BOOKKEEPING COURSE: THE JOURNAL AND NOMINAL LEDGER (GENERAL LEDGER)

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The Journal and Nominal Ledger (General ledger)

In order to illustrate the connection between the journal and the nominal ledger, we will use a simple example - a daily paper.
It is reasonable to assume that before the paper was printed, news was received in the editing room in a different form. A first, the news is received in the editing room in chronological order and not according to any classification of the news items.
However, when the final product (the printed newspaper) is received, the news items have been classified and concentrated according to the common denominator of each section in the paper. Let us assume that items are received in the news room (by telex from various reporters - in the following form:

EDITING ROOM

It may be clearly that there are 2 separate systems in the newspaper:

The Editing Room -is characterized by a chronological order (and not according to specific subjects).
The sections of the newspaper edited according to the various subjects (sport, weather, economics, politics and so on).

In the life of a business as described in bookkeeping, there are the same two systems.

The Journal-A textual record of events (Debit and Credit) that is characterized by the fact that all the records it contains are in a sequential chronological order.
The Nominal ledger (Also known as General Ledger, GP), Is made up of separate accounts for each matter (cash, banks, customers and so forth).

The accounts in the Nominal ledger look, technically, like the letter 'T' as was demonstrated previously at the start of this Tutorial. Let's try to describe the flow of the records in bookkeeping

Just as you, when you read a newspaper, go directly to the page in the paper that interests you (the sports section, the economics and so forth), when you use bookkeeping data you go directly to the relevant account in the Nominal ledger (the Max Account - will show you how much Max owes/is entitled to receive from/to pay to the business. The Cash Account - will show you how much money has been received/paid out.

The Structure of the Nominal ledger (General Ledger)

At the beginning of the tutorial, it was pointed out that an account in the Nominal ledger looks like the letter T. In fact, there are additional auxiliary data in the account Let us assume that January 1, xx, we received a loan in cash from Max in an amount of $10,000. The Journal Entry will look as follows: (let us assume that it concerns a voucher for which the serial number in the journal is xx):

xx Debit: Cash 10,000
Credit: Max 10,000
1.1.xx - Loan from Max, Receipt 013.

The Journal Entry will be transferred to 2 accounts in the Nominal Ledger as follows:

CASH ACCOUNT

Debit

Credit

Order No.		Contra Account		Date Recorded		Value Date		Ref.		Details		$
xx		Max		28.2.xx		1.1.xx		R.013		Loan from max		10,000

MAX ACCOUNT

Debit

Credit

Order No.		Contra Account		Date Recorded		Value Date		Ref.		Details		$
xx		Cash		28.2.xx		1.1.xx		R.013		Cash Loan		10,000

Let us analyze, for example, the "Cash" account. As you see in addition to the sum of $ 10,000 debited, there are other auxiliary data as follows:

Order Number-In our example, order xx. This is an important detail as the original document (Receipt 013) is filed under Journal Order Number xx
Contra Account This is the account that assisted, in the Journal entry to balance the record. If we go back to the journal entry, you will see that the contra account for the Cash is "*** Account". Therefore, in this column, we record "*** Account".
Date recorded The date on which the nominal ledger was updated. In the present instance, despite the fact that the event occurred on 1.1.xx, it was recorded in the nominal ledger only on 28.2.xx.
Value Date The date of the original document (in our case, the receipt was issued on 1.1.xx).
Reference This is the number of the original document (Receipt, invoice, etc.)
Details A short verbal description, similar in character to the details that appear in the Journal entry.

Account - Flow and Balance

Let us go back a little, to the example that was explained at the beginning of the tutorial, The Cash Account (in the Nominal Ledger) looks like this:

Cash	Accounts
Debit	Credit
600 700	200

We will now learn two new concepts - Flow and Balance

Debit Flow This is all the records on the debit side of the account (in the example before us $ 1,300) (600 + 700).
Credit Flow This is all the records on the credit side of the account (in the example before us $ 200).
Debit Balance The difference between the debit transactions and the credit transactions (when the debit transactions exceed the credit transactions).
Credit Balance The difference between the credit transactions and the debit transactions (when the credit transactions exceed the debit transactions).

In our example, there is a "Debit Balance" in the Cash Account (the total debit transactions exceed the credit transactions) of $ 1,100 (1300 - 200).

Before we go on to a comprehensive example, we will change the reference to the "Goods Account" a little. Until now, to keep matters simple, we have referred to the Goods Account as to a real account (the Warehouse Account), when on purchasing goods, we have debited the Goods Account (the warehouse 'received") and on selling goods, we have credited the Goods Account (the warehouse 'gave'). In fact, the reference to goods is different as the purchase prices ( 'in' to the warehouse) is normally lower that the price on leaving the warehouse (sale price).
The correct reference to the Goods Account is as to a normal profit and loss account, as for this purpose, 2 temporary bookkeeping accounts are opened: the first "Goods Purchased" (an expense - and therefore the account will normally be debited), the second "Goods Sold" (income - and therefore the account will normally be credited). A simple example appears below (the example ignores Value added tax):

1.1.xx We bought goods for cash for a sum of $ 1,000.
5.1.xx All the goods were sold for $ 1,200 cash.

The journal entries will be as follows:

	Debit	Credit
1. Debit: Purchase of goods Credit: Cash Purchase of Goods, Invoice .....	1,000	1,000
2. Debit: Cash Credit: Sale of Goods Cash sale. Receipt.....	1,200	1,200

Comprehensive Example

We will go on now to a comprehensive example that we will use until the end of this tutorial (in the example, we will try to imagine that your name is Miles and that you are the owner of a new business).

Business data

1.1.xx
We opened a new business in which we invested $ 10,000 dollars in cash.

