1. BAF3M1 THE SIMPLE LEDGER Chapter 4, Section 4.1

2. Ledger Accounts  In this chapter, you will be learning the system used to maintain an up-to-date financial position  An account is a __________ usually designed to _____________ _______ ____________in each individual item affecting _______________ ________________  There is one account for each item. All the accounts together are called the ledger.  A ledger is a _____________ ____ _____ _____ ______________

3. Example: Pacific Delivery  The balance sheet of Pacific Delivery  The data from this balance sheet are used to set up the separate pages called accounts.  The dollar values for each item on the balance sheet gives the beginning value for that item’s account

4. The Simple Ledger of Pacific Delivery  These accounts are called T- accounts.  The T-account is a simple type of account, used mainly to explain accounting theory.  The formal account used in business will be introduced in a later chapter.

5. Important Features of Ledger Accounts  Each individual balance sheet item is given its own specially divided page with the name of the item at the top (For now, think of each T as a page). Each of these pages is called an account. (Ex. Cash account, Accounts Receivable account, Bank Loan account, etc.)  The dollar figure for each item is recorded in the account on the first line. This is the beginning value for the account. For any item, the correct side is the side on which the item itself would appear on a simple balance sheet.

6. Important Features of Ledger Accounts cont’d  The ledger and balance sheet both show financial position, although in different ways. Note: If you have a ledger, a balance sheet can be prepared from it. If you have a balance sheet, a ledger can be prepared from it.

7. BAF3M1 THE SIMPLE LEDGER Chapter 4, Section 4.2

8. Debit and Credit Theory  The theory of accounting using ledger accounts is based entirely on the understanding that every account page has _____ _____________ _________  Debit is the word associated with the ___________ _________of an account. In accounting “debit” means left  Credit is the word associated with the ____________ _________of an account. In accounting “credit” means right

9. Debit and Credit Theory cont’d  Looking back at the simple ledger, you will notice:  the beginning values of the assets were placed on the left side (debit side) in each of their accounts.  the values of the liabilities and of the capital were placed on the right side (credit side) in each of their accounts  Asset accounts have _____________ values. Liabilities and capital accounts have ___________ values.

10. Rules of Debit and Credit  You have discovered which side of the account (left or right) to use to record the beginning value for each type of account. Now let’s discover how changes are recorded in the accounts.  There is a simple rule for recording changes in accounts:  For each type of account, record increases on its beginning value side, and record decreases on the other side.

11. Double-Entry System of Accounting  Whenever a transaction occurs, changes must be made in the accounts.  For each transaction, all of the _____________ ______________together ________ _______________.  In the double-entry system of accounting, every transaction is recorded in the accounts in two steps: 1. debit (or debits) 2. credit (or credits)  The total of the debit entries ______________ the total of the credit entries.

12. BAF3M1 THE SIMPLE LEDGER Chapter 4, Section 4.3

13. Calculating the Balance of an Account  To calculate the balance of a T-account, two steps are performed: Step 1: Add the two sides of the account separately. Use tiny pencil figures to write down these two subtotals, one beneath the last item on each side. These tiny totals are known as ________ ________________ or ________________ _________________. Step 2: a) Subtract the smaller total from the larger total b) Write the result beneath the larger of the two pin totals from Step 1. Circle this final amount.

14. Calculating the Balance of an Account cont’d  The circled amount is the dollar value of the account. The side on which it is recorded indicates which type of balance it is, debit or credit. Together, the two pieces of information represent the ______________ _________________ – the dollar value of an account and shows whether it is a debit or credit value

15. Interpreting the Balance of an Account  At this stage, all accounts fall into one of three categories. You should know that assets have debit balances, and liabilities and capital have credit balances. Therefore, going back to the earlier example:  The Cash account is an asset because it has a debit balance;  The W. Caruso account is an asset (account receivable) because it has a debit balance;  The Dini Bros account is a liability (account payable) because it has a credit balance, and is not the Capital account

16. Exceptional Account Balances  An account that would normally have a debit balance ends up with a credit balance (vice versa). Opposite balances don’t necessarily mean that there’s a mistake. There may be a good reason for an account to end up with a balance opposite to its normal one.  Jack Evans, a customer, owes us $50. Suppose he sends us a cheque for $55 in payment. His account will end up with a credit balance of $5, even though he is a customer and normally has a debit balance. The account shows that the business owes Jack $5.  We might temporarily spend more funds that we have in the bank. Then we would end up with a credit balance in the Bank account.

17. BAF3M1 THE SIMPLE LEDGER Chapter 4, Section 4.4

18. Trial Balance  Just as a balance sheet must balance, the ledger must also balance. This is done by means of a trial balance.  A trial balance is a listing of the account balances in a ledger. It is used to see if the dollar value of the accounts with ______________ _____________ is _____________ to the dollar value of the accounts with _______________ _________________.  To do this, you simply add up all of the debit balances, add up all of the credit balances, and see if the two totals are the same.

19. Preparing a Trial Balance Step 1: Write a heading at the top. List all the accounts and their balance. Step 2: Place the debit balances in a debit column and the credit balances in a credit column. Step 3: Add up the two columns. Step 4: See if the two column totals are the same. Only if the two column totals are the same can you consider your ledger work to be correct.  See ‘The Trial Balance’ handout

20. Trial Balance out of balance  When the trial balance is out of balance, _____ ____________ ______ error has been made in the accounting process. It is the accountant’s job to find and correct these errors.  Errors may have been caused by faulty addition, by entering an item on the wrong side, or by other mistakes.  It takes a methodical approach to locate accounting errors because they are often quite difficult to detect.  See “The Trial Balance” handout for the ‘four step procedure if you find a ledger that does not balance’