Chapter 4 Intro To Chapter 4 And Debit And Credit

Introduction to Accounting Introduction to Accounting 120120

Chapter 4The Simple Ledger

Review from YesterdayReview from Yesterday

•In this chapter, you will be learning the system used to maintain an up-to-date financial position. For this purpose, accountants developed the account and the ledger.

An AccountAn Account

•An account is a page specifically designed to record the changes in each individual item affecting the financial position. There is one account for each item.

The LedgerThe Ledger

•All the accounts together are called the ledger. A ledger is a group or file of accounts.

Types of Ledgers: Loose-Types of Ledgers: Loose-LeafLeaf

• Loose Leaf: In the pre-computer era, accounting personnel had to record each change by hand. The pages were actual pieces of paper and were normally housed in a large ledger book. These books, designed specifically for accounting, provide rulings for money items and other necessary notations.

Types of Ledgers: RolodexTypes of Ledgers: Rolodex

• Card Ledger: Another pre-computer ledger system was the card ledger. Account information was recorder on individual cards and housed on a device similar to a rolodex. Envision accounting records of a dental office with each customer having their own card displaying the date, the amount of each bill and the receipt of any payment.

Types of Ledgers: Computer Types of Ledgers: Computer LedgerLedger

• Computer Ledger: Today, most businesses use some type of computerized accounting software. These programs automatically adjust the account when a transaction is entered. Individual accounts can be viewed and printed at any time.

The General LedgerThe General Ledger

• View the following display. It is important to understand that each balance sheet account has its own "page" in the ledger, holding information specific to it.

The T-AccountThe T-Account

• The T-Account is in fact shaped like the letter T and divides information onto its two sides: the left and the right.

• As information is entered, the T-Account displays:– The account name – The opening or beginning balance – Individual entries – Possibly an ending or updated balance

• This unit will use the T-Account as the account "page." Each account will have its own T and the assembled T-Accounts will make up the general ledger.

Establishing the T-Account Establishing the T-Account LedgerLedger

• The first steps to establishing T-Accounts and developing a ledger is to record individual account names and opening balances. The account names and opening balances are obtained from a company's opening balance sheet.

• Examine the balance sheet for Atlantic Fleet, a rental company owned by Charles Stanson in Campbellton, New Brunswick. The preliminary (opening) balance sheet contains the assets acquired, the costs incurred and the owner's net worth when establishing the business. The company is about to open its door and begin operations. The data from this statement will be used to set up the accounts of the ledger in T-Account form.

The Opening BalanceThe Opening Balance

• The opening balance for an Asset account is recorded on the left side of the T-Account. The opening balance for a Liability account or an Owner's Equity account is recorded on the right side of the T-Account.

• Initially, it may be difficult to recall on which side of the T-Account the opening balance is recorded. An easy way to remember is to envision a balance sheet with a T-Account drawn on top.

• When the T-Account is drawn on top of the balance sheet:– The assets fall on the left side; thus, the opening balance falls

on the left side. – The liabilities and owner's equity fall on the right side; thus,

their opening balances fall on the right side.

  Features of the T-Account Features of the T-Account LedgerLedger

• Examine the T-Accounts ledger of Atlantic Fleet with their opening balances:

  Features of the T-Account Features of the T-Account LedgerLedger

• Note the following important features of the T-Account ledger:

• Each balance sheet item is given its own page (T-Account).

• The name of the account is centered at the top. • The opening dollar figures for assets are recorded on

the left side of the T-account. • The opening dollar figures for liabilities and capital

are recorded on the right side of the T-Account. • The sum of the left sides equals

the sum of the right sides. • Both the ledger and the balance

sheet display the financial position of the business. 

U4A1 - AnswersU4A1 - Answers

• Please print U4A1 (3 sheets total), staple and hand in.

• We will now mark this assignment as a group.

• Hand marked (and tallied) assignments back in.

Moving On… Debit and Moving On… Debit and CreditCredit

•  Knowing that every account page has two distinct sides (left and right) is necessary for understanding the theory of accounting.

• In accounting, these sides are termed debit (left side) and credit (right side). 

