Lesson 5 of 9
Posting
Moving entries out of the journal and into accounts, one T at a time, then reading a balance off each. The bindery's cash account, from zero to $88,200.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- The journal is chronological and the ledger is by account. Posting moves the same entries from one arrangement into the other.
- A T-account is a single account with debits on the left and credits on the right, and its balance is the difference.
- Nothing is created by posting. It is a re-sort of information that was already complete, which is why the two sides still agree afterwards.
The journal answers "what happened on 1 April". It cannot answer "how much cash is there", because the cash entries are scattered through it in date order.
The ledger answers the second question. It holds one account for each thing being tracked, and posting is the act of copying each half of each journal entry into the account it belongs to.
Cash, from nothing to a year-end balance
- Opening cash$0
- Owner's investment+$60,000
- Bank loan+$40,000
- Machine bought−$48,000
- Rent paid ahead−$12,000
- Paid to suppliers−$24,000
- Cash sales+$110,000
- Wages paid−$45,000
- Customer deposit+$9,000
- Interest paid−$1,800
- Cash at 31 December= $88,200
What a T-account looks like
Draw a T. Write the account name above the crossbar. Debits go on the left of the upright, credits on the right. That is the whole apparatus, and it is called a T-account for the obvious reason.
Every other account, the same way
The chart of accounts
The list of accounts a business keeps is called its chart of accounts, and it is a design decision rather than a given. Fen Street Bindery uses twelve. A large manufacturer uses thousands, numbered so that assets occupy one range, liabilities another and so on.
The choice matters more than it looks. An account is the finest grain at which anything can later be reported, so a cost that was never given its own account cannot be reported separately afterwards without going back through the journal. That is why a company that wants to report revenue by product line has to decide that before the year starts, not after it ends.
Why software still works this way
Modern accounting systems do not draw Ts, and they post automatically the moment an invoice is raised. The structure underneath is unchanged: a journal in date order, a ledger by account, and a rule that the two sides of every entry agree.
The reason the structure survived is that it is verifiable. Any balance in any account can be traced back to the entries that produced it, and each of those entries to a document. A system that simply stored current balances would be smaller, faster and impossible to audit.
Reading a balance correctly
An account's balance is the difference between its two sides, carried on the larger one. Accounts payable above has $24,000 of debits and $30,000 of credits, so it carries a credit balance of $6,000, which is what the bindery still owes suppliers.
The materials account shows the same logic on the other side. Thirty thousand went in, twenty six thousand came out as cost of sales, and $4,000 of stock remains.
Notice that prepaid rent still reads $12,000 and the interest expense still reads $1,800. Neither is right at 31 December, and neither is a posting error. Nine months of rent has been used and three months has not; three quarters of the year's interest has been paid and one quarter has not. The journal recorded what happened; nobody has yet recorded what elapsed. That is lesson seven.
Check yourself
What does posting add to the information in the journal?
- The amounts
- The dates
- Nothing. It rearranges the same entries by account instead of by date
Show the answer
Answer: C.
The journal and the ledger contain identical information in two arrangements. That is why the two sides still agree after posting.Accounts payable has debits of $24,000 and credits of $30,000. What is the balance?
- $54,000 credit
- $6,000 credit
- $6,000 debit
Show the answer
Answer: B.
The balance is the difference, carried on the larger side. Credits exceed debits by $6,000, and payables is a liability, which is the side it should be on.A revenue account shows a debit balance. What does that suggest?
- The company made a loss
- Something was posted on the wrong side, since revenue increases with credits
- Revenue was collected in cash
Show the answer
Answer: B.
Each account type carries its balance on a predictable side. A balance on the wrong side is a mechanical signal that an entry was reversed.Sources
- This lesson is taught from first principles. No external source is cited, because no claim here depends on one.
What this leaves out
- Fen Street Bindery and every figure are invented, chosen so each balance can be recomputed by hand.
- Real ledgers carry hundreds of accounts and are maintained by software that posts automatically. The T is a teaching device that survives because it makes the two sides visible.
- The balances here are before the year-end adjustments, so three of them are knowingly incomplete at this point.
- Nothing here is advice about any security.