The general ledger and double-entry bookkeeping

Earlier, we noted that financial statement transactions originate from source documents and are first recorded in the books of prime entry (day books). These transactions are then posted to general ledger accounts through journal entries using double-entry bookkeeping. This chapter looks at the main types of ledger accounts and how to record transactions in them using journal entries.

Learning objectives

By the end of this lesson, you should be able to:

• Describe the main types of general ledger accounts, including their nature and function.
• Describe how financial data is initially recorded in the accounting system.
• Explain the use of journal entries and how journal entries are processed to general ledger accounts.
• Identify correct journal entries from a given narrative.
• Illustrate how to balance and close the general ledger accounts at the year-end.

The general ledger

Every transaction is first entered in the prime book of entry. From there, transactions are posted to the general ledger using the double-entry bookkeeping principle.

Definitions

General ledger

Also called the nominal ledger, it is the central record (manual or computerized) that contains all ledger accounts. It organizes transactions by categories, each corresponding to elements of the financial statements.

Ledger account

A ledger account is a specific record within the general ledger that summarizes all transactions for a particular item, such as an asset, liability, equity, income, or expense.

For example, credit sales from the sales daybook are posted to both the sales ledger account and the receivables ledger account within the general ledger.

Every ledger account has two sides:

• Debit (Dr)
• Credit (Cr)

In a manual accounting system, ledger accounts are usually presented in a T-form (a T-account) as shown below.

• The left-hand side represents debits, while the right-hand side represents credits.
• An entry on the debit side means the account is debited, and an entry on the credit side means it is credited.
• The date column records when the transaction occurred, while the description column briefly states the corresponding ledger account.

Every financial transaction follows the duality concept - each transaction has two equal and opposite effects. One account is debited, and another is credited, following the rules of double-entry bookkeeping. Below are examples of some general ledger accounts and the related elements of the financial statements.

Ledger account	Related element of the financial statement
Sales	Income
Trade receivables	Asset
Purchases	Expense
Trade payables	Liability
Cash and bank balance	Asset
Bank overdraft	Liability
Rent	Expenses
Office building	Asset
Long-term loans	Liability
Ordinary shares	Equity
Inventories	Asset

Many businesses now use accounting software for ledger accounts. The same principles still apply, but you typically won’t draw T-accounts.

Double-entry bookkeeping

Double-entry bookkeeping (often called the golden rule of accounting) states that every transaction affects at least two ledger accounts: one debit and one credit, always with equal amounts. Each ledger account belongs to one of the five financial statement elements: assets, liabilities, equity, expenses, or income.

• Debits increase assets and expenses but decrease liabilities, equity, and income.
• Credits increase liabilities, equity, and income but decrease assets and expenses.

This principle is the foundation for all postings in the general ledger. It’s summarized in the table below.

	Assets & expenses related ledger	Income, liability and equity related ledger
A debit entry	Increases the balance	Decreases the balance
A credit entry	Decreases the balance	Increases the balance

Because a debit entry increases the balance of assets and expenses, these accounts are said to have a debit balance. In contrast, income, liability, and equity accounts are said to have a credit balance.

You must not proceed if you have not mastered this principle because this will form the basis of all computations we will do later in this course.

Passing journal entries

Passing journal entries means recording transactions in the general journal by debiting and crediting the appropriate ledger accounts in line with the double-entry principle. Typically, before posting to the general ledger, you raise a journal entry that shows:

• the account to be debited, and
• the account to be credited.

Journals show, at a glance, the general ledger accounts affected by each transaction and the direction of the effect.

Format of a general journal is shown below

Date	Description	Debit ($)	Credit ($)
	GL account to be debited	xxx
	GL account to be credited		xxx

Description of the transaction posted

In subsequent chapters and sub-chapters, each transaction may be presented in one of these three ways: posted directly into the general ledger without showing the journal; recorded in the journal only; or shown in both the journal and the corresponding general ledger posting. The main requirement is to know which ledger account to debit and which to credit.

