Maintaining a General Ledger
The general ledger reflects a permanent summary of all your supporting journals, such as the sales and cash receipts journal and the cash disbursements journal. Closing your books and maintaining your general ledger should be one of your top priorities.
It terms of your company's books, it all boils down to the general ledger.
This accounting-must functions as a permanent summary of all your supporting journals, such as the sales and cash receipts journal and the cash disbursements journal. In addition, your financial statements are built from the general ledger.
Tools for Keeping an Accurate General Ledger
For each account title shown on your sales and cash receipts journal columns and your cash disbursements journal columns, there is a general ledger account. There are also separate general ledger accounts for miscellaneous items that don't have their own column in the journals, but are entered in a "miscellaneous" column.
For example, Cash, Accounts Receivable, Accounts Payable, Sales, Purchases, Telephone Expense and Owner's Equity are all examples of general ledger accounts. Your accounting software will reserve space in the general ledger for each general ledger account.
The individual entries in the general ledger are always from the total columns of your supporting journals. When all journal entries are posted, you can arrive at the ending balance for each account. The sum of all general ledger debit balances should always equal the sum of all general ledger credit balances.
Suggested General Ledger Accounts
We've provided a list of common general ledger accounts many businesses find useful. Depending on your type of business, you will use many, but probably not all, of these account names. When you set up your accounting software, you'll want to include all applicable accounts.
On your financial statements, they should generally be placed in the order shown.
Balance Sheet Accounts
- petty cash (if you maintain a petty cash fund)
- cash in checking (a separate ledger account for each bank account)
- cash in savings
- accounts receivable
- reserve for bad debts
- prepaid expenses
- office supplies (if you maintain a significant amount of office supply inventory)
- utility deposits
- notes receivable
- organization expenses
- accumulated depreciation — vehicles
- furniture and fixtures
- accumulated depreciation — furniture and fixtures
- accumulated depreciation — equipment
- accumulated depreciation — buildings
- accounts payable
- sales tax payable
- federal withholding taxes payable
- FICA taxes payable
- state withholding taxes payable
- unemployment taxes payable
- accrued wages
- unearned revenue
- accrued income taxes
- note payable
- owner's equity
- owner's drawing account
- common stock
- additional paid-in capital
- preferred stock
- retained earnings
Income Statement Accounts
- sales returns and allowances
- sales discounts
- investment income
- gain (loss) on sale of assets
- purchases (if you purchase inventory for resale)
- freight (if you purchase inventory for resale)
- purchases returns and allowances (if you purchase inventory for resale)
- cost of goods sold: materials
- cost of goods sold: labor
- cost of goods sold: direct expenses
- cost of goods sold: indirect expenses
- bad debt expense
- bank charges
- charitable contributions
- commissions expense
- contract labor
- credit card fees expense
- delivery expense
- depreciation expense
- dues and subscriptions
- income taxes
- interest expense
- office expense
- operating supplies
- payroll taxes
- permits and licenses
- professional fees
- property taxes
- vehicle expenses
Have you been running your business for a while and are just now trying to take over some of the basic bookkeeping? If you've had financial statements prepared by an accountant in the past, look at last year's balance sheet and income statement. You can get started by setting up general ledger accounts for each account title shown on those financial statements.
Closing the Books at the End of an Accounting Period
When you reach the end of an accounting period, hold off a second before pouring the bubbly: you still need to "close the books."
At a minimum, you will close your books annually because you have to file an income tax return every year. If you are having financial statements prepared, you will want them done at least annually. However, annual financial statements may not be enough to help you keep tabs on your business. You may want financial statements monthly, bi-monthly or quarterly.
Even if you are not having financial statements prepared, you may want to close your books monthly. Sending out customer statements, paying your suppliers, reconciling your bank statement, and submitting sales tax reports to the state are probably some of the tasks you need to do every month. You may find it easier to do these if you close your books.
How to Close Your Books
After you finish entering the day-to-day transactions in your journals, you are ready to close the books for the period. A step-by-step description of how to close the books follows. How many of the steps you do yourself depends on how much of the accounting you want to do, and how much you want to pay your accountant to do.
Of course, using the proper accounting software will consolidate many of these steps.
- Post entries to the general ledger. Transfer the account totals from your journals (sales and cash receipts journal and cash disbursements journal) to your general ledger accounts.
- Total the general ledger accounts. By footing the general ledger accounts, you will arrive at a preliminary ending balance for each account.
- Prepare a preliminary trial balance. Add all of the general ledger account ending balances together. Total debits should equal total credits. This will help assure you that your accounts balance prior to making adjusting entries.
- Prepare adjusting journal entries. Certain end-of-period adjustments must be made before you can close your books. Adjusting entries are required to account for items that don't get recorded in your daily transactions. In a traditional accounting system, adjusting entries are made in a general journal.
- Foot the general ledger accounts again. This will give you the adjusted balance of each general ledger account.
- Prepare an adjusted trial balance. Prepare another trial balance, using the adjusted balances of each general ledger account. Again, total debits must equal total credits.
- Prepare financial statements. After tracking down and correcting any trial balance errors, you (or your accountant) are ready to prepare a balance sheet and an income statement.
