1. Accounting & Financial Analysis 1 Lecture 3 The General Ledger

2. Owner’s equity Aka Proprietorship For accounting purposes the business exists separately from the owner. The start up capital that the owner puts into the business (money and assets) is considered as money owing back to the owner In addition the owner is also entitled to the profits that the business makes Aka Proprietorship For accounting purposes the business exists separately from the owner. The start up capital that the owner puts into the business (money and assets) is considered as money owing back to the owner In addition the owner is also entitled to the profits that the business makes

3. Owner’s equity (2) The capital plus retained profits is known as Owner’s Equity.

4. General Ledger A General Ledger is a combination of accounts that make up the financial statements of a business It is where all business transactions are recorded under their appropriate account heading. A General Ledger is a combination of accounts that make up the financial statements of a business It is where all business transactions are recorded under their appropriate account heading.

5. Account Headings Examples Sales a/c, Purchases a/c, Wages a/c, Telephone a/c, Postage a/c, etc., etc. A business could have a hundred different accounts Sales a/c, Purchases a/c, Wages a/c, Telephone a/c, Postage a/c, etc., etc. A business could have a hundred different accounts

6. CHART OF ACCOUNTS A listing of all these accounts for easy reference is called a “Chart of Accounts”

7. Format of Accounts : “ T ” accounts Each account is generally a separate page in the ledger and split vertically down the middle. This is why they are referred to as “ T ” accounts. The account name is written at the top of the account page “ DEBIT ” The left hand side is called the “ DEBIT ” side. The right hand side is called the “ CREDIT ” “ CREDIT ” side. Each account is generally a separate page in the ledger and split vertically down the middle. This is why they are referred to as “ T ” accounts. The account name is written at the top of the account page “ DEBIT ” The left hand side is called the “ DEBIT ” side. The right hand side is called the “ CREDIT ” “ CREDIT ” side.

8. Computer based accounts If using a computer based system the accounts are printed in three column fashion. Debit, Credit & Balance (not “ T ” a/c) If using a computer based system the accounts are printed in three column fashion. Debit, Credit & Balance (not “ T ” a/c)

9. Principle of double entry book-keeping Every transaction that is recorded in the General Ledger: must have a “ DEBIT ” in one account(s) and a corresponding “CREDIT” in another account(s) Therefore the total of all the debit amounts should equal the total of all the credit amounts. Every transaction that is recorded in the General Ledger: must have a “ DEBIT ” in one account(s) and a corresponding “CREDIT” in another account(s) Therefore the total of all the debit amounts should equal the total of all the credit amounts.

10. Principle of double entry book-keeping (2) Double entry accounting is a system for recording transactions to ensure that the accounting equation always remains in balance.

11. The General Ledger All these accounts assembled together are known as the “General Ledger” These accounts are classified into groups that are known as accounting elements. There are five accounting elements. All these accounts assembled together are known as the “General Ledger” These accounts are classified into groups that are known as accounting elements. There are five accounting elements.

12. 5 Accounting elements Assets Liabilities Proprietary Ledger Owner’s Equity Revenue Nominal Ledger Expenses Assets Liabilities Proprietary Ledger Owner’s Equity Revenue Nominal Ledger Expenses

13. Division of the General Ledger: Although the general ledger is a combination of all the accounts put together for practical purposes it is separated into two distinct sections. The NOMINAL ledger The PROPRIETARY or PRIVATE ledger Although the general ledger is a combination of all the accounts put together for practical purposes it is separated into two distinct sections. The NOMINAL ledger The PROPRIETARY or PRIVATE ledger

14. The NOMINAL ledger Where all the trading transactions (activities) are recorded and from which we can calculate the profit or loss made during the accounting period Account is debited: Expenses and Losses Account is credited: Income, gains Where all the trading transactions (activities) are recorded and from which we can calculate the profit or loss made during the accounting period Account is debited: Expenses and Losses Account is credited: Income, gains

15. The PROPRIETARY or PRIVATE ledger Where all the Assets, Liabilities and Owner’s Equity of the business are recorded.

16. Accounting Equation Assets = Liabilities + Owner’s Equity OR Owner’s Equity = Assets - Liabilities Assets = Liabilities + Owner’s Equity OR Owner’s Equity = Assets - Liabilities

17. Assets What the business owns - (Debit balances) Account is generally debited: Value of assets that belong to the business, and cash or amounts owed to the business. What the business owns - (Debit balances) Account is generally debited: Value of assets that belong to the business, and cash or amounts owed to the business.

