General ledger and trial balance example transactions
Some examples of source documents are:. These source documents are then recorded in a Journal. This is also known as a book of first entry. The journal records both sides of the transaction recorded by the source document.
These write-ups are known as Journal entries. These Journal entries are then transferred to a Ledger. The group of accounts is called ledger. A ledger is also known as a book of accounts. The purpose of a Ledger is to bring together all of the transactions for similar activity. For example, if a company has one bank account, then all transactions that include cash would then be maintained in the Cash Ledger. This process of transferring the values is known as posting. Once the entries have all been posted, the Ledger accounts are added up in a process called Balancing.
This will make much more sense when you learn about Debits and Credits. Balancing implies that the sum of all Debits equals the sum of all Credits.
A particular working document called an unadjusted trial balance is created. This lists all the balances from all the accounts in the Ledger. Notice that the values are not posted to the trial balance, they are merely copied. At this point accounting happens.
The accountant produces a number of adjustments which make sure that the values comply with accounting principles. These values are then passed through the accounting system resulting in an adjusted trial balance. This process continues until the accountant is satisfied.
Financial statements are drawn from the trial balance which may include:. For the purposes of accounting, please forget what you know about credits and debits. In accounting, debit Dr. An account will have either a " normal credit balance " or a " normal debit balance ", depending on the type of account. The normal balance indicates which side of the account the amount goes to when the account balance increases.
For example, the account 'Cash' has a normal debit balance: Debits and credits may be derived from the fundamental accounting equation. They result from the nature of double entry bookkeeping.
Two entries are made in each balanced transaction, a debit and a credit. This allows the accounts to be balanced to check for entry or transaction recording errors. In accounting this is generally rewritten from the perspective of the business or commercial entity the books detail:.
Entries in the books are in pairs and track the advantage or asset of the company simultaneously with the disadvantage or liability. In this view the Owner's equity is a claim of the investor against the company. Even when a business has a single owner we make a distinction between the owner's assets and the assets of the business. For example if the owner gives a van to the business this will count as capital introduced, if the owner takes a salary this will be accounted for as drawings.
All accounting transactions are first recorded in a journal. The most common of these is the General Journal , sometimes also known as the Book of Original Entry, because it is the first place a transaction is entered into the books. Journal Entries are made from source documents , which can be anything from receipts to invoices to bank statements. These two entries show the premise of double-entry accounting.
Note that the form of what is written is as important as the actual text:. One representation of an account is called the T-account , shown above.
A T-account contains just the basic elements of the account, so it lacks the necessary detail for use in bookkeeping operations. However, it has its uses as both an illustrative tool and a quick reference. Each account needs to have a unique Account Name , such as Cash, for ease of reference later on.
In modern accounting systems, you will often see an account number alongside the name in order to facilitate report generation and computer entry. Under the bar are the debit from the Latin debere , to owe and credit credere , to believe columns. As it shows in the example above, the balance of a T-account can be figured by first totaling each column. Second, subtract the smaller subtotal from the larger, and finally placing the total in the larger number's column.
While a T-Account is useful for quickly summarising an account's balance, it only contains a fraction of the information that was recorded in the Journal. A central axiom for accounting is the accounting equation above.
Depending on the type of company involved, Owner's Equity may be "Shareholder's" or simply "Equity", but the equation holds. The list of all of the accounts along with their respective account numbers is called the Chart of Accounts.
Asset accounts indicate what a company owns. This can be actual possession or the right to take possession, such as a loan extended to another company. Some assets are identifiable by the term "Receivable". Assets have a normal debit balance. Liability accounts indicate what a company owes to others. Examples of liabilities include loans to be repayed and services that have been paid for that the company hasn't performed yet. This list will contain the name of each nominal ledger account and the value of that nominal ledger balance.
Each nominal ledger account will hold either a debit balance or a credit balance. The debit balance values will be listed in the debit column of the trial balance and the credit value balance will be listed in the credit column. The trading profit and loss statement and balance sheet and other financial reports can then be produced using the ledger accounts listed on the same balance.
The first published description of the process is found in Luca Pacioli 's work Summa de arithmetica , in the section titled Particularis de Computis et Scripturis. Although he did not use the term, he essentially prescribed a technique similar to a post-closing trial balance. The purpose of a trial balance is to prove that the value of all the debit value balances equal the total of all the credit value balances.
If the total of the debit column does not equal the total value of the credit column then this would show that there is an error in the nominal ledger accounts.
This error must be found before a profit and loss statement and balance sheet can be produced. The trial balance is usually prepared by a bookkeeper or accountant who has used daybooks to record financial transactions and then post them to the nominal ledgers and personal ledger accounts. The trial balance is a part of the double-entry bookkeeping system and uses the classic 'T' account format for presenting values.
A trial balance only checks the sum of debits against the sum of credits.