General Ledger: Posting and Balances

Learning objectives

By the end of this chapter, you will be able to:

• Explain double-entry bookkeeping and the normal balance for assets, liabilities, equity, income, and expenses.
• Post transactions from journals to the general ledger and explain how some errors can leave the trial balance in agreement while individual accounts are wrong.
• Calculate and interpret closing balances usingopening balance + movements(with movements analysed into debits and credits).
• Prepare and interprettrade receivablesandtrade payablescontrol accounts.
• Apply period-end adjustments (accruals, prepayments, depreciation, and allowances for receivables) and explain their effects on ledger balances and financial statements.

Overview & key concepts

The general ledger is the central record of an entity’s financial activity. Each ledger account collects postings for a particular category (for example, cash, sales, inventory, trade receivables, trade payables, wages, and so on). Ledger balances are extracted into a trial balance and used to prepare the financial statements.

To post confidently, you need three building blocks:

• The accounting equation:assets are financed by liabilities and equity.
• Double-entry:every transaction records equal debits and credits.
• Timing adjustments:some entries are needed to ensure income and expenses are recognised in the correct period and assets/liabilities are stated appropriately.

Core theory and frameworks

1) The accounting equation and what equity represents

At the broadest level:

Assets = Liabilities + Equity

Equity is what belongs to the owners once you take account of everything the business owes to outsiders. Another way to think about it is: assets are the resources controlled by the business, liabilities are outside claims on those resources, and equity is the remaining claim.

Over time, equity changes mainly because:

• the business makes profits or losses (income increases equity; expenses reduce it), and
• the owners inject funds or take value out (for example, through dividends).

2) Debits, credits, and normal balances

A ledger account has two sides:

• Debit (Dr)
• Credit (Cr)

“Normal balance” means the side that typically carries the positive closing balance for that type of account:

• Assets:normallydebit
• Expenses:normallydebit
• Liabilities:normallycredit
• Income:normallycredit
• Equity:normallycredit

A practical rule:

• If an account’s normal balance isdebit, thendebits increase itandcredits decrease it.
• If an account’s normal balance iscredit, thencredits increase itanddebits decrease it.

Example (cash purchase of office supplies):

• Office supplies (asset) increases →Dr office supplies
• Cash (asset) decreases →Cr cash

3) Cash vs credit transactions

A common posting error is confusing how a transaction is paid with when income or expenses are recognised.

• Cash sale:Dr cash / Cr sales (plus any tax element if applicable).
• Credit sale:Dr trade receivables / Cr sales (plus any tax element).
• Cash purchase (expense):Dr expense / Cr cash.
• Credit purchase (expense or inventory):Dr expense or inventory / Cr trade payables.

Settlement is a separate step:

• Collect from customer: Dr cash / Cr trade receivables.
• Pay supplier: Dr trade payables / Cr cash.

4) Operating expenses, accruals, and prepayments

Operating expenses are recognised in the period they relate to, not simply when cash is paid.

Accrual: an expense has been incurred but not paid at the period end.

• Entry:Dr expense / Cr accrual (liability)

Prepayment: cash has been paid in advance for a future period.

• Entry on payment:Dr prepayment (asset) / Cr cash
• As time passes:Dr expense / Cr prepayment

5) Inventory and cost of sales in ledger terms

Inventory accounting depends on the system used:

• Perpetual system:inventory and cost of sales update as purchases and sales occur.
• Periodic system:purchases may be recorded during the year and cost of sales is determined at the end using opening inventory, purchases, and closing inventory.

At a high level, ledger postings must achieve two outcomes:

• Inventory (asset)reflects goods still held.
• Cost of sales (expense)reflects goods sold in the period.

6) Deferred income (unearned revenue)

Deferred income arises when cash is received before goods or services are provided.

• On receipt:Dr cash / Cr deferred income (liability)
• When earned:Dr deferred income / Cr income

7) Notes payable (loans) and interest

Typical entries:

• When funds are received:Dr cash / Cr loan payable
• When interest accrues (even if unpaid):Dr interest expense / Cr interest payable
• When interest is paid:Dr interest payable (if accrued) / Cr cash

8) Allowance for receivables and write-offs

Keep these separate:

Specific write-off: remove a confirmed irrecoverable customer balance.