18. The Assets are divided into two categories: Current assets: These represent assets that will change in value within the accounting period (Less than 12 months) Non-current assets: These represent assets that will be used by the business for a period in excess of 12 months Current assets: These represent assets that will change in value within the accounting period (Less than 12 months) Non-current assets: These represent assets that will be used by the business for a period in excess of 12 months

19. Current assets Cash at bank Trade debtors Inventory Input tax credit Prepayments Cash at bank Trade debtors Inventory Input tax credit Prepayments

20. Non-current assets Land & buildings Motor vehicles Plant & Equipment Furniture & Fittings Patents Trade marks Land & buildings Motor vehicles Plant & Equipment Furniture & Fittings Patents Trade marks

21. Liabilities What the business owes - (Credit balances) Account is generally credited: Cash or amounts owed by the business. What the business owes - (Credit balances) Account is generally credited: Cash or amounts owed by the business.

22. The liabilities are divided into two categories: Current liabilities Non-current liabilities Current liabilities Non-current liabilities

23. Current liabilities These represent liabilities that will change in value within the accounting period (Less than 12 months). E.g. Trade creditors GST payable Accruals Bank overdraft Employee entitlements These represent liabilities that will change in value within the accounting period (Less than 12 months). E.g. Trade creditors GST payable Accruals Bank overdraft Employee entitlements

24. Non-current liabilities These represent liabilities of a long term nature due to be paid in more than 12 months. E.g. Long term bank loans Other loans or amounts owing These represent liabilities of a long term nature due to be paid in more than 12 months. E.g. Long term bank loans Other loans or amounts owing

25. Owner’s Equity = (Credit balances) Capital that the proprietor puts into the business and any accumulated profits retained by the business. (Owed by the entity to the shareholders) = (Credit balances) Capital that the proprietor puts into the business and any accumulated profits retained by the business. (Owed by the entity to the shareholders)

26. As a general rule any transaction that affects the Nominal ledger has the contra entry in the Proprietary ledger. Example 1 : Sale of goods for cash $253 Sales are recorded in the Nominal ledger (trading transaction) : GST payable is recorded in the Proprietary ledger (amount owing) Sales a/c Credit $230 GST payableCredit$ 23 The other side of the entry, which has to be a Debit, is the cash. Cash is not a trading transaction it is an increase in Property, and therefore it is an account recorded in the Proprietary ledger. Cash or Bank a/cDebit$253 Example 1 : Sale of goods for cash $253 Sales are recorded in the Nominal ledger (trading transaction) : GST payable is recorded in the Proprietary ledger (amount owing) Sales a/c Credit $230 GST payableCredit$ 23 The other side of the entry, which has to be a Debit, is the cash. Cash is not a trading transaction it is an increase in Property, and therefore it is an account recorded in the Proprietary ledger. Cash or Bank a/cDebit$253

27. Any transaction that affects the Nominal ledger has the contra entry in the Proprietary ledger (2) Example 2 : Sale of goods on credit $385 Sales are recorded in the Nominal ledger : GST payable is recorded in the Proprietary ledger Sales a/cCredit$350 GST payableCredit$ 35 The other side of the entry, which has to be a Debit, is money owing to the business by somebody else – a Trade Debtor Debtors are not a trading transaction, and therefore it is an account recorded in the Proprietary ledger. Trade DebtorsDebit$385 Example 2 : Sale of goods on credit $385 Sales are recorded in the Nominal ledger : GST payable is recorded in the Proprietary ledger Sales a/cCredit$350 GST payableCredit$ 35 The other side of the entry, which has to be a Debit, is money owing to the business by somebody else – a Trade Debtor Debtors are not a trading transaction, and therefore it is an account recorded in the Proprietary ledger. Trade DebtorsDebit$385

