Chapter 4 THE SIMPLE LEDGER 1 LEDGER ACCOUNTS

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Chapter 4: THE SIMPLE LEDGER 1

Chapter 4: THE SIMPLE LEDGER 1

LEDGER ACCOUNTS 2

LEDGER ACCOUNTS 2

§ Colin § My first teaching contract was a classic “dog’s breakfast” that included

§ Colin § My first teaching contract was a classic “dog’s breakfast” that included teaching seven different preps, including one period where three (very different) courses were put together in the same room, at the same time. (Not just a split class, a split/split class!) I’m focused on maintaining a work/life balance while still giving my students the time and attention that they need to be successful. 3

LEDGER ACCOUNTS §An account is a page specially account designed to record the changes

LEDGER ACCOUNTS §An account is a page specially account designed to record the changes in each individual item affecting the financial position. §A ledger is a group or file of ledger accounts §A ledger can take many forms: cards, paper in binders, electronic files, etc. 4

LEDGER ACCOUNTS §Each individual balance sheet item is given its own account Typically, you

LEDGER ACCOUNTS §Each individual balance sheet item is given its own account Typically, you would have one account per page. §The dollar figure for each balance sheet item is recorded in the account on the first line. This is the beginning balance for the account. 5

LEDGER ACCOUNTS §Ensure that you record the dollar figure on the correct side of

LEDGER ACCOUNTS §Ensure that you record the dollar figure on the correct side of the account. §The ledger and the balance sheet ledger both show financial position … if you have a ledger you can prepare a balance sheet … if you have a balance sheet you can prepare a ledger. 6

§Three parts: 1. Title 2. left side 3. right side §In its simplest form,

§Three parts: 1. Title 2. left side 3. right side §In its simplest form, these parts are positioned like the letter T §Therefore called a T Account

LEDGER ACCOUNTS ØWhat is the accounting equation? equation ØWhich side of the balance sheet

LEDGER ACCOUNTS ØWhat is the accounting equation? equation ØWhich side of the balance sheet do you find assets? Liabilities? Owner’s Equity? ØWhere would you normally find the ledger balance for assets? Liabilities? Owner’s Equity? Assets = Liabilities + Owner’s Equity Beginning $ Value Left 8

SAMPLE COMPANY 9

SAMPLE COMPANY 9

Assets Cash = Liabilities + Owner’s Equity Supplies 3, 265 Bank Loan 2, 465

Assets Cash = Liabilities + Owner’s Equity Supplies 3, 265 Bank Loan 2, 465 18, 000 B. Rissien, Capital 60, 287 A/R Caruso W. 150 A/R R. Van Loon 620 Trucks A/P Dini Bros. 55, 075 Equipment 22, 174 1, 516 A/P Packham Products 3, 946 10

EXERCISE 1 (PAGE 91) ØSet up the ledger for Stevens Woodworking using T-accounts. 11

EXERCISE 1 (PAGE 91) ØSet up the ledger for Stevens Woodworking using T-accounts. 11

EXERCISE 3 (PAGE 92) ØShown below is the ledger of Lilly Wall, who operates

EXERCISE 3 (PAGE 92) ØShown below is the ledger of Lilly Wall, who operates an interior design business. Create a balance sheet as of January 31, 2008. Cash 500 Accounts Receivable 2, 100 Accounts Payable Bank Loan 950 2, 000 Supplies 1, 500 Equipment 2, 800 Lilly Wall, Capital ? ? ? 12

HOMEWORK q. Section 4. 1 Review Questions 1, 2 q. Section 4. 1 Exercises

HOMEWORK q. Section 4. 1 Review Questions 1, 2 q. Section 4. 1 Exercises 1, 2, 3, 4 13

DEBIT & CREDIT THEORY 14

DEBIT & CREDIT THEORY 14

LEDGER ACCOUNTS ØEarlier we learned that ledger accounts have a “left side” and a

