Ledger Accounts or General Ledgers are the summaries or the records of the primary books. General Ledgers contain the detailed transactions of each item in Financial Statements. For example, in Statement of Financial Position, the sub-component of total assets would be:
- Property Plant and Equipment (PPE)
- Cash and Cash equivalent
If you are using Quick Books, you will find General ledger which is listed down many accounting items as well as the summary.
In summary, General Ledgers are the summary or records of the detailed items of financial statements, and each ledger name differently with a different purpose.
Please remember, one transaction or even effect two ledgers in accounting equation that we will discuss later.
Why do we need a General ledger?
The company needs General Ledger to records its financial information and to produce financial statements. The financial information will records in the different ledger, date consequently, and based on its nature.
What is the Accounting Equation?
Accounting Equation is the concept or basis on how transactions effect in the financial statements.
The official formula of the accounting equation is
Assets = Liabilities + Equity
The very basic example of this is, when the owner introduces the money into the business $1,000.00, the statement of financial position will be like
Assets ($1,000)= liabilities($)+ Equity($1,000)
Another example is when the company purchase assets on credit $2,000.00, the Statement of Financial Position will be like this
Assets ($1000+$1000) =Liabilities ($1,000)+Equity ($1,000)
Double Entry Bookkeeping?
The concept of double-entry Bookkeeping is one transaction equal value with different effect in the financial statements.
So let say, you buy a spare part for your company with cost $100, the transactions would be
- Credit Cash = $100,
- Debit Spare part = $100
Cash is in Asset reduced by $100, but Spare Part which is also in Assets also increase $100 as well.
Another example of double-entry about sales on credit. You have sales on credit $1,000 to Mr.A.
The accounting entry would be:
Debit Account Receivable, Mr. A = $1,000
Credit Sale= $1,000
Sales-in Income Statement Items and will effect Items
Account Receivable is in Assets Items.
Simple Rule of Double Entry Bookkeeping You Should Remember
A debit entry will
- increase an asset
- decrease a liability
- increase an expense
A credit entry will
- decrease an asset
- increase a liability
- increase income
The journal entry
All of the financial transactions that occurred in the company is initially records in the journal entry.
Manual, journal entry is the first place to records all of the transactions; however, in the accounting system, the journal entry will immediately affect the ledgers accounts that they should effect.
Examples: Journal entries
The following is a summary of the transactions of Hair by Fiona Middleton hairdressing business of
which Fiona is the sole proprietor.
– 1 January Put in cash of $2,000 as capital
– Purchased brushes and combs for cash $50
– Purchased hair driers from Gilroy Ltd on credit $150
– 30 January Paid three months rent to 31 March $300
– Collected and paid in takings $600
– 31 January Gave Mrs. Sullivan a perm, highlights, etc on credit $80
Show the transactions by means of journal entries.
If you have any question about Ledger Accounts and double entry, please leave your comment here.