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Sunday, July 4, 2010

Ledger General Entries - Example

Ledger general entries represent the main step in recording and accounting for business transactions for the purpose of financial statements preparation. Understanding what is general ledger and how to record entries there is the main aim for those who want to master accounting theory and practice. In this article you can explore several examples how ledger general entries are recorded in the accounting books.

Process and Example

Based on the accounting cycle before transactions are recorded into the general ledger, they are reflected in the general journal by certain entries which name accounts impacted by the transaction, stating whether the particular account is debited or credited and providing short description of the transaction. The following example demonstrates this:

D Cash $10,000

___C Share Capital $10,000

_______Establishment of company XYZ by investing cash in the form of share capital.

In the above you can see an example when new company is established and shareholders invest cash into business. Therefore there is an increase in balance of Cash account, which is debited and increase in balance of Share Capital account which is credited. Do not forget that in each entry debit must equal to credit, which comes out of the main accounting equation, where Assets=Liabilities+Equity.

The next step is to post general journal entries to the General Ledger Accounts. In the above example the following entry is made:

D____________________Cash (General Ledger Asset Category Account)______C

Opening balance___0____________________________________

_______________$10,000________________________________

Closing balance___$10,000________________________________

This was posting of increase in cash into Cash account. Since the company is established, there is 0 opening balance in Cash account. The balance of this account is on the Debit side, since this is Asset category account, which always must have Debit balance.

D___________________Share Capital (General Ledger Equity Category Account)_____C

_________________________________________________Opening balance_____0___

_______________________________________________________________$10,000__

Closing balance__________________________________________________$10,000

This was posting of the second part of the above transaction, i.e. increase is Share Capital into General Ledger. Opening balance is on the Credit side and has a balance of 0. The balance of this account is on the Credit side, since this is Equity category account, which always must have Credit balance.

So this was a very simple example of ledger general entries. In practice there might be many more complex transactions impacting not only two general ledger accounts, which must be recorded correctly. The main aim is to record the entries into the correct accounts and on the correct (debit or credit) side of account, which will ensure that assets are equal to the sum of liabilities and equity.

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1 comment:

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