LEDGER ACCOUNTS ØEarlier we learned that ledger accounts have a “left side” and a “right side”. ØAccountants refer to these two sides as Debit and Credit. Debit Assets = Liabilities + Owner’s Equity Left Right Debit Credit (DR) (CR) For ALL ACCOUNT, the “left side” is the Debit side and Debit the “right side” is the Credit side. Credit 15

1. Title 2. Debit 3. Credit

1. Title 2. Debit 3. Credit

§ Debit (Dr. ) indicates left; Credit (Cr. ) indicates right § Entering an

§ Debit (Dr. ) indicates left; Credit (Cr. ) indicates right § Entering an amount on the left side is called debiting the account § Entering an amount on the right side is crediting the account § Debit balance § Debits > Credits § Credit balance § Credits > Debits

1. Title 2. Debit (left side) 3. Credit (right side) Debit balance Credit balance

1. Title 2. Debit (left side) 3. Credit (right side) Debit balance Credit balance

§Debit Credit Song

§Debit Credit Song

RULES OF DEBIT AND CREDIT ØNow that we know which side of the account

RULES OF DEBIT AND CREDIT ØNow that we know which side of the account is debit and which is credit, we need to know how to enter changes in the accounts. ØThe rule “feeds” from the normal beginning normal balance … what are they? ØDoes a debit or a credit increase or decrease debit the balance in the account? Assets Debit Credit (DR) Beginnin g $ Value (CR) = Liabilities Debit Credit (DR) (CR) Beginni ng $ Value Equity + Owner’s Debit Credit (DR) (CR) Beginni ng $ Value 20

TRANSACTION ANALYSIS SHEET § The company purchases $200 worth of supplies from Packham Products,

TRANSACTION ANALYSIS SHEET § The company purchases $200 worth of supplies from Packham Products, to be paid for later. Supplies A/P – Packham Products Asset Liabilities + + DR CR j 200– An accountant would express this transaction as: “debit Supplies and credit AP – Packham Products, $200. ” 21

PACIFIC TRUCKING LEDGER Cash Supplies 3, 265 W. 150 A/R R. Van Loon 620

PACIFIC TRUCKING LEDGER Cash Supplies 3, 265 W. 150 A/R R. Van Loon 620 18, 000 Trucks 55, 075 Equipment 22, 174 Capital 60, 287 A/P Dini Bros. de Caruso 2, 465 j 200 B. Rissien, n tio & ac it ns eb l l tra d ta ta a o t e to th th e e bo th th : TE des and AL. NO clu dit QU dits in cre ts E cre bi A/R Bank Loan 1, 516 A/P Packham Products 3, 946 200 j 22

TRANSACTION ANALYSIS SHEET § The company pays $500 to Dini Bros. In partial payment

TRANSACTION ANALYSIS SHEET § The company pays $500 to Dini Bros. In partial payment of the amount owed to them. A/P – Dini Bros. Cash Liability Asset – – DR CR k 500– An accountant would express this transaction as: “debit A/P – Dini Bros and credit Cash, $500. ” 23

PACIFIC TRUCKING LEDGER Cash 3, 265 A/R Supplies 500 k 2, 465 j 200

PACIFIC TRUCKING LEDGER Cash 3, 265 A/R Supplies 500 k 2, 465 j 200 Caruso W. 150 A/R R. Van Loon 620 Bank Loan Trucks 55, 075 Equipment 22, 174 B. Rissien, 18, 000 Capital 60, 287 A/P Dini Bros. k 500 A/P 1, 516 Packham Products 3, 946 200 j 24

TRANSACTION ANALYSIS SHEET § The company receives $200 cash from R. Van Loon in

TRANSACTION ANALYSIS SHEET § The company receives $200 cash from R. Van Loon in partial payment of her debt. Cash A/R – R. Van Loon Asset + – DR CR l 200– An accountant would express this transaction as: “debit Cash and credit A/R – R. Van Loon, $200. ” 25

