Presentation on theme: "Accounting for a Service Business Unit 1.8 The Ledger."— Presentation transcript:
Accounting for a Service Business Unit 1.8 The Ledger
Once transactions are recorded in a journal, their debit and credit information is then copied from the journal to the general ledger The general ledger is a book or file that holds pages or cards On each page or card is each account that was used in the journal. (see illustration on page 115)
The Ledger This process of copying transactions from the journal to the ledger is called posting Posting is done as a matter of efficiency. Just think: Without posting, every time you wanted to know what any account balance was, you would have to search the journal entries and tally up all the debits and credits for that particular account. In any given month for any given account, there could be hundreds of entries affecting that account!
The Ledger Page 117 in your text gives an illustration of transferring to the general ledger. (a) Debits are transferred as debits and credits are transferred as credits. (b) The reference number is what page in the general journal this entry came from.
The Ledger (continued) Notice: (c) The date is the date the entry was made in the general journal, not the date it was posted (transferred to the ledger).
The Ledger After posting each entry, write the account number (for example: Cash is No. 10, Kline, Capital is No. 40) in the reference column of the general journal. This is a cross-reference so you can later see, at a glance in your general journal, where you posted an entry to.
The Ledger Each account in the general ledger is numbered. Illustration 4-5 on page 116 of your text shows you a sample chart of accounts. A chart of accounts is simple a listing of all the accounts and their account numbers.
The Ledger Kline, Capital No. 40 Date Explanation Ref. Debit Credit Balance 2010 Nov. 1 J1 15,000 15,000
The Ledger Equipment No. 15 Date Explanation Ref. Debit Credit Balance 2010 Nov. 2 J1 10,000 10,000
The Ledger Supplies No. 8 Date Explanation Ref. Debit Credit Balance 2010 Nov. 3 J1 1,3501,350
The Ledger Rent Expense No. 63 Date Explanation Ref. Debit Credit Balance 2010 Nov. 7 J
The Ledger Insurance Expense No. 64 Date Explanation Ref. Debit Credit Balance 2010 Nov. 7 J
The Ledger Utilities Expense No. 65 Date Explanation Ref. Debit Credit Balance 2010 Nov. 7 J
The Ledger P. Kline, Drawing No. 41 Date Explanation Ref. Debit Credit Balance 2010 Nov. 10 J1 1,500 1,500
Trial Balance Before computers, it was very important to check that total debit balances equaled total credit balances. This was done by creating a trial balance. A trial balance is a listing of all accounts with their balances. The accounts are listed by category: assets first, then liabilities, then owner’s equity, revenues, and expenses. These accounts and balances are taken from the ledger.
Trial Balance Despite the common use of computers for today’s accounting systems, it is still a good idea to prepare a trial balance. This will provide us with a useful summary of all the accounts and their balances. Page 125 in your text shows a sample trial balance.
Trial Balance Remember, even though the trial balance looks like a financial statement, it is not. The trial balance is a tool we use to prove that the total debits and total credits are equal. What if our trial balance doesn’t balance? We have to look for our errors...
Locating Trial Balance Errors Many out-of-balance conditions can be discovered by calculating the difference between total debits and total credits on the trial balance. Then, try one or more of the following...
Locating Trial Balance Errors Search for a missing account. The amount that your debits and credits don’t match by may be the balance of the missing account. Trace each account from the ledger to the trial balance to locate the missing account. Search the journal for the amount of the difference. The difference may be the result of an incorrect journal entry or posting.
Locating Trial Balance Errors Divide the difference between the debits and credits by 2. If you transferred a debit as a credit or a credit as a debit, the amount of the error is doubled. Look in the journal for the quotient and trace the account affected.
Locating Trial Balance Errors Divide the out-of-balance amount by 9. If the result is evenly divisible by 9, the error may be a slide. (example: writing $54 as $540) or a transposition (example writing $54 as $45).
Limitations of the Trial Balance The trial balance simply proves that the total ledger debits equal the total ledger credits. It does not guarantee that ...all transactions have been recorded, ...all transactions have been recorded correctly, …all journal entries are posted once and only once, or that ...the correct accounts and amounts were used in journalizing and posting.
Use of Dollar Signs Do we use dollar signs in the journals or ledgers? No In the trial balance and financial statements? Yes, but only for the first item in the column and for the total of that column.
Use of Underlines Place one underline under a column of figures to be added or subtracted. Place a double underline under the final sum of a column.