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Every account from the chart of accounts is included in the
general ledger. It is made up of all of the transactions recorded
into the accounts. An important component of any general ledger
is source documents. Some common examples of source documents
are checks, deposit tickets, customer invoices, payroll reports,
and vendor invoices. Source documents are critical in that
they provide the information to input into the general ledger
and they provide an audit trail to back up the information
in your system.
The basic principle of the general ledger is double-entry
accounting. All entries are entered into two accounts. Think
of this as the money moving from one account to another. When
you write a check to pay the phone bill, the money moves from
your bank account (cash) to the telephone company (an expense
account).
The system used in recording entries on a general ledger
is called a system of debits and credits. In fact, if you
can gain even a basic understanding of debits and credits,
you will be well on your way to understanding your entire
accounting system. For every debit, there is an equal and
offsetting credit. An advantage of the computerized accounting
system is that it will ensure that all of your debit and credit
entries are equal, making your books balance.
An example of a debit and credit entry is paying rent for
the organization's office. The check decreases the cash in
your bank account (credits the account) while increasing the
rent expense (debits the account). Another example is depositing
money given to you by a foundation. The deposit increases
your cash in the bank (debits the account) while increasing
the revenue from foundations (credits the account).
Entries into the general ledger normally include the date,
the person where the money comes from or goes to, a good description
of the transaction, and the amount of the transaction. The
entries are accumulated over time in the general ledger accounts
which tell you how much money comes in and goes out for each
type of revenue and expense and how much money you currently
have.
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