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Accounting Journals and Ledgers – Transaction Posting

Posted in 4. Ledgers and Journals by Erin Lawlor on the September 19th, 2008

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The process of gathering and storing Financial Transaction data in the Accounting System is accomplished through the use of both:

  • Ledgers: which maintain Account Balances
  • Journals: which maintain the line by line detail of each Transaction.

Ledgers:

I’m starting with Ledgers because we’ve gone through the basic organization of the Accounting System from Double Entry (debit/credit) Transaction Posting, to the Chart of Accounts and finally the General Ledger.  I’ll stay on the topic of the General Ledger first and then back up to the Journals where each transaction is originally posted.

In Accounting, there are two types of Ledgers, the General Ledger (Book of final entry) and Subsidiary (Sub) Ledgers. The Accounts for the General Ledger come from the Chart of Accounts. The Accounts for the Subledgers depend on the specific purpose of the Subledger.

If you remember in the “Chart of Accounts – Basics”, I said that Accounts should only be created to describe types of things not individual things themselves. Well, in some cases especially in the case of cash substitutes like Accounts Payable and Accounts Receivable more detail is required. So, to maintain the summary nature of the Chart of Accounts/General Ledger and to provide more detail, Subsidiary (Sub) Ledgers were developed.

Everything that is posted into Subledgers is also posted into the General Ledger and they act together to provide progressive levels of detail/summary.

The two most common Subledgers are:

  • The Accounts Payable Subledger: which maintains a list of Vendors (or creditors) and their individual Account Balances.  Each individual Vendor represents a Subledger (Accounts Payable – Vendor) Account.
  • The Accounts Receivable Subledger: which maintains a list of Customers and their individual Account Balances.   Each individual Customer represents a Subledger (Accounts Receivable – Customer) Account.

Each Subledger relates directly to a General Ledger Account that requires more detail than the General Ledger can offer.  These GL Accounts are often referred to as control accounts. The Balance of a Control Account should always be equal to the total of its related Subledger Account Balances. As you can see, the total of the Accounts Payable Subledger below equals the Balance of the related General Ledger Accounts Payable Account.

General Ledger
Account Description Debits Credits
1000 Checking Account $44,350
1200 Accounts Receivable $0
1500 Office Equipment $1,300
1520 Office Furniture $1,650
2000 Accounts Payable $1,700
4000 Sales $50,000
7000 Rent $3,000
7020 Office Supplies $150
7040 Subscriptions $300
7060 Utilities $125
7100 Fuel $275
7200 Repairs and Maintenance $500
7300 Credit Card Interest and Fees $50
Totals $51,700 $51,700
Accounts Payable Subledger
Account Description Balance
ACEC Ace Credit Card Corp. $1,700
JOHN Johnson Management $0
SHEL Shelton Oil $0
Totals (see GL Account 2000) $1,700

The listings above are Ledger Account summaries. Both the General Ledger and the Subledgers actually have a more detailed section for each Account. Those sections include summarized entries and balances along with references indicating which journals those entries originated in.

The tables below show an example of a Subledger Account and an example of the corresponding General Ledger Account.

Accounts Payable Subledger Account: ACEC
Transaction Date Jrnl Ref Description Debit Credit Balance
Beginning Balance $0
8/01/08 AP 23 123_0808 (invoice) $2,500 $2,500
8/31/08 CD 37 123_0808 (payment) $2,500 $0
9/01/08 AP 55 123_0908 (invoice) $1,700 $1,700

General Ledger Account: 2000
Transaction Date Jrnl Ref Description Debit Credit Balance
Beginning Balance $0
8/01/08 AP 23 Accounts Payable Invoices $2,500 $2,500
8/31/08 CD 37 Cash Disbursements $2,500 $0
9/01/08 AP 55 Accounts Payable Invoices $1,700 $1,700

Because there can be multiple Subledgers, there are also multiple Journals. The Jrnl field indicates which journal the entry came from. The AP’s in the jrnl field mean that those entries came from the Accounts Payable Journal and the CD entry came from the Cash Disbursements Journal which is the journal that maintains detail for Cash Outflows. The Jrnl and Ref field together give a cross reference that enable the user to access more detail about each entry.

Journals:

All financial transactions are recorded in Journals. The Journal maintains each individual transaction line by line. Just as there are two types of Ledgers, there are also two types of Journals: The General Journal and the Subsidiary Journals. Most entries will originate in Subsidiary Journals, however, if none of the GL Accounts affected by an entry have a related subsidiary journal, the entry will originate in the General Journal.

