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This is where the Double Entry System starts to Pay Off. The time element introduced in this post completes the basics of how to organize and operate this system. From this point forward, you will start to experience nothing but increasing rates of return on your investment of time in learning it. The next few posts will introduce Financial Statements and how to put them to work for you and will complete the basics.
The General Ledger is more than just another important element in the Accounting System, it is where the goods are. The General Ledger is the combination of the Chart of Accounts, Financial Transactions, Account Balances and Accounting Periods. In practice, once the Chart of Accounts has been established, the term “Chart of Accounts” is considered more in terms of a report than as an object. From this point forward, Accounts from the Chart of Accounts will be called General Ledger Accounts.
The General Ledger adds the essential organizational element of Time (Accounting Periods) to the Accounting System, so in addition to the original three organizational methods of the Chart of Accounts, the General Ledger is organized in four ways.
- 1. Accounting Type
- 2. Order of Liquidity
- 3. Account Number
- 4. Accounting Periods
Accounting Periods are generally date/time intervals of Months, Quarters and Years. The term Accounting Period can mean any of those in different situations. For purposes of this discussion, Accounting Periods will refer to Months within a given year.
If the General Ledger is going to organize around accounting periods, then we need to add dates to the data we gather with transactions. There can be a variety of dates that are relevant to a transaction, the transaction date, the invoice date, the due date, the expiration date etc. but for purposes of this post, the date we’ll focus on is the transaction date.
The transaction grid introduced in the previous posts needs to be expanded to 5 columns to accommodate the new data requirements of date and account number.
The Transaction Date is only required to be entered on the first line of a transaction (in a manual ledger) because it is assumed to be (and must be) the same for each entry in a transaction. In addition to the requirement that total Debits = total Credits for each Transaction, Total Debits must also equal Total Credits for each Accounting Period. This requirement fulfills the original intent of double entry, a balanced view of uses and sources of funds (debits = credits) by Transaction, by Accounting Period and by default, Overall.
Both entries in the transaction post to their Accounts in Accounting Period 9/08.
This is a Comparison Trial Balance Report from the General Ledger and this is where you can take a step back from the details of transactions and see the larger picture.
**This example starts with June because of space limitations here.
The only accounts listed are the two from the transaction example but they demonstrate the ability to compare accounts against themselves and against other accounts from period to period. Notice that the totals on the bottom line are all zeros, this shows that the books are in balance because total debits (positive amounts on this report) combined with total credits (negative amounts on this report) = Zero.
When reports do not have two columns to display amounts, the credits will be displayed as negatives. In reports like this, *Debit Accounts should have positive balances and Credit Accounts should have negative balances. There is only cause for concern if the +/- of the amount does not match its accounting type. In this case, the Checking Account is a Debit Account so that is an indication of trouble. (*See 6. Chart of Accounts - Transaction Types)
Accounting Periods are an essential analysis tool in accounting. They provide the opportunity to compare account balances not just one account against another but also against itself over time. Time analysis provides the data to detect unusual changes in account balances from period to period that may indicate errors or unintentional over or under payments of critical obligations such as taxes, rents, utilities, insurance etc. Time analysis is also essential to management and owners for cash planning, establishing correlations between expenses and revenues to help make operational adjustments, and detecting changes that may indicate theft or fraud.
© 2008 - 2010 Erin Lawlor
**disclaimer: All information posted on this blog is from my own experience and training. The guidelines I present are general and in my experience, standard practice. I do not write with authority from any Accounting Standards Boards.