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Case Study: Posting to the General Ledger

Case Study: Posting to the General Ledger

Author: Evan McLaughlin

Identify a general ledger in the context of a particular business.

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Hey, everyone, and welcome to our video-- a case study on the general ledger. So what's today's video about? We're going to look at a subject company-- Legacy Realty. We're going to talk about what that company does, what their primary business is, and how the general ledger fits into that. And then we're going to go through some transactions, within the general ledger, for our subject company.

But first, let's introduce our company, Legacy Realty. What type of company is it? It's a sole proprietorship. That's a type of company that's owned by a single individual and where the individual and the business are legally treated as the same.

So what's the purpose of our business? It owns, leases, and manages rental properties. So this company purchases houses and condominiums, leases them out to tenants, performs their own management of the units-- repairs, maintenance, and collecting rent. The business is located in Washington, DC, and has a small staff of five people. So that's going to be our case-study company for the day.

So now let's look at our case-study company and the general ledger. Does our company need a general ledger? Yes, of course they do. Well, why do they need a general ledger? It serves as the accounting system where entries are posted. Those entries come from the general journal, and our journal entries.

The general ledger provides summary data for all of our accounts. It provides the rolling totals. And it also provides the information for the financial statements, so we can't create those financial statements without a proper general ledger.

So now, let's dive into our transactions. First transaction. Owner $200,000 contribution for initial funding. Well, the company needs money to purchase properties and fund its operations. So let's take a look at the general ledger for that-- our $200,000 contribution.

Well, we know cash is coming in. And we have that unique identifier, there-- that number, 101? That comes from our chart of accounts. So that's the unique identifier for the cash account, so that we can pinpoint in our financial system.

We put in our date and our description-- in this case, owner contribution-- and that reference. The reference column comes from the specific journal entry, within the general journal. And so, since cash is going up, it's going to be a $200,000 debit, which leaves us a balance of $200,000 in that cash ledger.

Now let's look at owner's capital. OK? So since we're funding cash with equity, OK? We're going to have owners capital, as well. On same date, same description, same journal entry reference. And, since it's equity, it's going to be increased with a credit. So we're going to put the credit there, in that column. And that's going to leave us with the balance, in the owner's capital account, of $200,000.

Now let's look at our next transaction. We're going to purchase our first property for $75,000. Now this is to invest funds in the business's purpose and start generating revenue. So let's take a look at those ledgers.

Purchase our first property. So our first ledger's going to be buildings. So we're purchasing property, so we're going to have an asset; that's the building. Building A. A journal entry reference. And, since it's an asset, it's going up. We're going to put that $50,000 debit, in that column, and leaves us with a balance of $50,000.

Now, we're also going to have land. So, when we purchase a property, we have the building, as well as the land the building sits on, which is also an asset. Same journal entry reference; it's also a debit, because it's an asset, and it has a $25,000 balance in the land ledger.

And we're going to pay for it with cash. So we see that, in that cash ledger, we have our previous transaction, and now we're going to add this one into it. Say we're going to add our purchase. OK? And since cash is going down, it's an asset, so that's a credit. And now, we see that, in our cash ledger, we're left with a balance of $125,000. So you can see that rolling-total idea that we spoke about earlier.

Third transaction. We're going to perform $5,000 of repairs to our property, before we lease it up. We need to do that to make sure that our property is in adequate condition, in order to lease and begin generating revenue. So let's look at those ledgers.

Performing our $5,000 of repairs. OK, so we're incurring an expense. So then we would record repairs expense. Building A repairs. Again, our journal entry reference. And, because expenses are increased with debits, we're going to put that $5,000 in our debit column, leaving a balance of $5,000.

So, if we're paying cash for these repairs expenses, we're gonna add this entry to our cash. OK? Same date; same description; same journal entry reference. And, since cash is going down, we're going to put it in the credit column, and that brings our cash balance down to $120,000.

So let's look at our fourth entry. Purchase $500 of office supplies, on account. Well, our office needs basic office supplies, in order to operate. So let's look at the ledgers. Again, we're incurring an expense, so we're going to have office expense, for our supplies. We have our journal entry reference. And we're going to put it in the debit column, because expenses are increased with debits. Leaves us with a $500 balance.

So now, what's the other ledger going to be? Well, the key words here were "on account." So that means we're going to have an accounts payable or a liability. Again, same date, same description, same reference. And, because it's a liability, and it's going up, we're going to put that $500 in our credit column, leaving us with a balance of $500 in our accounts payable ledger.

So now, one more transaction. Let's look at this last one. We're going to lease our property. We're going to collect our first month's rent of $1,500. When our units are leased, we collect rent. And again, this is our primary way that our business generates revenue. So this is the great thing.

So let's look at our ledgers. So we collected cash. So we see our cash ledger, which has all of the past transactions that we spoke about. Now we're going to add this collection of rent into it. So, on this date, March rent, Building A. Again, we have our journal entry reference, and, because our cash is going up, we're going to put that in the debit column. OK? So that actually brings our cash balance, now, up to $121,500. OK?

And so, since we're collecting rent, that can be considered revenue, for our business. So then we put this in our revenue ledger. OK? And since revenues are increased with credits, we're going to put that in the credit column-- $1,500. So we're going to have a balance, in our revenue ledger, of $1,500.

So bring it all home. What did we talk about, today, in a nutshell? We discussed our case-study company-- Legacy Realty-- and we also saw several examples of entries that are posted to the general ledger. We looked at an owner contribution. We looked at purchasing our first property. We looked at performing repairs to that property and paying with cash. We also looked at purchasing office supplies, with cash, for our business. And then we also looked at collecting first month's rent of $1,500.

I hope everybody enjoyed this video, I hope you got a lot out of it, and I can't wait to see you next time.