Hello, Guest   |   Login here

A Review of Key Concepts in Accounting Systems

Now we are starting to operate the company and perform transactions. At this stage is useful to review what we have learnt on recording transactions, double-entry bookkeeping and ledgers.

Historically, the purchase ledger was maintained in book form, hence the term ledger, but in modern practice it is much more likely to be held on computer using accountancy software or a spreadsheet.

The General Ledger, sometimes known as the Nominal Ledger, is the main accounting record of a business which uses double-entry bookkeeping. It will usually include accounts for such items as current assets, fixed assets, liabilities, revenue and expense items, gains and losses. Each account in the General Ledger is divided in two sections. The left hand side lists debit transactions and the right hand side lists credit transactions. This gives a 'T' shape to each individual general ledger account.

T Account
Name of Account
The left-hand side when it is the "debit" entry. The right-hand side when is a "credit" entry
The general ledger is a collection of the group of accounts that supports the value items shown in financial statements. It is built up by posting transactions recorded in the journal. There are seven basic categories in which all accounts are grouped:

Assets

Liabilities

Owner's equity

Revenue

Expenses

Gains (Profits)

Losses

The balance sheet and the income statement are both derived from the general ledger. Each account in the general ledger consists of one or more pages. The general ledger is where posting to the accounts occurs. Posting is the process of recording amounts as credits, right side of each account, and amounts as debits, left side of each account, in the pages of the general ledger. The use of accounting software eliminates the use of “books” where posting to each account in the ledger is done automatically.

The listing of the account names is called the chart of accounts. The extraction of account balances, namely balances of assets, liabilities, revenues and expenses. is called a trial balance. The purpose of the trial balance is, at a preliminary stage of the financial statement’s preparation process, to ensure the equality of the total of debits and credits.

The main categories of the general ledger may be further subdivided into sub-ledgers to include additional details of such accounts as cash, accounts receivable, accounts payable, etc. For instance, an accounts receivable subsidiary ledger would contain a separate account for each credit given to a customer, tracking that customer's balance separately.

Because each book-keeping entry debits one account and credits another account in an equal amount, the double- entry bookkeeping system helps ensure that the general ledger is always in balance, thus maintaining the accounting equation:

Assets = Liabilities + (Shareholders or Owners equity)

The accounting equation is the mathematical structure of the balance sheet.

For purposes of simplicity in the teaching methodology using worksheets we have grouped the four accounts: 

Subscribe today and learn the fundamentals

Hello,
It seems you don't have access to the exclusive content of The Course.

In order to gain access to the content of The Course you will have to register with EntreprenAble. Membership with EntreprenAble will also give you access to our interactive Business Game and Accounting Simulations.

Subscribe today and get:

  • Unlimited website access to The Course
  • Optimized view for Desktop, Tablet and Mobile devices
  • Free 7-day, no obligation trial - normally £15
Start free trial
Test-drive the system for free