Chapter 4 – The Simple Ledger BAF3M Accounting Chapter 4 – The Simple Ledger

4.1 Ledger Accounts First off, some key distinctions: An “Account” is a page designed to record the changes for an individual item A “Ledger” is a group or file of accounts “Heath Ledger” is a late actor best known for playing The Joker in The Dark Knight

4.1 Ledger Accounts There are many ways to create a ledger In “real world” would be computerized In “class” we will use paper to learn the accounting theory Each item (account) on the B/S has its own page in the ledger (p. 89) Use T-Accounts for this…

4.1 Ledger Accounts T – accounts Called so because they look like a T leftTright Account name

4.1 Ledger Accounts It’s key to understand what side of the ledger the beginning balance is on ASSETS  LEFT LIABILITIES + OE  RIGHT

4.1 Ledger Accounts To Do 1) Copy the T account relationship on page 90. Do Exercises 1, 2 We’ll do 3 together Do Exercise 4

4.2 Debit and Credit Theory Debit (DR)  LEFT SIDE Credit (CR)  RIGHT SIDE Asset accounts have DEBIT values Liab & OE accounts have CREDIT values

4.2 Debit and Credit Theory Rules of Debit and Credit For each type of account, record increases on its beginning value side and decrease on the other side EX. ASSETS  increases – left -- debit  decreases – right -- credit

4.2 Debit and Credit Theory Types of Accounts Beginning Value Side Increases Decreases ASSET accounts LEFT DEBIT CREDIT LIABILITY & OWNER’S EQUITY accounts RIGHT

4.2 Debit and Credit Theory Memorize this: ASSETS = LIABILITIES + OWNER’S EQUITY + - - + - + DR CR DR CR DR CR Follow along with scenario on pgs 94 - 100

4.2 Debit and Credit Theory TO DO: 4.2 Questions #1 – 6, 9 – 11; pg 102 4.2 Exercises 1 – 4 Pg 102-4

4.3 Account Balances and Terminology Calculating the Balance of an account 2 steps Step 1: Add the two sides separately (your totals are called ‘pin totals’ or ‘pencil footings’) Step 2: Subtract the smaller total from the larger total, write the result beneath the larger number and circle it See Example Figure 4.6 p. 94

4.3 Account Balances and Terminology Interpreting the Balance of an Account Exceptional Account Balances The Bank Account Buying & Selling on Credit Read each section (p.94) and make your own notes

WHY DO WE DO A TRIAL BALANCE? Periodically it is necessary to check the accuracy of the ledger (your T-accounts) To do this we use a form called a TRIAL BALANCE

4.4 Trial Balance WHAT IS A TRIAL BALANCE? TRIAL BALANCE - is simply the listing of the account balances in a ledger it is used to see if the dollar value of the accounts with debit balances is equal to the dollar value of the accounts with credit balances

4.4 Trial Balance KEY TERMS IN BALANCE – if the debits equal the credits OUT OF BALANCE – if the debits don’t equal the credits

STEPS TO CREATE A TRIAL BALANCE Include the heading (who, what, when) List all the accounts and their balances. Place the debit balances in a debit column and the credit balances in a credit column. Add up the 2 columns. See if the 2 column totals are the same.

Trial Balance Example

If the 2 columns balance does that mean I did it right? 4.4 Trial Balance If the 2 columns balance does that mean I did it right? NO Sometimes the errors made were incorrect entries that just happened to be balanced .. This takes some skill to detect and solve