UNIT 1: Chapter 4- THE SIMPLE LEDGER

1. UNIT 1: Chapter 4- THE SIMPLE LEDGER 4.1-Ledger Accounts 4.2-Debit and Credit Theory 4.3-Account Balances and Terminology 4.4-Trial Balance

2. LEDGER ACCOUNTS (section 4.1) • Group Work Activity: ROLES: Summarizer: using your own words tell the main idea of the section. Questioner: Based on what you just read pose questions about any unclear parts, puzzling information, and connections to other concepts already learned. Clarifier : address any confusing parts and attempt to answer the questions that were just posed. Predictor:Based on what you know about transactions and how they work offer a prediction about what we might do with the ledger accounts, how we will do that, and why you might think that.

3. LEDGER ACCOUNTS • Organizations need to see a more specific break down of the transactions that are occurring within the organization and need to further organize that information. LEDGER ACCOUNT: • Account: is a page specially designed to record the changes in each individual item affecting the financial position. • Ledger: is a group or file of those individual accounts

4. Sample Company • How many accounts do you see here?

5. LEDGER ACCOUNTS • Each individual account is record in a “T-chart” • The ledger and the balance sheet 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. LEDGER ACCOUNTS Assets Liabilities Owner’s Equity = + Left Right Left Right Left Right • What is the accounting equation? • Which side of the balance sheet do you find • Assets? Liabilities? Owner’s Equity? Beginning $ Value Beginning $ Value Beginning $ Value

7. Sample Company • How many accounts do you see here?

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

9. LEDGER ACCOUNTS • IMPORTANT FEATURES WHEN CREATING “T-CHARTS”: • Each individual item on the Balance Sheet is considered its own account and is given its own page which is divided as a “T”. • The dollar figure for each item is recorded in the account in the first line. This is the beginning value. • It is important to record the figured on the correct side of the chart. Remember the accounting equation when doing this A=L+OE

10. Exercise 1(page 82) • Set up the ledger for Stevens Woodworking using T-accounts.

11. Exercise 3(page 83) • Shown below is the ledger of Lilly Wall, who operates an interior design business. Create a balance sheet as of January 31, 2008. Accounts Receivable Cash Supplies Equipment 500 2,100 1,500 2,800 Accounts Payable Lilly Wall, Capital Bank Loan 950 2,000 ???

12. Debit & Credit Theory

13. + = Liabilities Assets Owner’s Equity Left Right Left Right Left Right Debit Credit Debit Credit Debit Credit (DR) (CR) (DR) (CR) (DR) (CR) For ALL ACCOUNTS, the “left side” is the Debit side and the “right side” is the Credit side. Ledger Accounts • Earlier we learned that ledger accounts have a “left side” and a “right side”. • Accountants refer to these two sides as Debit and Credit.

14. Liabilities Assets = + Owner’s Equity Debit Credit Debit Credit Debit Credit (DR) (CR) (DR) (CR) (DR) (CR) Rules of Debit and Credit • Now 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. • RULE: For each account, increases are recorded on the “beginning value” side and decreases are recorded on the opposite side. Beginning $ Value Beginning $ Value Beginning $ Value

15. Transaction Analysis Sheet

16. Transaction Analysis Sheet for Pacific Trucking • The company purchases $200 worth of supplies from Packham Products, to be paid for later. + DR j 200– Supplies Asset + j 200– A/P – Packham Products Liabilities CR An accountant would express this transaction as: “debit Supplies and credit AP – Packham Products, $200.”

17. Cash Supplies Bank Loan B. Rissien, Capital 3,265 2,465 18,000 60,287 A/R W. Caruso A/P Dini Bros. Trucks NOTE: the transaction includes both a debit & credit and the total debits EQUAL the total credits. 150 55,075 1,516 A/R R. Van Loon A/P Packham Products Equipment 22,174 620 3,946 Pacific Trucking Ledger j 200 ACCOUNTING ENTRY—All of the changes in the accounts caused by one business transaction, expressed in terms of debits and credits. 200 j

18. Transaction Analysis Sheet for Pacific Trucking • The company pays $500 to Dini Bros. In partial payment of the amount owed to them. – A/P – Dini Bros. Liability DR k 500– – Asset Cash CR k 500– An accountant would express this transaction as: “debit A/P – Dini Bros and credit Cash, $500.”

