General Ledger The general ledger is the system of

bookkeeping used to show the individual

accounts in the books of the business.

Business Entity Rule An important accounting principle that states

that the books of the business should not reflect
the personal affairs as it relates to their wealth
outside of the business. The books of the
business should be drawn up to reflect only the
wealth of the business owner inside the
business.
The equation by which the system of accounting
The Accounting Equation for business financial transactions must be
based. The accounting equation can be written
as:

Owner’s Equity = Assets – (Minus) Liabilities.

Assets Assets are resources controlled by the business

because of past events from which future
economic benefits are likely to flow to the
business.

Liabilities Liabilities represent business obligations that

will result in the future outflow of cash from the
business.

Owner’s Equiry The worth of what the owner of the business

owns within the business.

Debits The name was given to the left-hand side of an

account and the application of funds in a
business increase on the debit side.

Credits The name was given to the right-hand side of an

account and the sources of funds in a business
increase on the credit side.

Accounting Equation and Double Entry System – Unit 2

Assets, Liabilities and Owner’s Equiry

1. Assets
A resource with economic value that an individual, corporation or country owns or
controls with the expectation that it will provide a future benefit.

In other words, assets are those things, tangible or intangible that the business owns. It
belongs to the business, and they will use it to produce a product or deliver a service
 to their consumers. Assets can further be divided into two categories, namely non-
current assets and current assets.

Non–Current Assets
Non-current assets are those assets a business owns that they will keep for a long,
more than 12 months.
Examples: Land, Buildings, plant, equipment, office equipment, office furniture,
vehicles. Trademarks, goodwill, and financial investments.

Current Assets
Current assets are those assets that the business owns and can convert into cash within
a short period of time, for example, less than 12 months.
Example: cash on hand, cashiers float, a bank account with a positive balance, petty
cash, financial investments, inventory, and accounts receivable. Cash is always the
most liquid current asset with inventory being the current asset that can take the
longest to convert to cash. This is especially true when the inventory is sold to
customers on credit. The accounts receivable must first pay their outstanding debt for
the business to have cash.

2. Liabilities
The future sacrifices of economic benefits that the entity is obliged to make to other
entities because of part transactions or other past events the settlement of which may
result in the transfer or use of, provision of services or another yielding of economic
benefits in the future.

In other words, liabilities are the debt of the business. It is what the business owes to
other companies or individuals. Liabilities are also further divided into non-current
liabilities and current liabilities.

Non-Current Liabilities
Non-current liabilities are the debt obligations that a business will settle in longer than
12 months.
Examples of non-current liabilities are Mortgage Bonds (20 years), personal loans (2
to 5 years repayment period), hire purchase, and leases used to purchase equipment
and vehicles (5 years repayment period).

Current Liabilities
Current liabilities are the debt obligations that a business will settle in shorter than 12
months.
Examples are bank overdraft, accounts payable (bought from suppliers on debt) any
other loans that must be repaid in 12 months.

3. Owner’s Equity
Owner’s equity consists of the capital contribution of the owner, the withdrawals
the owner makes from the business as well as the profit or loss of the business. It is
also said the owner’s equity is what the owners have left when they sell all the assets
of the business and pay all the outstanding debts of the business.

 Owner’s Equity (EO) = Capital – Drawings + Net Profit or – Net Loss

 Owner’s Equity (EO) = Assets (A) – Liabilities (L)
 Accounting Equation
The accounting equation is perhaps a term
you have heard or come across before
although you may not have used it or been
exposed to it yet.

Assets = Liabilities + Owners Equity

By using arithmetic, we can also swop the accounting equation to read like this and still make
the equation balance:

 Liabilities = Assets - Owner Equity

 Owner Equity = Assets – Liabilities

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 Business Entity Rule
The Business Entity Rule
The business entity rule is predicated on the fact that the business and the owner's private
affairs must be kept separate and the two should not be interlinked.

1. Why do you think it is important for the owner of a business to keep his personal
expenses separate from the business? Do you think this will have an impact on the
financial statements and accounts of the business? Why do you think so?

2. If the owner takes something out of the business for his personal use (e.g., money
from petty cash or a piece of equipment to use at home), should we record this in
the books of the business? What would we call this when an owner takes goods
for personal use out of the business?

It is important to establish between the wealth of owner/s of a business in their capacity as

well as their wealth in the business itself. The two should always be kept secret and the
business entity rule should be closely always adhered to.
Personal expenses of the business owner/s should be kept separate from the accounts of the
business and are not allowed to affect the operating results of the business.
General ledger and posting

In the accounting and bookkeeping cycle, the next

step (step 3) is to post ledger entries.
This refers to the posting of journal balances
(totals) to the general ledger accounts and then
closing off those accounts.
 Posting Transactions to the General Ledger
The bookkeeping cycle, after summarising the source documents in the subsidiary journals,
follows on by posting the totals from these journals to the general ledger. The general ledger
is a collection of accounts and contains all the accounts for a business.

Each general ledger account has a debit (left) and a credit (right) side.

It should be because we looked at the general ledger accounts at the start of the course when
we explored the double-entry bookkeeping system. You can go back to that part of the course
to refresh your memory. In summary, transactions can be broadly entered into the general
ledger as follows:
Example 1

General Ledger

Below is an example of how a general ledger account will look, remember for each account
there is a debit side and a credit side.

Read below what information needs to go into the corresponding number in the general
ledger.

1. This column is used to record the year and month of the posting.
2. This column is used to record the day on which the posting took place.
3. This column is used for the name of the contra accounts.
4. Just as in the folio column in a subsidiary journal, the folio column in the general
ledger is used to reference the journal from where the posting was made.
5. The amount column will be the journal column total.

Example 2

General Ledger

Transaction:

 The business bought a vehicle for R15 000

 Balance and Close off General Ledger Accounts
Closing Off General Ledger Accounts
If we use the example above and wish to balance the ledger accounts for Vehicles and the
Bank account, we will also assume we had receipts from the cash book payments journal for
R20 000, to illustrate the balancing of the account. (There will of course be more transactions
for the month in real-world business, but for illustrative purposes, we will use the example as
above).

Posting to and balancing the general ledger are critical elements of the bookkeeping cycle.

Making sure that all accounts are balanced and ready for the trial balance is crucial to
ensuring the correctness of the books of the business.