PACIFIC TRUCKING LEDGER Cash 3, 265 l 200 A/R Supplies 500 k 2, 465

PACIFIC TRUCKING LEDGER Cash 3, 265 l 200 A/R Supplies 500 k 2, 465 j 200 Caruso W. 150 Trucks 55, 075 A/R R. Van Loon 620 Bank Loan 200 l Equipment 22, 174 B. Rissien, 18, 000 Capital 60, 287 A/P Dini Bros. k 500 A/P 1, 516 Packham Products 3, 946 200 j 26

TRANSACTION ANALYSIS SHEET § A delivery service is provided for a customer at a

TRANSACTION ANALYSIS SHEET § A delivery service is provided for a customer at a price of $400. The customer pays cash at the time of the service. Cash B. Rissien, Capital Asset Owner’s Equity + + DR CR m 400– An accountant would express this transaction as: “debit Cash and credit B. Rissien, Capital, $400. ” 27

PACIFIC TRUCKING LEDGER Cash 3, 265 l 200 m 400 A/R Supplies 500 k

PACIFIC TRUCKING LEDGER Cash 3, 265 l 200 m 400 A/R Supplies 500 k 2, 465 j 200 Caruso W. 150 Trucks 55, 075 A/R R. Van Loon 620 Bank Loan 200 l Equipment 22, 174 B. Rissien, 18, 000 Capital 60, 287 400 m A/P Dini Bros. k 500 A/P 1, 516 Packham Products 3, 946 200 j 28

TRANSACTION ANALYSIS SHEET § A used truck costing $8, 000 is purchased from Dini

TRANSACTION ANALYSIS SHEET § A used truck costing $8, 000 is purchased from Dini Bros. A cash down payment of $2, 500 is made at the time of the purchase and the balance is to be paid at a later date. Truck Cash A/P – Dini Bros Asset Liability + – + DR CR CR n 8, 000– n 2, 500– n 5, 500– An accountant would express this transaction as: “debit Trucks $8, 000, credit Cash $2, 500 and credit A/P – Dini Bros $5, 500. ” 29

PACIFIC TRUCKING LEDGER Cash Bank Loan Notice: 500 k 2, 465 3, 265 18,

PACIFIC TRUCKING LEDGER Cash Bank Loan Notice: 500 k 2, 465 3, 265 18, 000 total Debits 2, 500 n j 200 l 200 m 400 still EQUAL total A/R W. A/P Dini Caruso Trucks Credits. Bros. 150 55, 075 n 8, 000 A/R R. Van Loon 620 Supplies 200 l Equipment 22, 174 k 500 A/P B. Rissien, Capital 60, 287 400 m 1, 516 5, 500 n Packham Products 3, 946 200 j 30

TRANSACTION ANALYSIS SHEET § A delivery service is completed for R. Van Loon at

TRANSACTION ANALYSIS SHEET § 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 so pay within 60 days. A/R – R. Van Loon B. Rissien, Capital Asset Owner’s Equity + + DR CR o o 350– An accountant would express this transaction as: “debit A/R – R. Van Loon and credit B. Rissien, Capital, $350. ” 31

PACIFIC TRUCKING LEDGER Cash 3, 265 l 200 m 400 A/R Supplies 500 k

PACIFIC TRUCKING LEDGER Cash 3, 265 l 200 m 400 A/R Supplies 500 k 2, 465 2, 500 n j 200 Caruso W. 150 Trucks 55, 075 n 8, 000 A/R R. Van Loon 620 o 350 Bank Loan 200 l Equipment 22, 174 B. Rissien, 18, 000 A/P Dini Bros. k 500 A/P Capital 60, 287 400 m 350 o 1, 516 5, 500 n Packham Products 3, 946 200 j 32

TRANSACTION ANALYSIS SHEET § One of the lifting machines (equipment) breaks down. The company

TRANSACTION ANALYSIS SHEET § One of the lifting machines (equipment) breaks down. The company spends $650 cash to have the machine repaired. B. Rissien, Capital Cash Owner’s Equity Asset – – DR CR p p 650– An accountant would express this transaction as: “B. Rissien, Capital and credit Cash, $650. ” 33