Everything that is posted into Subsidiary Journals is also posted into the General Journal. Journals act together with Ledgers to provide progressive levels of detail/summary.

Subsidiary Journal:

The format for Transactions in the the Subledger Journals is similar to the format for the General Journal that I’ve used in previous posts except they require at least three more columns in the grid. One for the Subledger Account, one for an Invoice Number and one for a Reference Number. This entry in the Accounts Payable Journal shows the detail for the both of the Ledger entries above that indicate Jrnl = AP and Ref = 55.

This entry records A Credit Card Statement into Accounts Payable, which includes the purchase of a Chair and a Desk along with Credit Card charges.

Accounts Payable Journal
Subledger Account Invoice # Transaction Date Ref GL Account Description Debit Credit
ACEC 123_908 9/01/08 55 2000 Ace Credit Card Corp. $1,700
1520 Chair $750
1520 Desk $900
7300 Credit Card Interest & Fees $50

Note that the Vendor Account, the Invoice #, Transaction Date and Ref# are not re-entered for each line. It is assumed that those three items remain the same for each of their balancing entries.

** Important: Individual transactions for each Subledger Account must have a unique identifying number, in this case, its an Invoice Number. That number combined with the Subledger Account creates a unique pair that prevents duplicate payments and provide a way for each party to reference the transaction for payments or if disputes or questions arise.

General Journal:

Since the system requires that all financial transactions have an entry in the General Ledger, they must also have an entry in the General Journal. This requires some duplication of effort but it is necessary. So, once the entries are posted to the Subledger Journals, they are then summarized and posted to the General Journal after which the Balances in the General Ledger are updated.

General Journal
Transaction Date Jrnl Ref Account Description Debit Credit
9/01/08 AP 55 1520 Furniture & Fixtures $1,650
9/01/08 AP 55 7300 Credit Card Interest & Fees $50
9/01/08 AP 55 2000 Accounts Payable $1,700

The Path of entries for Financial Entries:

Transactions containing a GL Account that is related to a subsidiary journal start with the Subsidiary Journal otherwise they start with the General Journal

Subsidiary Journal –> Post to Subsidiary Ledger by its Account –> Post to General Journal —-> Summarize and post to General Ledger by GL Account.

© 2008 -2010 Erin Lawlor

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**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.

General Ledger Analysis – Accounting Periods

Posted in 4. Ledgers and Journals by Erin Lawlor on the September 3rd, 2008

<< Chart of Accounts – Accounting Types >>Financial Statements – Trial Balance

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.

Transaction Date Account Description Debit Credit
9/01/08 7000 Rent $3,000
1000 Checking Account $3,000

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.

Account Description Jun Jul Aug Sept Oct Nov Dec Total
1000 Checking $0 $0 $0 -$3,000 $0 $0 $0 $-3,000
….. ……….
7000 Rent $0 $0 $0 $3,000 $0 $0 $0 $3,000
Totals $0 $0 $0 $0 $0 $0 $0 $0

**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

Next Up: >>Financial Statements – Trial Balance

<< Chart of Accounts – Accounting Types

**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.

Chart of Accounts – More on Accounting Types

Posted in 3. Chart of Accounts,4. Ledgers and Journals by Erin Lawlor on the August 31st, 2008

<< Chart of Accounts – Organization >>General Ledger Accounts by Accounting Periods

This post completes the basics in the discussion about methods of organizing transactions with the Chart of Accounts – specifically the method of Accounting Types. The Chart of Accounts is really just a list of the descriptions that you have chosen to use in transactions.  Accounting Types help to organize the descriptions (accounts) in meaningful ways. The most important concept to transactions is Double Entry but it is the Chart of Accounts that makes sense of the transactions and provides mission critical information to owners and managers.

The Basic Accounting Types (In order) Are:

  • Assets – Things you own
  • Liabilities – Things you owe
  • Equity – Owners’ Stake in Company
  • Revenue – Income through Sales of the Products of the Business
  • Costs of Goods Sold – Costs to provide the service or to manufacture or acquire the product the business sells
  • Expenses – Things that are paid for that are consumable, they have no lasting value but are part of the cost of running a business
  • Other Revenue and Expenses – Revenue and Expenses that are unusual cases and are not directly related to the business product and are not usual costs of running a business.

There are at least 7 basic Accounting Types, but each Accounting Type can be categorized more simply under the 2 Double Entry Accounting Categories as either Funds/Uses of Funds or as Sources of Funds.

