Chapter 4 - The Simple Ledger

Introduction 4.1 - Ledger Accounts 4.2 - Debit and Credit Theory 4.3 - Account Balances 4.4 - Trial Balance

4.1 Ledger Accounts

Important Definitions Ledger Accounts: used to maintain an up-to-date financial position Account – Page designed to record changes in items affecting financial position Ledger – Group or file of accounts

T-Accounts Accounts in a ledger can often be represented as a T- Account They are usually used to see if an account has debited or credited. Assets Liabilities Owners Equity Beginning Value($) Beginning Value($) Beginning Value($) DR CR DR CR DR CR

Debit and Credit Theory 4.2 Debit and Credit Theory

Liabilities and OE Accounts The Rules Debits are found on the left side of accounts Credits are found on the right side of accounts Types of Account Beginning Value Side Increases Decreases Debit Credit Liabilities and OE Accounts Asset Account

Double-Entry System of Accounting When a transaction occurs, changes are made in their respective accounts For each and every transaction, all of the account changes together must balance The total of the debit amounts should equal the total of the credits amount

Transaction Analysis Sheet A transaction analysis sheet is helpful when examining a transaction Allows you to organize thoughts about transactions

4.3 Account Balances

Calculating Balances 2 main steps are performed to find balances of a T chart Step 1: Add the 2 sides of the account separately. Write down the 2 subtotals Step 2: a) Subtract smaller total from the larger total b) Record amount beneath the larger subtotal. Don’t forget to circle your final amount.

Example Cash A/P 3265 400 200 3865 500 2500 650 3650 200 620 350 970 770 215 Final amount is beneath larger amount and circled Both sides are added up separately with the subtotal underneath

Exceptional Account Balances There may be a good reason for an account to end up with a opposite balance The Company overpays Accounts Payable Return goods for credit to a supplier with whom you have no previous account balance Example: John Miller owes Bob’s Bakery $100, but he pays $50 extra, so he can pay for products that he will purchase later on.

Buying and Selling on Credit Businesses with good reputation can buy goods on short term credit Purchaser is able to delay payment for 30 days and has time to inspect goods before paying

On Account This term is used in 4 specific ways in modern business 1) Purchase on account – is a purchase that is not paid for at the time it is made 2) Sale on account – is a sale for which the money is not received at the time the sale is made. 3) Payment on account – is money paid to a creditor to reduce the amount owed to that creditor. 4) Receipt on account – is money received from a debtor to reduce the amount owed by that debtor.

4.4 Trial Balance

Trial Balance Trial Balance – Used to check the accuracy of all business transactions that are recorded in the ledger If dollar value of Total Debit Balance = Total Credit Balance Both totals are the same – in balance Not the same – out of balance Taking off a Trial Balance – act of checking ledger

Ledger of Pacific Trucking

Taking off a Trial Balance Heading: Who? What? When? Account balances listed as debit or credit In Ledger Order Balanced column Totals

Out of Balance Process to fix out of balance: Step 1: Re add the trial balance columns Step 2: Check to see if the amounts from the ledger are the same as the amounts on the trial balance. Make sure none are missing or on the wrong side Step 3: Recalculate the account balances Step 4: Finally, check to see if there is a balanced entry in the accounts for each transaction

Importance of the Trial Balance Important to accountants to have ledger in balance Ledger out of balance doesn’t help businesses At least one error has been made Work is not accurate