PACIFIC TRUCKING LEDGER Cash 3, 265 l 200 m 400 A/R Supplies 500 k

PACIFIC TRUCKING LEDGER Cash 3, 265 l 200 m 400 A/R Supplies 500 k 2, 465 2, 500 n j 200 650 p Caruso W. 150 Trucks 55, 075 n 8, 000 A/R R. Van Loon 620 o 350 Bank Loan 200 l Equipment 22, 174 B. Rissien, Capital 18, 000 p 650 A/P Dini Bros. k 500 A/P 60, 287 400 m 350 o 1, 516 5, 500 n Packham Products 3, 946 200 j 34

DOUBLE-ENTRY SYSTEM OF ACCOUNTING Ø Whenever a transaction occurs, changes must be made in

DOUBLE-ENTRY SYSTEM OF ACCOUNTING Ø Whenever a transaction occurs, changes must be made in the accounts. Ø All of the account changes, in a single transaction, must balance. Ø For each transaction, the total debits EQUAL the total credits. 35

DOUBLE-ENTRY SYSTEM OF ACCOUNTING Ø In the double-entry system of accounting every transaction is

DOUBLE-ENTRY SYSTEM OF ACCOUNTING Ø In the double-entry system of accounting every transaction is accounting recorded in the accounts in two steps: (1) as a debit and (2) as a debit credit Ø At least two accounts are affected by every transaction. Ø The following is a summary of the transactions we analyzed using the “transaction analysis sheet”. 36

DOUBLE-ENTRY SYSTEM OF ACCOUNTING 2 2 NOTE: for each NOTE: the Debit entry NOTE:

DOUBLE-ENTRY SYSTEM OF ACCOUNTING 2 2 NOTE: for each NOTE: the Debit entry NOTE: the NOTE: each Debit entry Debit individual transaction, is listed before the transaction consists of is listed before the total debits Credit entry. at least Credit entry. two accounts. Credit two EQUAL total credits. EQUAL credits 2 2 37

EXERCISE 1 (PAGE 102) Flora Siska is the owner-operator of a fitness clinic. The

EXERCISE 1 (PAGE 102) Flora Siska is the owner-operator of a fitness clinic. The ledger used in her business contains the following accounts: Cash; Accounts Receivable (several); Supplies; Furniture; Equipment; Automobile; Accounts Payable (several); and Flora Siska, Capital. Listed on the following page, are transactions of Flora’s business. Examine these transactions and record your analysis on a “transaction analysis sheet”. 38

EXERCISE 1 (CONTINUED) Transactions: 1. The business receives $300 cash from J. Parker, one

EXERCISE 1 (CONTINUED) Transactions: 1. The business receives $300 cash from J. Parker, one of the debtors. 2. The business purchases $200 worth of supplies for cash. 3. Little Bros. , one of the creditors, is paid $100. 4. The owner withdraws $250 for her personal use. 5. A new piece of equipment costing $500 is purchased from Champion Sports. The business pays $125 cash at the time of purchase, with the balance due within 30 days. 6. A new customer signs up for a fitness course. The $300 fee is paid in cash. 39

HOMEWORK q. Section 4. 2 Review Questions 1, 3 -6, 9, 12 q. Section

HOMEWORK q. Section 4. 2 Review Questions 1, 3 -6, 9, 12 q. Section 4. 2 Exercises 1, 2, 3 (A, B), 4 40

ACCOUNT BALANCES AND TERMINOLOGY 41

ACCOUNT BALANCES AND TERMINOLOGY 41

PACIFIC TRUCKING LEDGER Cash Draw a line to Supplies Bank Loan B. Rissien, signify

