CHAPTER 4
THE SIMPLE LEDGER
4.1 LEDGER ACCOUNTS
account
→ a page specifically designed to record changes in each individual item affecting the
financial position (often referred to as a T - account)
ledger
→ a group or file of accounts
Important Features of Ledger Accounts
1. Each balance sheet item is given its own specifically divided page with the name at the top.
Each of these pages is called an account.
2. The dollar figure for each item is recorded in the account on the first line (beginning value).
3. It is important to record the dollar figure on the correct side. The correct side is the side
on which the item itself would appear on a balance sheet. Remember the fundamental
accounting equation A = L + OE.
Assets
=
Liabilities
beginning
value
left
+
Owner’s Equity
beginning
value
right
left
right
beginning
value
left
4. The ledger and balance sheet both show financial position but in different ways.
HOMEWORK
Section 4.1 (pgs. 82 – 83)
Exercises # 1, 2, 3
right
4.2 DEBIT AND CREDIT THEORY
debit
→ to record an amount on the left-hand side of an account
credit
→ to record an amount on the right-hand side of an account
Assets
=
Liabilities
+
Owner’s Equity
left
right
left
right
left
right
debit
DR
credit
CR
debit
DR
credit
CR
debit
DR
credit
CR
increases
decreases
decreases
increases
decreases
increases
Applying the Rules of Debit and Credit
1. Write down the names of the accounts that are affected by the transaction.
2. Write down whether each of these accounts is an asset, a liability, or the capital account.
3. Write down whether the accounts are to be increased or decreased.
4. Write down whether the accounts are to be debited or credited.
→ To increase an asset, debit the account. To decrease an asset, credit the account.
→ To increase a liability, credit the account. To decrease a liability, debit the account.
5. Write the amounts by which the accounts are increased or decreased. This completes the
accounting entry for the transaction.
accounting entry
→ all of the changes in the accounts caused by one business transaction, expressed in
terms of debits and credits
→ for each type of account, record increases on its beginning value side and decreases on
the other side
double – entry system of accounting
→ in each transaction, the debits must equal the credits
→ record the debit amount first and the credit amount second
HOMEWORK
Section 4.2 (pgs. 91 – 93)
Exercises # 1, 2, 3, 4
Transactions for Pacific Trucking
Transaction 1
The company purchases $200 worth of supplies from Packham Products, to be paid for later.
Transaction 2
The company pays $500 to Dini Bros. in partial payment of the amount owed to them.
Transaction 3
The company receives $200 cash from R. Van Loon in partial payment of her debt.
Transaction 4
A delivery service is provided for a customer at a price of $400. The customer pays cash at
the time the service is completed.
Transaction 5
A used truck costing $8000 is purchased from Dini Bros. A cash down payment of $2500 is
made at the time of the purchase and the balance is to be paid at a later date.
Transaction 6
A delivery service is completed for R. Van Loon at a price of $350. Van Loon does not pay
for the service at the time it is provided, but agrees to pay within 60 days.
Transaction 7
One of the lifting machines (part of Equipment) breaks down. The company spends $650
cash to have the machine repaired.
Accounting Entries for Pacific Trucking
No.
1)
2)
3)
4)
5)
6)
7)
Account Names
Asset, Liability,
or Owner’s
Equity
Increase (+) or
Decrease (–)
Debit or
Credit
Amount
4.3 ACCOUNT BALANCES AND TERMINOLOGY
Calculating the Balance of an Account
Step 1
Add the two sides of the account separately. Use tiny pencil figures to write down the two
subtotals, one beneath the last item on each side. The tiny totals are called pin totals or
pencil footings.
Step 2
Subtract the smaller total from the larger total. Write the result beneath the larger of the
two pin totals from step 1. Circle this final amount. This gives the account balance.
account balance
→ gives the dollar value of an account and shows whether it is a debit or credit value
3
4
Cash
3 265
200
400
3 865
500 2
2 500 5
650 7
3 650
6
A/R - R. Van Loon
620
200
350
970
A/P - Dini Bros.
500
1 516
5 500 5
2
200
500
770
215
6 516
Step 1
Step 2
7 016
Step 1
Step 1
Step 2
Step 2
Normal Account Balances
→ if an account has a debit balance, it is an Asset
→ if an account has a credit balance, it is a Liability or Capital account
Exceptional Account Balances
Occasionally, an account that would normally have a debit balance ends up with a credit
balance, or vice versa. Opposite balances are not necessarily the result of mistakes,
although that possibility should certainly be checked out. Some transactions that can bring
about exceptional balances are:
→ a customer over pays an account receivable
→ you temporarily spend more funds than you have in the bank
→ you overpay an account payable
→ a customer with no account balance returns unsatisfactory merchandise for credit
→ you return goods for credit to a supplier with whom you have not account balance
The Bank Account
→ the words “bank” and “cash” are often used interchangeably
→ when an item is bought for cash, this means that it is paid for at the time it is purchased
usually by cheque or electronic funds transfer
Buying and Selling on Credit
→ businesses with good reputations usually are able to make purchases and delay
payment for a short period of time (usually 30 days)
→ the purchaser has time to inspect or test the goods before paying for them, and can
refuse to pay for the goods if they are not satisfactory
On Account
Purchase on Account (purchase on credit)
→ a purchase is made but not paid for
→ debit an asset and credit an A/P
Sale on Account (sold on credit)
→ a sale is made but money has not been received
→ debit an A/R and credit Capital
Payment on Account
→ money paid to a creditor (A/P) to reduce the amount owed to that creditor
→ debit an A/P and credit Bank (asset)
Receipt on Account
→ money received from a debtor (A/R) to reduce the amount owed by that debtor
→ debit Bank and credit an A/R
HOMEWORK
Section 4.3 (pgs. 96 – 97)
Exercises # 1, 2, 3
4.4 TRIAL BALANCE
taking off a trial balance
→ a listing of the account balances in a ledger to see if the dollar value of accounts with
debit balances is equal to the dollar value of accounts with credit balances
→ usually done at the end of each week or month to check the accuracy of the ledger
Methods of Taking Off a Trial Balance
1. Enter the heading: Who, What and When.
2. List all the accounts and their balances.
3. Place the debit balances in a debit column and the credit balances in a credit column.
4. Add up the two columns and single underline.
5. See if the totals for the two columns are the same. Double underline the totals
Pacific Trucking
Trial Balance
July 2, 20-Accounts
Debits
Credits
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
If the Trial Balance Doesn’t Balance
1. Re-add the trial balance columns.
2. Check the figures from the ledger against those of the trial balance.
3. Recalculate the account balances.
4. Check that there is a balanced accounting entry in the accounts for each transaction.
→
Even if the ledger is in balance, it might still have errors in it. The accountant may have
made incorrect entries that were balanced ones. These errors are difficult to find.
HOMEWORK
Section 4.4 (pgs. 101 – 103)
Exercises # 1, 2, 3
Section 4.5 (pgs. 103 – 108)
Accounting Software: Ledger Accounts and the Trial Balance
→ My Computer
→ common on ‘oes232........
→ student pick up folder
→ Accounting Grade 11
→ Simply Accounting Templates
→ Version 7.0
• right click once on Chapter 4 and select the copy option
• minimize the screen and open My Documents (Drive H)
• click on the Edit pull down menu and select Paste
• open Simply Accounting
• choose the Select an existing company option
• open your h: drive, select Chapter 4 and then select Sam’s Softball City
• work through Section 4.5 on pages 103 – 106
• complete Exercise 1 on page 107
• complete the section on Extending Your Computer Skills
HOMEWORK
Review Exercises # 1 – 6 (pgs. 109 – 112)