As a small business owner, you need to keep track of your company’s transactions. You can record transactions in a journal and ledger account. Making journal and ledger entries are important steps in accounting.
Every time you make a transaction for your business, you must record it. Transactions go through several steps in the accounting process.
First, you record transactions in a journal. A journal is used to identify transactions. Also known as the book of original entry, the journal is a running list of business transactions. Each line is a journal entry. Entries include the dates, descriptions, and amount of items bought or sold.
Journals are separated into different accounts to stay organized. You will have five main accounts: assets, expenses, liabilities, revenue, and equity. Each of the main accounts can be divided into smaller subcategories. For example, you can break down assets into inventory and receivable categories.
If you use a double-entry bookkeeping system, you will also include a debit or credit. Debits and credits are equal but opposite entries. The debits and credits balance each other. Make one debit and one credit entry for each transaction.
Debits and credits affect the accounts differently. Some accounts are increased by debits, while others are increased by credits. Use the table below to see how debits and credits affect accounts:
The following is an example of accounting journal entries. For each business transaction, there are two entries – a debit and a credit.
Journal Entries Example
|Deposit money into your bank account||20,000||20,000|
|Pay rent for your business location||1,500||1,500|
Let’s break down each line item:
Line one (5/1): You deposited money into your bank account.
- You earned cash, which is an asset. Assets are increased by debits. Debit the cash account $20,000.
- The cash you gained is also capital. Capital is part of your owner’s equity. Equity is increased by credits. Credit the capital account $20,000.
Line two (5/4): You paid rent for your business location.
- You gained an expense. Expenses are increased by debits. Debit the expense account $1,500.
- You lost the cash used to pay rent. Cash (an asset) is decreased by credits. Credit the cash account $1,500.
Line three (5/8): You bought inventory.
- You gained inventory, which is an asset. Assets are increased by debits. Debit the inventory account $2,000.
- You owe the supplier money as part of accounts payable. Accounts payable is a liability. Liabilities are increased by credits. Credit accounts payable $2,000.
Posting journal entries to general ledger accounts
After recording transactions in the journal, transfer them to the general ledger. You must post every transaction from your journal into the ledger.
The ledger is the book of final entry. You use the ledger to organize and classify transactions. Each journal entry is moved into an individual account. The line items are called ledger entries.
Transfer the debit and credit amounts from the journal to the ledger account. After posting entries to the general ledger, calculate the balance of each account.
- Calculate the balance of an asset or expense account by subtracting the total credits from the total debits.
- Calculate the balance of a liability or equity account by subtracting the total debits from the total credits.
If you don’t want to balance accounts and calculate totals yourself, use basic accounting software to record transactions in your ledger. The software will automatically calculate totals for you.
Without software, you can record your ledger in a spreadsheet. However, this method could be time consuming and lead to more errors while posting to the ledger.
Ledger account example
As a small business owner, you should be posting to the general ledger as you make transactions. At the end of each month, transfer journal entries into a ledger. The ledger organizes the same information in a different format.
Instead of a comprehensive list, ledger entries are separated into different accounts. The accounts, called T-accounts, look like an uppercase “T” and trace debits and credits in your accounting records.
The following is an example of a checking account in the general ledger:
The general ledger will consist of T-accounts for each category in your accounting journals.
Why ledger entries are important
Without the posting process, you only have a list of transactions. Finding individual entries becomes difficult and time consuming. Posting in a ledger helps you compartmentalize transactions. You can see the big picture of your financial health and review patterns in sales and expenses.
Posting in a ledger makes it easier to find mistakes in your accounting records. Catching mistakes early is important for accurate financial reports and tax filings. In the case of an audit, learning how to make ledger entries that are up-to-date can help you avoid penalties.
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