Account Balances and Terminology. Created by D. Gilroy Heart Lake Secondary School

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1 Account Balances and Terminology Created by D. Gilroy Heart Lake Secondary School 42

2 Pacific Trucking Ledger Cash Supplies Draw a line to Bank Loan B. Rissien, 3, ,465 signify a total 18,000 Capital , ,287 2, Total the debits and A/P ,865 3,650 2,665 Dini Bros the credits these ,037 A/R Trucks are known as 2 pencil 500 1,516 W. Caruso 55,075 5, ,387 footings 500 7, , ,075 0 Circle to signify 6,516 Subtract the smaller 63,075 account balance number from A/R the larger and A/P Packham R. Van Loon Products record the difference Equipment as the account 620 balance beneath 3, , the larger number 0 4, ,146

3 Interpreting the Account Balance ü Normally, we can determine the type of account from the balance. v 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. ü What can you say about liabilities? owner s equity? 44

4 Interpreting the Account Balance ü Exceptions to the rule: v A creditor overpays v Bank account becomes over-drawn v Overpay a debtor v A customer, who does not have an A/R balance, returns some merchandise v You return goods to a supplier whom you currently have no A/P balance ü Exceptional balances do not last long. Ordinary business activity usually causes them to return quickly to normal. 45

5 Terminology: Bank vs. Cash ü Businesses rely heavily on the banking system. ü The most common ways to make payment are by cheque and electronic funds transfer. ü You can expect to see an account called Bank rather than Cash. ü The words bank and cash are often used interchangeably. v 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. 46

6 Terminology: Buying and Selling on Credit ü Businesses with good reputations are able to buy goods on short-term credit. ü The purchaser is able to delay payment for a short period of time, usually 30 days. ü The purchaser thus has time to inspect or test the goods thoroughly before paying for the. ü If you are the purchaser, which account would this affect? ü What if you are the seller? 47

7 Terminology: On Account ü The term on account is an essential part of business vocabulary. The term is used in four specific ways: v If an item is purchased on account it is not paid for at the time of purchase. v A sale on account is a sale for which the money is not received until a later date. v A payment on account is money paid to a creditor to reduce the amount owed to that creditor. v A receipt on account is money received from a debtor to reduce the amount owed by that debtor. 48

8 Exercise 1 (page 110) Calculate the balances for the following accounts: Cash A/R H. Devrie A/P P. Helka R. Smart, Capital ,140 1, A. What does the debit balance in the H. Devrie account mean? B. What does the credit balance in the P. Helka account mean? 49

9 Exercise 2 (page 110) The following three accounts have exceptional balances. Examine them and answer the questions that follow. Cash 500 A/R P. Chu 100 A/P J. Reicher 300 A. For each account, explain what is unusual about the balance. B. For each account, give a possible cause of the exceptional balance. 50

10 Exercise 3 (page 110) Indicate whether the following phrases best represented by the word debit or by the word credit. 51

11 Trial Balance Created by D. Gilroy Heart Lake Secondary School 52

12 Keeping things in Balance Ø When setting up a ledger, where do we get the information from? Ø BALANCE SHEET Ø Why? Ø To ensures that the ledger begins in balance Ø Each transaction forms a balanced account entry total debits equal total credits. 53

13 What would happen if all the debit account balances were in one column and all the credit account balances in another, and the two columns were totaled? The totals should equal WHY? 54

14 A trial balance: Ø a listing of the account balances in the ledger. Ø compares the total of the accounts with DR balances with the total of accounts with CR balances. 55

15 Trial Balance Ø If total DR = total CR, the ledger is said to be in balance. Ø If they don t agree, the ledger is said to be out of balance. 56

16 Trial Balance Ø Taking off a trial balance is usually done weekly or monthly. Ø Checking to see if total debits = total credits 57

Pacific Trucking Ledger Assets = Liabilities + Owner s

Rissien, 3,265 500 2 2,465 18,000 Capital 3 200 2,500 51

Caruso 55,075 5,500 5 60,387 500 7,016 5 8,000 150

17 Pacific Trucking Ledger Assets = Liabilities + Owner s Equity Cash Supplies Bank Loan B. Rissien, 3, ,465 18,000 Capital , ,287 2, A/P ,865 3,650 2,665 Dini Bros ,037 A/R Trucks ,516 W. Caruso 55,075 5, , , , , ,516 63,075 A/P Packham A/R R. Van Loon Equipment 22,174 Products 3, ,146 4,146 58

18 Step 1: Write Title (Who, What, & When) Trial Balance Step 3: Enter debit & credit balances Step 2: List Accounts: Assets first then liabilities and capital Step 4: Total Columns 59

19 Trial Balance Other Formatting??? 60

20 Importance of Trial Balance Ø A trial balance that is out of balance is a certain sign of at least one error in the accounts. 61

21 Trial Balance Out of Balance Ø Possible problems: ü Faulty addition ü Entering an item on the wrong side ü Dollar value entry error Ø Even if the ledger is in balance, it might still have errors. HOW IS THIS TRUE? 62

22 Trial Balance Out of Balance Ø If in balance, may only be mathematically correct. Ø There may be incorrect, balanced entries (amounts could be right but Dr/Cr the wrong account. 63

Make sure that none are missing, on the wrong side, or for the wrong amount.

23 4 step procedure to find errors: 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, on the wrong side, or for the wrong amount. Step 3 Recalculate the account balances. Step 4 Check that each transaction entry is balanced 64

24 Let s Review Shore s Shrimp and Shells Transactions will they balance? Will they be correct? Bought a used delivery truck for $5500 from Jamal Motors, paid $2000 cash and the balance to be paid later. Delivery Truck 5500 DR Bank 5500 CR 65

25 2. Bought equipment for the office for $3475 from Kamide s Kostly Krates, payment to be made within 30 days. Equipment 3475 DR Bank 3475 CR 66

26 Paid $350 cash to Guest s Green Machine for the monthly payment on the loan. Bank 350 DR Bank Loan 350 CR 67

27 Received a cheque from M. Vonk, a customer for $285. Bank 285 DR A/R M. Vonk 285 CR 68

28 Delivered a banquet buffet service for K. Wagner for $800, payment to be made in 30 days. A/P K. Wagner 800 DR A. Shore, Capital 800 CR 69

29 $250 worth of shrimp was stolen by whales! A. Shore, Capital 250 DR Bank 250 CR 70

30 Homework Ø Read pgs Ø P.111 Exercises 4-5 Ø P Exercises 1-3 Ø Assignment (for marks!) 71

Chapter 4: The Simple Ledger

Chapter 4: The Simple Ledger 4.1: Ledger Accounts Pages 88 92 account a record that documents each change to items in the accounting equation. There is one account for each asset, each liability, and each