Chapter 4 - The Simple Ledger
Introduction
4.1 - Ledger Accounts
4.2 - Debit and Credit Theory
4.3 - Account Balances
4.4 - Trial Balance
4.1
Ledger Accounts
Important Definitions
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•
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Ledger Accounts: used to maintain an up-to-date
financial position
Account – Page designed to record changes in
items affecting financial position
Ledger – Group or file of accounts
T-Accounts
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Accounts in a ledger can often be represented as a TAccount
They are usually used to see if an account has
debited or credited.
Assets
Beginning
Value($)
DR
Liabilities
Owners Equity
Beginning
Value($)
CR
DR
CR
Beginning
Value($)
DR
CR
4.2
Debit and Credit Theory
The Rules
Debits are found on the left side of accounts
Credits are found on the right side of accounts
Types of Beginning Value
Account
Side
Increases
Decreases
Asset
Account
Debit
Debit
Credit
Liabilities
and OE
Accounts
Credit
Credit
Debit
Double-Entry System of
Accounting
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•
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When a transaction occurs, changes are made in
their respective accounts
For each and every transaction, all of the account
changes together must balance
The total of the debit amounts should equal the total
of the credits amount
Transaction Analysis Sheet
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A transaction analysis sheet is helpful when
examining a transaction
Allows you to organize thoughts about transactions
4.3
Account Balances
Calculating Balances
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2 main steps are performed to find balances of a T
chart
Step 1: Add the 2 sides of the account separately.
Write down the 2 subtotals
Step 2: a) Subtract smaller total from the larger total
b) Record amount beneath the larger subtotal. Don’t
forget to circle your final amount.
Example
Cash
A/P
3265 500
200
620
400
2500
200
350
200
650
970
3865 3650
215
Final amount is
beneath larger
amount and circled
770
Both sides are added
up separately with the
subtotal underneath
Exceptional Account
Balances
•
•
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There may be a good reason for an account to end up
with a opposite balance
The Company overpays Accounts Payable
Return goods for credit to a supplier with whom you have
no previous account balance
Example: John Miller owes Bob’s Bakery $100, but he
pays $50 extra, so he can pay for products that he will
purchase later on.
Buying and Selling on Credit
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Businesses with good reputation can buy goods on
short term credit
Purchaser is able to delay payment for 30 days and
has time to inspect goods before paying
On Account
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This term is used in 4 specific ways in modern
business
1) Purchase on account – is a purchase that is not
paid for at the time it is made
2) Sale on account – is a sale for which the money is
not received at the time the sale is made.
3) Payment on account – is money paid to a creditor to
reduce the amount owed to that creditor.
4) Receipt on account – is money received from a
debtor to reduce the amount owed by that debtor.
4.4
Trial Balance
Trial Balance
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Trial Balance – Used to check the accuracy of all
business transactions that are recorded in the ledger
If dollar value of Total Debit Balance = Total Credit
Balance
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Both totals are the same – in balance
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Not the same – out of balance
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Taking off a Trial Balance – act of checking ledger
Ledger of Pacific Trucking
Taking off a Trial Balance
Pacific Trucking
Trial Balance
As of July 2 2011
Debits
Accounts
Bank
A/R - W. Caruso
A/R - R.Van Loon
Supplies
Trucks
Equipment
Bank Loan
A/P - Dini Bros.
A/P - Packham Products
B. Rissien, Capital
Heading: Who?
What?
When?
Credits
$215
150
770
2665
63075
22174
$89,049
Account balances
listed as debit or
credit
$18,000
6516
4146
60387
$89,049
In Ledger
Order
Balanced
column Totals
Out of Balance
Process to fix out of balance:
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Step 1: Re
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Step 2:
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Step 3:
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Step 4:
add the trial balance columns
Check to see if the amounts from the ledger
are the same as the amounts on the trial balance.
Make sure none are missing or on the wrong side
Recalculate the account balances
Finally, check to see if there is a balanced entry
in the accounts for each transaction
Importance of the Trial Balance
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Important to accountants to have ledger in balance
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Ledger out of balance doesn’t help businesses
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At least one error has been made
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Work is not accurate