A general ledger acts as a record of all of the accounts in a company and the transactions that take place in them. Balancing the ledger involves subtracting the total number of debits from the total number of credits. In order to correctly calculate credits and debits, a few rules must first be understood.
Key Takeaways
- A general ledger is a record of all of the accounts in a business and their transactions.
- Balancing a general ledger involves subtracting the total debits from the total credits.
- All debit accounts are meant to be entered on the left side of a ledger while the credits are on the right side.
- For a general ledger to be balanced, credits and debits must be equal.
- Debits increase asset, expense, and dividend accounts, and decrease liability, revenue, and equity accounts. The reverse is true for credits.
How to Calculate the Balances
To begin, enter all debit accounts on the left side of the balance sheet and all credit accounts on the right. Include the balance for each. Consider which debit account each transaction impacts and whether it ultimately increases or decreases that account. For instance, does it decrease inventory or increase cash? Finally, calculate the balance for each account and update the balance sheet.
When you have finished, check that credits equal debits in order to ensure the books are balanced. Another way to ensure that the books are balanced is to create a trial balance. This means listing all accounts in the ledger and balances of each debit and credit. Once the balances are calculated for both the debits and the credits, the two should match. If the figures are not the same, something has been missed or miscalculated and the books are not balanced.
Important Rules to Follow
First, debits must ultimately equal credits. While this may be confusing at first, and it may be tempting to simply use positive and negative numbers to account for transactions, ultimately the debit and credit relationship more accurately expresses what happens in a business.
Second, debits increase asset, expense, and dividend accounts while credits decrease them. It may be helpful to use the mnemonic D.E.A.D. to remember this. Debits increase Expenses, Assets, and Dividends.
Third, the opposite holds true for liability, revenue, and equity accounts. Credits increase these while debits decrease them. The mnemonic for remembering this relationship is G.I.R.L.S. Accounts which cause an increase are Gains, Income, Revenues, Liabilities, and Stockholders’ equity.
Because these have the opposite effect on the complementary accounts, ultimately the credits and debits equal one another and demonstrate that the accounts are balanced. Every transaction can be described using the debit/credit format, and books must be kept in balance so that every debit is matched with a corresponding credit.
Important
Debits increase the balance of expenses, assets, and dividends, while credits decrease them. Credits increase the balance of gains, income, revenues, liabilities, and equity, while debits decrease them.
Accounting Practices
Accounting software such as QuickBooks, FreshBooks, and Xero are useful for balancing books since such programs automatically mark any areas in which a corresponding credit or debit is missing. Most companies will have an in-house accountant who will handle all of this, but if you are handling your own finances it is a good idea to run important numbers through an outside accounting consultant like a certified public accountant (CPA) or enrolled agent (EA).
A debit without its corresponding credit is called a dangling debit. This may happen when a debit entry is entered on the credit side or when a company is acquired but that transaction is not recorded. Similarly, a credit ticket may be entered into the general ledger when a deposit is made, but it needs an offsetting debit ticket, either at the same time or soon after, to balance the books.
What Does Credit and Debit Mean?
In accounting, credits and debits are the two types of accounts used to record a company’s spending and balances. Put simply, a credit is money “owed,” and a debit is money “due.” Debits increase the balance in asset, expense, and dividend accounts, and credits decrease them. Conversely, credits increase the liability, revenue, and equity accounts, and debits decrease them. When the accounts are balanced, the number of credits must equal the number of debits.
What’s the Difference Between a Credit Card and a Debit Card?
Credit cards and debit cards are both commonly used forms of electronic payment cards used as an alternative to cash. The main difference is where the money comes from; a debit card is connected to your bank or credit union account, and the payments are subtracted from your account balance. A credit card is effectively a loan from the card issuer, that must be repaid at the end of a billing cycle. Debit cards limit your spending to the total amount of cash in your account, while credit cards allow you to pay for current purchases with future income. However, credit card rates are extremely high, so it is important to pay them off as quickly as possible.
What Are the Accounts of a General Ledger?
In accounting, a general ledger is divided into five major components: assets, liabilities, equity, revenue, and expenses. Each of these may be further subdivided into subledgers, such as “office supplies” or “payroll.” In each case, the number of debits and credits must be equal when the accounts are balanced.
The Bottom Line
In accounting, a general ledger is a complete record of how a company spends and uses its resources in order to conduct business. The debit column, on the left, records money coming in, and the credit column on the right records money going out. When the books are balanced, the number of credits and debits must be equal.
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