Step-by-step illustration

Now that you understand double-entry bookkeeping and have seen examples of general ledger accounts, the next skill is turning a narrative into a journal entry. Use the guide below when passing a journal entry for a transaction.

Steps

1. Identify all the ledger accounts involved in the narrative - this ensures the duality principle.
2. Determine the effect on each ledger account - will it increase, decrease, or will one increase while the other decreases?
3. Relate each ledger account to a financial statement element (asset, liability, equity, income, or expense).
4. Apply debit/credit rules:
   • If the account relates to an asset or expense: increases are debited, decreases are credited.
   • If the account relates to income, liability, or equity: increases are credited, decreases are debited.

Let’s demonstrate these guidelines using these narratives.

Narrative 1: Kofi sold goods worth $ 5,000 for cash.

• The two ledger accounts from the narratives are sales and cash.
• We have sold goods, so sales (i.e. revenue) will increase and since we are receiving cash it will also increase.
• Sales is an income and cash is an asset.
• Since cash (asset item) is increasing, we debit the cash general ledger account.
• Also because sales (i.e. income item) is increasing, we credit the sales general ledger account. We make a journal entry for the transaction as depicted below.

Ledger accounts	Debit ($)	Credit ($)
Cash	5,000
Sales		5,000
Being sales of goods for cash

You can also show the same transaction using T-accounts. When you use a T-account, you record the entry on the debit or credit side and use the description to reference the corresponding account. This makes the duality concept visible: each entry points to the other account affected by the same transaction.

Try the next example on your own.

Narrative 2: Kofi bought office furniture costing$10,000 on credit.

• The two ledger accounts from the narratives are:

• What is the effect on each account?

• What elements of the financial statement do the ledger accounts relate to?

• What will be the journal entry?

The T-accounts forms are shown below:

:::

Try this example on your own.

Narrative 3: Kofi paid a cash amounting to $ 3,000 to the creditor.

• The two ledger accounts from the narratives are:

• What is the effect on each account?

What elements of the financial statement do the ledger accounts relate to?

What will be the journal entry?

:::

The T-accounts, as continued from the earlier narratives, follow as:

Balancing a ledger account

In practice, many transactions occur, and many journal entries are posted. Periodically (daily, weekly, monthly, etc.), the accountant determines the net amount on each ledger account. This process is called balancing the account. Follow these steps when you want to balance any account.

Steps

1. Draw total lines beneath the last debit and credit entries, leaving one line space.
2. Add all debit balances and all credit balances separately.
3. Enter the higher of the two totals on both sides of the account.
4. Find the difference between the two sides.
5. Record this difference as the Balance c/d on the side with the lower total, then bring it down as Balance b/d on the opposite side.

Demonstration of balancing an account

Let’s balance the ledger accounts we earlier created. Let’s demonstrate with the cash ledger account.

• Total debit balance is$5,000 as against a $ 3,000 total credit balance.
• We enter $ 5,000 as the total on both the debit and credit sides of the general ledger account.
• The shortfall of $ 2,000 (i.e,. $ 5,000 minus $ 3,000) on the credit side becomes balance carry down (c/d).
• The shortfall is then carried to the opposite (i.e., debit) side as the balance brought down (b/d).

This is shown below.

The balances brought down for each ledger account are summarised on the trial balance (to be treated later in this course).

Follow this procedure to balance the other ledger accounts.

Closing of ledger accounts

Closing a ledger account is similar to balancing off, but it occurs specifically at the end of the accounting year. The closing balances are used in preparing the financial statements.

• Income and expense related accounts are closed into the Profit or Loss Statement.
• Asset, liability, and equity related accounts are both carried forward to the next period as well as reported in the current year’s Statement of Financial Position.

Rules for closing-off:

• Income accounts: Debit the income ledger, Credit Profit or Loss Statement.
• Expense accounts: Credit the expense ledger, Debit Profit or Loss Statement.