What Are the Five Steps of Posting in Accounting?

The business updates the ledger by copying each of the entries in the books of prime entry to the appropriate account in the ledger. This updating process is referred to as posting the general ledger. Ledger accounting software also takes care of keeping your account balances up to date and generating reports.

The Accounting Cycle refers to the posting to the general ledger steps that a company takes to prepare their financial statements. The Cash account in the following figure increases with debits and decreases with credits. Ideally, the Cash account always ends with a debit balance, which means there’s still money in the account. A credit balance in the cash account would indicate that the business is overdrawn.

. Withdrawal of Cash by Owner

Notice some similarities in the components of the ledger account and the T-account. For example, both of them have an account title, a debit side and a credit side. The final step is to cross verify the balances and recheck whether there are any mathematical errors; if any of the errors are found, rectify them to maintain proper records.

Notice that we have left space between the accounts to be able to add more when we need to (and that we only used three digits instead of 4, because this is a pretty small company). Let’s assume that on February 1, 2023, you invested $5,000 cash in your company. On the same day, you purchased an equipment amounting to $1,000, payable in two equal installments on February 10 and March 1. Then on February 4, 2023 you rendered a service to a client for $400.

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But what exactly are they, and how do they differ from each other? Learn about their purposes and how to distinguish between the two. Next, cash is an asset, and since it’s going down–because you’re paying for prepaid expense–there is going to be a credit to your cash of $1,000, leaving a $1,000 balance in cash. Since it’s an asset and it’s going up, you’re going to debit your equipment. Let’s begin with the first journal entry recorded on February 1, 2023.

Step #4 – Enter the Debit and Credit Balances in the Ledger

• Therefore, you would debit your accounts payable, because it is a liability and it is decreased by a debit.
• With double-entry bookkeeping, you record two entries for every transaction using debits and credits.
• Transfer the debit and credit amounts from your journal to your ledger account.
• In contrast to the two-sided T-account, the three-column ledger card format has columns for debit, credit, balance, and item description.
• Journal entries also use the five main accounts and sub-accounts to stay organized.
• This updating process is referred to as posting the general ledger.

Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting. The example shows the electricity expense account which is on page 21 of the ledger. The name of the account ‘Electricity Expense’ and its account code 640 are also shown in the heading. The Balance column in the General Ledger is used to keep a running balance in each account.

Debits increase balance sheet asset accounts, such as cash and inventory, and increase income statement expense accounts, such as marketing and salary expenses. Debits decrease balance sheet liability accounts, such as notes payable, and shareholders’ equity accounts, such as retained earnings. Posting from general journal to general ledger (or simply posting) is a process in which entries from general journal are periodically transferred to ledger accounts (also known as T-accounts). It is the third step of accounting cycle because business transactions are first analyzed, recorded in the journal and then they are posted to respective ledger accounts in the general ledger. Posting in the ledger is a manual process; hence workforce is needed. It ensures that all assets and liabilities are to be recorded properly.

If the company lost money and the bottom line of the income statement showed that cost and expenses exceeded sales, then the number would be a debit. That debit would be subtracted from the balance in Retained Earnings, to show the reduction to profits reinvested in the company. For the business example depicted in the figures below, three of the accounts — Cash, Accounts Receivable, and Accounts Payable — are carried over month to month, so each has an opening balance. The Sales account is closed at the end of each accounting period, so it starts with a zero balance. They include speed, data accuracy, up-to-date information, and reports’ generation.

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We can prepare ledger accounts using journal entries of Moon Service Inc. prepared on the journal entries page. The recording of debits or credits is the next step in the posting process. This means that this entry in the cash account can be traced back to page 1 of the general journal, assuming that the related journal entry is recorded in page 1 of the general journal. Notice that for each ledger account, there is a corresponding unique account number assigned to it that serves as the account’s identification number.

What is a general journal and what is its purpose?

• You’re making the payment on the same date, and note your journal entry reference.
• When posting entries to the ledger, move each journal entry into an individual account.
• The second transaction involves a purchase of $10,000 of equipment, on account.
• Let’s assume that on February 1, 2023, you invested $5,000 cash in your company.

You can see how money flows in and out of your business, which helps you create important financial reports like your balance sheet and income statement. This cross referencing process helps facilitate the tracing of entries between the journal and the general ledger. Columns in both the journal and general ledger are filled up, this signifies that the transaction entry has already been posted. Column in the general journal remains blank, it signifies that the journal entry still needs to be posted to the general ledger.

Ideally, this account has a credit balance because money is still due to vendors, contractors, and others. The Accounts Receivable account in the next figure increases with debits and decreases with credits. Ideally, this account also has a debit balance that indicates the amount still due from customer purchases. As shown in the ledger above, the company has $7,480 at the end of December. In the world of ERPs, posting has been automated and reduced to just a click of a button.

Income Statement

Note that the opening balance is zero for both accounts since this is a new business. Accounting software is usually supplied in modular format allowing a business to select the relevant accounting functions it requires to operate. While each entry in the ledger is different general rules of posting apply in most cases.

It serves as a check and balance to ensure each transaction has been posted to the appropriate account. It is used in the process of posting transactions from the general journal to the general ledger. The final step in the posting process is to check for mathematical and data transfer errors. Accounting software packages may reduce these errors through automation, but verifying the numbers is a prudent step that prevents errors from propagating to the financial statements.