The General Ledger (Junior Cert Business Studies): Revision Notes
The General Ledger
The general ledger is the second major step in the accounting process for any business. Once you've completed your analysed cash book, it's time to organise this information in a way that shows the bigger picture of your business's finances.
What is a general ledger?
A general ledger is where all the financial transactions of a business are recorded in one organised system. It's like a master filing system that contains separate accounts to track different aspects of the business's finances, such as sales, wages, rent, and equipment purchases.
Think of the general ledger as a financial diary that records every money movement in your business. While your analysed cash book shows you the day-to-day detail of transactions, the general ledger provides summary totals for specific time periods.
For example, if Dunnes Stores wanted to know their total sales for March, they would look at their sales account in the general ledger rather than scrolling through hundreds of individual transactions in their cash book.
Why do businesses prepare a general ledger?
The general ledger serves several important purposes:
- Provides summary information: Instead of looking through daily transactions, managers can quickly see totals for wages, sales, or purchases over a month or year
- Tracks money owed: Businesses often buy and sell on credit, so the ledger helps track who owes money to the business and who the business owes money to
- Prepares for financial statements: The ledger provides the organised information needed to create profit and loss accounts and balance sheets
- Enables better decision-making: With clear totals and balances, business owners can make informed decisions about their operations
Understanding debit and credit in the general ledger
The terms "debit" and "credit" have different meanings in the general ledger compared to the analysed cash book.
Debit side of accounts
In the general ledger, the debit side records assets and expenses.
Assets are items of value owned by the business:
- Current assets: Cash or items expected to become cash within one year (such as stock, money owed by customers)
- Fixed assets: Long-term items that last many years (such as buildings, equipment, vehicles)
Expenses are costs the business pays to operate (such as wages, electricity, rent).
Credit side of accounts
In the general ledger, the credit side records liabilities, income, and gains.
Liabilities are money owed by the business:
- Current liabilities: Money owed within one year (such as bank overdrafts, money owed to suppliers)
- Long-term liabilities: Money owed over more than one year (such as mortgages, long-term loans)
Income is money earned by the business (such as sales revenue). Gains are other sources of income (such as interest received).
Memory aid
A helpful way to remember what goes on the debit side is: "If you want to see a Dr, make a trip to A&E" where Dr = debit, A = assets, and E = expenses.
Posting from the analysed cash book to the general ledger
"Posting" means transferring information from your analysed cash book to the appropriate accounts in your general ledger. This follows a simple but important rule:
Posting rule: What appears on the debit side of the cash book goes to the credit side of the ledger account, and what appears on the credit side of the cash book goes to the debit side of the ledger account.
Step-by-step posting process:
- Open accounts: Create separate accounts for each type of transaction (sales, wages, purchases, VAT, etc.)
- Transfer totals: Take the monthly totals from your analysed cash book and enter them in the appropriate ledger accounts
- Use correct sides: Remember the opposite sides rule when posting
- Balance accounts: If an account has entries on both sides, calculate the balance
Example: SuperValu Cork posting sales
If SuperValu Cork's analysed cash book showed total sales of €45,000 on the credit side for January, this amount would be posted to the credit side of the Sales account in the general ledger, because sales are income.
Balancing ledger accounts
When a ledger account has transactions on both the debit and credit sides, you must balance the account to find the net position.
Worked Example: Balancing Steps
- Add up both sides: Calculate the total of the debit side and the total of the credit side
- Find the difference: Subtract the smaller total from the larger total
- Enter balance carried down (c/d): Write this difference on the smaller side as "Balance c/d"
- Make totals equal: Both sides should now have the same total
- Bring down balance: On the next line, enter "Balance b/d" on the opposite side with the same amount
For example, if a VAT account has €2,000 on the debit side (VAT on purchases) and €3,500 on the credit side (VAT on sales), the balance carried down would be €1,500 on the debit side, showing the business owes this amount to Revenue.
Key rules for completing the general ledger
- Date format: Always use the full date format (dd/mm/yyyy)
- Month-end totals: Enter totals from the analysed cash book on the last day of the month
- Opposite sides: Entries from the cash book always go on the opposite side in the ledger
- Balance when necessary: Any account with multiple entries should be balanced
- Clear descriptions: Use "Bank" or "Cash" in the details column where appropriate
- Prepare for trial balance: Once complete, all balances feed into the trial balance
Practical application
The general ledger is essential for preparing a trial balance, which checks that all debits equal all credits in the accounting system. This is the foundation for creating financial statements that show the true financial position of the business.
Modern businesses may maintain their general ledger manually in record books or electronically using accounting software like Sage or QuickBooks, but the principles remain the same.
Key Points to Remember:
- The general ledger organises financial information by account type rather than by date
- Debit sides record assets and expenses; credit sides record liabilities, income, and gains
- Always post entries to the opposite side from where they appeared in the cash book
- Accounts with multiple entries must be balanced to show the net position
- The completed general ledger provides the information needed for the trial balance and financial statements