• Entry (common approach):Dr irrecoverable debt expense / Cr trade receivables
• If an allowance already exists and the question indicates it is used:Dr allowance for receivables / Cr trade receivables

Allowance estimate: a year-end adjustment for remaining receivables.

• Entry:Dr irrecoverable debt expense / Cr allowance for receivables
• In most questions, you post only themovementneeded from the opening allowance to the required closing allowance.

Exam technique: if opening allowance is a credit and required closing allowance is a credit, compare the two and post the difference.

9) Equity transactions: share capital, share premium, dividends, retained earnings

Issue of shares:

• Share capital is credited with the nominal value.
• Any excess received is credited to share premium.

Dividends: dividends are distributions to owners and are not an expense.

• A dividend liability is recognised only when the dividend is properly authorised/declared and is no longer at the entity’s discretion.

Some entities post dividends to a separate dividends (equity) account and transfer it to retained earnings later. Others post dividends directly to retained earnings. Both approaches reduce equity, not profit.

10) VAT control account mechanics

Where VAT applies:

• Output VAT:tax charged on sales.
• Input VAT:tax charged by suppliers on purchases (often recoverable, subject to local rules).

Net VAT:

• Payableif output VAT exceeds input VAT.
• Receivableif input VAT exceeds output VAT.

A credit balance on VAT control usually represents VAT payable; a debit balance usually represents VAT receivable (depending on how the ledger is set up).

Currency is illustrative throughout this chapter.

11) Suspense accounts

A suspense account is a temporary holding account used when the correct posting is not yet known. It keeps the bookkeeping system balanced while information is investigated. Suspense balances should be cleared promptly.

Worked example

Narrative scenario

ABC Corporation operates in a VAT environment. During the year, the following transactions occurred:

1. Credit sales of$200,000were made. Output VAT of$12,000relates to these sales.
2. Cash of$150,000was received from customers. Included in this was a$5,000receipt that was initially credited to a suspense account because the customer could not be identified at the time.
3. Raw materials were purchased on credit for$80,000. Input VAT of$8,000relates to these purchases.
4. Cash of$60,000was paid to suppliers.
5. Utility expenses of$5,000were incurred during the year and were paid in the following month (after year end).
6. Depreciation of$10,000was recorded on machinery.
7. Shares with a nominal value of$1each were issued for$1.50per share, raising$45,000in total.
8. Dividends of$5,000were paid to shareholders.
9. Bad debts of$2,000were written off.
10. An accrual of$3,000was recorded for unpaid salaries at the year end.
11. An insurance prepayment of$4,000was made during the year and relates entirely to the next accounting period.
12. Interest income of$1,000was earned during the year and will be received after year end.

Assume opening balances for trade receivables and trade payables are $0, and there is no opening allowance for receivables.

Required

1. Prepare thetrade receivables control accountand calculate the closing balance.
2. Prepare thetrade payables control accountand calculate the closing balance.
3. Prepare theVAT control accountand calculate the net amount payable or receivable.
4. Record journal entries for: utilities (accrual), salaries (accrual), insurance (prepayment), and interest income (accrued income).
5. Record the journal entry fordepreciationof machinery.
6. Prepare the journal entry for theissue of shares.
7. Record thedividend paymentand state when a dividend liability would be recognised.
8. Clear thesuspense accountonce the customer is identified.
9. Adjust theallowance for receivablesto5%of closing trade receivables and show the year-end adjustment.

Solution

1) Trade receivables control account (asset: debit balance)

• Credit sales (gross):$200,000 + $12,000 =$212,000
• Cash received:$150,000 total, of which $5,000 was credited to suspense initially → allocated to receivables initially$145,000
• Bad debts written off:$2,000
• Suspense cleared to receivables:$5,000

Trade receivables control

Closing balance:$60,000 debit (amount owed by customers)

2) Trade payables control account (liability: credit balance)

• Credit purchases (gross):$80,000 + $8,000 =$88,000
• Cash paid:$60,000

Trade payables normally carry a credit closing balance. To “total off” the account, Balance c/d is placed on the debit side (the opposite side) so that both sides agree.

