Imagine that it's approaching the end of March for your GBD Fits merch business. This means that we need to begin the process of creating our Pre-Closing Trial Balance, Income Statement, Statement of Stockholders' Equity, Balance Sheet, and Post-Closing Trial Balance.
However... before we do that, we must post all our journal entries in the General Journal into the General Ledger!
General ledger explained
In an effort to make things simple, here's the baseline purpose of the general ledger:
The general ledger takes the beginning balance of each account, and then shows all the journal entries related to the account for the month, resulting in the final balance for that account for the month.
Why is this important?
The final balances contained in the general ledger go directly into the pre-closing trial balance, which enables the creation of the income statement, statement of stockholders' equity, balance sheet, and post-closing trial balance!
There ya have it. That's the core understanding of the general ledger that I need you to understand moving forward.
Now, let's figure out how we create this general ledger! (It's honestly a piece of cake.)
How to create a general ledger
Remember, the general ledger is segmented by account. Based on our journal entries from Journal Entries & General Journal and Adjusting Entries, we have the following general journal:
There are two crucial steps to creating the general ledger: (1) identifying the journal entries in the general journal and (2) identifying beginning balances of the accounts.
Identifying journal entries in general journal
Based on the journal entries that we wrote in Journal Entries & General Journal and Adjusting Entries, we composed the following general journal:
MARCH
| Date | Transaction | Debit | Credit |
|---|---|---|---|
| 3-1 | Equipment | $1,000 | |
| Cash | $1,000 | ||
| New printing press | |||
| 3-1 | Prepaid Insurance | $120 | |
| Cash | $120 | ||
| Printing press 6-month insurance package | |||
| 3-5 | Cash | $20 | |
| Accounts Receivable | $30 | ||
| Sales Revenue | $50 | ||
| Johnny's GBD hoodie, paid with cash and credit | |||
| 3-7 | Inventory | $75 | |
| Accounts Payable | $75 | ||
| 10 base-model hats for inventory | |||
| 3-14 | Cash | $30 | |
| Accounts Receivable | $30 | ||
| Johnny paying back his $30 payment on credit | |||
| 3-15* | Accounts Receivable | $550 | |
| Sales Revenue | $550 | ||
| Group order from the brothers of Sigma Apple Pi, will pay later | |||
| 3-18* | Cash | $200 | |
| Common Stock | $200 | ||
| Issue common stock to friends and family | |||
| 3-25* | Retained Earnings | $100 | |
| Cash | $100 | ||
| Issue dividends | |||
| 3-26* | Cash | $500 | |
| Note Payable | $500 | ||
| Borrowed cash from bank for business operations, will back in 1+ years | |||
| 3-28* | Wages Expense | $125 | |
| Wages Payable | $125 | ||
| Pay Marc for his help printing hoodies this week, will pay back next month | |||
| 3-31 | Insurance Expense | $20 | |
| Prepaid Insurance | $20 | ||
| Adjusting entry for first month of printing press insurance |
* These are journal entries I added to beef things up for the income statement and statement of stockholders' equity (in later articles)
Now, how can we use this general journal to create a general ledger?
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