General Accounting 101 Basic Fundamentals
Learn Bookkeeping Basics From Journals to Financial Statements
Nov 11, 2009
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 process to create the financial statements. 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.
Function and Types of Accounting Journals
The accounting journals are used to post the financial transactions of the business. The journals are posted with debits and credits. The total dollar amount of debits must equal the total dollar amount of credits for each financial transaction. There are different journals that are used depending on the type of dollar transaction. The following are some typical journals and their functions.
- Sales Journal – is used to record all the sales activities for the business. Normally the posting of the sales journal is taken from invoices written for customer sales.
- Purchase Journal – is used for purchases made from vendors and suppliers on open credit terms. Normally the posting of the purchase journal is taken from vendors and suppliers invoices. Purchases are posted with a credit (increase) to accounts payable and a debit to an asset or expense.
- Cash Receipts Journal – is used for all cash taken in. Cash is usually debited (increase) and other accounts like accounts receivable are usually credited.
- Cash Disbursement Journal – or check register is used for various payments. Cash is credited (decrease) and other accounts like payables are debit, although there can be some exceptions to the rule.
- General Journal – is used for miscellaneous transactions that are not covered by other journals. The general journal is more commonly used for month end adjustments.
Accounting General Ledger Chart of Accounts
The separate accounts that are posted in journals are known as the general ledger (GL) chart of accounts or just simply general ledgers. The journal totals are transferred to the individual GL accounts. The GL accounts usually have 5 main categories.
- Assets
- Liabilities
- Equity
- Income
- Expense
Within each main category, there are sub accounts. As an example, the sub accounts for assets might consist of:
- Cash
- Inventory
- Equipment
- Accounts Receivable
- Furniture
- Vehicles
From the General Ledger Accounts to the Financial Statements
The two main financial statementsa are the balance sheet and income statement. Usually at the end if each month, the general ledger accounts are transferred to the trial balance. The trial balance is used to make sure that the debits and credits balance. Once they are balanced, the general ledger accounts are then transferred to the balance sheet and income statement. The following main GL accounts are transferred to the appropriate financial statements.
Balance Sheet
- Assets
- Liabilities
- Equity
Income Statement
- Income
- Expenses
The main purpose for the balance sheet is to report owner’s equity. The equation for owner’s equity is assets minus liabilities. The income statement reports net profit (or loss). The equation for net profit is income minus expenses. The accounting process starts with journal entries. The journal transactions are then transferred to the general ledgers.The general ledgers are then listed on the two main financial statements.
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