Chapter 4: The Simple Ledger 1.

Chapter 4: The Simple Ledger 1

Ledger Accounts 2

Ledger Accounts An account is a page specially designed to record the changes in each individual item affecting the financial position. A ledger is a group or file of accounts A ledger can take many forms: cards, paper in binders, electronic files, etc. 3

Ledger Accounts Each individual balance sheet item is given its own account. Typically, you would have one account per page. The dollar figure for each balance sheet item is recorded in the account on the first line. This is the beginning balance for the account. 4

Ledger Accounts Ensure that you record the dollar figure on the correct side of the account. The ledger and the balance sheet both show financial position … if you have a ledger you can prepare a balance sheet … if you have a balance sheet you can prepare a ledger. 5

Ledger Accounts What is the accounting equation?
Which side of the balance sheet do you find assets? Liabilities? Owner’s Equity? Where would you normally find the ledger balance for assets? Liabilities? Owner’s Equity? = + Assets Left Right Liabilities Left Right Owner’s Equity Left Right Beginning $ Value Beginning $ Value Beginning $ Value 6

Sample Company 7

Assets = Liabilities + Owner’s Equity
Cash Equipment Trucks Supplies A/R W. Caruso A/R R. Van Loon Bank Loan A/P Dini Bros. A/P Packham Products B. Rissien, Capital 3,265 2,465 18,000 60,287 150 55,075 1,516 620 22,174 3,946 8

Debit & Credit Theory 11

Ledger Accounts Earlier we learned that ledger accounts have a “left side” and a “right side”. Accountants refer to these two sides as Debit and Credit. Assets Left Right Owner’s Equity Liabilities = + Debit Credit (DR) (CR) For ALL ACCOUNT, the “left side” is the Debit side and the “right side” is the Credit side. 12

Rules of Debit and Credit
Now that we know which side of the account is debit and which is credit, we need to know how to enter changes in the accounts. The rule “feeds” from the normal beginning balance … what are they? Does a debit or a credit increase or decrease the balance in the account? Assets Owner’s Equity Liabilities = + Debit Credit (DR) (CR) Beginning $ Value Beginnin g $ Value Beginning $ Value 13

Transaction Analysis Sheet for Pacific Trucking
The company purchases $200 worth of supplies from Packham Products, to be paid for later. Supplies Asset + DR ① 200– A/P – Packham Products Liabilities + CR ① 200– An accountant would express this transaction as: “debit Supplies and credit AP – Packham Products, $200.” 14

Pacific Trucking Ledger
B. Rissien, Capital Bank Loan A/P Dini Bros. A/P Packham Products Cash Equipment Trucks Supplies A/R W. Caruso A/R R. Van Loon 3,265 620 150 55,075 2,465 18,000 60,287 1,516 3,946 22,174 NOTE: the transaction includes both a debit & credit and the total debits EQUAL the total credits. ① 200 200 ① 15

The company pays $500 to Dini Bros. In partial payment of the amount owed to them. – A/P – Dini Bros. Liability DR ② 500– Cash Asset – CR ② 500– An accountant would express this transaction as: “debit A/P – Dini Bros and credit Cash, $500.” 16

B. Rissien, Capital Bank Loan A/P Dini Bros. A/P Packham Products Cash Equipment Trucks Supplies A/R W. Caruso A/R R. Van Loon 3,265 620 150 55,075 2,465 18,000 60,287 1,516 3,946 22,174 ① 200 200 ① 500 ② ② 500 17

The company receives $200 cash from R. Van Loon in partial payment of her debt. Cash Asset + DR ③ 200– A/R – R. Van Loon Asset – CR ③ 200– An accountant would express this transaction as: “debit Cash and credit A/R – R. Van Loon, $200.” 18

B. Rissien, Capital Bank Loan A/P Dini Bros. A/P Packham Products Cash Equipment Trucks Supplies A/R W. Caruso A/R R. Van Loon 3,265 620 150 55,075 2,465 18,000 60,287 1,516 3,946 22,174 ① 200 200 ① 500 ② ② 500 ③ 200 200 ③ 19

A delivery service is provided for a customer at a price of $400. The customer pays cash at the time of the service. Cash Asset + DR ④ 400– B. Rissien, Capital Owner’s Equity + CR ④ 400– An accountant would express this transaction as: “debit Cash and credit B. Rissien, Capital, $400.” 20

B. Rissien, Capital Bank Loan A/P Dini Bros. A/P Packham Products Cash Equipment Trucks Supplies A/R W. Caruso A/R R. Van Loon 3,265 620 150 55,075 2,465 18,000 60,287 1,516 3,946 22,174 ① 200 200 ① 500 ② ② 500 ③ 200 200 ③ ④ 400 400 ④ 21

