range from 100-199 ;Liabilities a range from 200-299; Equity a range from 300-399, Revenues a range from 400-499, and Expenses a range from 500-599.

    Assets (100-199)
    Account Name:Cash
    Account Number:100
    Description:Currency and checks and balance in bank

    Account Name:Accounts Receivable
    Account Number:110
    Description:Amounts due from customer's for services rendered

    Account Name:Inventory-Office Supplies
    Account Number:115
    Description:On hand supplies of such items as copier & computer paper, pens, pencils and other office supplies

    Account Name:Mowing Equipment
    Account Number:150
    Description:Mowers purchased

    Liabilities (200-299)
    Account Name:Accounts Payable
    Account Number:200
    Description:Amounts owed suppliers for business purchases and expenses

    Account Name:Note Payable-Bank
    Account Number:210
    Description:Mortgages and loans owed to bank

    Equity (300-399)
    Account Name:Owner's Capital
    Account Number:300
    Description:Amounts invested by owner and earned by operations

    Account Name:Owner's Draws
    Account Number:310
    Description:Amounts withdrawn by owner for personal expenses

    Revenue (400-499)
    Account Name:Mowing Revenues
    Account Number:400
    Description:Earnings from mowing yards

    Expenses (500-699)
    Account Name:Advertising Expense
    Account Number:510
    Description:Expenditures for TV, radio, newspaper, and other promotions.

    Account Name:Mulch Expense
    Account Number:520
    Description:Expenditures for mulch used for yard work

    Of course most businesses have many more than our eleven accounts we used for our sample ABC business. Can you think of some other accounts that we might need and want ? How about telephone, utilities, professional fees (that's me), salaries & wages, equipment rental, building rental, maintenance & repairs, contract labor, office equipment just to name a few.

    Back To The General Ledger

    What Information does a General Ledger Page contain ?

    • Name of Account and Account Number
    • Date of Posting
    • Description-additional notes about the entry if needed
    • Posting Reference-journals name (abbreviation) , page, and entry reference
    • Amounts of the debits or credits transferred
    • Current Balance of the Account

    Sample of a General Ledger Page

    The Posting Reference GJ-1-1 refers to:
    GJ-General Journal
    1-Page 1
    1-Entry Number 1

    Click on the posting reference to see the journal entry

    Account Name:Cash Account Number:100
    Date Description Post Ref. Debit Amount Credit Amount Balance
    Jan 1, xxxx Beg Bal       5000
    Jan 5, xxxx   GJ-1-1   1000 4000
    Jan 8, xxxx   GJ-1-2 200   4200
    Jan 10, xxxx   GJ-1-3   400 3800
               
               
               
               
               
               
               
               

    Return To General Ledger Check

    Notice that the account has an amount column for debits (left side or first column) and an amount column for credits (right side or second column).

    General Journal

    Journals are preliminary records where business transactions are first entered into the accounting system. The journal is commonly referred to as the book of original entry. Specialized Journals-are journals used to initially record special types of transactions such as sales, cash disbursements, and cash receipts in their own journal.

    The end result of double entry bookkeeping is having an up to date , in balance, and properly posted Ledger. In our prior lessons we recorded all our debits and credits (transactions) directly in the General Ledger. This would work for a small business that had very few transactions but would become unwieldy for most businesses with any volume of activity. By its very definition the General Ledger is supposed to be a summary record of a business's financial transactions.

    It logically follows that since we only want summary amounts in our Ledger we need to record our detail entries some place else first. What record(s) do we use to do this ? You're right ! Journals are our preliminary records. All our transactions are first entered in a preliminary record called a journal or book of original entry. This process is called journalizing. After our business transactions have been entered in our journal(s), they are then periodically (usually monthly) summarized and totaled and then transferred (posted) to the General Ledger as summary entries.

    What type of information is included in the Journal Record ?

    • Entry Number
    • Date of each transaction
    • Names and/or the account numbers of the accounts to be debited or credited
    • Amounts of the debits and credits
    • Posting Reference-Account Number in the General Ledger
    • Explanation or description of the entry

    The journals contain all the chronological (by date) information necessary to record debit and credit amounts in the accounts of the General Ledger.

