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. In order to correctly calculate credits and debits, a few rules must first be understood.
- A general ledger is a record of all of the accounts in a business and their transactions.
- Balancing a general ledger involves subtracting the total debits from the total credits.
- All debit accounts are meant to be entered on the left side of a ledger while the credits are on the right side.
- For a general ledger to be balanced, credits and debits must be equal.
- Debits increase asset, expense, and dividend accounts, while credits decrease them.
- Credits increase liability, revenue, and equity accounts, while debits decrease them.
How 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 have finished, check that credits equal debits in order 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 accounts in the ledger and 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, something has been missed or miscalculated and the books are not balanced.
Important Rules to Follow
First, debits must ultimately equal credits. While this may be confusing at first, 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 which cause an increase are Gains, Income, Revenues, Liabilities, and Stockholders' equity.
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.
Accounting software such as QuickBooks, FreshBooks, and Xero are useful for balancing books since such programs automatically mark any areas in which a corresponding credit or debit is missing. Most companies will have an in-house accountant who will handle all of this, but if you are handling your own finances it is a good idea to run important numbers through an outside accounting consultant like a certified public accountant (CPA) or enrolled agent (EA).
A debit without its corresponding credit is called a dangling debit. This may happen when a debit entry is entered 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.