A used truck costing $8,000 is purchased from Dini Bros. A cash down payment of $2,500 is made at the time of the purchase and the balance is to be paid at a later date. Truck Asset + DR ⑤ 8,000– Cash Asset – CR ⑤ 2,500– A/P – Dini Bros Liability + CR ⑤ 5,500– An accountant would express this transaction as: “debit Trucks $8,000, credit Cash $2,500 and credit A/P – Dini Bros $5,500.” 22

B. Rissien, Capital Bank Loan A/P Dini Bros. A/P Packham Products Cash Equipment Trucks Supplies A/R W. Caruso A/R R. Van Loon 3,265 620 150 55,075 2,465 18,000 60,287 1,516 3,946 22,174 ① 200 200 ① 500 ② ② 500 ③ 200 200 ③ ④ 400 400 ④ Notice: total Debits still EQUAL total Credits 2,500 ⑤ ⑤ 8,000 5,500 ⑤ 23

A delivery service is completed for R. Van Loon at a price of $350. Van Loon does not pay for the service at the time it is provided, but agrees so pay within 60 days. A/R – R. Van Loon Asset + DR ⑥ 350– B. Rissien, Capital Owner’s Equity + CR ⑥ 350– An accountant would express this transaction as: “debit A/R – R. Van Loon and credit B. Rissien, Capital, $350.” 24

B. Rissien, Capital Bank Loan A/P Dini Bros. A/P Packham Products Cash Equipment Trucks Supplies A/R W. Caruso A/R R. Van Loon 3,265 620 150 55,075 2,465 18,000 60,287 1,516 3,946 22,174 ① 200 200 ① 500 ② ② 500 ③ 200 200 ③ ④ 400 400 ④ ⑤ 8,000 2,500 ⑤ 5,500 ⑤ 350 ⑥ ⑥ 350 25

One of the lifting machines (equipment) breaks down. The company spends $650 cash to have the machine repaired. B. Rissien, Capital Owner’s Equity – DR ⑦ 650– Cash Asset – CR ⑦ 650– An accountant would express this transaction as: “B. Rissien, Capital and credit Cash, $650.” 26

B. Rissien, Capital Bank Loan A/P Dini Bros. A/P Packham Products Cash Equipment Trucks Supplies A/R W. Caruso A/R R. Van Loon 3,265 620 150 55,075 2,465 18,000 60,287 1,516 3,946 22,174 ① 200 200 ① 500 ② ② 500 ③ 200 200 ③ ④ 400 400 ④ ⑤ 8,000 2,500 ⑤ 5,500 ⑤ ⑥ 350 350 ⑥ ⑦ 650 650 ⑦ 27

Double-Entry System of Accounting
Whenever a transaction occurs, changes must be made in the accounts. All of the account changes, in a single transaction, must balance. For each transaction, the total debits EQUAL the total credits. 28

In the double-entry system of accounting every transaction is recorded in the accounts in two steps: (1) as a debit and (2) as a credit. At least two accounts are affected by every transaction. The following is a summary of the transactions we analyzed using the “transaction analysis sheet”. 29

NOTE: for each individual transaction, the total debits EQUAL total credits. NOTE: the Debit entry is listed before the Credit entry. NOTE: each transaction consists of at least two accounts. 2 3 NOTE: the Debit entry is listed before the Credit entry. 30

Account Balances and Terminology
35

Cash 3,26 5 500 ② ③ 200 2,500 ⑤ ④ 400 650 ⑦

Cash Draw a line to signify “a total” Supplies Bank Loan B. Rissien, Capital 3,265 500 ② 2,465 18,000 ③ 200 2,500 ⑤ ① 200 ⑦ 650 60,287 ④ 400 650 ⑦ Total the debits and the credits … these are known as “pencil footings” 2,665 400 ④ 3,865 3,650 2,665 A/P Dini Bros. 350 ⑥ 215 650 61,03 7 Trucks ② 500 1,516 Subtract the “smaller” number from the “larger” and record the difference as the “account balance” beneath the “larger” number A/R W. Caruso Circle to signify “account balance” 60,387 5,500 ⑤ 55,075 500 7,016 ⑤ 8,000 150 6,516 63,07 5 63,075 A/R R. Van Loon A/P Packham Products Equipment 3,946 620 200 ③ 22,174 200 ① ⑥ 350 4,146 970 200 4,146 770 36

Exercise 1 pg. 110

Interpreting the Account Balance
Normally, we can determine the type of account from the balance. For example, Cash has a debit balance, assets have debit balances, therefore, Cash is an asset. The opposite would also be true … Cash is an asset account, therefore, it should have a debit balance. What can you say about liabilities? owner’s equity? 37

Interpreting the Account Balance
Exceptions to the rule: A debtor overpays Bank account becomes over-drawn Overpay a creditor A customer, who does not have an A/R balance, returns some merchandise You return good to a supplier whom you currently have no A/P balance Exceptional balances do not last long. Ordinary business activity usually causes them to return quickly to “normal”. 38