    Sample of A General Journal Page

    General Journal Page 1
    Entry No Date Account Name Post Ref. Debit Credit
    GJ-1-1 Jan 5, xxxx Supplies 502 1000  
        Cash 100   1000
    Record Supplies Expense
    GJ-1-2 Jan 8, xxxx Cash 100 200  
        Sales 300   200
    Record Cash Sale
    GJ-1-3 Jan 10, xxxx Advertising Expense 500 400  
        Cash 100   400
    Record Advertising Expense
    GJ-1-4 Jan 20, xxxx Utilities   650  
        Cash     650
    Record Utilities Expense

    Click On the posting reference (account number) to see the entry posted in the sample General Ledger (only for posting reference Account No:100 Cash )

    Do you notice anything odd about any of our entries in our General Journal ? Look at entry number 4 (GJ-1-4). It doesn't have a posting reference. Why not ? The answer is simple. Entry Number 4 has not yet been posted to the General Ledger. This is our way of keeping up with what entries have and have not been posted to the General Ledger.

    Check me out to see if I'm telling the truth General Ledger Check

    Remember ABC ? Yeah, it's the mowing guys.

    Navigation:
    Interactive Links are included in the following Beginning Balances Table.

  • Click on the Underlined Dollar Amounts (Links) to see the Beginning Amounts recorded in the appropriate General Ledger Accounts.
  • ABC's Beginning Account Balances as of December 1, xxxx

    Assets Liabilities Equity
    Cash $5,500
    Accounts Receivable $1,600
    Mowing Equipment $2,500
    Accounts Payable ($2,000)
    Owner's Capital ($7,500)
    Mowing Revenue ($1,000)
    Advertising Expense $200
    Mulch Expense $100
    Owner Draws $600

    Note:Credit balances are indicated by using parentheses ( ).

    ABC Transactions for December xxxx

    Oh Shucks, those mowing guys again ! Notice that this time the check numbers, invoice numbers, and dates were added to the transaction descriptions.

    Navigation:
    Interactive Links are included in the following transaction list.

  • Click on the Journal Entry Link to be taken to the Formal Journal Entry recorded for the transaction in the General Journal. The transaction will be the first one displayed in the Journal.
  • 1. December 2, xxxx ABC mows a client's yard and receives a check # 484 from the customer for $50 for the service provided.
    Journal Entry 1
    2. December 4, xxxx ABC purchases $100 worth of office supplies and stores them in their storage room. The office supply store gives them an invoice # 983 that allows them to pay for them in 15 days (on account).
    Journal Entry 2
    3. December 8, xxxx ABC places an ad in the local newspaper receives the invoice from the supplier # 555 and writes a check # 900 for $25 to the newspaper.
    Journal Entry 3
    4. December 10, xxxx ABC purchases five mowers for $10,000 and finances them with a note from the local bank.
    Journal Entry 4
    5. December 15, xxxx ABC mows another customer's yard and sends their customer a $75 bill (invoice # 1000 ) for the service they performed. They allow their customer ten (10) days to pay them for this service (on account).
    Journal Entry 5
    6. December 20, xxxx the owner of ABC needs a little money to pay some personal bills and writes himself a check # 901 for $500.
    Journal Entry 6
    7. December 22, xxxx ABC pays the office supply company $100 with a check # 902 for the office supplies that they charged (promised to pay invoice # 983).
    Journal Entry 7
    8. December 27, xxxx ABC receives a check # 55 from the customer who they billed (invoiced # 1000) $75 for services and allowed 10 days to pay.
    Journal Entry 8
    9. December 29, xxxx ABC purchased some mulch for $60 and received an invoice # 777 from their supplier with terms of 15 days. The mulch was used on a customer's yard.
    Journal Entry 9
    10. December 31, xxxx ABC bills (prepares an invoice # 1001 ) the customer $80 for the mulch and mowing his yard and receives a check for $80 # 555 from the customer.
    Journal Entry 10

    General Journal

    The transactions for ABC are presented below in a formal General Journal. Review the entries and if you have any questions go back to Lesson 4 for detailed discussions for each of the transactions.

