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After you summarize your journals and develop all the entries you need for the General Ledger (see the previous section), you post your entries into the General Ledger accounts.

When posting to the General Ledger, include transaction dollar amounts as well as references to where material was originally entered into the books so you can track a transaction back if a question arises later. For example, you may wonder what a number means, your boss or the owner may wonder why certain money was spent, or an auditor (an outside accountant who checks your work for accuracy) could raise a question.

Whatever the reason someone is questioning an entry in the General Ledger, you definitely want to be able to find the point of original entry for every transaction in every account. Use the reference information that guides you to where the original detail about the transaction is located in the journals to answer any question that arises.

For this particular business, three of the accounts – Cash, Accounts Receivable, and Accounts Payable – are carried over month to month, so each has an opening balance. Just to keep things simple, this example starts each account with a $2,000 balance. One of the accounts, Sales, is closed at the end of each accounting period, so it starts with a zero balance.

Most businesses close their books at the end of each month and do financial reports. Others close them at the end of a quarter or end of a year. (Book V Chapter 6 talks more about which accounts are closed at the end of each accounting period and which accounts remain open, as well as why that is the case.) For the purposes of this example, it’s assumed that this business closes its books monthly. And the figures that follow only give examples for the first five days of the month to keep things simple.

As you review the figures for the various accounts in this example, take notice that the balance of some accounts increases when a debit is recorded and decreases when a credit is recorded. Others increase when a credit is recorded and decrease when a debit is recorded. That’s the mystery of debits, credits, and double-entry accounting. (For more, flip to Book I Chapter 1.)

The Cash account (see Figure 3-5) increases with debits and decreases with credits. Ideally, the Cash account always ends with a debit balance, which means there’s still money in the account. A credit balance in the cash account indicates that the business is overdrawn, and you know what that means – checks are returned for nonpayment.

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Figure 3-5: Cash account in the General Ledger.

The Accounts Receivable account (see Figure 3-6) increases with debits and decreases with credits. Ideally, this account also has a debit balance that indicates the amount still due from customer purchases. If no money is due from customers, the account balance is zero. A zero balance isn’t necessarily a bad thing if all customers have paid their bills. However, a zero balance may be a sign that your sales have slumped, which could be bad news.

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Figure 3-6: Accounts Receivable account in the General Ledger.

The Accounts Payable account (see Figure 3-7) increases with credits and decreases with debits. Usually, this account has a credit balance because money is still due to vendors, contractors, and others. A zero balance here equals no outstanding bills.

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Figure 3-7: Accounts Payable account in the General Ledger.

These three accounts – Cash, Accounts Receivable, and Accounts Payable – are part of the balance sheet, covered in Book II Chapter 4. Asset accounts on the balance sheet usually carry debit balances because they reflect assets (in this case, cash) owned by the business. Cash and Accounts Receivable are asset accounts. Liability and Equity accounts usually carry credit balances because Liability accounts show claims made by creditors (in other words, money owed by the company to financial institutions, vendors, or others), and Equity accounts show claims made by owners (in other words, how much money the owners have put into the business). Accounts Payable is a liability account.

Here’s how these accounts impact the balance of the company:

The Sales account (see Figure 3-8) isn’t a balance sheet account. Instead, it’s used in developing the income statement, which shows whether or not a company made money in the period being examined. (For the lowdown on income statements, see Book II Chapter 5.) Credits and debits are pretty straightforward when it comes to the Sales account: Credits increase the account, and debits decrease it. The Sales account usually carries a credit balance, which is a good thing because it means the company had income.

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Figure 3-8: Sales account in the General Ledger.

What’s that you say? The Sales account should carry a credit balance? That may sound strange, so let me explain the relationship between the Sales account and the balance sheet. The Sales account is one of the accounts that feeds the bottom line of the income statement, which shows whether your business made a profit or suffered a loss. A profit means that you earned more through sales than you paid out in costs or expenses. Expense and cost accounts usually carry a debit balance.

The income statement’s bottom line figure shows whether or not the company made a profit. If Sales account credits exceed expense and cost account debits, then the company made a profit. That profit would be in the form of a credit, which then gets added to the Equity account called Retained Earnings, which tracks how much of your company’s profits were reinvested into the company to grow it. If the company lost money, and the bottom line of the income statement showed that cost and expenses exceeded sales, then the number would be a debit. That debit would be subtracted from the balance in Retained Earnings to show the reduction to profits reinvested in the company.

If your company earns a profit at the end of the accounting period, the Retained Earnings account increases thanks to a credit from the Sales account. If you lose money, your Retained Earnings account decreases.

Because the Retained Earnings account is an Equity account and Equity accounts usually carry credit balances, Retained Earnings usually carries a credit balance as well.

After you post all the Ledger entries, you need to record details about where you posted the transactions on the journal pages (see Book I Chapter 4 for more on journals).