28. Any transaction that affects the Nominal ledger has the contra entry in the Proprietary ledger (3) Example 3 : Bought stationery on credit $110 Stationery a/c Debit$100 (Nominal Ledger) Input tax credit a/cDebit$ 10 (Proprietary ledger) Trade Creditors a/cCredit$110 (Proprietary ledger) Example 3 : Bought stationery on credit $110 Stationery a/c Debit$100 (Nominal Ledger) Input tax credit a/cDebit$ 10 (Proprietary ledger) Trade Creditors a/cCredit$110 (Proprietary ledger)

29. When does the rule not apply? The rule does not always apply to the Proprietary ledger. Many transactions dealing with the Bank a/c have the Debit and the Credit entries within the Proprietary ledger. The rule does not always apply to the Proprietary ledger. Many transactions dealing with the Bank a/c have the Debit and the Credit entries within the Proprietary ledger.

30. Example 1 : A Trade Debtor pays us a cheque for amount owing of $385 This has an affect of reducing the amounts owed to us by Trade Debtors We know that Trade Debtors are within the Proprietary ledger. Therefore we have to Credit the Trade Debtors a/c. The trading transaction took place when the sale occurred. The late payment is merely a settlement of property. The cheque is deposited into the bank increasing our balance or reducing the overdraft. A Trade Debtor pays us a cheque for amount owing of $385 This has an affect of reducing the amounts owed to us by Trade Debtors We know that Trade Debtors are within the Proprietary ledger. Therefore we have to Credit the Trade Debtors a/c. The trading transaction took place when the sale occurred. The late payment is merely a settlement of property. The cheque is deposited into the bank increasing our balance or reducing the overdraft.

31. Example 1 - Answer The entry will be: Credit$385 Trade Debtors a/Credit$385 Debit$385 Bank a/cDebit$385 The entry will be: Credit$385 Trade Debtors a/Credit$385 Debit$385 Bank a/cDebit$385

32. Example 2 We paid the Trade Creditor by cheque the amount owing for stationery of $110 This has an affect of reducing the amounts owing by us to Trade Creditors We know that Trade Creditors are within the Proprietary ledger. Therefore we have to Debit the Trade Creditors a/c. The trading transaction took place when the purchase occurred. The late payment is merely a settlement of property. The cheque is drawn on our bank account reducing our balance or increasing the overdraft We paid the Trade Creditor by cheque the amount owing for stationery of $110 This has an affect of reducing the amounts owing by us to Trade Creditors We know that Trade Creditors are within the Proprietary ledger. Therefore we have to Debit the Trade Creditors a/c. The trading transaction took place when the purchase occurred. The late payment is merely a settlement of property. The cheque is drawn on our bank account reducing our balance or increasing the overdraft

33. Example 2 - Answer The entry will be: Debit$110 Trade Debtors a/c Debit $110 Credit $110 Bank a/c Credit $110 The entry will be: Debit$110 Trade Debtors a/c Debit $110 Credit $110 Bank a/c Credit $110

34. Journals Transactions are recorded in the general ledger by the process of “JOURNALS “ The journal identifies the accounts effected by the transaction and the relevant $ value. Transactions are recorded in the general ledger by the process of “JOURNALS “ The journal identifies the accounts effected by the transaction and the relevant $ value.

35. Journals – Debit or Credit? The following schedule indicates whether the $ value should be a Debit (DR) or Credit (CR) entry in the journal.

36. Have a go! CLASS EXERCISE 3 At the back of your handouts CLASS EXERCISE 3 At the back of your handouts