Continuing on with our FM’s Guide to Accounting series, this week will cover ledgers and journals. Again, understanding the basics of financial accounting is a great tool for facility managers throughout all industries. By knowing how money is allocated, tracked, and recorded, you will be far ahead of your peers when it comes to budgeting, forecasting, and emergency requests that require funds you don’t have. So, without further ado, here’s an introduction to ledgers and journals…
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A ledger organizes a company’s financial information by account. The chart of accounts becomes the organization’s table of contents for their general ledger (all of their financial information by account type). A Journal, or book of original entry, is a record that keeps financial transactions as they occur in chronological order. When a transaction is entered, it is called a journal entry.
Journal entries are typically done using the double-entry method. Double-entry bookkeeping means that there is an exchange between two accounts. The way this happens is by entering the journal entry in two places, a debit to one account and a credit to a different account. Each journal entry has a date, an explanation, and the accounts and amounts debited and credited. The figure to the left shows an example of what that looks like.
The whole purpose of the double-entry system is to balance this equation:
Assets = Owner’s Equity + Liabilities
Credits and Debits
Credits are opposites of debits. Debits are recorded on the left and credits are recorded on the right. For asset accounts, debits increase the account balance and credits reduce it. For liability accounts, debits decrease the account balance and credits increase it (i.e., you borrowed more). This can be confusing, so this figure will help you keep track of that.
For assets and expenses, debits increase the account and credits decrease the account.
For liabilities and revenues, debits decrease the account and credits increase the account.
So let’s take another look at the first figure above that shows the ledger. In this example, on March 1 the company increased its cash (asset account) balance by $35,000 from taking out a loan. This was then also recorded as an increase to the notes payable account (liability account), as part of the double-entry system.
The next day, they bought $10,000 worth of equipment (asset account) by paying cash for it. This decreased the cash account (asset account). Notice again, this $10,000 transaction is coded twice with the double-entry system.
The third day, they bought a building for $100,000, which increased the Building A account (asset account). They did this by doing two things, paying $20,000 in cash and taking out a mortgage for $80,000. Here, there are three entries, but the equation still balances. The assets go up $100,000 and the cash goes down $20,000 while the mortgage payable account goes up $80,000. Here’s what that equation looks like:
Assets = Owner’s Equity + Liabilities
Building A + Cash = Owner’s Equity + Mortgage Payable
$100,000 + (-$20,000) = $80,000
$80,000 = $80,000
The reference column is present in both journals and ledgers and is a way to cross-reference the two. In the journal, it references to which account the entry was posted in the general ledger. In the above example, the $35,000 was posted to account number 1000 (Cash in the general ledger). In a ledger, the reference indicates in which journal the entry was made (if the organization used more than one) and sometimes on which page.
Facility managers won’t be the ones expected to make journal entries in the accounting software, but we should have a basic understanding of accounting. Accounting is cyclical with journal entries being posted, adjusted, and reviewed prior to the reporting of financial statements during a given period.
This intro to ledgers and journals is the second in a series of articles that will give facility management professionals an understanding of the basics of accounting within business finance. A knowledge of ledgers and journals is an important piece for understanding the puzzle pieces of financial data that will aggregate into the bigger financial picture. In the next accounting article, we will look at financial statements, which are extremely valuable to learn. If you have any questions, please feel free to leave comments below or you can reach me at anytime at firstname.lastname@example.org. Thanks so much for reading!