- Prepare closing entries. Get your general ledger ready for the next accounting period by clearing out the revenue and expense accounts and transferring the net income or loss to owner's equity. This is done by preparing journal entries that are called closing entries in a general journal.
- Prepare a post-closing trial balance. After you make closing entries, all revenue and expense accounts will have a zero balance. Prepare one more trial balance. Since all revenue and expense accounts have been closed out to zero, this trial balance will only contain balance sheet accounts. Remember that the total debit balance must equal the total credit balance. This will help ensure that all general ledger account balances are correct as of the beginning of the new accounting period.
Preparing Trial Balance Sheets
The trial balance is a worksheet on which you list all your general ledger accounts and their debit or credit balance. The total debits must equal the total credits. If they don't equal, you know you have an error that must be tracked down.
When closing out your books at the end of an accounting period, you will prepare three trial balances:
- A preliminary trial balance is prepared using your general ledger account balances before you make adjusting entries.
- An adjusted trial balance is done after preparing adjusting entries and posting them to your general ledger. This will help ensure that the books used to prepare your financial statements are in balance.
- A post-closing trial balance is done after preparing and posting your closing entries. This trial balance, which should contain only balance sheet accounts, will help guarantee that your books are in balance for the beginning of the new accounting period.
You're preparing to close the books for the year ended December 31, 2011. You post totals from the journals to the general ledger, and foot the general ledger accounts. Then you prepare the following preliminary trial balance, using the balances from your general ledger accounts.
Beta Service Company
Preliminary Trial Balance
December 31, 2010
|Debit ||Credit |
|Cash in bank ||3,423 || |
|Accounts receivable ||11,400 || |
|Equipment ||42,900 || |
|Accumulated depr. equip. || |
|Buildings ||119,000 || |
|Accumulated depreciation building || |
|Land ||80,000 || |
|Accounts payable || |
|Payroll taxes payable || |
|Mortgage payable || |
|Capital || |
|Drawing account ||24,000 || |
|Sales || |
|Advertising ||18,900 || |
|Depreciation ||16,760 || |
|Insurance ||4,500 || |
|Interest expense ||12,421 || |
|Payroll taxes ||16,233 || |
|Property taxes ||4,989 || |
|Repairs and maintenance ||23,430 || |
|Utilities ||3,856 || |
|Wages ||198,515 || |
|580,327 ||580,327 |
A trial balance spreadsheet can be found in the Business Tools area. It is an Excel (4.0 or higher) spreadsheet template, so you can use the template as a starting point for your own trial balance.
What if your trial balance does not balance? In other words, what if total debits don't equal total credits? This shouldn't surprise or discourage you. In fact, it might be more surprising if it does balance. Accounting errors happen. Even experienced bookkeepers normally have to find trial balance errors.
Finding Trial Balance Errors and Keeping a General Journal
When preparing a trial balance, the total debits must equal the total credits. Don't be discouraged if they don't. Bookkeeping errors happen. Just think of the trial balance as a tool to find the errors. Use the following steps as a guide to track down the error or errors.
- Be sure the numbers on your trial balance are the same numbers shown in your general ledger. Check to see if you properly classified amounts as debits or credits on your trial balance.
- Go back to your journals (sales and cash receipts journal, cash disbursements journal and general journal). Check that the journal totals were properly posted to the general ledger. Were the correct amounts posted? Were they properly classified as debits or credits?
- Go back to each journal again. Look at the totals that were posted to the general ledger. Do total debits equal total credits in each journal?
- Go back to each journal again. Did you foot each column on each page of the journal? Did you carry forward all column totals to the next page? Did all the items entered in the "miscellaneous" column get posted to the general ledger?
- Is the difference divisible by nine? If so, it could be a simple transposition error. For example, writing down 540 instead of 450 results in a difference of 90. Writing down 26 instead of 62 results in a difference of 36. Notice that both of these differences are divisible by nine. If the difference between debits and credits is divisible by nine, go back to the journals, looking for the error. Knowing that it may be the result of transposed numbers should help you find it.
- Is the difference between debits and credits 1, 100, 1,000, 10,000, etc.? If so, it is probably an addition or subtraction error.
- Divide the difference by two. Is the resulting number shown on your trial balance? If so, check to see if you have incorrectly classified the amount as a debit or credit.
Updating the General Journal
The general journal is usually a two-column journal used for unusual and annual accounting entries that aren't recorded in the sales and cash receipts and cash disbursements journals. Adjusting entries and closing entries, made at the end of an accounting period, are the most common entries made in the general journal. The general journal is also used to record special transactions that don't get recorded in one of the regular journals.
As an example of a "special transaction," on April 12, $7,500 was spent on new production equipment in your machine shop. At that time, the amount was incorrectly expensed to repairs and maintenance in the cash disbursements journal. It should have been recorded as a purchase of fixed assets. Upon discovery of the error, you make the following correcting entry in your general journal.
|Debit ||Credit |
|Equipment ||7,500 || |
|Repairs and maintenance || |
|To correct 4/12/2011 purchases journal entry |
General journal entries are posted to the respective general ledger accounts.
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