    The reference numbers refer to General Journal, Entry Number, and Page Number. GJ-1-1 means GJ (General Journal), Page 1, and Entry 1. The Posting Reference (Post Ref.) is the General Ledger Account Number taken from our Simple Chart Of Accounts.

    Navigation:
    Interactive Links are included in our following General Journal.

  • Click on the Underlined Entry Number (GJ-1-1, etc.) to Return or be Taken To the Transaction Listing.

  • Click on the Underlined Account Name Link or the Underlined Posting Reference (Account Number) Link to see the entry posted (transferred) from the General Journal to The General Ledger Account.
  • General Journal Page 1
    Entry Number Date Account Name Post Ref. Debit Credit
    GJ-1-1 Dec 2, xxxx Cash 100 50  
        Mowing Revenue 400   50
    Record customer check # 484 and revenue from mowing job.
    GJ-1-2 Dec 4, xxxx Inventory-Office Supplies 115 100  
        Accounts Payable 200   100
    Record invoice # 983 for office supplies purchased on account.
    GJ-1-3 Dec 8, xxxx Advertising Expense 510 25  
        Cash 100   25
    Record check # 900 for advertising services
    GJ-1-4 Dec 10, xxxx Mowing Equipment 150 10000  
        Note Payable-Bank 210   10000
    Record purchase of mowing equipment financed by bank note.  
    GJ-1-5 Dec 15, xxxx Accounts Receivable 110 75  
        Mowing Revenue 400   75
    Invoice (# 1000) customer on account for revenue earned from mowing yard.
    GJ-1-6 Dec 20, xxxx Owner's Draw 310 500  
        Cash 100   500
    Record owner's draw check # 901.
    GJ-1-7 Dec 22, xxxx Accounts Payable 200 100  
        Cash 100   100
    Record check # 902 paid to supplier for office supplies charged on account (invoice # 983).
    GJ-1-8 Dec 27, xxxx Cash 100 75  
        Accounts Receivable 110   75
    Record customer's check # 55 received from customer on account.
    GJ-1-9 Dec 29, xxxx Mulch Expense 520 60  
        Accounts Payable 200   60
    Record mulch purchase/expense (invoice # 777) with credit terms.
    GJ-1-10 Dec 31, xxxx Cash 100 80  
        Mowing Revenue 400   80
    Record check # 555 received from customer paying our invoice #1001 for mowing services.

    ABC's General Ledger

    Navigation:
    Interactive Links are included in the following General Ledger Accounts.

  • Click on the Underlined Posting Reference Link (GJ-1-1,etc.) in the General Ledger Account to Return or Be Taken to the Related Journal Entry.

  • Click on the Underlined Beginning Balance (Beg Bal.) Link to see where we got the Beginning Balances for our Accounts.

  • Click on the Underlined Balance Link to see the entry entered in the Trial Balance.
  • ABC's General Ledger with the transactions posted (transferred) from the General Journal follows.

    Assets

    Account Name:Cash Account Number:100
    Date Description Post Ref. Debit Credit Balance
    Dec 1 Beg Bal.       5500
    Dec 2   GJ-1-1 50   5550
    Dec 8   GJ-1-3   25 5525
    Dec 20   GJ-1-6   500 5025
    Dec 22   GJ-1-7   100 4925
    Dec 27   GJ-1-8 75   5000
    Dec 31   GJ-1-10 80   5080
               
    Account Name:Accounts Receivable Account Number:110
    Date Description Post Ref. Debit Credit Balance
    Dec 1 Beg Bal.       1600
    Dec 15   GJ-1-5 75   1675
    Dec 27   GJ-1-8   75 1600
               
               
               
               
               

