Principles of Financial Accounting: The Accounting Equation and Double Entry - Posting to the, General Ledger

What It Is

Posting to the General Ledger is the process of recording transactions in the general ledger, which is a centralized accounting system that contains all the accounts of a company. This process is crucial in financial accounting as it ensures that all transactions are accurately and systematically recorded, allowing for the preparation of financial statements. If a company buys $10,000 of inventory, the transaction would be posted to the general ledger, increasing the inventory account and decreasing the cash account.

Key Concepts & Formulas

• Debit/Credit Rule: Debits increase asset and expense accounts, while credits increase liability, equity, and revenue accounts. Example: Debit Cash $10,000, Credit Inventory $10,000.
• Accounting Equation: Assets = Liabilities + Equity Example: If Cash increases by $10,000, then Assets increase by $10,000.
• Gross Profit Formula: Gross Profit = Sales – COGS Example: If Sales are $100,000 and COGS are $60,000, then Gross Profit is $40,000.
• Net Income Formula: Net Income = Gross Profit – Operating Expenses Example: If Gross Profit is $40,000 and Operating Expenses are $20,000, then Net Income is $20,000.
• Normal Balance: Asset accounts have a debit balance, while liability, equity, and revenue accounts have a credit balance. Example: Cash has a debit balance of $10,000.
• Journal Entry: A journal entry is a record of a transaction that is posted to the general ledger. Example: Debit Cash $10,000, Credit Inventory $10,000.
• Posting: The process of recording transactions in the general ledger. Example: Posting a journal entry to the general ledger.
• Trial Balance: A trial balance is a list of all the accounts in the general ledger, along with their debit or credit balances. Example: A trial balance showing Cash with a debit balance of $10,000.

Journal Entry Examples

1. Dr. Cash $10,000 Cr. Inventory $10,000

   Explanation: This journal entry records the purchase of inventory for $10,000, increasing the inventory account and decreasing the cash account.

2. Dr. Accounts Payable $5,000 Cr. Purchases $5,000

   Explanation: This journal entry records the purchase of goods on account for $5,000, increasing the accounts payable account and decreasing the purchases account.

3. Dr. Sales $10,000 Cr. Cash $10,000

   Explanation: This journal entry records the sale of goods for $10,000, increasing the sales account and decreasing the cash account.

Common Mistakes

1. Mistake: Confusing debits and credits for expense accounts. Correction: Expense accounts are debited, while revenue accounts are credited. Example: Debit Rent Expense $1,000, Credit Rent Revenue $1,000 (Incorrect).
2. Mistake: Not considering the accounting equation when recording transactions. Correction: The accounting equation must be maintained at all times. Example: If Cash increases by $10,000, then Assets increase by $10,000.
3. Mistake: Not using the correct journal entry format. Correction: Use the correct format: Debit account name $xxx, Credit account name $xxx. Example: Debit Cash $10,000; Credit Inventory $10,000.

Exam Tips

1. Tip: Remember the debit/credit rule: Debits increase asset and expense accounts, while credits increase liability, equity, and revenue accounts.
2. Tip: Use the accounting equation to ensure that transactions are accurately recorded.
3. Tip: Be careful when recording transactions that involve multiple accounts.

Quick Practice

1. What is the adjusting entry for accrued salaries of $5,000?

   Answer: Debit Salaries Expense $5,000, Credit Salaries Payable $5,000.

   Explanation: This adjusting entry records the accrual of salaries expense and the liability for salaries payable.

2. What is the journal entry for the sale of goods for $10,000, with a 20% discount?

   Answer: Debit Sales $8,000, Credit Cash $8,000.

   Explanation: This journal entry records the sale of goods for $8,000, which is 80% of the original price of $10,000.

3. What is the adjusting entry for the depreciation of a machine with a cost of $10,000 and a useful life of 5 years?

   Answer: Debit Depreciation Expense $2,000, Credit Accumulated Depreciation $2,000.

   Explanation: This adjusting entry records the depreciation of the machine over its useful life.

Last-Minute Cram Sheet

1. Debits increase asset and expense accounts, while credits increase liability, equity, and revenue accounts.
2. Assets = Liabilities + Equity
3. Gross Profit = Sales – COGS
4. Net Income = Gross Profit – Operating Expenses
5. Asset accounts have a debit balance, while liability, equity, and revenue accounts have a credit balance.
6. A journal entry is a record of a transaction that is posted to the general ledger.
7. Posting is the process of recording transactions in the general ledger.
8. A trial balance is a list of all the accounts in the general ledger, along with their debit or credit balances.
9. Dividends are NOT an expense – they go directly to retained earnings.
10. Revenues are NOT expenses – they are recorded as credits to the revenue account.