Terminology: Bank vs. Cash
Businesses rely heavily on the banking system. The most common ways to make payment are by cheque and electronic funds transfer. You can expect to see an account called Bank rather than Cash. The words “bank” and “cash” and “cheque” are often used interchangeably. For example, when an accountant describes an item as bought for cash, this means that it is paid for at the time it is purchased. The payment is generally made by cheque and not by actual cash. 39

Terminology: Buying and Selling on Credit
Businesses with good reputations are able to buy goods on short-term credit. The purchaser is able to delay payment for a short period of time, usually 30 days. The purchaser thus has time to inspect or test the goods thoroughly before paying for the. If you are the purchaser, which account would this affect? What if you are the seller? 40

Terminology: On Account
The term “on account” is an essential part of business vocabulary. The term is used in four specific ways: If an item is purchased on account it is not paid for at the time of purchase. A payment on account is money paid to a creditor to reduce the amount owed to that creditor. A sale on account is a sale for which the money is not received until a later date. A receipt on account is money received from a debtor to reduce the amount owed by that debtor. 41

Purchase on account - increases accounts payable
Payment on account - decreases accounts payable Sale on account - increases accounts receivable Receipt on account - decreases accounts receivable

Exercise 1 (page 96) Calculate the balances for the following accounts: A/R H. Devrie A/P P. Helka R. Smart, Capital Cash 250 1,210 360 29 190 48 512 25 150 70 35 175 30 45 75 40 175 150 3,140 What does the debit balance in the H. Devrie account mean? What does the credit balance in the P. Helka account mean? 42

Exercise 3 (page 97) Indicate whether the following phrases best represented by the word debit or by the word credit. 44

Trial Balance 45

Keeping things in Balance
When setting up a ledger the information for the accounts is usually obtained from a balance sheet. This ensures that the ledger begins in balance … total of the accounts with debit balances equals the total of accounts with credit balances. Business transactions are recorded in the ledger. Each transaction forms a balanced account entry … total debits equal total credits. 46

Trial Balance Periodically, it is necessary to check the accuracy of the ledger. To ensure that everything is in balance we can “take off” a trial balance. A trial balance is a listing of the account balances in the ledger. A trial balance compares the total of the accounts with debit balances with the total of accounts with credit balances. 47

Trial Balance If the total debits agree with the total credits, the ledger is said to be in balance. If they don’t agree, the ledger is said to be out of balance. In a manual accounting system the whole process, called taking off a trial balance, is usually done weekly or monthly. In a computerized accounting system, you can check the trial balance report as frequently as you wish. 48

Steps for Taking Off a Trial Balance
List all the accounts and their balances. Leave room for a three-line heading. Place the debit balances in a debit column and the credit balances in a credit column. Add up the two columns. 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. Write a heading at the top. A heading is necessary on the trial balance. It must show “Who”, “What”, and “When. 49

B. Rissien, Capital Bank Loan A/P Dini Bros. A/P Packham Products Equipment Trucks Supplies A/R W. Caruso A/R R. Van Loon 620 150 55,075 2,465 18,000 60,287 1,516 3,946 22,174 ① 200 200 ① ② 500 200 ③ ④ 400 400 ④ ⑤ 8,000 5,500 ⑤ ⑥ 350 350 ⑥ ⑦ 650 650 ⑦ Cash 3,265 500 ② ③ 200 2,500 ⑤ 3,865 3,650 215 970 200 770 500 7,016 6,516 2,665 63,07 5 4,146 63,075 650 61,03 7 60,387 Assets = Liabilities + Owner’s Equity 50

Trial Balance Step 3: Enter debit & credit balances
Step 1: Write Title (Who, What, & When) Step 2: List Accounts Step 4: Total Columns 51

Trial Balance Other Formatting??? 52

Importance of Trial Balance
It is important to an accountant to ensure the ledger in balance. A trial balance that is out of balance is a certain sign of at least one error in the accounts. 53

Trial Balance Out of Balance
Possible problems: Faulty addition Entering an item on the wrong side Dollar value entry error Even if the ledger is in balance, it might still have errors. 54

A ledger that is in balance may only be mechanically or mathematically correct. The accountant may have made incorrect, balanced entries. 55

To find errors, there is a four-step procedure: Step 1 Re-add the trial balance. Step 2 Check the figures from the ledger against those of the trial balance. Make sure that none are missing, none are on the wrong side, and none are for the wrong amount. Step 3 Recalculate the account balances. Step 4 Check that there is a balanced accounting entry in the accounts for each transaction. 56

Peer Assessment 57

Chapter 4: The Simple Ledger 1.

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Chapter 4: The Simple Ledger 1.

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