Funds/Use of Funds (Debit) Accounting Types:

  • Assets – Things you own
  • Costs of Goods Sold – Costs to provide the service or to manufacture or acquire the product the business sells
  • Expenses – Things that are paid for that are consumable, they have no lasting value but are part of the cost of running a business
  • Other Expenses – Expenses that are unusual cases and are not directly related to the business product and are not usual costs of running a business.

Each Accounting Type under the “Funds/Use of Funds” Category increases in value or balance with each debit (Use of Funds) transaction entry and decreases in value or balance with each credit (Source of Funds) transaction entry.  Use of Funds Accounts are sometimes referred to as Debit Accounts.

**Positive balances for these accounts are balances where total debits > total credits to the account and their balances should show in the Debit Column.

Assets – Assets are items of value that are owned by the business and their value is expected to last beyond the current fiscal (business) year.

Costs of Goods Sold are Funds/Uses of Funds and are another type of Expense.  They are similar to Expenses in that they are consumable items that benefit the business and have no lasting value beyond the current fiscal (business) year, but the difference is that Cost of Goods Sold Accounts are related directly to the manufacturing and acquisition of the products the business provides or sells.

**Important Note:  Costs are posted to Costs of Good Sold only when the business no longer owns the product.  If the product is owned by the business until its sale, the costs of the product are posted as inventory – which is an asset – until the products are sold.  At the time of recording the sale, the inventory account is decreased with a credit entry and the cost of goods sold account is increased with a debit entry for the cost of the product. However, If inventory is sold at about the same rate as it is purchased, the Periodic Inventory System allows purchases to be classified directly as costs on the Income Statement rather than holding them in the Balance Sheet Inventory account until sold.

Expenses are Funds/Uses of Funds, they are consumable items that benefit the business but have small or no lasting value beyond the current fiscal year.  They are similar to Costs of Goods Sold except that the amounts categorized as Expenses or Other Expenses are related to the administrative (for Expenses) or unusual costs (for Other Expenses) of running the business.

**Important Note:  Current Assets differ from Expenses because they have a lasting value whether in their current form or as cash.  The value of expensed items is not expected to last beyond the current fiscal year.

Source of Funds (Credit) Accounting Types:

  • Liabilities – Things you owe
  • Equity – Owners’ Stake in Company
  • Revenue – Income through Sales of the Products of the Business
  • Other Revenues – Revenues that are unusual cases and are not directly related to the business product and are not usual revenues from running a business.

Each Accounting Type under the “Source of Funds” Category increases in value or balance with each credit  (Source of Funds) transaction entry and decreases in value or balance with each debit (Use of Funds) transaction entry.  Source of Funds Accounts are sometimes referred to as Credit Accounts.

**Positive balances for these accounts are balances where total credits > total debits to the account and their balances should show in the Credit Column.

Liabilities are essentially agreements to delay payments and so, are sources of funds because they provide a way to acquire or pay for goods and services without a direct transfer of cash at the time of the exchange.

Equity is a source of funds through direct owner investment or owner “re-investment” when some or all of the income from the previous year is retained by the business rather than distributing it to the owners.

Revenue is a source of funds through sales of the business product (for Revenue) or through other sources not directly related to the business products (for Other Revenue).

**Important Note:  Do not confuse the terms of Revenue or Income with Cash.  Cash is an Asset that is received in exchange in the sale of a product or service.  In Accounting, Revenue, Income and Sales are synonymous, they are Sources of Cash, not Cash itself.

Financial Statements:

Accounting Types help to organize Financial Statements too. All Accounting Types are found on the Trial Balance but the Income Statement and Balance Sheet split the Accounting Types between them.   The Accounting Type is the determining factor for whether an Account is reported on the Balance Sheet or on the Income Statement.   In addition to the reference to an account as a Debit Account or a Credit Account, accounts are also referred to as either Balance Sheet Accounts, or Income Statement Accounts.

Balance Sheet Accounting Types: Income Statement Accounting Types:
Assets Revenue
Liabilities Costs of Goods Sold
Equity Expenses
Other Revenues and Expenses

The Basics of Data Collection and Organization in the Double Entry Accounting System:

  • Debits and Credits
  • Chart of Accounts
    • Accounting Types
    • Order of Liquidity
    • Account Numbers
  • General Ledger
    • Time

The next post introduces the final organization element of Time into the system and illustrates how to use the combined elements of time and financial data to secure and manage resources.

© 2008 – 2010 Erin Lawlor

Next Post:  >>Accounting Periods – General Ledger Analysis – The Big Picture

<< Chart of Accounts – Organization

**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.