General Ledger is the basic structure of the accounting system. It is the place where accounts can be examined and adjusted. At the end of each month, the balances in the General Ledger accounts are transferred to the Balance Sheet and the Profit and Loss Statement. Through this post you can learn how to set-up General Ledger and make opening entries for the first time.

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First of first, perhaps, the most important thing to remember about the General Ledger is this: The General Ledger must always be kept in balance. That means that the debits will always offset the credits, and vice versa.

Initially, the Chart of Accounts is placed into the General Ledger as it was created. It remains in the same order. Each account is listed on a separate page in the General Ledger, and that page has columns or spaces for the transactions that will be posted during the month and the year.

Each General Ledger account will be set up with the following column headings:

  • Date. This column is used to record the date.
  • Reference No. This column is used to record the entry numbers posted to that account. During the month, numerous entries are posted to the General Ledger. Usually these are numbered so that if a question arises, the entry can be more easily identified and located.
  • Description. This is a brief explanation of the entry that has been posted.
  • Debit or Credit. The amount of the transaction will be recorded in either the Debit or the Credit column. The ending balance of the account will also appear in either the Debit or the Credit column, depending on the balance of the account when it is being reviewed.

Pads of columned ledger paper can be purchased at any office supply store to help you set up your General Ledger pages.

Here is a sample of how the cash accounts will look when they are transferred to the General Ledger:

 

Date         Ref. No.                     Description                 Debit     Credit

1000        Checking Account     Beginning Balance       0.00
Ending Balance            0.00
1010        Saving Accounts        Beginning Balance       0.00
Ending Balance            0.00

 

All the accounts in the Chart of Accounts will be set up in exactly the same way. Since no transactions have been posted, there are no entries in the Date or Reference No. columns, and the balances of the accounts are still at zero. However, the account balance will change each time an entry is posted to the account.

 

More About Debit And Credit Accounts

A debit is a positive number. A credit is a negative number. Sometimes these numbers are referred to as black or red. Example: $1,000.00 [=plus one thousand dollars] or $1,000.00 [= minus one thousand dollars]. Years ago, bookkeepers recorded debits with black ink and credits with red ink.

When a business was said to “be in the red,” it meant that it had too many negative numbers and was in a loss situation. Accounting ledgers at that time were done manually. The term “in the red” is still used occasionally with regard to bank accounts, but accounting systems no longer use the term or that distinction.

[Info_Box]In modern accounting systems, a negative number has a minus sign in front of it or is shown in parentheses, for example, –200.00 or (200.00). This alerts you to the fact that the number is a credit rather than a debit. This does not mean that the account is registering a loss; a credit balance today simply means that it is an offset to a debit.[/Info_Box]

Every account in the General Ledger has either a debit or a credit balance. When these are all added together, the end result should be zero because they are meant to offset each other.

Some accounts normally carry a debit balance. On the other side, some accounts normally carry a credit balance. Before you post the opening entry for the bookstore, you must determine which of the listed amounts will be credited to the designated General Ledger account and which will be debited.

The following lists the accounts in the General Ledger and indicates whether it normally carries a debit or a credit balance:

  • Accounts that normally carry a debit balance, referred asDebit Accounts”: Checking Account, Saving Accounts, Accounts Receivable, Inventory, Deposits, Land, Building, Leasehold Improvements, Vehicles, Furniture & Fixtures, Equipment, Organization, Other Assets, Sales Discounts, Sales Returns & Allowances, Drawing, Purchases, Freight Charges, Other Costs, Advertising, Auto Expenses, Salaries & Wages, Bank Service Charges, Depreciation Expense, Amortization Expense, Dues & Subscriptions, Equipment Rental, Utilities, Insurance–Employees Group, Insurance–General, Insurance–Officers Life, Interest Expense, Legal & Accounting, Miscellaneous Expense, Postage, Office Expense, Rent Expense, Payroll Taxes, Other Taxes, Income Tax, Penalties, Supplies, Telephone Expense, Travel, Meals
  • Accounts that normally carry a credit balance, referred asCredit Accounts”: Accumulated Depreciation, Accumulated Amortization, Accounts Payable, Loan  Payable–FNB, Loan Payable–John Doe, Credit Card Payable–VISA, Accrued Payroll Taxes, Sales Tax Collected, Accrued Expenses, Common Stock, Retained Earnings, Costs Capital, Sales of Goods/Services, Other Income, Interest Income, Purchase Discounts, Purchase Returns.

 

Notice however that, there are more debit accounts than credit accounts in the list of accounts in the General Ledger. This is only because there are so many categories of expenses that are recorded in separate accounts, and all expenses are considered to be debit accounts.

[Info_Box]A number of accumulated depreciation accounts exist in your General Ledger, one for each depreciable asset. All of those accumulated depreciation accounts carry a credit balance and are offset by the debit account Depreciation Expense.[/Info_Box]

Accounting Periods

Once the General Ledger is set up, you must establish the accounting periods that will be used. Most businesses operate on a calendar year; the year begins on January 1 and ends on December 31 each year.

