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.
Key Takeaways
- 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 Practices
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.
FAQs
Key Takeaways
How to calculate the balances of each of the ledger accounts? ›
You can calculate your ledger balance by taking the opening balance and subtract debits and add any credits/deposits. Debits may include any transaction made throughout the day, such as bank card transactions. Credits include deposits, such as payroll, as well as payments from customers or refunds.
How do you calculate debits and credits in accounting? ›
Debits are recorded on the left side of an accounting journal entry. A credit increases the balance of a liability, equity, gain or revenue account and decreases the balance of an asset, loss or expense account. Credits are recorded on the right side of a journal entry. Increase asset, expense and loss accounts.
What is debit balance and credit balance in ledger? ›
There are two sides of account i.e. debit and credit. Transactions are recorded accordingly. After a period, balancing of each account is done by making the total of both sides. Excess of debit over credit is called as "Debit Balance" and excess of credit over debit is called as "credit balance".
What is the credit balance in the general ledger? ›
Essentially, a “credit balance” refers to an amount that a business owes to a customer. It's when a customer has paid you more than the current invoice stipulates. You can locate credit balances on the right side of a subsidiary ledger account or a general ledger account.
How do you calculate debit balance and credit balance? ›
Balancing the 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.
What is the formula for debit and credit? ›
The extended accounting equation is as follows: Assets + Expenses = Equity/Capital + Liabilities + Income, A + Ex = E + L + I. In this form, increases to the amount of accounts on the left-hand side of the equation are recorded as debits, and decreases as credits.
What is the debit and credit in the general ledger? ›
Debits and credits are used in a company's bookkeeping in order for its books to balance. Debits increase asset or expense accounts and decrease liability, revenue or equity accounts. Credits do the reverse.
What is the trick for remembering debits and credits? ›
The accounting equation must always be in balance, the left side (assets) must always be equal to the right side (liabilities and equity). An increase to the left side of the equation is a debit (debit means left), and an increase in the right side of the equation is a credit (credit means right).
What is the accounting equation for debits and credits? ›
Debit simply means left side; credit means right side.
ASSETS = LIABILITIES + EQUITY The accounting equation must always be in balance and the rules of debit and credit enforce this balance. In each business transaction we record, the total dollar amount of debits must equal the total dollar amount of credits.
Assets = Liabilities + Equity
Each transaction entered to both the journal (and later, the general ledger) is organized according to this equation, with debits on the left and credits on the right. For accurate reconciliation, the total debit balances must equal the total credit balances.
How do you read a ledger debit and credit? ›
Debits are recorded on the left side of the ledger, while credits are recorded on the right side. Running balance columns: Some general ledgers include running balance columns to show the cumulative balance of each amount after each transaction. This helps quickly assess the current balance of an account.
What are the rules for debit and credit in accounting? ›
First: Debit what comes in, Credit what goes out. Second: Debit all expenses and losses, Credit all incomes and gains. Third: Debit the receiver, Credit the giver.
How to determine debit or credit in accounting? ›
In traditional double-entry accounting, debits are entered on the left, and credits are entered on the right, like so: Asset accounts Debit Increase, Credit Decrease. Expense accounts Debit Increase, Credit Decrease. Liability accounts Debit Decrease, Credit Increase.
What is debit or credit on ledger? ›
A simple way to distinguish between the two is to know that a debit entry always adds a positive number to the ledger, and a credit entry always adds a negative number.
How do you calculate ledger balance? ›
A ledger balance can be calculated by combining the closing balance from each business day for a particular month and dividing the result by the number of days from a specific month.
How do you balance off accounts in the ledger? ›
Balancing off Accounts Process
Calculate the total figures in both columns of the ledger account; Figure out any discrepancies between the two columns. Enter it in the column of the ledger with the smaller amount, so that both sides are made equal. This is to be the balance c/f (carried forward);
How do you calculate an account balance? ›
An account balance is the total amount of money in a bank account or general ledger account. Accountants or banks usually calculate this by taking the sum of all deposits and subtracting all withdrawals.
What is the formula for ledger account? ›
Assets = Liabilities + Equity
Each transaction entered to both the journal (and later, the general ledger) is organized according to this equation, with debits on the left and credits on the right. For accurate reconciliation, the total debit balances must equal the total credit balances.
