Key Takeaways
- The manual bookkeeping process uses two types of books: the accounting journal from which business transactions are initially recorded, and the general ledger where the recorded transactions in the accounting journal are transferred through the process of posting.
- Posting is the process of updating the general ledger accounts by transferring the details of the journal entries in the accounting journal to the general ledger.
- An accounting software virtually eliminates the need to use physical journals and ledgers and makes bookkeeping more efficient because the posting process happens automatically and simultaneously with the recording of the transactions in the software.
Overview of the Accounting Cycle
Posting transactions to the ledger is the third step in the accounting cycle of the business. The Accounting Cycle refers to the steps that a company takes to prepare their financial statements.
Below are the steps in the accounting cycle, done in the following order:
- Gathering of business source documents
- Analyzing and journalizing business transactions
- Posting journalized transactions to the ledger
- Preparing an unadjusted trial balance
- Journalizing and posting adjusting entries
- Preparing an adjusted trial balance
- Preparing the financial statements
- Journalizing and posting closing entries
- Preparing a post-closing trial balance
- Journalizing and posting reversing entries
What is a General Ledger?
The accounting information system records and keeps track of the financial transactions of a company. This encompass the entire bookkeeping process starting from the gathering of source documents up to the generation of financial statements.
All of the transactions that are recorded in the accounting system are stored in a large database of financial transactions called the general ledger.
A General Ledger is a record that contains all the ledger accounts of a business. It provides a complete list of all the transactions that are entered in each account. The general ledger is also called the Book of Final Entry because all data that are recorded in the accounting journal are transferred here through the posting process.
Ledger Accounts are the individual account records that makeup the general ledger of your company. Each account is classified under assets, liabilities, equity, income, and expenses.
Below are the two formats or layouts of a typical ledger account.
Ledger Format A:
Ledger Format B
The ledger account is actually the formal version of the T-account. Here’s an example of a T-account:
Notice some similarities in the components of the ledger account and the T-account. For example, both of them have an account title, a debit side and a credit side.
In actual practice however, the ledger account is where transactions are stored instead of the T-account. Think of the T-account as a scratch paper that you can only use as a visual guide when you’re doing preliminary analysis of transactions before you formally record them on the accounting books.
The ledger account contains the following information that the T-account doesn’t have:
- Account number – the identification number that is systematically assigned to the account.
- Post reference or Ledger Folio – used to identify the journal page number of the journal entry that is related to the posted transaction.
- Account balance – the ending amount of the ledger account after applying the debit and credit effects of transactions during the period.
All the ledger accounts that your business uses are kept and grouped by account type in the general ledger, which serves as a central database of your company’s accounting system. The information contained in the general ledger makes it possible for you to create the financial statements of your company.
The Journal and the General Ledger
In a manual accounting system, the two most important documents are the accounting journal and the general ledger. It is from these two books that business transactions are recorded in the accounting information system.
However, before we confuse both books from each other, it’s important that we have a basic understanding about the characteristics of each book.
The Journal
The Journal or Accounting Journal is a document that contains a list of business transactions that are chronologically recorded. It is also called the Book of Original Entry because this is where transactions are initially entered into the accounting system through the process of journalizing.
The journal contains all journal entries that represent the recorded transactions. These journal entries contain the date of the transaction, the accounts that are debited and credited, the amounts involved, and a description of the transaction.
Below is an example of a general journal, the most common type of journal.
Notice that both the journal and the general ledger contain almost the same information such as the transaction date, the account name, a post reference or folio, and debit and credit amounts. While both show the same information on the surface, there are differences in how each are used.
Key Difference Between a Journal and a General Ledger
| JOURNAL | GENERAL LEDGER |
| All transactions are only recorded in one place – the journal – regardless of the accounts used by the journal entries. | Instead of presenting the journal entry transactions in one place, each element of the journal entry is separately recorded to their respective accounts in the general ledger. |
| The balance of an account cannot be determined using the journal because every journal entry records multiple accounts simultaneously. The focus of the journal is to present journal entry transactions and not the details inside each account. | The balance of an account can be determined in the general ledger since all individual accounts contain transactions that either increases or decreases the balance of an account. All transactions that affect an account are summarized in one place. |
| As the book of original entry, the journal serves as the initial place for recording transactions through the process of journalizing. These transactions are eventually posted to separate accounts in the general ledger. | As the book of final entry, the final recording of transactions are made in the general ledger. Through the process of posting, the data from the journal entry is transferred on a per account basis to the general ledger. |
| The journal cannot be used as the basis for the preparation of financial statements because it only lists transactions and does not provide account balances. | The balance of each account in the general ledger becomes the basis for the preparation of financial statements. |
Nowadays, most companies use an accounting software to record business transactions, thus eliminating the need for physical journals and ledgers. With a computerized accounting system, data is only entered once and will be automatically saved in a database from which you can easily generate financial statements.
Subsidiary Ledger
As your business grows and you begin to take in large amounts of transactions particularly those related to accounts receivable, accounts payable and inventories, recording them in separate customer or supplier accounts in the general ledger could easily clutter up the said ledger.
For accounts that encounter high volumes of transactions, using separate ledgers, instead of the general ledger, could provide a more efficient and accurate way of recording those transactions to their respective accounts. These individual ledgers are called Subsidiary Ledgers.
A Subsidiary Ledger is a ledger that contains individual accounts that support the total amount of a related control account in the general ledger.
