This week’s post discusses step 3 of the Accounting Cycle, posting to the general ledger, the nature of roll forward balances and accounting periods.
If you’re interested in a more in depth look, have a look at the accompanying textbook Balancing Act: A Practical Approach to Business Event Based Insights, available for download. Specifically, look at Chapter 5, Accounting.
3 Books of Bookkeeping
Historically, there were three books in bookkeeping, which correspond to the steps of the accounting cycle.
1- The Daybook, in which the activity through the day is recorded, in whatever order the customer or vendors show up in. It is a running log of everything that happens.
2-The Journal, in which an accounting clerk would take each discernible transaction, and decide what the flow of activity was through the accounts. This would require creating journal entries for each transaction or business event.
3-The Ledger; which has a running total of each account, and the balance within it.
>>> Related Post: Historical Accounting and The Three Books of Bookkeeping <<<
Sort Order of Books
The Daybook and the Journal are kept in chronological order, as things happen throughout the day, and then as each of those business events is turned into a journal entry.
When we get to the Ledger, here is where the sort order of the book changes. The Ledger is organized by account numbers, by categories of business events. They would typically be in order numerically by the account number, which would typically also be the order of the balance sheet followed by the income statement. This allowed the clerk to search the ledger and find the appropriate account for each of the journal entries.
This is the first point upon which bookkeeping makes sense of the world. Alfred W. Crosby has explained:
Double-entry bookkeeping was and is a means of soaking up and holding in suspension and then arranging and making sense out of masses of data that previously had been spilled and lost….The efficient friar taught us how to oblige grocery stores and nations, which are always whizzing about like hyperactive children, to stand still and be measured….Alfred W. Crosby, The Measure Of Reality: Quantification And Western Society, 1250-1600 (Cambridge University Press, 1997) Pages 200, 220
>>> Related Post: Historical Accounting’s View of Blockchain Ledgers <<<
The second point upon which bookkeeping organizes the world is the posting process. Posting means taking the last balance produced, adding or subtracting the results of the journal entry from it, and making a new balance.
The sort order of the accounts in the ledger, plus the creation of a balance which reflected the results of business events and transactions over time, is the magic of bookkeeping.
At times because of processing volumes, and to simplify the need for double entry on each transaction, a set of books is created for one particular business process.
For example a set of books might be kept for all vendor purchases, which is typically called the Accounts Payable Sub-Ledger. Or for customer purchases, which would be called the Accounts ReceivableSub- Ledger. Employee payments can be in the Payroll Sub-Ledger
This simplifies the process because in a sub-ledger, the offsetting account is always known (it is often cash). Thus one can turn each business event into one side of the journal entry, and after all the journals have been created, a single offsetting entry be made to cash for all the payments or receipts.
Use of sub-ledgers creates the need for a General Ledger, where all the data comes together for a single view of the results of financial activity. Often the General Ledger is summarized such that the details of vendors or customers or employees are only maintained in the sub-ledgers.
>>> Related Post: Finance Costs: Data Fragmentation <<<
Watch the next week episode at Accounting Cycle Step 4: Trial Balance
Watch the prior week episode at Accounting Cycle Step 2: Create Journal Entries
Watch all episodes in order at the Conversations with Kip Playlist