Transaction analysis and journal entries are the first two stages of the accounting cycle. Posting is the transfer of journal entries to a general ledger, which usually contains a separate form for each account. Journals record transactions in chronological order, while ledgers summarize transactions by account. Posting in accounting consists of a few simple steps.
The five steps of posting from the journal to ledger include typing the account name and number, specifying the details of the journal entry, entering the debits and credits for the transaction, calculating the running debit and credit balances, and correcting any errors.
Income statement accounts include sales (aka revenues), cost of goods sold, marketing and advertising expenses, depreciation expenses, interest and taxes. Balance sheet accounts include:
- accounts receivable
- accounts payable
- bonds payable
- accumulated depreciation
- retained earnings
- common stock
Depreciation is the gradual allocation of a fixed asset's cost over its useful life.
The second step is to post the date, description and reference number of each journal entry for each account during an accounting period. The reference number could be in "J#" form, where "J" refers to the company's journal and "#" refers to the journal page number. For example, J1 would mean that the entry is from page 1 of the journal. The description is the same as in the journal: for example, "Cash receipt, invoice number 11-1097."
The recording of debits or credits is the next step in the posting process. Each transaction must have at least one debit and one credit.
Debits increase balance sheet asset accounts, such as cash and inventory, and increase income statement expense accounts, such as marketing and salary expenses. Debits decrease balance sheet liability accounts, such as notes payable, and shareholders' equity accounts, such as retained earnings. Debits also decrease sales accounts on the income statement.
Credits increase balance sheet liability accounts, shareholders' equity accounts and sales accounts. Credits decrease balance sheet asset accounts and expense accounts.
The fourth step is to calculate the running debit and credit balance for each account. For example, if the cash account has a debit entry of $10,000, a credit entry of $5,000 and a debit entry of $25,000 on three separate dates, the total debits are $10,000 plus $25,000, or $35,000, and the sum of the credits is $5,000. Therefore, the debit balance on the last date is $35,000 minus $5,000, or $30,000.
The final step in the posting process is to check for mathematical and data transfer errors. Accounting software packages may reduce these errors through automation, but verifying the numbers is a prudent step that prevents errors from propagating to the financial statements.