Week four. Debit (Dr) side. Lectures Page 1. Monday, 22 August 2016

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1 Week four Monday, 22 August 1:22 PM What is a general ledger? General ledger- summary of each account A general ledger contains all the assets, liabilities and equity accounts, Collection of all the individual accounts of an entity Organised in the order they appear in the balance sheet and income statement Each account has a specific identification number The ledger accumulates all the information about changes in specific account balances such as sales revenue, cash, and wages expense. Can vary from simple two digit number to complex alphanumeric system Two formats to do ledger : Account Formats T-Accounts Convenient way to show individual accounts Illustrate effects of transactions on an account Still used in practice for quick calculations Running Balance Accounts Used in formal accounting systems Standard presentation for computerised systems Familiar to most - format used in Bank Statements ACCOUNT: Cash at Bank Account No. 100 Date Explanation Debit Credit Balance October. 3 Chris, Capital Vehicle Wages expense Accounts Payable Accounts Receivable Chris, Drawings General ledger T-Accounts Three points: Title Place for recording increases Place for recording decreases Account Title Date Explanation Amount Date Explanation Amoun t Debit (Dr) side Lectures Page 1

2 Lectures Page 2 Credit (Cr) side Date Cash at Bank Explanation Amount Date Explanation Amoun t 3/10 Chris, Capital /10 Vehicle / /10 Wages 21/10 Accounts /10 expense Accounts receivable payable Balance b/d /10 Chris, Balance c/d (differenc Drawings e) Trail balance Once recording is complete, a trial balance is prepared. the balance of each account in the general ledger must be calculated. It involves: 1. For each account, add each side. Generally, the normal account balance side will be the side with the greater amount. 2. Leaving a blank line, rule lines as illustrated in figure 2.33 and write in the greater amount calculated in step 1 on both the debit and credit sides of the account (between the ruled lines). 3. The closing balance for the account can now be determined by subtracting the amounts listed on the lesser side from the total. The words closing balance and the amount calculated in this step are recorded on the lesser side (generally the side opposite to the normal balance side). 4. The date (the first day of the next month), the words opening balance and the balance calculated in step 3 are written below the ruled-off lines on the greater account balance side (usually the normal balance side). Lists all ledger accounts and their balances- prep at end accounting period in order they appear Debits in one column, credits in another The totals of both columns must be equal If this is the case, the ledger balances The main purpose of a trial balance is to prove the mathematical equality of debits and credits after posting. In addition, a trial balance is useful in the preparation of financial statements, These are the procedures for preparing a trial balance: 1. List the account numbers, names and their balances. 2. Total the debit and credit columns. 3. Verify the equality of the two columns. Limitations of the trial balance: May balance but still contain errors If it doesn t balance there is definitely an error but it doesn t tell you what the error is Posting general journal transactions to general ledgers

3 Lectures Page 3 Posting from JOURNAL to LEDGER The procedure of transferring journal entries to ledger accounts is called posting. General journal s record each transaction (as discussed in Week 3) General ledger records the effects of transactions on each individual account Think of journal as an instruction which accounts are changing, which direction and by how much? Then the ledger is the summary of each account. Posting involves the following steps: 1. Using the account number in the posting reference column, locate in the ledger the account to be debited and enter the date the transaction occurred. 2. To the right of the date, enter the name of the ledger account to which the credit entry will be posted. This is called the cross-reference- provides additional info, indicate corresponding leder accounts 3. Enter the amount to be debited to the debit side of the ledger account. (If a running balance ledger account is used, enter the amount in the debit column of the ledger account and calculate the new balance in the balance column.) 4. In the general journal, place a tick beside the account number in the posting reference column. This signifies that the entry has now been posted to the ledger. 5. Repeat steps 1 4 for the credit side of the entry. In a computerised system: Posting is automated Therefore, it is important that the initial entries are correct Debits and credits automatically checked for equality Completing the unadjusted trial balance 1. Unadjusted Trial Balance Week 4 Is prepared before adjusting general journal entries are completed. This trial balance reflects all the activity recorded from day-to-day transactions and is used to analyse accounts when preparing adjusting entries. 2. Adjusted Trial Balance Week 5 (DON T WORRY FOR NOW!) Is completed after the adjusting entries are completed. This trial balance has the final balances in all the accounts and is used to prepare the financial statements. 3. Post-Closing Trial Balance Week 6 (DON T WORRY FOR NOW!) Shows the balances after the closing entries have been completed. This is your starting trial balance for the next year. As it is POST closing entries the and expense accounts have a zero balance (closed), and therefore, post-closing TB only includes Assets, Liability and Equity accounts. Introduction to the 10 column worksheet CHRIS PTY LTD Works heet For the month ended July Account names Cash at bank AR Vehicle AP Trial balanc e Adjust ments Adjuste d Trial balanc e Statem ent of profit or loss Statem ent of financi al

4 Lectures Page 4 Wages Expense Capital Drawings Totals Profit or (Loss) Continuing with Gibbs Barber Shop Jun 1 $ Jun 9 $260 Cash at Bank June 17 $ Closing $ Business Supplies Business Supplies Grooming equipment Jun 12 $ Closing $ Telephone Payable Jun 16 $160 Bank Loan Payable Business Supplies Payable Telephone Expense Jun 5 $160 Closing $160 Jun 4 $400 Closing $400 Rent Expense $400 Jun 4 $5 260 Jun 14 $160 June 16 $ June 17 Jun 5 $160 Closing $0 Jun 12 $ Closing $60 000

5 Lectures Page 5 Casual Wages Expense Jun 14 $860 Closing $860 Salary Expense Jun 14 $4 400 Closing $4 400 Capital Account Jun 1 $ Closing $ Jun 9 $260 Jun 12 $140 Closing $400 Account Debit Credit Cash at Bank Accounts Receivable 140 Business Supplies 700 Grooming Equipment Telephone Payable 0 Business Supplies Payable 700 Bank Loan Capital Telephone expense 160 Rent expense 400 Salary expense Casual wages expense 860 Total