    Account Name:Inventory-Office Supplies Account Number:115
    Date Description Post Ref. Debit Credit Balance
    Dec 1 Beg Bal.       0
    Dec 4   GJ-1-2 100   100
               
               
               
               
               
               
    Account Name:Mowing Equipment Account Number:150
    Date Description Post Ref. Debit Credit Balance
    Dec 1 Beg Bal.       2500
    Dec 10   GJ-1-4 10000   12500
               
               
               
               
               
               

    Liabilities

    Account Name:Accounts Payable Account Number:200
    Date Description Post Ref. Debit Credit Balance
    Dec 1 Beg Bal.       (2000)
    Dec 4   GJ-1-2   100 (2100)
    Dec 22   GJ-1-7 100   (2000)
    Dec 29   GJ-1-9   60 (2060)
               
               
               
               
    Account Name:Note Payable-Bank Account Number:210
    Date Description Post Ref. Debit Credit Balance
    Dec 1 Beg Bal.       0
    Dec 10   GJ-1-4   10000 (10000)
               
               
               
               
               
               

    Equity

    Account Name:Owner's Capital Account Number:300
    Date Description Post Ref. Debit Credit Balance
    Dec 1 Beg Bal.       (7500)
               
               
               
               
               
               
               
    Account Name:Owner's Draws Account Number:310
    Date Description Post Ref. Debit Credit Balance
    Dec 1 Beg Bal.       600
    Dec 20   GJ-1-6 500   1100
               
               
               
               
               
               

    Revenue & Expense

    Account Name:Mowing Revenue Account Number:400
    Date Description Post Ref. Debit Credit Balance
    Dec 1 Beg Bal.       (1000)
    Dec 2   GJ-1-1   50 (1050)
    Dec 15   GJ-1-5   75 (1125)
    Dec 31   GJ-1-10   80 (1205)
               
               
               
               
    Account Name:Advertising Expense Account Number:510
    Date Description Post Ref. Debit Credit Balance
    Dec 1 Beg Bal.       200
    Dec 8   GJ-1-3 25   225
               
               
               
               
               
               

    Account Name:Mulch Expense Account Number:520
    Date Description Post Ref. Debit Credit Balance
    Dec 1 Beg Bal.       100
    Dec 29   GJ-1-9 60   160
               
               
               
               
               
               

    Trial Balance

    We used a Trial Balance at the end of Lesson 4 to check our postings. I just didn't tell you at the time. Let's review the formal definition. A Trial Balance is a listing of all the accounts appearing in the general ledger with the dollar amount of the debit or credit balance of each. It is used to make sure the books are "in balance" -total debits and credits are equal.

    A trial balance is just a worksheet that bookkeeper's and accountants prepare from the General Ledger to check that the books (General Ledger) are in balance (Debit Account Balances = Credit Account Balances).

    Let's prepare our trial balance for ABC at the end of December.

    Navigation:
    Interactive Links are included in our Trial Balance.

  • Click on the Underlined Account Name Link to go to the Ending Balance in the General Ledger Accounts.
  • Account Debit Balances Credit Balances
    Asset Accounts
    Cash 5080  
    Accounts Receivable 1600  
    Inventory-Office Supplies 100  
    Mowing Equipment 12500  
     
    Liability Accounts
    Accounts Payable   2060
    Note Payable-Bank   10000
     
    Equity Accounts
    Owner's Capital   7500
    Owner's Draws 1100  
     
    Revenue Accounts
    Mowing Revenue   1205
     
    Expense Accounts
    Mulch Expense 160  
    Advertising Expense 225  
     
    Totals 20765 20765

    Sure enough our debit balances equal our credit balances. How did we determine what account balances had a debit balance and what account balances had a credit balance ? It was easy because we used the parentheses ( ) to denote that an account balance was a credit. Therefore, all the balances that are not enclosed in parentheses make up our Debit Balance Accounts and all the balances enclosed in parentheses make up our Credit Balance Accounts.

    So you know !
    We covered this earlier; but, it's worth repeating. In this lesson we used parentheses ( ) to indicate credits. Remember that this is just one of the methods used for indicating debits and credits and whether an account's balance is a Debit or a Credit.

