Lesson Objectives:- How journal entries feed into posting to the general ledger.
- The purpose of the general ledger
- Posting balances using the T-account format.
We are now on the second step of the accounting cycle: Summarize accounts, General Ledger posting, as shown in the image above.
Think of journal entries as a set of instructions for the general ledger posting as they will define the amounts that you need to record. The general ledger is essentially the compilation of all transactions that have taken place and it allows the company to see the balances for each account.
Journal entries require you to record each transaction by using debits and credits. As we looked at examples in the previous lesson, the journal entries are basically just a listing of all of the transactions that take place in the company. While the company can see the physical reporting of the transactions by looking at the journal entries, it doesn't give them a full picture.
What the transaction analysis and journalizing doesn't reflect is the actual balance of each account. For example, after the cash account is debited by a certain amount, we would want to know what the balance is. The same goes for credits, the company needs to be able to look at the balance after the transaction takes place.
The general ledger quantifies an ending balance for every account that exists within the company. The analysis and journalizing step is essentially a preface for the second step of posting to the general ledger, as you must know what changes are taking place before you can post the final balances. Any asset account, liability account or equity account will show up on the general ledger as it will show all accounts.
The graphic above gives you an idea of the different types of transactions and accounts that are covered in the general ledger. For the purpose of this lesson, I won't detail each individual account, but I will demonstrate how to post to the general ledger, based on the information from the journal entries. The examples you will see in this lesson are just a glimpse into the many accounts that you will would work with in the real world.
Let's look at three different examples of general ledger entries and I will explain how to post them to their subsequent T-accounts. First, the entries are journalized with the debit and credit amounts as you can see in the table above.
Each transaction has a reference number starting with the number 1 for the most liquid asset of cash. These reference numbers will carry over when we put the general ledger information in the T-account format.
The ledger accounts use the T-account format in order to show the balances in all of the accounts. They are called T-accounts because they look just like the letter T. Now, let's post the general ledger entries to their subsequent T-accounts:
As you can see from each example, the debits and credits are carried over from the general ledger to the appropriate side of the T-account format. Debits are always recorded on the left and credits on the right. The total balance is summed up at the bottom of each account with a line on the side that shows a balance.
In summary, if the company wants to know the balance of a certain account, they will look to the general ledger T-accounts to determine this information.