Chapter 4: The Simple Ledger

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1 Chapter 4: The Simple Ledger 4.1: Ledger Accounts Pages account a record that documents each change to items in the accounting equation. There is one account for each asset, each liability, and each type of equity. ledger a group or file of accounts 1

2 Note the balance sheet and the related T accounts on page 89. T accounts a simplified form of an account used as a teaching tool only to help understand accounting theory. Important Features of Ledger Accounts Each individual balance sheet item is given its own T account. The dollar figure for each item is recorded on the first line. This is the beginning value for the account. The correct side for the beginning value is the side on which it is found in the fundamental accounting equation. 2

3 4.2 Debit and Credit Theory Pages Debit (Dr) the word associated with the left side of an account. Credit (Cr) the word associated with the right side of an account. Debit and Credit Rules: Increases are recorded on the balance side. Decreases are recorded on the side opposite the balance side. Account Type Beg. Value Side Increase Decrease Asset Liability Owner's Equity 3

4 Applying Rules of Debit and Credit A B C D E Account Names Assets, Liabilities, or Owner s Equity Increase + or Decrease Debit or Credit Amount 4

5 Accounting Entry the changes in the accounts caused by one business transaction, expressed in terms of debit and credit. Double entry system of accounting a system of accounting which records transactions in two steps with the debits recorded first followed by the credits so that the total of the debit entries equals the total of the credit entries. 5

6 Items to keep in mind for each accounting entry: Total debits = Total Credits A balanced entry is not necessarily a correct entry. 4.3 Account Balances and Terminology Pages account balance the figure which gives the dollar value of an account and shows whether it is a debit or credit value. 6

7 Calculating the Balance of an Account Step 1 Write down the subtotal of each side beneath the last item of each side using tiny pencil figures called pin totals or pencil footings. Step 2 Subtract smaller total from larger total and place result beneath larger of two pin totals and circle this amount. Calculating Account Balances for Pacific Trucking 7

8 Exceptional Account Balances a balance found on a side opposite to where it would normally be found. Example: Cash has a credit balance instead of a debit balance. Should not last long. May be the result of: overpayment by a customer overdraft in the bank overpayment of an account payable customer/business, who owes nothing, returns merchandise The account balance should easily indicate: A debit or credit balance. The value of the account balance. Usually indicate the type of account. 8

9 The Bank Account Since it is more convenient for businesses to keep money in a bank account, an account called Bank will be used instead of Cash. Buying and Selling on Credit purchase on account purchasing an item and paying for it at a later date. Increases an account payable, a liability. sale on account selling an item and receiving payment at a later date. Increases an accounts receivable, an asset. 9

10 payment on account paying for an item that was previously bought on account. Money paid to a creditor reducing an accounts payable, a liability. receipt on account receiving money for an item that was previously sold on account. Money received from a debtor reducing an accounts receivable, an asset. 4.4 Trial Balance Pages Trial Balance a listing of the accounts and their balances in a ledger. The columns are totaled to see if the DR total = CR total in balance DR total = CR total out of balance DR total = CR total Note steps for taking off a trial balance on page

11 Page 112 Page 113 Taking Off A Trial Balance 11

12 Importance of a Trial Balance A ledger that does not balance indicates that at least one error has been made. This/these error(s) must be corrected before doing any other accounting activity. Standard practice to take off a trial balance at least once a month and kept on file for at least a year. Even if the trial balance totals equal, there still may be mistakes. 12

13 Procedure to Follow if Trial Balance Does Not Balance 13

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

Account Balances and Terminology Created by D. Gilroy Heart Lake Secondary School 42 Pacific Trucking Ledger Cash Supplies Draw a line to Bank Loan B. Rissien, 3,265 500 2 2,465 signify a total 18,000