      Ways and symbols you might run across are:
    • Dr for Debit and Cr for Credit
    • + (Plus Sign) for Debit and - (Minus Sign) for Credit
    • No Bracket for Debit and < > (Brackets) for Credit
    • No Parentheses for Debit and ( ) (Parentheses) for Credit
    Symbol Indicates a Debit Indicates a Credit
    Dr / Cr Dr Cr
    + / - + -
    No Bracket / Bracket < >   < >
    No Parentheses / Parentheses ( )   ( )

    Note: The plus (+) and minus (sign) are often used by accounting and bookkeeping programs to indicate debits and credits. Don't get confused and think that the plus sign means an increase or that the minus sign means a decrease. They do not. In this case, they are simply symbols that mean either a debit or a credit.

    Normal Balances for the Types of Accounts

    Just to keep you on your toes - do you recall what type of accounts normally have a debit or credit balance ?

  • Assets, Expenses, and Draws normally have Debit Balances.
  • Liabilities, Owner's Capital, and Revenue accounts normally have Credit Balances.

    Need proof ?
    Refer back to our preceding Trial Balance for ABC. The Trial Balance has a column for Debit Balance Accounts and a column for Credit Balance Accounts.

    Sure enough, our Assets, Owner's Draws, and Expense Type of Accounts are listed in the Debit Balance Column. Likewise, our Liability, Owner's Capital, and Revenue Type of Accounts are listed in the Credit Balance Column.

    How do you initially determine that an Account has a Debit or Credit Balance ? This is simply a matter of determining if the Account has more Debit Amounts Posted or More Credit Amounts Posted. If More Debits Than Credits have been posted to the Account, the Account will have a Debit Balance. Likewise, if More Credits Than Debits have been posted to the Account, the Account will have a Credit Balance.

    You have now been introduced to some of bookkeeping and accounting's formal records, namely the General Ledger and General Journal. You could get by with just these two records, but if your business like most has many transactions instead of the few that ABC had you'd be spending a heck of a lot of time recording and posting. What's the solution to streamlining the recording and posting processes.

    Remember when I introduced Journals in this lesson where I briefly mentioned Special Journals ? Well, they are the solution.

    Some Special Journals a business will normally have are:

    • Cash Receipts Journal
    • Cash Disbursements Journal (Check Register)
    • Payroll Journal
    • Sales Journal
    • Purchase Journal
    • General Journal

    All these journals are designed to record special types of business transactions and post the totals accumulated in these journals to the General Ledger periodically (usually once a month).

    Instead of using just one journal to record all our business transactions we use many. Although this tutorial is not going to discuss the Special Journals I wanted to make you aware of them and the purpose they serve.

    If you want to learn more about Special Journals, my So, you want to learn Bookkeeping - Special Journals tutorial covers this topic.

    Before we move on to Lesson 6, since they say that a picture's worth a thousand words, let's use a picture to illustrate the flow of information (business transactions) into our bookkeeping records. You're right Financial Statements haven't been discussed, but guess what's coming in Lesson 6 ?

    Source Documents

    provides the initial data about business transactions.

    Journals

    use the information from the source documents to create a chronological listing of all business transactions and detailed information about each transaction.

    General Ledger

    uses the information transferred from the journal(s) to summarize the data into individual accounts.

    Trial Balance

    uses the information from the General Ledger to summarize the data to use for preparing the Financial Statements.

    Financial Statements

    uses the summarized data contained in the Trial Balance to prepare the business's financial reports .

    Where's that darn light and quiz ? This reminds me of an ole American commercial about hamburgers with an ole lady driving up to a fast food window and after being served asking "Where's the beef ?". I do think you deserve a break; but, before we go get back under the light. Just a few questions and then you're free to take a break.

    Basic Bookkeeping-General Ledger and Journals

    We've been gradually climbing the ladder of bookkeeping knowledge. We're not at the top but we're getting there. Hang in there only a few more lessons left.

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