4.3 – Account Balances & Terminology

Chapter 4

What is the Balance in the Cash T-Account (Ledger)?

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1. Add the two sides of the account separately writing the balance of each side beneath the last item on each side.

2. Subtract the smaller total from the larger total and record it under the larger total.

3. Circle the final amount.

Calculating the Balance of an Account

Calculate all the Balances of the T-Accounts

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This is the balance in each of the ledger accounts and the side it is written on represents if it is a debit balance or a credit balance.

Usually: Assets have a Debit Balance Liabilities have a Credit Balance Owner’s Equity has a Credit Balance

DEBITS = CREDITS

What do these balances represent?

Sometimes an asset account might have a credit balance or a liability will have a debit balance. For instance: If the business takes out more cash than is in their

bank account because they have an overdraft agreement, then the cash would have a credit balance.

Your business overpays an accounts payable balance then it will end up with a debit balance.

These balances don’t usually have an exceptional balance for long.

Exceptional Account Balances

Buying and Selling on Credit – when a business buys from another business, they are usually given terms that allow them to pay for the goods at a later date. Here is some terminology:

1. Purchase on Account – items are received from a supplier but not paid for.

DR. Asset or Expense CR. Accounts Payable

2. Sale on Account – items are sold but the customer will pay later.

DR. Accounts Receivable CR. Capital

Interpreting Transactions

3. Payment on account– you have paid money to a creditor (Accounts Payable)

DR. Accounts Payable CR. Cash

4. Receipt on Account– a customer has paid a debt that they owe you.

DR. Cash CR. Accounts Receivable

Interpreting Transactions

A. Received $180 from M. Coburn on account.

B. Paid $100 to Tri Tech Computers on account.

C. Performed a $200 service for G. Vanderveen on account.

D. Purchased $300 of office furniture from Office Outfitters on account.

Your Turn – What is the transaction for each situation.