Trade payables control

Closing balance:$28,000 credit (amount owed to suppliers)

3) VAT control account and net VAT

• Output VAT =$12,000
• Input VAT =$8,000

Net VAT = $12,000 − $8,000 = $4,000 payable

A credit balance on VAT control usually represents VAT payable; a debit balance usually represents VAT receivable (depending on how the ledger is set up).

4) Utilities accrual, salaries accrual, insurance prepayment, and interest receivable

(a) Utilities accrued (incurred, unpaid at year end)

• Dr Utilities expense$5,000
• Cr Utilities accrual (payable)$5,000

(b) Salaries accrued (unpaid at year end)

• Dr Salaries expense$3,000
• Cr Salaries accrual (payable)$3,000

(c) Insurance paid in advance (relates entirely to next period)

• Dr Prepaid insurance$4,000
• Cr Cash$4,000

(d) Interest income earned but not yet received

• Dr Interest receivable$1,000
• Cr Interest income$1,000

5) Depreciation journal entry

• Dr Depreciation expense$10,000
• Cr Accumulated depreciation (machinery)$10,000

6) Share issue journal entry

Proceeds: $45,000 at $1.50 per share → shares issued = $45,000 / $1.50 = 30,000 shares

• Share capital = 30,000 × $1 =$30,000
• Share premium = $45,000 − $30,000 =$15,000

Journal:

• Dr Cash$45,000
• Cr Share capital$30,000
• Cr Share premium$15,000

7) Dividend payment and when a dividend liability arises

Dividends are distributions to owners and do not reduce profit.

Dividend paid during the year (paid immediately):

• Dr Dividends (equity)$5,000
• Cr Cash$5,000

Some entities post dividends directly to retained earnings (Dr retained earnings / Cr cash). Both approaches reduce equity, not profit.

A dividend liability is recognised only when the dividend is properly authorised/declared and is no longer at the entity’s discretion. If declared but unpaid:

• Dr Dividends (equity)
• Cr Dividend payable (liability)

8) Suspense account clearance

Initial unidentified receipt:

• Dr Cash$5,000
• Cr Suspense$5,000

When the customer is identified:

• Dr Suspense$5,000
• Cr Trade receivables$5,000

9) Allowance for receivables at 5%

Closing trade receivables = $60,000
Required allowance = 5% × $60,000 = $3,000

Assuming no opening allowance, the year-end adjustment is:

• Dr Irrecoverable debt expense$3,000
• Cr Allowance for receivables$3,000

Movement logic: if an opening allowance exists (credit) and the required closing allowance is also a credit, compare them and post only the difference.

Bad debt write-off note: the $2,000 write-off removes the specific customer balance:

• Dr Irrecoverable debt expense$2,000
• Cr Trade receivables$2,000

(If an allowance balance was given and the question indicated it should be used, the debit would usually be to the allowance instead.)

Interpretation of the results

• Trade receivables closing balance ($60,000):the gross amount customers still owe, affecting liquidity and working capital.
• Trade payables closing balance ($28,000):the gross amount owed to suppliers, affecting working capital and near-term cash planning.
• Net VAT payable ($4,000):a short-term liability to the tax authority.
• Accruals (utilities and salaries):increase expenses (lower profit) and create liabilities (higher payables).
• Prepayment (insurance):creates an asset; it does not affect current-year profit on these facts.
• Interest receivable:increases income (higher profit) and creates an asset.
• Depreciation:reduces profit and reduces the asset’s carrying amount via accumulated depreciation.
• Share issue:increases cash and increases equity (share capital and share premium).
• Dividend paid:reduces cash and reduces equity; it does not affect profit.
• Suspense cleared:removes an artificial balance and ensures receivables are correctly stated.

Common pitfalls and misunderstandings

• Incorrect “balance c/d” placement when totalling off:balance c/d is placed on the opposite side to the closing balance so totals agree.
• Ignoring VAT in receivables/payables control accounts:customers and suppliers usually settle gross amounts—control accounts should reflect that when VAT is stated separately.
• Confusing timing with payment:expenses can exist without payment (accruals), and payments can exist without expense (prepayments).
• Mixing up allowance and write-off:write-offs remove specific debts; the allowance is a year-end estimate on remaining receivables.
• Posting dividends as an expense:dividends reduce equity, not profit.
• Leaving suspense balances unresolved:suspense is temporary and should be cleared once details are known.

