A company’s general ledger is a record of every transaction posted to the accounting records throughout its lifetime.
The general ledger is the “big picture” financial document and contains everything necessary to prepare financial statements, including assets, liabilities, equity, revenue and expenses.
The general ledger also lists every account name and number in the chart of accounts, along with each debit and credit entry for a particular account. The general ledger is used to generate a trial balance, and the adjusted trial balance is used to produce the financial statements.
Chart of Accounts
Every business creates a chart of accounts, which is a list of each account needed to manage the business, and a corresponding account number. As the company grows, the accounting department may add, subtract, or change the accounts used to post transactions.
Assume, for example, that a gift shop creates a chart of accounts, including account #1000 cash and #3000 inventory- greeting cards. Accounting software such as QuickBooks, provide the user a standard chart of accounts, or a chart of accounts based on the company’s industry.
Once the chart of accounts is determined, the gift shop can post accounting transactions using the concept of double-entry accounting. Double-entry accounting requires an accountant to use these rules to post a journal entry:
- Debit entries: Debit entries are posted on the left side of each journal entry. Asset and expense accounts are increased with a debit entry, with some exceptions.
- Credit entries: Credit entries are posted on the right side of each journal entry. Liability and revenue accounts are increased with a credit entry, with some exceptions.
- Totals: The total dollar amount of debits must always equal credits. The number of debit and credit entries, however, may be different.
- One of each: Every journal entry has at least one debit and one credit entry.
Assume, for example, that the gift shop purchases $3,000 in greeting cards for cash on January 5th. The journal entry is:
Once all of the accounting transactions are posted for January, the accounting department generates a trial balance, which is a listing of each account and the account balances. The trial balance includes the $62,000 ending balance in cash, and a trial balance may require adjustments and corrections. The adjusted trial balance is used to generate the financial statements.
|#3000 Inventory- greeting cards||$3,000|
(To record the purchase of greeting cards for cash on 1/5)
This entry increases an asset account (inventory) with a debit, and decreases cash, which is also an asset account.
This article on the QuickBooks community shows how accounts are affected by debits and credits.
The Balance Sheet Equation
The balance sheet is one of the basic financial statements, and the report is generating using the balance sheet equation:
Assets = liabilities + equity
Double-entry accounting requires that the dollar amounts posted to assets, liabilities, and equity must keep the formula in balance. Here is the impact of the greeting card purchase:
Assets = liabilities + equity
+$3,000 = $0 + $0
The formula stays in balance. In fact, accounting software programs require users to enter transactions that keep the balance sheet formula in balance. If not, the software reports an error.
The general ledger detail for a particular account may include dozens or even hundreds of transactions in a given month. The cash account typically has the most activity of any account, since many transactions require a debit or credit entry to cash.
Here is an example of the cash general ledger account:
|1/12||Sales collected in cash||$25,000|