On my previous post [How to set-up General Ledger and Opening Entries], you have just seen how easy it is to add an account to the Chart of Accounts. You simply slip it into the proper section, placing it so that it will print out on the report in a logical place. When you are setting up a Chart of Accounts, you include all the standard accounts the business will need. However, as time goes on, there will be changes that require modifications to the Chart of Accounts. In this post I would discuss about how to add and eliminate accounts in general ledger.
Adding Other Accounts To The General Ledger
Adding other [one or more] accounts tp the General Ledger is just as easy as setting up aaccounts at the first time. If you haven’t read my previous post about setting up general ledger you can read it [here].
A manufacturing company provides the best example of the kinds of changes that can occur. A new company begins with one product but then begins to add others. All the products could be included in one Inventory account, but it may be more efficient to set up a new account for each one.
Another thing to consider with a manufacturing company is the way the products are put together. An inventory account for the raw materials required to produce the merchandise is often needed. Another inventory account for the finished goods is set up, and still another might be necessary for the merchandise that is still in the production stage.
These accounts would appear on the Chart of Accounts as follows:
- 1200 Inventory–Raw Materials
- 1210 Inventory–Finished Goods
- 1220 Inventory–W.I.P. (Work in Progress)
You should also have some knowledge of a few different companies and their individual requirements.
A construction firm would have an account set up for Inventory–Land, for any parcels of property where future housing developments were to be built. The same company would have an asset account for Construction in Progress and expense accounts for Masonry, Carpentry, Plumbing, Electrical, and all the other things that it might hire subcontractors to do.
Nonprofit organizations have accounts set up in all sections of the Chart of Accounts to monitor funds, grants, pledges, and donations.
Keep in mind that although a particular company or business may have its own customized Chart of Accounts, its accounting procedures will not vary from what you are learning in this site.
If you are a new bookkeeper coming into an existing company, studying the Chart of Accounts will give you a good idea of how the business is operated.
Eliminating Accounts From The General Ledger
Eliminating an account from the General Ledger is not as simple as adding one. First of all, any account that has had posting activity should not be eliminated in the current year, even if it is no longer needed. It is best to wait until the current year is closed out, and then eliminate the account at the beginning of the new year before any transactions are posted.
In a computerized system, some accounts are considered control accounts. This means that the function of other accounts is related to them; the computer will not allow you to eliminate a control account. For example, Accounts Receivable and Accounts Payable are control accounts because they hold the totals for credit sales and credit purchases. Even if you don’t have credit sales or credit purchases, a computerized accounting system would not allow you to delete either of these accounts.
Although you may have extraneous accounts in your General Ledger, they are not a problem. If an account has a zero balance, it is not printed in a computerized system unless it is specifically requested. If you are running a manual system, you are transferring the balances from the General Ledger to the financial statements. Again, an account with a zero balance does not need to be listed.
Sometimes you might want to reclassify an income or expense. You accomplish that by taking the balance from the old account and transferring it in full to the new account. If the old account has a debit balance, your General Journal Entry would credit that amount and then debit the same amount to the new account. For example, if you have very little activity in the Postage account, you might want to transfer it to the Office Expense account.
After a transferring entry, the two General Ledger accounts would look like this:
Date Ref No. Description Debit Credit
Beginning Balance 0.00
4-30 4-10 Cash Disbursements 33.00
7-30 7-11 Transfer to 6300 33.00
Ending Balance 0.00
6300 Office Expense
Beginning Expense 0.00
Opening Entry 200.00
4-30 4-20 Cash Disbursements 57.00
5-31 5-10 Cash Disbursements 110.00
6-30 6-12 Cash Disbursements 60.00
7-30 7-11 Transfer from 6290 33.00
Ending Balance 460.00
Remember that the Chart of Accounts and the General Ledger are both functional and flexible. You can add accounts and eliminate accounts as needed. Just take care when transferring balances from one account to another that the entries offset each other.