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