2.1.xx
We transferred $ 4,000 in cash to open a current bank account at the City Central Bank.

3.1.xx
We bought office furnishings in the sum of $ 1,000 in cash.

4.1.xx
We paid $ 600 in cash for office rental.

5.1.xx
We bough a telephone with a check for $ 300.

30.1.xx
We paid electricity expenses (by check) in an amount of $ 400.

1.2.xx
We bought goods with a check for $ 1,200 (ignore the Value Added Tax).

2.2.xx
We sold part of the goods for $ 1,000; the money received was deposited directly into the bank account.

3.2.xx
We bought more goods with a check for $ 3,000.

4.2.xx
We sold all the remaining goods for $ 5,000. The money received was deposited directly into the bank account.

28.2.xx
The bank credited our account with interest in the amount of $ 100.

Pay attention to the journal entries while referring to the general debit/credit table at the beginning of the tutorial.

JOURNAL ENTRIES

Journal No.	Date		Debit	Credit	Account Type	Debit and Credit Rule No.
1.	1.1.xx	Cash Owners Equity Owners Investment in Cash	10,000	10,000	Real Personal*	2 1
2.	2.1.xx	Current account at City Central Cash Cash Deposit	4,000	4,000	Real/Personal** Real	1-2 2
3.	3.1.xx	Fixed assets Cash Purchase of furniture for	1,000	1,000	Real Real	2 2
4.	4.1.xx	Expenses for office rental Cash Payment of rent in cash	600	600	Temporary Real	3 2
5.	5.1.xx	Fixed assets City Central current account Purchase of telephone	300	300	Real Real/Personal	2 1-2
6.	30.1.xx	Electricity expenses City Central current account Payment of electricity	400	400	Temporary Real/Personal	3 1-2
7.	1.2.xx	Purchase of goods City Central current account Purchase of goods	1,200	1,200	Temporary Real/Personal	3 1-2
8.	3.2.xx	City Central current account Sales of goods Sale of goods	1,000	1,000	Real/Personal Temporary	3 1-2
9.	3.2.xx	Purchase of goods City Central current account Purchase of goods	3,000	3,000	Temporary Real/Personal	3 1-2
10.	4.2.xx	City Central current account Sale of goods Sale of goods	5,000	5,000	Real/Personal Temporary	1-2 3
11.	28.2.xx	City Central current account Income from interest Income from interest, City and Central Current Account	100	100	Real/Personal Temporary	1-2 3
			26,600	26,600

Owners Equity Account

A normal personal account that is in credit as the owner of the business (Miles) "is credited as eligible" to receive from the business (refer to the business as a separate body) his basic investment in the sum of $ 10,000. To differentiate between the external creditors of the business (suppliers, lenders and so forth), and the owner of the business, the prefix "Owners Equity" appears at the beginning of the name of the account. Remember that from the point of view of the business, the business owners eligibility to be credited with $ 10,000 is not as important as the financial eligibility of a normal supplier to receive $ 10,000. In the current cash management of the business, the eligibility of the owner of the business can be almost completely ignored as this obligation is not immediately repayable.

** Current Account

The account can be referred to as both a real account (like Cash) or as a personal account.

1. Real account

Imagine for a moment that the money in the bank is in a metal cash box that belongs to you. On depositing money, the box "received" money (received - debit) while when drawing a check the box "gave" money (gave - credit)

2. Personal Account

In making a deposit in the current account it is as though the bank manager (personal) owes you money. When you draw money out of the account, the bank manager owes you less than he did a moment before you made the withdrawal. (A reduction of a debit is expressed in bookkeeping as a credit transaction).

Structure of the Nominal Ledger (General ledger)

Comment: For the sake of brevity, only the following details appear on each account page.
        1. The journal entry number.
        2. Name of the contra-account.
        3. Description of the transaction.

Cash

Accounts

Debit

Credit

1. Owners Equity - Investment	10,000


	_________
	10,000

2. City Central current account - Deposit	4,000
3. Fixed assets - Furnishing	1,000
4. Rental expenses - Rental	600
	____________
	5,600

OWNERS EQU

ITY ACCOUNT

Debit

Credit

1. Cash - Owners Investments

10,000

CITY CENTRAL

CURRENT ACCOUNT

Debit

Credit

2. Cash - Deposit	4,000
8. Sale of goods - Sales	1,000
10. Sale of goods - Sales	5,000
11. Income from interest - Current interest	100
	_________
	10,100

5. Fixed Assets - Telephone	300
6. Electricity expenses - Expenses	400
7. Purchase of goods - Purchases	1,200
9. Purchase of goods - Purchases	3,000
	_________
	4,900

FIXED ASSETS

ACCOUNT

Debit

Credit

3. Cash - Furniture Purchase	1,000
5. City and Central current account - Telephone	300
	_________
	1,300

OFFICE RENTAL

EXPENSES ACCOUNT

Debit

Credit

4. Cash - Rent	600

ELECTRICITY EX

PENSES ACCOUNT

Debit

Credit

6. City Central current account Payment of expenses	400

PURCHASE OF

GOODS ACCOUNT

Debit

Credit

7. City Central account-Goods purchase	1,200
9. City Central account -Goods purchase	3,000
	_________
	4,200

SALE OF

GOODS ACCOUNT

Debit

Credit

8. City Central current account - Sales	1,000
10. City Central current account - Sales	5,000
	_________
	6,000

INCOME FROM

INTEREST ACCOUNT

Debit

Credit

11. City Central current account Income from interest	100

The Development of Bookkeeping The debit & credit rules Journal Entries Nominal Ledger Trial Balance Annual Statements (Profit & Loss/Balance Sheet) The Balance Sheet
Bank Reconciliation Salaries Tax Deduction at Source Value added tax

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