Summary and further reading

The general ledger organises transactions into accounts so that balances can be extracted and financial statements prepared. Double-entry ensures each transaction records equal debits and credits, keeping the ledger in balance.

Control accounts summarise receivables and payables and support reconciliation to detailed listings. Period-end adjustments—accruals, prepayments, depreciation, accrued income, and allowances for receivables—ensure profit is measured for the correct period and assets and liabilities are stated appropriately.

FAQ

What is the purpose of a control account?

A control account summarises the total activity and balance from individual customer or supplier accounts. It provides a check on completeness and accuracy: the control account should agree to the total of the detailed listing after reconciliation for timing differences and identified errors.

How do accruals and prepayments affect financial statements?

Accruals record costs (or income) relating to the period even if unpaid (or unreceived) at the reporting date, creating liabilities (or assets). Prepayments record payments made in advance as assets, which are released to expense as time passes. Both adjustments help ensure profit reflects the correct period.

What errors can leave the trial balance in agreement but still be wrong?

If equal debits and credits are recorded but posted to the wrong accounts, the trial balance can still balance while individual balances are misstated. Examples include posting a receipt to the wrong customer, recording the wrong amount on both sides, or using the wrong expense category.

How is depreciation recorded in the general ledger?

Depreciation is recorded by debiting depreciation expense and crediting accumulated depreciation. The expense reduces profit, while accumulated depreciation reduces the asset’s carrying amount.

What is the role of a suspense account?

A suspense account is a temporary holding account used when the correct posting is not yet known. Once resolved, the balance is transferred to the correct account so suspense returns to nil.

How do you adjust an allowance for receivables?

Determine the allowance required at the reporting date, compare it to the opening allowance, and post only the movement. If both opening and required allowances are credit balances, the adjustment is the difference between the two.

Summary (Recap)

This chapter explained how the general ledger records transactions using double-entry and how normal balances guide debit and credit postings. It showed how to calculate closing balances from opening balances and movements, and how control accounts summarise receivables and payables activity. It also covered key period-end adjustments (accruals, prepayments, depreciation, accrued income, and allowances for receivables), and the correct treatment of VAT, suspense items, share issues, and dividends. The worked example demonstrated consistent “total off” conventions for control accounts and linked postings to closing balances.

Glossary

General ledger
The main set of accounts that accumulates transactions by category (assets, liabilities, equity, income, and expenses) and provides balances used to prepare financial statements.

Double-entry bookkeeping
A recording method where every transaction is entered with equal debits and credits across at least two accounts, so the ledger remains in balance.

Normal balance
The side (debit or credit) on which an account type typically carries its closing balance.

Control account
A summary ledger account (for example, trade receivables or trade payables) that should agree to the total of individual balances in a detailed listing after reconciliation.

Accrual
A period-end posting that records an expense or income for the period and creates the matching payable or receivable when cash has not yet been paid or received.

Prepayment
A payment made before the related expense is due; it is recorded as an asset and later transferred to expense as the benefit is used up.

Deferred income
Money received before income is earned, recorded as a liability and later transferred to income when the goods or services are provided.

Depreciation
An accounting entry that spreads an asset’s cost across the periods it is used. In the ledger it is an expense with a matching credit to accumulated depreciation, reducing the asset’s carrying amount over time without any cash payment.

Suspense account
A temporary holding account used when the correct posting is not yet known, cleared once the correct information is obtained.

Allowance for receivables
An estimate recorded to reduce trade receivables to the amount expected to be collected, with the adjustment recognised in irrecoverable debt expense.

VAT control account
A ledger account that gathers output VAT and input VAT and shows the net amount payable to or recoverable from the tax authority.

Share capital / share premium
Share capital records the nominal value issued to owners; share premium records amounts received above nominal value.

Dividend
A distribution to owners that reduces equity and does not form part of expenses.