However, some businesses use a fiscal year. A fiscal year is a 12-month period that does not begin and end in the same year. For example, a fiscal year that begins on April 1, 2008, ends on March 31, 2009. A company that does a large amount of business during the summer months might chose a fiscal year that begins when its sales are the strongest. The fiscal year for such a company would begin June 1st and end May 31st.

[Info_Box]Only corporations and partnerships operate on a fiscal year because the end of the accounting year determines when the federal tax return is due. A small business transfers its profit or loss to the individual owner at the end of the year, to be reported on a personal tax return that is always due April 15 of the following year.[/Info_Box]

For the purposes of this post, you will assume a 12-month accounting period that begins January 1 and ends December 31. That is not to say that a business cannot begin in the middle of the year. It can, but even if it begins in September, for accounting and tax purposes it will still end on December 31. In that case, your General Ledger for the first year would only have entries for four months, but those four months would constitute an entire year on the owner’s personal tax return.

On the next section, we are going to perform opening entries for the first time. Read on…

 

How to Make Opening Entries

Assume it is January 1 and you are setting up an accounting system for a new business. You have created the Chart of Accounts and have used them to set up your General Ledger. The next step is the opening entries.

Opening entries are made for everything that the business acquired in order to open its doors, make that first sale, or service that first client. A bookshop, for instance, might have the following things in place: a bank account, retail space in a mall, furniture, fixtures, equipment, and inventory.

Assume that the owner had $15,000 to begin this business venture and borrowed an additional $5,000 from the bank. This gives the owner a total of $20,000. The owner then made the following expenditures: desk and chair, $200; store fixtures, $1,300; books, $8,000; cash register, $600; first month’s rent on retail space, $500. The total cost of these items is $10,600, which leaves the owner $9,400 in his bank account.

Here is a recap of all the financial activity that will be part of the opening entries for this business:

Checking Account         $9,400.00
Inventory                         8,000.00
Furniture & Fixtures        1,300.00
Equipment                         600.00
Loan Payable–First
National Bank                 5,000.00
Capital                            5,000.00
Office Expense                  200.00
Rent Expense                     500.00

This represents everything the business has as of January 1, and this information must be entered into the accounting system.

However, before an entry can be made, you must remember that the General Ledger must always be kept in balance. Debits must always equal credits, and vice versa.

 

How to Post Transactions Onto General Ledger

Every debit that is posted will have a credit posted to offset it. In most cases, there are related accounts that work together to achieve this balance.

Some of them, such as Accumulated Amortization in the asset section and Amortization Expense in the expense section, are obvious because they have similar titles. When revenue is received, cash is debited; when an expense is paid, cash is credited. The same holds true for Accrued Payroll Taxes in the liabilities section and Payroll Taxes in the expense section.  You will see that the Cash account is the one account that is used over and over again as an offsetting account.

Study the next chart to familiarize yourself with the offsetting debit and credit accounts in the General Ledger:

 

Debit Account                      Offsetting Credit Account

Checking Account                        Sale of Goods or Services
Rent Expense                                Checking Account
Loan Payable–John Doe                Checking Account
Checking Account                        Purchase Returns
Inventory                                      Checking Account
Sales Returns and Allowances      Checking Account
Insurance–General                        Checking Account
Checking Account                        Capital
Saving Accounts                           Interest Income
Bank Charges                                Checking Account
Deposits                                       Checking Account
Checking Account                        Other Income
Drawing                                        Checking Account

This brings you back to the opening entry that still needs to be posted to the General Ledger.

You have already seen a recap of this financial activity. It could be posted as one entry, and that’s how it would ordinarily be done. However, because you are just learning about debits and credits and how they offset each other, taking each part of the activity separately and posting it that way first will be more helpful. Here they are:

The owner had $15,000 to begin his business venture. That would be posted as follows:

[Debit]. Checking Account =15,000.00
[Credit].Capital = (15,000.00)

The owner’s cash was deposited into the checking account. It was added to the account, so the dollar amount is a debit to that account. To offset this debit, the Capital account that was set up to record the amounts invested in the business is credited for the same amount.

*The owner then borrowed an additional $5,000 from First National Bank:

[Debit]. Checking Account = 5,000.00
[Credit]. Loan Payable–First National Bank = (5,000.00)

The proceeds from this loan were also deposited in the checking account, another debit to that account. The offset is a credit to the liability account that resulted from the loan because the money will have to be paid back to the bank.

*The owner made the following expenditures: desk and chair, $200.00:

[Debit]. Office Expense 200.00
[Credit]. Checking Account (200.00)

A check for $200 was written to pay for the desk and chair. Since money was taken out of the bank, the checking account is credited. The other side of that is the debit to the expense account to record the expense to the business.