PACIFIC TRUCKING LEDGER Cash Draw a line to Supplies Bank Loan B. Rissien, signify “a total” 500 k 2, 465 18, 000 Capital 2, 500 n j 200 p 650 60, 287 650 p 2, 66 Total 0 the debits and the 400 m A/P Dini 2, 665 3, 65 5 credits … these are 350 o Bros. 0 known as “pencil 65 61, 03 k 500 1, 516 Trucks footings” 0 60, 387 7 A/R W. 5, 500 n 55, 075 Caruso 50 7, 01 n 8, 000 150 Circle to signify 6, 516 0 6 63, 07 0 Subtract the “smaller” number “account balance” 63, 075 5 from the “larger” and record the 3, 265 l 200 m 400 3, 86 5215 A/R R. difference as the “account Van Loon balance” beneath the “larger” Equipment 200 l 620 number 22, 174 o 350 97 200 0770 A/P Packham Products 0 3, 946 200 j 4, 146 6 42

INTERPRETING THE ACCOUNT BALANCE üNormally, we can determine the type of account from the

INTERPRETING THE ACCOUNT BALANCE üNormally, 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. üWhat can you say about liabilities? owner’s equity? 43

INTERPRETING THE ACCOUNT BALANCE üExceptions to the rule: v. A creditor overpays v. Bank

INTERPRETING THE ACCOUNT BALANCE üExceptions 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 good to a supplier whom you currently have no A/P balance üExceptional balances do not last long. Ordinary business activity usually causes them to return quickly to “normal”. 44

TERMINOLOGY: BANK VS. CASH üBusinesses rely heavily on the banking system. üThe most common

TERMINOLOGY: BANK VS. CASH üBusinesses rely heavily on the banking system. üThe most common ways to make payment are by cheque and electronic funds transfer. üYou can expect to see an account called Bank rather than Cash. üThe 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. 45

TERMINOLOGY: BUYING AND SELLING ON CREDIT üBusinesses with good reputations are able to buy

TERMINOLOGY: BUYING AND SELLING ON CREDIT üBusinesses with good reputations are able to buy goods on short-term credit. üThe purchaser is able to delay payment for a short period of time, usually 30 days. üThe purchaser thus has time to inspect or test the goods thoroughly before paying for the. üIf you are the purchaser, which account would this affect? üWhat if you are the seller? 46

TERMINOLOGY: ON ACCOUNT üThe term “on account” account is an essential part of business

TERMINOLOGY: ON ACCOUNT üThe term “on account” 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. 47

EXERCISE 1 (PAGE 110) Calculate the balances for the following accounts: Cash 250 190

EXERCISE 1 (PAGE 110) Calculate the balances for the following accounts: Cash 250 190 1, 21 48 0 512 360 29 A/R H. Devrie 175 25 150 70 35 A/P P. Helka 75 30 40 45 175 R. Smart, Capital 150 3, 14 0 A. What does the debit balance in the H. Devrie account mean? B. What does the credit balance in the P. Helka account mean? 48

EXERCISE 2 (PAGE 110) The following three accounts have exceptional balances. Examine them and

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. 49

HOMEWORK q. Section 4. 3 Review Questions 1 -6 q. Section 4. 3 Exercises

HOMEWORK q. Section 4. 3 Review Questions 1 -6 q. Section 4. 3 Exercises 1, 2, 3, 4 50

TRIAL BALANCE 51

TRIAL BALANCE 51

KEEPING THINGS IN BALANCE ØWhen setting up a ledger the information for the accounts

KEEPING THINGS IN BALANCE ØWhen setting up a ledger the information for the accounts is usually obtained from a balance sheet. ØThis ensures that the ledger begins in balance … total of the accounts with debit balances equals the total of accounts with credit balances. ØBusiness transactions are recorded in the ledger. Each transaction forms a balanced account entry … total debits equal total credits. 52

TRIAL BALANCE ØPeriodically, it is necessary to check the accuracy of the ledger. ØTo

TRIAL BALANCE ØPeriodically, it is necessary to check the accuracy of the ledger. ØTo ensure that everything is in balance we can “take off” a trial balance ØA trial balance is a listing of the account balances in the ledger. ØA trial balance compares the total of the accounts with debit balances with the total of accounts with credit balances. 53

