General Journal and General Ledger Accounts

There are two types of accounting entries:

• Credit - Located on the right-hand side of the ledger and increases equity, liability, or revenue account. It may also decrease an asset or expense account. 

• Debit - Located on the left-hand side of the ledger and increases an asset or expense account. It may also decrease equity, liability, or revenue account.

Accounting systems are based on the principle that for every Debit entry, there will always be an equal Credit entry. This is known as the Duality Principle. Double-entry bookkeeping is an accounting system where every transaction is recorded in two accounts: a debit to one account and a credit to another. 
 
Every transaction has two effects. For example, if one of Brentwood Landscaping's client's purchases of a decorative garden statue, they pay cash (or another form of payment) to the Brentwood Landscaping and in return, they receive their statue. This simple transaction has two effects from the perspective of both, the client/buyer as well as the seller.

1. The buyer’s cash balance decreases by the amount of the item price however they do acquire a statue (increase their personal inventory).

2. Brentwood Landscaping's (the seller) inventory decreases by one statue however their cash balance increases by the price of the item.

Accounting attempts to record both effects of a transaction or event on the company's financial statements. This is the application of the double-entry concept. Without applying double entry concept, accounting records would only reflect a partial view of the company’s affairs. 

For example, Brentwood Landscaping has purchased a machine during the year, but the accounting records do not show whether the machine was purchased for cash or on credit. Perhaps the machine was acquired in exchange for another machine. Such information can only be gained from accounting records if both effects of a transaction are accounted for.

This is how it a double entry may look like.

Here is a short video explaining double-entry bookkeeping (from an inventory perspective).

To better understand the principle of double-entry bookkeeping, one should know the fundamental principle of accounting called the accounting equation. The accounting equation sets the foundation of double-entry accounting and is the fundamental element of the balance sheet.

The accounting equation is: 

• Assets = Liabilities + Equity.

The accounting equation, Assets = Liabilities + Equity means that the total assets of the business are always equal to the total liabilities plus the equity of the business. This is true at any time and applies to each transaction.

For example, if the Brentwood Landscaping wishes to purchase an asset (ie. a company car) valued at $10,000, and they are able to secure a bank loan for $5,000 of the cost (liability) and they have $5,000 cash savings available to utilise then the asset is equal to the liability (bank loan) + cash on hand (owner's equity).

This is how the accounting equation may look like.

A journal is used to record and summarise the transactions that occur in a business. Small organisations only have a single journal that records every transaction within the company. However, larger organisations will divide the journals up into specific records of different transactions.

For example, there might be individual journals for:

• Cash receipts.

• Cash payments.

• General transactions (General Journal). Business use general journals if the transaction does not need to go through a sub-ledger such as accounts receivable or accounts payable.

The journals will record the accounts that are affected in a transaction, as well as the total summary balances for the period. Subsidiary ledgers are created for some journals.

These are how journals may look:

Cash Receipts Journal (CRJ)

Sales Journal (SJ)

General Journal

This video can help you learn more about making journal entries

Subsidiary ledgers are useful for maintaining individual records of specific aspects of a business, and then these are generally summarised in the general ledger. There may be numerous sub-ledgers for items such as cash, accounts receivable and accounts payable. It is not always necessary to have subsidiary ledgers, however, they do help if the business has a high volume of sales.

Below are some examples of Accounts Receivable subsidiary ledgers. Accounts Receivable refers to the amount owed to the company by a creditor (client or customer) for the provision of goods and/or services on credit. For example, Brentwood Landscaping has three clients who currently have credit accounts (Anderson, Smith, and Turner). Each time one of these clients purchases an item or service on credit it is recorded in the Debit section of the relevant subsidiary ledger. When they then pay their invoice the amount is recorded in the Credit section of the subsidiary ledger. At the end of the reporting period, they may have a carryover balance or they may have a zero balance depending on payment terms.

Anderson

Smith

Turner

Here is a video that helps explain how subsidiary ledgers are maintained:

The general ledger is the most important component of any financial system. It can be thought of as the heart of any financial record system. The general ledger is the ‘books’ and any business transaction made will move through the general ledger at some point, which will form a permanent record of all business transactions.

The information in the general ledger is summarised and transposed into the financial statements at the end of each accounting period. The balance sheet and the profit and loss statement requires information that is drawn directly from the general ledger.

The general ledger tracks five prominent accounting items:

• Assets.

• Liabilities.

• Owner's Capital (equity).

• Revenue.

• Expenses.

Here is how a general ledger may look like.

Here is a video to help you learn more about the general ledger.

Reconciliation in Accounting is the process of ensuring account balances are correct between two accounts at the end of an accounting period. 

If there are any discrepancies or differences between the balances of the subsidiary accounts and the control account, you need to investigate how these discrepancies occurred. There is a wide range of reasons for such discrepancies. If accounts are done manually, there is a chance that it may simply be an adding error, where the accountant made a mistake. For manual bookkeeping, it is important that checking of the ledgers is undertaken and an attempt made to ascertain whether any errors of this kind were made. 

Essentially, at the end of each month, what must be done is to ensure that the totals of the subsidiary ledgers equal the totals of the general ledger accounts. This is completed for the accounts receivable and accounts payable accounts. It is important that the recorded entries on journals, sub-ledgers and the general ledger have no discrepancies.

Conducting such reconciliation is a fairly simple process and involves the development of a schedule that lists the balances of all accounts receivable or accounts payable. Once you have produced the schedule, the total can simply be computed and compared to the end general ledger account balance.

The reconciliation process at the account level typically comprises the following steps:

• Beginning balance investigation - Match the beginning balance in the account to the ending reconciliation detail from the prior period. If the amounts do not match, investigate the reason for the variance in the prior period. If the account has not been reconciled for some time, it is possible that the error lies several periods in the past.

• Current period investigation - Match the transactions reported in the account within the period to the underlying transactions and adjust (as necessary).

• Adjustments review - Review all adjusting journal entries recorded in the account within the period for appropriateness and adjust (as necessary).

• Reversals review - Ensure that all journal entries that should have reversed within the period have been reversed.

• Ending balance review - Verify that the ending detail for the account matches the ending account balance.

If the account reconciliation reveals that an account balance is not correct, adjust the account balance to match the supporting detail. Doing so justifies the account balances. Also, always retain the reconciliation detail for each account, not only as proof but also so that it can be used as the starting point for account reconciliations in subsequent periods.

For example, a company maintains a record of all the receipts for purchases made to make sure that the money incurred is going to the right avenues. When conducting a reconciliation at the end of the month, the accountant noticed that the company was charged ten times for a transaction that was not in the cash book. The accountant contacted the bank to get information on the mysterious transaction.

The bank discovered that the mysterious transaction was a bank error, and therefore, reimbursed the company for the incorrect deductions. Rectifying the bank error brought the bank statement balance and the cash book balance into an alignment.

Bad Debt is an expense that a business incurs when a credit account has not been paid and is deemed 'uncollectible'.

Doubtful debt is a credit account or accounts that the business predicts will turn into bad debt. 

There are two ways to estimate or identify bad debt expense: