The Simple Ledger 4 1.

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The Simple Ledger 4 1

Agenda Learning goals Vocabulary 4.1 ledger Accounts 4.2 Debits and Credits theory Debits and Credits Song 4.3 Account Balances and Terminology 4.4 Trial Balance

Learning Goals What is account and what is a ledger Be able to make accounts and ledger from a balance Be able to record business transaction on an account (T-Account) Be able to explain what is a credit and debit and what type of account are assets, liabilities, and owner’s equity

Vocabulary Account Account Balance Credit Debit Double-entry system of accounting In balance Ledger Out of balance Payment on account Pencil footing Pin total Purchase on account Receipt on account Sale on account Trial balance

4.1 Ledger Accounts In this chapter we will learn how to keep up to-date-financial position. To do that we need account and ledger Account: is a record that documents each change to items in the accounting equation. (one account for each asset, each liability and each owner’s equity) Ledger: is a group or file of accounts

Figure 4.2: Pacific Trucking Balance Sheet Figure 4–1 Chapter 4 Figure 4.2: Pacific Trucking Balance Sheet HOW MANY ACCOUNTS DOES PACIFIC TRUCKING HAVE? 6

Figure 4.3: Pacific Trucking Ledger with Opening Balances Figure 4–2 Chapter 4 Figure 4.3: Pacific Trucking Ledger with Opening Balances These accounts are also called T-Accounts because each one looks like the letter T. 7

Important Features of a ledger Accounts Each individual balance sheet item is given its own T-Account with the name of the item at the top The dollar figure for each item is recorded in the account on the first line. Being the beginning value of each T-Account The correct side for it’s beginning value is the side on which the item itself would appear in the accounting equation (A= L+OE)(Assets on the left and Liabilities and Owner’s Equity on the right)

Apply and practice Review Questions 1-7 Exercises 1-4

4.2 Debit and Credit Theory So far you know that assets are a “left” side account and liabilities and owner’s equity are “right” side accounts “left” = Debit (Dr) “Right” = Credit (Cr) Assets is a Debit account Liabilities and owner’s equity are credit accounts

4.2 Debit and Credit Theory If an asset account increases, money is added to the debit side. If an asset account decreases, money is added to the credit side. If owner’s equity or a liabilities account increases, money is added to the credit side. If owner’s equity or a liabilities account decreases, money is added to the debit side.

Double- Entry System of Accounting Double-entry system of accounting dictates that at least TWO accounts need to be affected by a business transaction. Also that when a credit is recorded there must be an offsetting debit recorded. This is done to ensure that A = L + OE Also that DEBITS = CREDITS

4.2 Student handout See if you understand and fill out the handout recording the debits and credits for Pacific Trucking Company from page 89. Ensure to record your transaction on the T-Accounts

Practice Questions Review questions 1-12 and exercises 1-4

4.3 Account Balance and Terminology To calculate the balance of any of the accounts you need to: Total each side of the T account. A line is drawn and the pin total is written below it for each side. Make sure that each side lines up. Subtract the smaller total from the larger total. The difference is written in the column with the larger total and circled. This is the account balance.

Calculating the Balances of an Account Once you take a look at the account balances, pay attention to what side each one is on. A balance on the debit side is an asset while a balance on the credit side is a liability (or equity). Take out your handout from yesterday and total the T-Accounts

Figure 4.5: Pacific Trucking Ledger with Seven Transactions PowerPoint 4–3 Chapter 4 Figure 4.5: Pacific Trucking Ledger with Seven Transactions 19

Figure 4.9: Completed Ledger for Pacific Trucking PowerPoint 4–4 Chapter 4 Figure 4.9: Completed Ledger for Pacific Trucking 20

Exceptional Account Balances Sometimes, balances will end up on the opposite side than you would expect. These are called exceptional balances Example: Jack Evans, a customer owes us $50. So that would be accounts receivable, as asset and a debit account. Jack send a cheque for $55. So our asset account has a credit balance of $5. So temporarily the assets account turns into a liability.

This is because most businesses do no use cash to do transactions. Bank instead of Cash So far we have been using the term “cash”. It is safe to say that we should be using “bank” from now on. This is because most businesses do no use cash to do transactions. Bill payments and deposits are made to a bank account for simplicity. It is easier to send a cheque than a wad of bills.

On Account If an item is purchased on credit, this mean that it is not paid for at the time of purchase. This is a purchase on account When an item is sold on credit, cash ins received at the time it is sold. This is a sale on account. If money is paid out to a creditor to decrease the amount owed, it is a payment on account. When money is received from a debtor to reduce the amount owed, it is a receipt on account.

Figure 4.8

4.4 Trial Balance Once the account balances have been found in the ledger, we can use the information to complete a trial balance. If the debit and credit numbers are the same then our accounts are in balance. If the debit and credit numbers are different then our accounts are out of balance.

Figure 4.9: Completed Ledger for Pacific Trucking PowerPoint 4–4 Chapter 4 Figure 4.9: Completed Ledger for Pacific Trucking 26

Methods of Taking off a Trial Balance Step 1: Write a heading at the top, it must show the name of the individual or business, the title “Trial Balance,” and the date. Step 2: List all of the accounts and their balances. Dollar signs are unnecessary Step 3: Place the debit balances in a debit column and the credit balances in a credit column. Step 4: Add up the two columns. Step 5: See if the tow columns totals are the same. If they are, write the totals and finish by drawing a line above the total and a double line below the totals to indicate they match.

PACIFIC TRUCKIN TRIAL BALANCE 25-Sep-13 Accounts DEBITS CREDITS Bank 215.00   A/R – W. Caruso 150.00 A/R – R. Van Loon 770.00 Supplies 2,665.00 Trucks 63,075.00 Equipment 22,174.00 Bank Loan 18,000.00 A/P – Dini Bros 6,516.00 A/P – Packham Products 4,146.00 B. Rissen, Capital 60,387.00 89,049.00

Trial Balance out of Balance Out of balance means the credit and debits do not match This means that an error has been made. If the trial balance is “out of balance” the accountant may want to: Re-add the trial balance columns Cross-reference the trial balance figures against those of the T account. Recalculate the account balances Check that there is a balanced accounting entry in the accounts for each transaction.

Review and application Do review questions 1-7 and exercises 1-5