:max_bytes(150000):strip_icc():format(jpeg)/business-woman-analyzes-investment--983130558-3801931007d14f08a4245334ad12f8e4.jpg)
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. To correctly calculate credits and debits, you must first understand a few rules.
Key Takeaways
- A general ledger is a record of all of the accounts in a business and its transactions.
- Balancing the ledger involves subtracting the total debits from the total credits.
- All debits are entered on the left side of a ledger while the credits are entered on the right side.
- Credits and debits must be equal for the general ledger to be balanced.
- Debits increase asset, expense, and dividend accounts, and decrease liability, revenue, and equity accounts while the reverse is true for credits.
How to Calculate the Balances
Consider the following steps 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 finish, check that the credits equal the debits 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 the accounts in the ledger and the 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, it means you either missed or miscalculated something and the books are not balanced.
Important Rules to Follow
First, debits must ultimately equal credits. While this may be confusing (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 that cause an increase are:
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 like QuickBooks, FreshBooks, and Xero help balance books since such programs automatically mark any areas in which a corresponding credit or debit is missing. Most companies typically have a staff accountant, but if you handle your own finances, consider running important numbers through an external accounting consultant like a certified public accountant (CPA) or enrolled agent (EA).
A debit without a corresponding credit is called a dangling debit. This may happen when a debit entry is documented 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 Do 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 and a Debit Card?
Credit and debit cards are common electronic payment cards used as alternatives 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 sub-ledgers, 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
A general ledger is a complete record of how a company spends and uses its resources 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.
