The General Ledger is where a bookkeeper or accountant will record and calculate the value of the business’ financial elements; i.e. its:
The General Ledger has a page (or pages) dedicated to each type of a business’ assets, liabilities, capital, income and expenses.
Each of these pages is known as a Ledger Account. The actual names or headings used for each ledger account varies between businesses. The table below however, provides examples of some commonly used ledger account names
|NAME OF LEDGER ACCOUNT||WHAT IT MEASURES|
|Bank account||The amount of money held in the business’ current bank account|
|Sales account||The value of the sales generated by the business in the current accounting period|
|Purchases account||The value of the purchases of materials or goods for resale bought by the business in the current accounting period|
|Motor expenses account||The value of the motoring costs (fuel, insurance, repairs, road tax etc.) in the current accounting period|
|Equipment account||The value of the equipment the business owns and uses in its business|
|Sales ledger control account||The amount owed to the business by its customers (note that this account is also commonly known as the Debtors control account)|
|Purchases ledger control account||The amount owed by the business to its suppliers (note that this account is also commonly know as the Creditors control account)|
|VAT account||The amount the business owes to HMRC in respect of VAT (or the amount of VAT that is due from HMRC to the business)|
Alternative names for the General Ledger
The General Ledger is also known as the Nominal Ledger (this name is often used in accounting software) and also as the Main Ledger
Layout of the General Ledger
Ledger accounts are commonly laid out in the form of “T-account”. An example of a T-account is shown below
A ledger account is split into two parts; the Debit side (which is always positioned on the left) and the Credit side (positioned on the right).
Debits and Credits
Under the double-entry bookkeeping system, all transactions are recorded using debit and credit entries in the General Ledger. When an amount is recorded on the debit side of a ledger account there must be a corresponding entry on the credit side of a different ledger account or accounts for the same amount. This idea that all transactions will be recorded in more than one ledger account is where the term “double-entry” comes from.
In section 5 of this course we will look at the way in which common transactions are recorded in the debit and credit sides of the general ledger accounts but for now we will simply consider what debits and credits represent.
What are debits and credits?
- Debits represents what happens to an organisation’s funds
- Credits represent where an organisation’s funds come from
Let’s say that a business has purchased a machine costing £1,500 using money from its bank account.
- We would record a debit of £1,500 in a Machinery account as this records what has happened to the money (i.e. we have used it to buy an asset)
- We would also record a credit of £1,500 in a Bank account as this records where the money used to buy the machine has come from
Financial elements and debits and credits
Accountants and bookkeepers tend to consider the ways that debits and credits affect the financial elements of an organisation. The table below puts debits and credits in terms of assets, liabilities, capital, income and expenses.
To illustrate the above, let’s imagine a business whose bank balance has increased. This increase would be recorded firstly a debit entry in the business’ Bank account, as there has been an increase in the value of one of the business’ assets (i.e. its bank balance).
The money paid into the bank balance has not appeared from nowhere and a credit entry is required in order to record where this increase has come from. The source of this money could, for example, have come any of the following sources:
- Taking out a bank loan (i.e. “an increase in the value of a liability”)
- The owners of the business (i.e. “an increase in the value of capital”)
- Sales to cash customers (i.e. “an increase in income)
- The sale of an asset such as a vehicle (i.e. “a decrease in the value of an asset”)
- A refund received after returning goods to a cash supplier (i.e. “a decrease in expenses”)
Splitting financial transactions into debits and credits is not an idea that comes naturally to most people and if you are having difficulty in understanding the above please know that you are not alone.
Many accountants and bookkeepers start by learning by rote how the different transactions are recorded (see section 5) and it is only after a great deal of practice that they understand the process itself.