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

20. + Asset Cash DR l 200– – l 200– A/R – R. Van Loon Asset CR Transaction Analysis Sheet for Pacific Trucking • The company receives $200 cash from R. Van Loon in partial payment of her debt. An accountant would express this transaction as: “debit Cash and credit A/R – R. Van Loon, $200.”

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

22. + Cash Asset DR m 400– + B. Rissien, Capital Owner’s Equity CR m 400– Transaction Analysis Sheet for Pacific Trucking • A delivery service is provided for a customer at a price of $400. The customer pays cash at the time of the service. An accountant would express this transaction as: “debit Cash and credit B. Rissien, Capital, $400.”

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

24. + Truck Asset DR n 8,000– – Cash Asset CR n 2,500– + A/P – Dini Bros Liability CR n 5,500– Transaction Analysis Sheet for Pacific Trucking • 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. An accountant would express this transaction as: “debit Trucks $8,000, credit Cash $2,500 and credit A/P – Dini Bros $5,500.”

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

26. + A/R – R. Van Loon Asset DR o 350– + B. Rissien, Capital Owner’s Equity CR o 350– Transaction Analysis Sheet for Pacific Trucking • 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. An accountant would express this transaction as: “debit A/R – R. Van Loon and credit B. Rissien, Capital, $350.”

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

28. – B. Rissien, Capital Owner’s Equity DR p 650– – Cash Asset CR p 650– Transaction Analysis Sheet for Pacific Trucking • One of the lifting machines (equipment) breaks down. The company spends $650 cash to have the machine repaired. An accountant would express this transaction as: “B. Rissien, Capital and credit Cash, $650.”

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

30. Double-Entry System of Accounting • Whenever a transaction occurs, changes must be made in the accounts. • All of the account changes, in a single transaction, must balance. • For each transaction, the total debits EQUAL the total credits.

31. Double-Entry System of Accounting • In the double-entry system of accounting every transaction is recorded in the accounts in two steps: (1) as a debit and (2) as a credit. • At least two accounts are affected by every transaction. • The following is a summary of the transactions we analyzed using the “transaction analysis sheet”.

32. 2 2 2 NOTE: the Debit entry is listed before the Credit entry. NOTE: the Debit entry is listed before the Credit entry. NOTE: for each individual transaction, the total debitsEQUAL total credits. NOTE: each transaction consists of at least two accounts. 2 3 2 2 Double-Entry System of Accounting

33. Exercise 3(page 91) 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”.

34. Exercise 3(continued) Transactions: • The business receives $300 cash from J. Parker, one of the debtors. • The business purchases $200 worth of supplies for cash. • Little Bros., one of the creditors, is paid $100. • The owner withdraws $250 for her personal use. • 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. • A new customer signs up for a fitness course. The $300 fee is paid in cash.

35. Exercise 4(page 92) Crooks Garage is a small business operated by James Crooks. Shown, are 10 selected transactions of Crooks Garage. Analyze these transactions on a “transaction analysis sheet”. When performing your analysis, choose from the following accounts: Cash; Accounts Receivable (several); Supplies; Equipment; Truck; Bank Loan; Accounts Payable (several); and J. Crooks, Capital.

36. Exercise 4(continued) Transactions: • A car is repaired for a customer who pays the $450 charge in cash. • The business purchases $170 of supplies for cash. • The business pays $125 to Rossi Co., an account payable. • The business receives $90 from G. Rawl, an account receivable. • A welding unit, included in the equipment account at $500, is run over by a truck. It is so badly damaged that it has to be thrown away. • A new welding unit is purchased on credit from Bly Co. at a cost of $790. • For the repair of his car, F. Stefryk pays $100 cash and owes $250, the balance of the repair charge. • Arrangements are made with the bank to borrow $6,000. A promissory note for this amount is signed by Mr. Crooks for the bank, after which the bank provides the business with $6,000 cash. • Albert McCann, a mechanic employed by Crooks Garage, is paid wages of $375. • A towing service is performed for a customer for $40 cash.