TRIAL BALANCE ØIf the total debits agree with the total credits, the ledger is

TRIAL BALANCE ØIf the total debits agree with the total credits, the ledger is said to be in balance ØIf they don’t agree, the ledger is said to be out of balance ØIn a manual accounting system the whole process, called taking off a trial balance, balance is usually done weekly or monthly. ØIn a computerized accounting system, you can check the trial balance report as frequently as you wish. 54

STEPS FOR TAKING OFF A TRIAL BALANCE 1. List all the accounts and their

STEPS FOR TAKING OFF A TRIAL BALANCE 1. List all the accounts and their balances. 2. 3. 4. 5. Leave room for a three-line heading. Place the debit balances in a debit column and the credit balances in a credit column. Add up the two columns. See if the two column totals are the same. Only if the two column totals are the same can you consider your ledger work to be correct. Write a heading at the top. A heading is necessary on the trial balance. It must show “Who”, “What”, and “When. 55

PACIFIC TRUCKING LEDGER Assets Equity Cash 3, 265 l 200 m 400 3, 86

PACIFIC TRUCKING LEDGER Assets Equity Cash 3, 265 l 200 m 400 3, 86 5215 A/R Supplies 500 k 2, 465 2, 500 n j 200 650 p 2, 665 3, 65 5 0 Caruso W. 150 A/R R. Van Loon 620 o 350 97 0770 = Liabilities + Owner’s 200 l 200 B. Rissien, Capital 18, 000 0 Trucks 55, 075 n 8, 000 63, 075 5 Bank Loan A/P Dini Bros. k 500 50 0 Equipment 60, 287 400 m 350 o 65 61, 03 0 60, 387 7 p 650 0 A/P 1, 516 5, 500 n 7, 01 6, 516 6 Packham Products 22, 174 0 3, 946 200 j 4, 146 6 56

TRIAL BALANCE Step 1: Write Title (Who, What, & When) Step 3: Enter debit

TRIAL BALANCE Step 1: Write Title (Who, What, & When) Step 3: Enter debit & credit balances Step 2: List Accounts Step 4: Total Columns 57

TRIAL BALANCE Other Formatting? ? ? 58

TRIAL BALANCE Other Formatting? ? ? 58

IMPORTANCE OF TRIAL BALANCE ØIt is important to an accountant to have the ledger

IMPORTANCE OF TRIAL BALANCE ØIt is important to an accountant to have the ledger in balance. ØA trial balance that is out of balance is a certain sign of at least one error in the accounts. 59

TRIAL BALANCE OUT OF BALANCE ØPossible problems: üFaulty addition üEntering an item on the

TRIAL BALANCE OUT OF BALANCE ØPossible problems: üFaulty addition üEntering an item on the wrong side üDollar value entry error ØEven if the ledger is in balance, it might still have errors. 60

TRIAL BALANCE OUT OF BALANCE ØA ledger that is in balance may only be

TRIAL BALANCE OUT OF BALANCE ØA ledger that is in balance may only be mechanically or mathematically correct. ØThe accountant may have made incorrect, balanced entries. 61

TRIAL BALANCE OUT OF BALANCE ØTo find errors, there is a four-step procedure: Step

TRIAL BALANCE OUT OF BALANCE ØTo find errors, there is a four-step procedure: 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, none are on the wrong side, and none are for the wrong amount. Step 3 Recalculate the account balances. Step 4 Check that there is a balanced accounting entry in the accounts for each transaction. 62

HOMEWORK q. Section 4. 4 Review Questions 4 -6 q. Section 4. 4 Exercises

HOMEWORK q. Section 4. 4 Review Questions 4 -6 q. Section 4. 4 Exercises 1, 2, 3, 4 63

HOMEWORK q. Chapter Review Exercises 1, 4, 5, 6 64

HOMEWORK q. Chapter Review Exercises 1, 4, 5, 6 64