Subsidiary ledgers compartmentalize individual accounts, called Subsidiary Accounts, that are held under one general ledger account. The combined amounts of these subsidiary accounts should equal the balance of the general ledger account, called the Control Account.
Basically, any general ledger account that consists of numerous underlying accounts warrants the use of a subsidiary ledger. Below are some examples of these accounts.
| GENERAL LEDGER CONTROL ACCOUNT | DESCRIPTION |
| Accounts receivable | provides detailed information on individual customer accounts |
| Accounts payable | provides detailed information on individual supplier accounts |
| Cash | provides detailed information on individual bank account that the company has |
| Merchandise inventory | provides detailed information on each product that is available for sale |
| Fixed assets | provides detailed information on each property, plant and equipment that the company controls |
| Capital | provides detailed information on every individual partner or shareholder of the company |
| Sales | provides detailed information on every product line and department in the company |
| Payroll | provides detailed information on the compensation of each employee or laborer in the company |
| Other expenses | provides detailed information on any type of expense incurred by every department in the company |
Let’s take accounts receivable as an example. Your company probably has different account customers who owe you. The total amount owed to you by these customers should equal the balance of the accounts receivable in your general ledger.
For every customer that you have, you must maintain a record that will show you how much the customer owes and how much of it has been paid. All these records of individual customer accounts are held in the accounts receivable subsidiary ledger.
Imagine not using a subsidiary ledger that contains all the details of each of your customer. Your company’s general ledger will probably be crowded with numerous customer accounts that could make the monitoring of individual customer account balances very difficult and cumbersome.
The subsidiary ledger effectively eliminates the inclusion of nonessential information in the general ledger. It could also give an opportunity for the management to analyze individual accounts and make important decisions such as estimating bad debts and providing credit to customers.
While subsidiary ledgers make recording in a manual accounting system more efficient, using an accounting software could greatly enhance the experience. An accounting software allows the simultaneous posting to the subsidiary ledger accounts and general ledger control accounts as transactions are recorded.
The need for reconciliation between the subsidiary ledger accounts and general ledger accounts is also virtually eliminated with an accounting software since both of them are updated at the same time as the transaction is recorded. However, in a manual accounting system, reconciliation should be done regularly to ensure that the total amounts of the subsidiary accounts are the same as that of their control account.
Posting Transactions to the General Ledger
Posting is the process of transferring data from the accounting journal to the general ledger to update the ledger accounts that are affected by the journal entries in the journal.
To understand how the posting process happens, let’s look at some journal transactions as an example.
Let’s assume that on February 1, 2023, you invested $5,000 cash in your company. On the same day, you purchased an equipment amounting to $1,000, payable in two equal installments on February 10 and March 1. Then on February 4, 2023 you rendered a service to a client for $400. Your client promised to pay you on February 12.
When you record the above transactions in the general journal, the journal entries for the month of February are as follows:
To post the above journal entries to the ledger, you must first check all the general ledger accounts involved in the above journal entries.
In this example, the accounts involved are as follows:
Notice that for each ledger account, there is a corresponding unique account number assigned to it that serves as the account’s identification number. The account numbers can be obtained from the chart of accounts, a listing of all the accounts that your company uses to record transactions in the general ledger.
Let’s assume that most accounts above already exist in your company’s general ledger. If, let’s say, that the equipment account is not yet in the general ledger, then you may create or open the said account in the ledger using the sample layout below:
With all the accounts already available, you may now begin the posting process. Basically, all you have to do is to transfer the details in the journal entries to their corresponding fields and accounts in the general ledger.
Let’s begin with the first journal entry recorded on February 1, 2023.
To post this entry, let’s begin with the Cash account in the general ledger. Just transfer the details that relate to the cash account as follows:
Notice that the Post Reference (P.R.) shows GJ1. This means that this entry in the cash account can be traced back to page 1 of the general journal, assuming that the related journal entry is recorded in page 1 of the general journal.
In addition, you’ll also notice that the account number of the cash account is also indicated in the corresponding P.R. column in the general ledger beside the cash debit entry. When the account number is already written under the P.R. column in the general journal, this means that the transaction was already posted in the general ledger.
This cross referencing process helps facilitate the tracing of entries between the journal and the general ledger. If the P.R. columns in both the journal and general ledger are filled up, this signifies that the transaction entry has already been posted. However, if the P.R. column in the general journal remains blank, it signifies that the journal entry still needs to be posted to the general ledger.
Let’s continue with the posting of the other journal entries. Below are the updated accounts in the general ledger.
Notice that the balance column also shows debit and credit sub-columns. These columns indicate the normal balance of the related account.
For example, the normal balance of cash is in the debit side that’s why the $4,900 balance of the cash account on February 12 is also located in the debit column. Likewise, the $500 balance in the accounts payable is located in the credit side which is the normal balance of a liability.
However, in the case of the accounts receivable ledger account, there is no balance by February 12 since the full amount of the receivable was already collected.
After posting to the general ledger, the updated general journal should appear as follows:
After posting the entries to the general ledger and updating the journal’s post reference column, the general journal should already show the corresponding general ledger account numbers in the said column, indicating that all transactions are already posted in the general ledger.
Review Questions
- What are the differences between a general journal and a general ledger?
- What is the difference between a subsidiary account and a control account?
- When do you need to use a subsidiary ledger?
- What is posting to the general ledger and why is this process necessary?
- How does cross referencing help with the posting process?