37. Account Balances and Terminology

38. 2,665 0 2,665 650 61,037 60,387 500 7,016 Circle to signify “account balance” 6,516 63,075 0 63,075 0 4,146 970 200 4,146 770 Pacific TruckingLedger Cash Supplies Draw a line to signify “a total” Bank Loan B. Rissien, Capital 3,265 500 k 2,465 18,000 2,500 n l 200 j 200 60,287 p 650 650 p m 400 Total the debits and the credits… these are known as “pencil footings” 400 m A/P Dini Bros. 3,865 3,650 350 o 215 k 500 1,516 Trucks A/R W. Caruso 5,500 n 55,075 n 8,000 150 Subtract the “smaller” number from the “larger” and record the difference as the “account balance” beneath the “larger” number A/P Packham Products A/R R. Van Loon Equipment 3,946 200 l 620 22,174 200 j o 350

39. Interpreting the Account Balance • Normally, we can determine the type of account from the balance. • 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. • What can you say about liabilities? owner’s equity?

40. Interpreting the Account Balance • Exceptions to the rule: • A creditor overpays • Bank account becomes over-drawn • Overpay a debtor • A customer, who does not have an A/R balance, returns some merchandise • You return good to a supplier whom you currently have no A/P balance • Exceptional balances do not last long. Ordinary business activity usually causes them to return quickly to “normal”.

41. Terminology: Bank vs. Cash • Businesses rely heavily on the banking system. • The most common ways to make payment are by cheque and electronic funds transfer. • You can expect to see an account called Bankrather than Cash. • The words “bank” and “cash” are often used interchangeably. • 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.

42. Terminology: Buying and Selling on Credit • Businesses with good reputations are able to buy goods on short-term credit. • The purchaser is able to delay payment for a short period of time, usually 30 days. • The purchaser thus has time to inspect or test the goods thoroughly before paying for the. • If you are the purchaser, which account would this affect?

43. Terminology: On Account • The term “on account” is an essential part of business vocabulary. The term is used in four specific ways: • If an item is purchased on account it is not paid for at the time of purchase. • A sale on account is a sale for which the money is not received until a later date. • A payment on account is money paid to a creditor to reduce the amount owed to that creditor. • A receipt on account is money received from a debtor to reduce the amount owed by that debtor.

44. Exercise 1(page 96) Calculate the balances for the following accounts: A/R H. Devrie A/P P. Helka R. Smart, Capital Cash 175 75 40 175 250 1,210 360 29 190 48 512 25 150 70 35 30 45 150 3,140 • What does the debit balance in the H. Devrie account mean? • What does the credit balance in the P. Helka account mean?

45. Exercise 5 (page 111) In your notebook create ledger accounts for A. Hoysted. Then enter in the transactions and then update each account.

46. Trial Balance

47. Trial Balance • Periodically, it is necessary to check the accuracy of the ledger. • A trial balance is a listing of the account balances in the ledger. • A trial balance compares the total of the accounts with debit balances with the total of accounts with credit balances. • If the total debits agree with the total credits, the ledger is said to be in balance.

48. Assets = Liabilities + Owner’s Equity Cash Supplies Bank Loan B. Rissien, Capital 3,265 500 k 2,465 18,000 2,500 n l 200 j 200 60,287 p 650 650 p m 400 2,665 0 400 m A/P Dini Bros. 2,665 3,865 3,650 350 o 215 650 61,037 k 500 1,516 Trucks 60,387 A/R W. Caruso 5,500 n 55,075 500 7,016 n 8,000 150 6,516 63,075 0 63,075 A/P Packham Products A/R R. Van Loon Equipment 3,946 200 l 620 22,174 200 j o 350 0 4,146 970 200 4,146 770 Pacific Trucking Ledger

49. Trial Balance Step 3: Enter debit & credit balances Step 1: Write Title (Who, What, & When) Step 2: List Accounts Step 4: Total Columns

50. Trial Balance