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 After the 7 transactions, the ledger looks like Page 105 Figure 4.5. (Show On the White board)  There are 10 accounts in the ledger.  How do you calculate.

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Presentation on theme: " After the 7 transactions, the ledger looks like Page 105 Figure 4.5. (Show On the White board)  There are 10 accounts in the ledger.  How do you calculate."— Presentation transcript:

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2  After the 7 transactions, the ledger looks like Page 105 Figure 4.5. (Show On the White board)  There are 10 accounts in the ledger.  How do you calculate the ending balance of the T accounts?  Step 1: Add the two sides of the account separately. Write the totals under the last number.  Step 2: Subtract the smaller total from the larger total. Write the result beneath the larger of the two totals from step 1. Circle this final amount. (Show on the board)

3  What are the normal balances for asset, liability and Owner’s Equity Accounts?  Asset:  Liability:  OE:  But sometimes accounts have abnormal balances such as cash account showing credit balance.  How does this happen?

4  Occasionally an account that would normally have a debit balance ends up with a credit balance, or vice versa.  An opposite (or abnormal) balance may be caused by your mistake sometimes, but most of the time, it is caused by a valid reason.  For example, suppose a customer (Jack) owes us $45. Let’s say that he sends a cheque for $54 in payment.

5  His account will end up with a credit balance of $9 even though this AR account normally has a debit balance.  This $9 shows that the business owes the customer $9. Next time when he buys a service ($99 on credit), this transaction will be debited for $99 in the AR account, so this AR account’s ending balance will be $90 debit balance.

6  NSF (Non Sufficient Funds): If the business issues a check for $88, but the checking account’s balance was only $78, then the bank will charge “NSF service charge” of $25 for example.  The ending balance of the cash account will be $10 + $25 = $35 credit balance.

7  If a customer returns goods to the store, and the store will not give cash back because of store policy, then the store has to give the customer “in store credit” then this in store credit will cause credit balance in AR of the customer.  Generally speaking these exceptional balances do not last long.

8  This means that if you know the account title with ending balances, you (as a reader, although you did not prepare the ledger) can interpret what’s going on in the company.  For example, if the ledger contains a lot of exceptional account balances, you know that there is something wrong going on in this company.

9  Many businesses try not to have too much cash in the business site. (because of theft or insider crime etc)  As a result, many businesses use banking system such as cheque and electronic funds transfer and credit card payment system etc. It is much easier to send a cheque for $50,000 than to send cash for $50,000.  From now on, we will use “Bank” or “Chequing account” instead of “Cash”. I will use the two terms interchangeably.

10  Many businesses with good reputations can buy goods on short term credit.  The purchaser is able to delay payment for about 30 days (most of the time). This is very common in North America.  (Read P109) There are 4 situations that we use the term “on account” (= “on credit”)  Purchased on account  Sold on account  Paid on account  Received on account

11  If a company “purchases an item (such as equipment) on credit,” this means that the company did not pay yet. ◦ Debit Asset account such as laptop ◦ Credit Accounts Payable account  If a company “sells on account”, this means that customer did not pay cash yet. ◦ Debit Accounts Receivable account ◦ Credit Capital account.

12  If a company “pays on account” to decrease the amount they owe to a creditor, then we: ◦ Credit Cash (or Bank) account and ◦ Debit Accounts Payable account  If a company “receives on account” from debtor, this means that the company received cash from the debtor. Then we: ◦ Debit Cash account and ◦ Credit Accounts Receivable account ◦ Let’s quiz each other with a partner.

13  P 110 Review questions #1 to 10  P 110 Exercises #1 to #5  I will check last week’s homeworks.  I will hand in the unit 1 test, if I am done marking it.  I will go over one question from yesterday’s or today’s homework.  End of September 29 class

14  When setting up a ledger, where does the beginning balance of ledger accounts come from? ◦ They come from a balance sheet. If your ledger starts from January , then the beginning balances of ledger accounts come from December balance sheet.  As business transactions occur, these transactions will be recorded in ledger accounts. These changes are all in the form of balance accounting entries. (each transactions have same debit amount and credit amount)  As a result, the ledger should be balanced after each full accounting entry.  Just as a balance sheet must balance (total assets = total liabilities + total equity), a ledger must also balance.

15  But in reality, accounting staffs sometimes (or few times) make mistakes.  Therefore, accountants have to periodically check the accuracy of the ledger and make sure the ledger is in balance. This is done by setting up a TRIAL BALANCE.

16  Trial Balance is done usually at the end of the month (after you are finished recording the business transactions into the T- Account Ledgers.)  A Trial balance is a listing of the account balances in a ledger. It is used to see if the dollar value of the debit accounts is equal to the credit accounts  To do this, you simply add up all of the debit balances, add up all of the credit balances, and see if the two totals are the same.

17  If the balances agree, then the ledger is said to be in balance.  If the balances do not agree, then the ledger is said to be out of balance. This process is called “taking off trial balance”  In manual accounting system, they had to check trial balances at the end of each week or month.

18  If you use a computerized accounting system, the ledger is never out of balance because accounting software programs prevent users from entering unbalanced accounting entries.  (For example, simply accounting software does not allow you to “enter” (or “post”) the transaction unless the debit amounts are equal to credit amounts.)

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20  If the Debits and Credits balance, the ledger is said to be in balance. If they don’t agree, the ledger is said to be out of balance. This whole process is called taking off a trial balance  If the ledger is out of balance, the work is not accurate and there is at least one mistake.  A trial balance is taken off the ledger monthly and kept until the books are audited at year end.

21  We will do P113 (Fig 4.10) on the board.  Step 1: Write the title, “who, what (trial balance) and when”  Step 2: List all the accounts in first column and their balances on second column or third column.  Step 3: Place the debit balances in the second column and credit balances in the third column.  Step 4: Add up the two total amount for debit column and for credit balances.  Step 5: Check if the two totals are the same. If they are, draw a line above the total amount and draw double line below the total amounts.

22  Another type of worksheet…has 3 main columns  Title: Who, what and when  All accounts are listed in the first column (same order as balance sheet!!! This time, we just have one column for all three types of accounts.)  Second column lists debit amounts  Third column lists credit amounts  Single (indicate totalling) and double underlines (totals)

23  NOTE: Sometimes trial balances do not work out on the first attempt. This is where the accountant’s real skill shines in finding and correcting errors.  Errors happen due to: ◦ faulty addition: example: someone added 1000 instead of ◦ Transposing numbers: example: someone added 196 instead of 169 ◦ Entering items on the wrong side: example: instead of debitting AR for $500, someone creditted AR for $500

24  Even if the ledger is in balance, but still it might have errors!!! These are the most difficult errors to find. ◦ Example: customer paid $500 they owed last month, so someone made incorrect entry of debitting AR by $500 and creditting $500 cash by $500. This kind of mistake will not be found by Trial Balance worksheet.

25  What to do if the Trial Balance is not balanced: Here are the 4 steps: 1.Re-add the Trial Balance columns 2.Check the account balances from the ledger against those of the Trial Balance (none missing, none on wrong side, correct amounts, etc) 3.Recalculate the account balances 4.Check that there is balanced accounting entries for each transaction in each account

26  Review Q’s – pg 115 #1, 2, 4, 5, 6, 7  Exercise Q’s – pg 115 #1 to #4  If you finish these questions and prepare yourself really well for the quiz, then you should work on the following questions: Homework for tomorrow (Wed) Review Exercises P123 to P125 #1 to #6


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