Moving On… Debit and Moving On… Debit and CreditCredit

• Remember how the opening balances for assets were placed on the left side and the opening balances for liabilities and owner's equity were placed on the right side? We can now state:

• "Asset accounts have debit values.“• "Liability and Owner's Equity

accounts have credit values."

Rules of Debit and CreditRules of Debit and Credit

• Now that you understand that the left side of the account is the debit side and the right side of the account is the credit side, we can examine how changes to accounts are recorded.

• The rules are fairly basic:

Rules of Debit and CreditRules of Debit and Credit

• Accounts increase on the same side as their opening balance and decrease on the opposing side:

Applying the Rules of Debit Applying the Rules of Debit and Creditand Credit

• Transaction analysis is vital to good and proper accounting. To further understand the rules of debit and credit, we will practice analyzing the transactions of Atlantic Fleet Company.

• Previously, transactions were analyzed using an equation analysis sheet. The equation analysis sheet does not incorporate the concept of debit and credit. The transaction analysis sheet is used to learn this accounting theory. Once the theory is mastered, the transaction analysis sheet becomes unnecessary.

The Transaction Analysis The Transaction Analysis SheetSheet

• Review the headings and information recorded on a transaction analysis sheet. The transaction analysis sheet is not a formal document; therefore, abbreviations are acceptable.

  Transaction 1Transaction 1

• Examine the following transactions, paying particular attention to how the entries are analyzed on the transaction sheet.

• Atlantic Fleet issues a cheque for $1 000 to Ramon Products, in partial payment of the debt owed.

  Transaction 1 - StepsTransaction 1 - Steps

In the first column, record the names of the accounts affected by the transaction.

1. In the second column, classify the individual accounts as Asset, Liability or Owner's Equity.

2. In the third column, record whether the accounts are to increase or decrease.

3. In the fourth column, record whether the accounts are to be debited or credited.

• In the fifth column, record the amounts by which the accounts are increased or decreased. It is not necessary to use "+" or "-" signs.

Transaction 1 - Transfer to T-Transaction 1 - Transfer to T-AccountsAccounts

• Observe the transfer from the transaction analysis sheet to the T-Accounts.

• Opening account balances are displayed in blue. The circled number indicates the transaction number. T-Accounts are not formal; thus, account name abbreviations are acceptable.

Transaction 2Transaction 2

• Charles Stanson invests an additional $10 000 cash into the business.

• Examine the effect of this transaction, using T-Accounts. Notice in the Bank account, there are now two entries in addition to the opening balance; both the debit and credit sides of the Bank T-Account have been utilized.

  Transaction 3Transaction 3

• A delivery service is provided for a customer. The customer pays $500 cash, in full payment.

  Transaction 4Transaction 4

• A used truck is purchased from Drake Company for $10 000. A $1 000 down payment is made. The owner contributes $5 000 of his personal funds towards the purchase, and the remaining balance is financed through the bank.

Transaction 4 (Continued)Transaction 4 (Continued)

• There are a couple additional things to note at this point:1. For each transaction, the account(s) debited is

listed before the account(s) credited. This is a common accounting practice and will become mandatory later.

2. Each transaction balances within itself, meaning debit amounts equal credit amounts. This ensures the fundamental accounting equation remains balanced.

Transaction 5Transaction 5

• A truck costing $8 000 is sold for $5 000 cash.

Transaction 6Transaction 6

• A delivery service is completed for K. Munro, at a price of $200. Monroe does not pay for the service at the time it is provided. She agrees to pay in 60 days.

A/R K. Munro is a new customer. She does not have an opening balance.

  Transaction 7Transaction 7

• Four company trucks are inspected and serviced. The company pays $350, in full payment.

  Let's ReviewLet's Review

• Re-examine the completed transaction analysis sheet.

  Let's ReviewLet's Review

• Did you remember that when a transaction occurs, at least two accounts are affected?

• Did you remember that for each transaction, the sum of debit entries always equals the sum of credit entries? This is known as double entry accounting.

• Double Entry Accounting means at least two accounts are affected in every transaction and the debit entries must equal the credit entries.

• Finally, did you remember that for each transaction, the debits are listed first?