General Ledger & Trial Balance

The general ledger is the book of final entry. It contains one account for every asset, liability, equity, revenue, and expense item used by the entity, and accumulates all journal postings to each account so that a current balance is available at any time. The trial balance is a listing of all general ledger account balances at a specified date, prepared to confirm the arithmetical equality of total debits and total credits before financial statements are drafted.

THE CHART OF ACCOUNTS

The chart of accounts is the structured list of all accounts in the general ledger, each identified by a unique number and title. Accounts are ordered in financial statement sequence: balance sheet accounts first (assets, liabilities, equity), followed by income statement accounts (revenue, cost of sales, operating expenses, other items). A conventional four-digit numbering structure is as follows:

• 1000–1999: Assets (current assets, then long-term investments, property, plant and equipment, intangible assets).

• 2000–2999: Liabilities (current liabilities, including source deductions and GST/HST payable, then long-term debt).

• 3000–3999: Equity (owner's capital and drawings; partners' capital accounts; or share capital, contributed surplus, retained earnings, and dividends).

• 4000–4999: Revenue.

• 5000–5999: Cost of goods sold or cost of sales.

• 6000–7999: Operating expenses (selling, general and administrative).

• 8000–8999: Other income and expenses (interest, gains and losses on disposal, income taxes).

Design principles: numbers should leave gaps for future accounts; accounts should be sufficiently detailed to meet tax-reporting requirements (for example, separating meals and entertainment, which are generally 50% deductible, from other expenses); and the structure should map cleanly to the reporting forms used by the entity.

Mapping to the General Index of Financial Information (GIFI)

Corporations filing a T2 return must report financial statement information using the CRA General Index of Financial Information. Each ledger account is mapped to a GIFI code: balance sheet items to Schedule 100 (codes 1000–3849), income statement items to Schedule 125 (codes 8000–9999), and, where applicable, Schedule 141 (Financial Statement Notes Checklist). Mapping the chart of accounts to GIFI codes at the design stage simplifies year-end filing.

STRUCTURE OF A LEDGER ACCOUNT

In practice the ledger is maintained in the three-column (running balance) format rather than the simplified T-account form. Each account contains:

• Account title and account number.

• Date of each posting.

• Explanation or description (optional where the journal narration is sufficient).

• Posting reference to the journal and entry number from which the amount was posted.

• Debit column, credit column, and a running balance column, with an indication of whether the balance is a debit or a credit.

THE POSTING PROCESS

1. Locate the ledger account for the first account named in the journal entry.

2. Enter the date, the journal reference, and the amount in the debit or credit column, as indicated in the journal.

3. Compute and enter the new running balance.

4. Enter the ledger account number in the posting reference column of the journal, confirming that the line has been posted.

5. Repeat for each remaining line of the entry.

In computerised systems posting is automatic, but the logic is identical. The cross-referencing of journal and ledger in both directions is what creates a complete audit trail.

NORMAL BALANCES

• Debit balance: assets, expenses, cost of goods sold, drawings, dividends declared, and contra-liability or contra-equity accounts.

• Credit balance: liabilities, equity, revenue, and contra-asset accounts (accumulated amortisation, allowance for doubtful accounts).

• An account carrying a balance opposite to its normal balance (for example, a credit balance in Cash, indicating an overdraft, or a debit balance in Accounts Payable, indicating an overpayment) requires investigation and may require reclassification for presentation.

SUBSIDIARY LEDGERS AND CONTROL ACCOUNTS

Where an account comprises many individual balances, details are maintained in a subsidiary ledger and only the total is carried in the general ledger control account. The sum of the subsidiary ledger balances must equal the control account balance at all times; this is verified through a periodic reconciliation.

• Accounts receivable subsidiary ledger: one account per customer; supports credit control, statements, and the aged receivables listing used to estimate the allowance for doubtful accounts.

• Accounts payable subsidiary ledger: one account per supplier; supports payment scheduling and the aged payables listing.

• Inventory subsidiary ledger: one record per stock-keeping unit, showing quantities and costs.

• Capital asset register: one record per asset, showing cost, date of acquisition, CCA class, accumulated amortisation, and undepreciated capital cost.

• Payroll register: one record per employee, showing gross pay, deductions, and year-to-date totals required for T4 reporting.

THE TRIAL BALANCE

The trial balance lists each general ledger account and its balance in the appropriate debit or credit column. Three versions are prepared during the accounting cycle:

1. Unadjusted trial balance: prepared after all routine transactions for the period have been posted; serves as the starting point for period-end adjustments.

2. Adjusted trial balance: prepared after adjusting entries have been posted; the source from which the income statement, statement of owner's equity or retained earnings, and balance sheet are prepared.

3. Post-closing trial balance: prepared after closing entries; contains only permanent accounts and confirms that the ledger is in balance at the start of the next period.

Limitations of the trial balance

A balanced trial balance demonstrates arithmetical equality only. It does not detect the following errors:

• Omission of an entire transaction.

• Duplicate recording of a transaction.

• Posting to the wrong account of the same type (an error of commission).

• Recording a transaction in an inappropriate class of account, such as capital expenditure charged to expense (an error of principle).

• Equal and offsetting errors (compensating errors).

• Entry of an incorrect amount on both the debit and credit sides (an error of original entry).

Procedure for locating a trial balance difference

1. Re-add the debit and credit columns.

2. Confirm that each balance has been placed in the correct column.

3. Divide the difference by 2: the result may equal an amount posted to the wrong side.

4. Divide the difference by 9: if evenly divisible, a transposition or slide error is likely.

5. Search for an amount equal to the difference, which may indicate an omitted posting.

6. Re-compute account balances and trace postings from the journal to the ledger.

THE WORKSHEET

A worksheet (working trial balance) is an internal, columnar schedule used to organise period-end work. It typically contains the unadjusted trial balance, the adjustments, the adjusted trial balance, and the extension of each balance to the income statement and balance sheet columns. The difference between the income statement debit and credit columns equals the net income or net loss for the period. The worksheet is not a financial statement and is not distributed externally.

BANK RECONCILIATION

A bank reconciliation compares the cash balance in the general ledger with the balance shown on the bank statement at the same date and explains every difference. It is prepared monthly for each bank account and is a fundamental cash control.

• Adjustments to the bank balance: deposits in transit (add), outstanding cheques (deduct), and bank errors.

• Adjustments to the book balance: bank service charges (deduct), interest earned (add), electronic receipts and pre-authorised payments not yet recorded, non-sufficient funds (NSF) cheques (deduct), and recording errors.

• Only adjustments to the book balance require journal entries.

• The adjusted bank balance and the adjusted book balance must agree.

THE MONTH-END CLOSE

1. Confirm that all source documents for the period have been recorded (sales, purchases, cash receipts and disbursements, payroll).

2. Reconcile all bank, credit card, and loan accounts.

3. Reconcile subsidiary ledgers to their control accounts.

4. Record accruals, deferrals, amortisation, and inventory adjustments.

5. Reconcile GST/HST, payroll source deduction, and other statutory liability accounts to filings and remittances.

6. Review the adjusted trial balance for unusual balances, and perform analytical review against budget and prior periods.

7. Prepare the financial statements and supporting schedules.

8. Lock the period in the accounting system.

SOURCES

• Canada Revenue Agency, Guide RC4088 General Index of Financial Information (GIFI).

• Canada Revenue Agency, T2 Corporation Income Tax Guide (T4012).

• Canada Revenue Agency, Keeping Records.

• CPA Canada Handbook, Accounting, Part II: Accounting Standards for Private Enterprises.