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Hey I’m James
you're watching Accounting Stuff
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and in this video we're going to
cover the general ledger
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What does it mean?
I like to think of the general ledger
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as a database that stores
a complete record of all your
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accounts and journal entries
But don't worry if this
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doesn't make sense right away
all would be revealed in this video
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First i think we should see where
the general ledger fits in the
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big picture of accounting
A little while ago i made a video
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on the accounting cycle
which basically shows us how
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financial accounting works
if you missed it i'll drop a link
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in the description but as you can see here
we post the general ledger in step three
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right after identifying transactions
and preparing journal entries
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and it's these three steps that
we're going to focus on today
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I’ve got two example transactions
for you and we're going to
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prepare the journal entries
and post them to the general ledger
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in two different ways
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Now let's take a step back
for a moment and pretend that you make delicious tasty cheeses for a living
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Mmmm now wouldn't that be the best!
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Your business is called Let it Brie and
it's been in your family for generations
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Back in the day when your
grandparents were running the business
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they would have looked after
Let it Brie’s books using actual books
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because that's what ledgers
were at the time
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books that you'd regularly
record transactions in
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Your grandparents were literally
bookkeeping and they would have kept
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several different ledgers
a cash book
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one for receivables
inventory
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fixed assets
maybe one for payables
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and so on
and then they had the precious
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the general ledger which is where
they stored a complete record of
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the businesses accounts and journal entries
all of these smaller books
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are called subledgers
they support the general ledger by providing
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extra detail for certain accounts
more on that soon
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Back then your grandparents would
have filled out all these ledges by hand
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but today the books are gone
now we've got computers
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we still hold on to some of the old
words like bookkeeping and ledger
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but their definitions
have changed slightly
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now you can think of a ledger
as a database that you regularly
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record transactions in
and the general ledger is a database
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that stores a complete record of
all your accounts and journal entries
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Time for those examples
but first I’d quickly just like to say
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thanks to all of my youtube
channel members you guys are
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absolute legends seriously
i really appreciate your support
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it helps push me to keep on
making more tutorials like this one
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If you haven't signed up yet
and you'd like to become a member
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then just scroll on down below this video
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and click on the Join button
simple as that
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Thank you again
I appreciate it
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Example 1
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Manual Journal Entries
Let it Brie’s general ledger looks
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something like this
it's a collection of all your
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accounts and journal entries
you have your assets your liabilities
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your equity your revenue
and your expense accounts
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and as usual debits are on the left
and credits are on the right
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It's the end of June and you've got a transaction to record
for the last month
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you've been using electricity to power
your cheese making machines
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but the electricity company
hasn't sent you a bill yet
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which is completely fine
but remember that in accrual accounting
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we record our expenses as we incur them
and you're pretty darn sure that you'll
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are about $400 for June
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so let's record this transaction using double entry
accounting
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First things first we'll debit overhead expenses
to record a $400 cost
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in your income statement and then
we'll credit accrued expenses
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by $400 to recognise a liability
in your balance sheet
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we'll add a description
and a date June 30th because that's
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the date that we're going to record the
transaction in your general ledger
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This type of transaction is
called an accrued expense
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because you've used the electricity
in the past but you haven't received
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an invoice or made the payment yet
if you'd like to learn more about that
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I’ve made a whole video covering
accrued expenses which i'll link to
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down in the bottom
But what we're looking at here
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is a journal entry and that means that
this is a record of a financial transaction
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and this is a manual journal entry
because we're posting it ourselves
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if we pop back to our diagram we can see
that we're posting this transaction
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directly into a general ledger
kind of like this
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we're skipping past all of the
subledgers because you don't
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have one for accrued expenses
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So let's post this shall we?
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You already have an
overhead expenses account with
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an $18,000 debit balance
on the left hand side
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This is your beginning balance
which you've brought forward and you
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also have an accrued expenses account
with a $16,500 credit balance
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on the right hand side
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These are called T accounts
because they look like T’s
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When we post this manual journal entry
into your general ledger you debit
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the left hand side of your
overhead expenses account by $400
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and you credit the right hand side of
accrued expenses by $400
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so your ending balance in your
overhead expenses account
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is now $18,400 which you’ll
carry forward into the next month
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and your accrued expenses
have increased to $6,900
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This is what we mean by
posting a journal and now
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we can see how it affects
your general ledger as a whole
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Your overhead expense and
accrued expense accounts
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have been updated to
reflect the transaction
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Example 2
and this time we're going to use a subledger
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and an automatic journal entry
An account with a subledger
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is often called a control account
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Take accounts payable for example
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this is a control account
held in your general ledger
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and right now it has a balance of $3,000
But what's that $3,000 made up of?
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We can't really tell by looking
at the general ledger
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it just doesn't give us enough detail
If we want to know who your business
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owes money to then we need to look at
the accounts payable subledger
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You can think of this as a mini-database
that supports the
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main accounts payable account
in the general ledger
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These two things are separate but they
interact with each other
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and the totals always have to match
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In the accounts payable subledger we can see that Let it Brie
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owes money to three different suppliers
and if we look a little closer
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we can see exactly which
invoices make up the balances
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Pretty handy hey!
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Now let's take a closer
look at Dairy Lane
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You've been buying milk from them for a while now
and they're kind enough to let you pay ‘On Account’
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which means that you don't have to pay for your milk right away
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Each time you buy some you're handed an invoice and you're given
30 days in order to make the payment
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At the moment you owe Dairy Lane
a total of $1,700 which is split across
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three different invoices
and today you decide to
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pay the oldest one
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Invoice 1485 which is for $1,000
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This payment is going to hit two places
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your accounts payable subledger
and your cash book
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In your accounts payable subledger
the $1,000 payment is allocated
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against invoice 1485
so this balance is cleared down to zero
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and now you're left with two
open invoices which add up to $700
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and your accounts payable subledger
now totals to $2,000 but how does
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this affect your general ledger?
Specifically your cash account and your
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accounts payable control account
remember these have to
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match their subledgers
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Well these days accounting software is pretty smart and often when you
make payments like this it'll trigger
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an automatic journal entry
in the background
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What would that look like?
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In this case the journal would
debit accounts payable by $1,000
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to reduce your liabilities
and credit cash by $1,000
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to reduce your assets as well
This automatic journal entry
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will debit the left-hand side of
your account's payable account
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reducing the balance down to two $2,000
and credit the right-hand side of
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your cash account bringing the
balance down to $149,000
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If we look again at your general ledger
we can see that it's been updated
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Your accounts payable control account
now has a balance of $2,000
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which matches the subledger
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Great stuff!
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Automatic journal entries like this can really save you a lot of time
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Think of all that extra cheese your grandparents could have made
if they didn't have to do this by hand
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As usual i've made a cheat sheet which
summarises the general ledger
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and basically everything
we just went through
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If you'd like to grab a copy then
head down into the description
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and you can find a link there
And if you've got any questions or
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suggestions for topics then please
let me know down in the comments
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or message me on instagram
I do check and I do respond
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I'm working on a whole bunch
of new videos at the moment
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so if you haven't already
click subscribe and maybe
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hit the bell while you're at it
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Why not?
Stay safe and I’ll see you soon
