Accounting 101 – Journal to General Ledger

Small Business Bookkeeping Basic Account Entries

Sep 27, 2009

Understanding how journals relate to the general ledger is one of the first steps to learning accounting basics. Learn the steps from journal to general ledger.

Even though using bookkeeping software will help with the daily use of accounting functions for a small business, it’s still important to have an understanding of the basic functions of accounting. Before understanding the relationships between journals and general ledgers it’s important to understand the functions of debits and credits. Understanding how debits and credits work is the first step into grasping the fundamentals of bookkeeping.

Accounting 101 – What is a Journal?

The accounting journal is where all the monetary transactions of a small business are posted. Monetary values from documents used in the day-to-day operations of a small business are transferred to journals. The values are posted with debits and credits. One of the more common journals for a small business is the sales journal.

Using the sales journal as an example let’s see how a typical sales invoice will post. Product XYZ is sold for $100.00, the cost of XYZ is $50.00 and it is sold with open credit terms. There is sales tax of 5% and a $7.00 dollar freight charge.

From the Journal to the General Ledger Accounts

Once the journals are posted, the monetary amounts are then transferred to the general ledgers (GL), usually the following business day. All of the above examples (i.e. accounts receivables, cost of sales, sales, freight, tax and inventory) are separate GL accounts. If the business entrepreneur or manager wants to know how sales are for the month, all they have to do is look at the sales general ledger. If they want to know how the gross profit is doing, they can subtract the cost of sales from the sales GL total.

Accounting General Ledgers

GL accounts are usually numbered for ease of identification and transfers to the financial statements. Most businesses have hundreds of general ledgers in order to analyze financial data. For example, expenses are often broken up into several general ledgers in order to keep track of expenses. Below is an example of some of the GL expense accounts variations.

These are just some examples. Each business is unique and GL accounts will vary from one business to another. If looking for business accounting software, it’s important that the software have general ledger flexibility. Businesses that have several departments may also have separate general ledgers for each department.

When manual adjustments need to be made to a general ledger, a journal voucher (JV) is generally used. JV entries need to have good references and explanations as to why the entry is made for audit purposes. At end of each month, the JV entries are transferred to the appropriate general ledgers. GL totals are then transferred to the appropriate income statements.

The copyright of the article Accounting 101 – Journal to General Ledger in Accounting is owned by James Clausen. Permission to republish Accounting 101 – Journal to General Ledger in print or online must be granted by the author in writing.