The general ledger : a book containing a record of each account

During the month, the journal entries made to record the January transactions would be posted from the general journal to the general ledger. The general ledger is a book containing a record of each account. (See boxed section below Figure 6.8.) Posting is simply the process of transferring the information from the general journal to the individual account pages in the general ledger.

The general ledger

The cash account, which probably is the first page (or pages) in the general ledger, would look like the example in Figure 6.8:The General Ledger

Notice that the account has two sides. As before, the left side is used to record the debits and the right side is used to record the credits.

Notice that the sample ledger account in Figure 6.8 lists an account number, 101 in the upper right hand corner. Every Asset, Liability, Owner’s Equity, Revenue, and Expense item has a number assigned to it. Usually, the Assets are the 100s, the Liabilities the 200s, the Owner’s Equity the 300s, the Revenues the 400s, and the Expenses the 500s. In the ledger, each item (or account) has a separate page with a separate number. In this case, cash has been assigned the number 101, and all cash transactions are recorded on this page.

The accounts are usually numbered for a variety of reasons; for example, to facilitate referencing or for use instead of the account name. This listing of accounts is normally called the chart of accounts.

After posting the first journal entry (January 1), the cash account would look like Figure 6.9:

the cash account

The date of the transaction is entered in the date column on the left-hand side since the entry was a debit. J-1 is entered in the reference column and that tells you that the journal entry that recorded the transaction can be found on page one of the general journal. Sixty-thousand dollars is entered in the left-hand amount column.

The other half to this first journal entry (the credit) would be posted to the Owner’s Investment account and would be recorded as shown in Figure 6.10:

Owner’s Investment account

Of course, in this instance the data is posted to the right-hand column since the entry is a credit to the account. Now after posting the first entry, the general journal would appear as shown in Figure 6.11:

journal

You see that the account numbers for the cash and Owner’s Investment accounts have now been entered in the reference column of the journal. This step completes the posting process for the first journal entry. The same procedure is repeated until all the journal entries have been posted to the general ledger.

After posting all the journal entries recorded in January, the cash account would look like Figure 6.12:

debit credit

If you add the debit and credit sides of the cash account, you will find that the debits total $54,000 and the credits total $34,600. The difference between these two figures is $19,400. You could say that the cash account has a debit balance at the end of January. Remember, in order to increase an Asset, we record a debit. If at the end of the period there is a debit balance in an Asset account, that means that there is a positive balance, or in this case with cash, “money in the bank.” Debits and credits will generally not be equal for each individual account; but once all the accounts are considered together, the debits and credits should be equal. This is reflected on the trial balance for the cash account before adjustments. A discussion of the trial balance follows below.

Trial Balance

Typically, accountants and bookkeepers will prepare a trial balance from the general ledger after all transactions have been recorded and posted. A trial balance is merely a list of all accounts in the general ledger that have a balance other than zero, with the balance in each account shown and the debits and credits totaled. A trial balance of Solana Beach Bicycle Company at January 31, 2006, would look like the one below in Figure 6.13:

trial balance

A trial balance is prepared by first turning through the pages of the general ledger and locating each account with a balance other than zero, as in Figure 6.12 where the cash account had a debit balance of $19,400. Once it is determined what the balance in each account is, this is noted on the trial Balance Sheet. Generally speaking, the trial balance is prepared for two reasons: the first reason is to determine whether the total debits equal the total credits. If they do not equal, some kind of error has been made either in the recording of the journal entries or in the posting of the general ledger. In either case, the error must be located and corrected. The second reason is to facilitate the preparation of adjusting entries (discussed in the next section), which are necessary before the financial statements can be prepared.

You should note that if Solana Beach Bicycle Company had been in operation prior to this year, a Retained Earnings figure would appear on the present trial balance. The Retained Earnings account will show the beginning Retained Earnings until the accountant closes the accounts that affect the Retained Earnings by the amount of the profit or loss for the period (month, quarter, or year). For more information on closing accounts, see Closing Journal Entries, page 93.