- Once transactions have been analyzed
and recorded in a journal,
it's necessary to classify and group all similar items.
This is accomplished by the bookkeeping procedure of posting
all the journal entries to appropriate accounts.
That simply means that the numbers
from the journal entries must be transferred
to the individual accounts.
Now, I should note at this point
that computers are very, very good
at this part of bookkeeping.
Computers transfer the right numbers
to the right accounts and make sure those numbers
get put on the proper side of the account,
the debit side or the credit side.
As indicated earlier, accounts are records of like items.
They show transaction dates, increases and decreases,
and balances.
For example, all increases and decreases
in cash arising from transactions recorded in the journal
are accumulated in one account called cash.
Similarly, all sales transactions are grouped together
in the sales account.
Posting is no more than sorting all journal entry amounts
by account and copying those amounts
to the appropriate account.
No analysis is needed.
All of the necessary analysis is performed
when the transaction is first recorded in the journal.
All accounts are maintained
in an accounting record called the ledger.
Here's an example of how the first three transactions
involving cash in the general journal
would be posted to the cash account in the general ledger,
with arrows depicting the posting procedures.
Observe that a number has been inserted
in the posting reference column in both books.
This number serves as a cross reference
between the general journal
and the accounts in the general ledger.
In the journal, it identifies the account
to which the journal entry has been posted.
In the ledger, it identifies the page
on which the entry appears in the general journal.
For example, the GJ1 notation in the cash account
for the July 1st entry means that the $2,000 has been posted
from page one of the general journal.
Now, as you might imagine,
these posting references are useful
in tracking down mistakes.
With a computer system, the software automatically
generates these posting references.
Now, you can see that the cash account
is constantly updated as journal entries are posted.
The cash account you see here serves the same purpose
as the cash column in the spreadsheet
that we've been reviewing.
All the transactions related
to a specific account are accumulated together.
Now you can see why a spreadsheet would quickly get unwieldy
if we had several hundred accounts.
That would be a very big spreadsheet.
A particular company will have as many
or as few accounts as it needs to provide
a reasonable classifications for its transactions.
The list of accounts used by a company
is known as its chart of accounts.
The normal order of a chart of accounts begins with assets,
then liabilities, followed by owner's equity,
then sales and expenses.
Here is one example of some accounts
that might appear in a typical company's chart of accounts.
Now, for big multinational corporations,
the chart of accounts could involve thousands of accounts.
Imagine dealing with all those accounts by hand.
That would be impossible.
Now, at the end of the accounting period,
you review the accounts in the general ledger
to determine each account's balance.
Asset, expense, and dividend accounts
normally have debit balances.
Liability, owner's equity, and revenue accounts,
they normally have credit balances.
In other words, the balance is normally
on the side that increases the account.
To illustrate how to determine an account balance,
consider the following T account depicting
all the cash transactions from our landscaping business,
and we've added dates.
The beginning cash account balance plus cash debit entries
less total credit entries equals the ending balance
in the cash account.
In this instance, the cash balance
at the end of the period is $2,767.
Cash was increased during the period by $4,485
and decreased during the period
with credits totaling $1,718.
Our cash inflows exceeded our cash outflows.
That is good news.