*The owner purchased store fixtures at a cost of $1,300:

[Debit]. Furniture & Fixtures = 1,300.00
[Credit].Checking Account = (1,300.00)

Another check was written to cover the cost of the fixtures, so again the checking account is credited. This is a major purchase, so the cost of the fixtures should be added or debited to the asset account Furniture & Fixtures.

*Inventory (books) was obtained at a cost of $8,000:

[Debit]. Inventory = 8,000.00
[Credit]. Checking Account = (8,000.00)

More money came out of the bank account to pay for the books, so the checking account receives another credit. The books will be sold to customers and as merchandise for resale, so the cost of them is added or debited to the Inventory account.

*A cash register was purchased for $600:

[Debit]. Equipment = 600.00
[Credit]. Checking Account = (600.00)

The checking account is credited once again to record the cost of the cash register. The register can be classified as equipment, and because it is also a major purchase, the cost of it is added or debited to the Equipment account.

*The first month’s rent on the retail space was paid in the amount of $500:

[Debit]. Rent Expense = 500.00
[Credit]. Checking Account = (500.00)

The last expenditure is for rent on the retail space, resulting in a credit to the checking account. The offset is a debit for the same amount to the expense account Rent.

Notice how many times the cash account was used to offset the other entries. Also take note that every entry has a debit and a credit that, when added together, result in zero.

The following is how the General Ledger accounts will look as a result of these postings:

Date   Ref. No. Description                          Debit                 Credit
1000                 Checking Account
Beginning Balance                       0.00
1-1-00              Opening Entry                   15,000.00
1-1-00              Opening Entry                     5,000.00
1-1-00              Opening Entry                                              200.00
1-1-00              Opening Entry                                           1,300.00
1-1-00              Opening Entry                                           8,000.00
1-1-00              Opening Entry                                              600.00
1-1-00              Opening Entry                                              500.00
————-  ————-
Ending Balance                                             9,400.00

1200                Inventory
Beginning Balance                        0.00
1-1-00             Opening Entry                      8,000.00
————- ————-
Ending Balance                                             8,000.00

1500               Furniture & Fixtures
Beginning Balance                        0.00
1-1-00            Opening Entry                      1,300.00
————- ————-
Ending Balance                     1,300.00

1550               Equipment
Beginning Balance                       0.00
1-1-00            Opening Entry                        600.00
————- ————-
Ending Balance                        600.00
2100               Loan Payable– First
National Bank
Beginning Balance                                                   0.00
1-1-00            Opening Entry                                                 5,000.00
————- ————-
Ending Balance                                                 5,000.00

3210               Capital
Beginning Balance                                                   0.00
1-1-00            Opening Entry                                               15,000.00
————- ————-
Ending Balance                                               15,000.00
6300              Office Expense
Beginning Balance                       0.00
1-1-00           Opening Entry                        200.00
————- ————-
Ending Balance                        200.00

6360              Rent Expense
Beginning Balance                      0.00
1-1-00           Opening Entry                       500.00
————- ————-
Ending Balance                       500.00

 

[Info_Box]Entries posted directly to the General Ledger are called “General Journal” entries and are usually assigned a number for reference.[/Info_Box]

Because this is clearly marked as the opening entry, no reference number was assigned. Posting each opening activity of the bookstore separately was not the only way to do it. The entry could have been calculated and written up as one entry.

Whenever a number of cash activities take place in the same time period, they can be posted as one entry. The way to do this with cash transactions such as the opening entry is to determine which accounts need to be debited and which need to be credited. The cash account is then posted with the difference between the debits and the credits.

Take another look at the original recap of the opening activities. This time they are listed showing how the amounts are to be posted to each individual account.

Account                                                      Amount

Inventory                                                       8,000.00 debit
Furniture & Fixtures                                      1,300.00 debit
Equipment                                                        600.00 debit
Loan Payable–First National Bank                (5,000.00) credit
Capital                                                       (15,000.00) credit
Office Expense                                                 200.00 debit
Rent Expense                                                   500.00 debit
———————-
Out of Balance                                             (9,400.00) credit

[Info_Box]Without the cash account, the entry shows a remaining credit balance. This is the amount that should be posted to Checking Account as an offset or a debit.[/Info_Box]

Review the General Ledger as it looked after the individual postings. The balances in all the accounts would be exactly the same, but instead of having seven different entries to the cash account, there would only be one.

The account would now look like this:

Date   Ref. No.    Description                        Debit           Credit

1000                   Checking account
Beginning Balance                   0.00

Opening Entry                  9,400.00
————- ————-
Ending Balance                 9.400.00

 

Whenever you have an entry that involves a number of different accounts, it is helpful to lay it out on paper before posting it to the General Ledger. Writing out the entry requires you to consider each account and what amount will be posted there. It also allows you to double-check for accuracy and make sure that the entry is in balance—for example, that debits equal credits.