A general journal entry breaks down business transactions so they can be recorded in a general ledger. At the end of the reporting period, once all of the transactions have been recorded in the appropriate journals, these amounts will be posted to the appropriate general ledger account.
Debits and credits are central to making journal entries and you will need to have a firm understanding of this concept before attempting to make ledger entries.
Let's go through an example of how you would enter a business transaction into a general ledger:
On 2 August 2018, a business paid for $1,000 of advertising from the bank account.
- The first thing to do is to identify what type of accounts are involved in this transaction. The first account is Advertising and this is an Expense account. The other account involved is Bank and this is an Asset account.
- The second step is to identify the debit entry and the credit entry. A normal entry for an expense account is a debit entry. As the expense has been incurred, the account is increased and a debit entry will be made. A normal entry for an asset is a debit entry. As money is going out of the bank out, the account is decreasing and the opposite entry to a debit must be made - a credit entry.
- It is important that the entry figures balance, so check that it does. If two accounts are involved then there must be one credit entry and one debit entry. If there are more than two accounts involved the number of debits and credits will be dependent on the nature of the transaction.
- When you go to enter the accounts into the ledger the debit entry must always go first.
So what will the ledger entry look like for the above transaction? Let's take a look:
The ref. no. related to the chart of accounts of the business.
A general ledger contains all of the accounts maintained by an entity (ie all assets, liabilities, equity, revenues, and expenses). It is a record of all of the business transactions completed by an entity during the financial year. This information is used to prepare financial statements.
There are also a number of steps involved in posting to the ledger accounts:
- Determine what ledger account the details of the transaction need to be entered in.
- Decide which side of the ledger you are posting to — the left-hand (or debit) side, or the right-hand (or credit) side.
- Enter the date of the transaction exactly as it was entered in the journal.
- Write the corresponding name of the account from the journal entry.
- Enter the exact amount from the journal into the ledger.
- Write the posting reference in the journal to indicate that the transaction has been posted to the ledger.
Step four states that you need to record the corresponding name of the account from the journal entry in the ledger account. This rule means that you will enter the other journal account name in the ledger journal.
Going back to our example, the original journal is debit Advertising and credit Bank. You will first go to the Advertising ledger and enter the date on the debit side and then enter the account name Bank. This is because the Advertising account balance was increased (there is an increase in the advertising expense) and the amount paid, was from the Bank account.
You would then go to the Bank ledger and enter the date on the credit side and then enter the account name Advertising. This is because the Bank account was decreased (an amount was paid out from the bank account) and the amount was paid in respect of the Advertising.
