Accounting for a Service Business

Unit 1.8

The Ledger

The Ledger

Once transactions are recorded in a journal, their debit and credit information is then copied from the journal to the general ledger

The general ledger is a book or file that holds pages or cards

On each page or card is each account that was used in the journal. (see illustration on page 115)

The Ledger

This process of copying transactions from the journal to the ledger is called posting

Posting is done as a matter of efficiency. Just think: Without posting, every time you

wanted to know what any account balance was, you would have to search the journal entries and tally up all the debits and credits for that particular account.

In any given month for any given account, there could be hundreds of entries affecting that account!

The Ledger

Page 117 in your text gives an illustration of transferring to the general ledger.

(a) Debits are transferred as debits and

credits are transferred as credits.

(b) The reference number is what page in

the general journal this entry came

from.

The Ledger (continued)

Notice:

(c) The date is the date the entry was

made in the general journal, not the

date it was posted (transferred to the

ledger).

The Ledger Cash No. 10Date Explanation Ref. Debit Credit Balance2010Nov. 1 J1 15,000 15,000

2 J1 10,000 5,000 4 J1 7,500 12,500 6 J1 4,000 16,500 7 J1 875 15,625 8 J1 1,350 14,275 9 J1 1,750 16,025 10 J1 1,500 14,525

The Ledger

After posting each entry, write the account number (for example: Cash is No. 10, Kline, Capital is No. 40) in the

reference column of the general journal.

This is a cross-reference so you can later see, at a glance in your general journal, where you posted an entry to.

The Ledger

Each account in the general ledger is numbered.

Illustration 4-5 on page 116 of your text shows you a sample chart of accounts.

A chart of accounts is simple a listing of all the accounts and their account numbers.

The Ledger

Kline, Capital No. 40Date Explanation Ref. Debit Credit Balance

2010

Nov. 1 J1 15,000 15,000

The Ledger

Equipment No. 15Date Explanation Ref. Debit Credit Balance

2010

Nov. 2 J1 10,000 10,000

The Ledger

Supplies No. 8Date Explanation Ref. Debit Credit Balance

2010

Nov. 3 J1 1,350 1,350

The Ledger

Accounts Payable No. 26Date Explanation Ref. Debit Credit Balance

2010

Nov. 4 J1 1,350 1,350

5 J1 300 1,650

8 J1 1,350 300

The Ledger

Fees Earned No. 50Date Explanation Ref. Debit Credit Balance

2010

Nov. 4 J1 7,500 7,500

6 J1 12,000 19,500

The Ledger

Advertising Expense No. 61Date Explanation Ref. Debit Credit Balance

2010

Nov. 5 J1 300 300

The Ledger

Accounts Receivable No. 6Date Explanation Ref. Debit Credit Balance

2010

Nov. 6 J1 8,000 8,000

9 J1 1,750 6,250

The Ledger

Rent Expense No. 63Date Explanation Ref. Debit Credit Balance

2010

Nov. 7 J1 500 500

The Ledger

Insurance Expense No. 64Date Explanation Ref. Debit Credit Balance

2010

Nov. 7 J1 200 200

The Ledger

Utilities Expense No. 65Date Explanation Ref. Debit Credit Balance

2010

Nov. 7 J1 175 175

The Ledger

P. Kline, Drawing No. 41Date Explanation Ref. Debit Credit Balance

2010

Nov. 10 J1 1,500 1,500

Trial BalanceBefore computers, it was very important to

check that total debit balances equaled total credit balances.

This was done by creating a trial balance. A trial balance is a listing of all accounts

with their balances. The accounts are listed by category: assets first,

then liabilities, then owner’s equity, revenues, and expenses.

These accounts and balances are taken from the ledger.

Trial Balance

Despite the common use of computers for today’s accounting systems, it is still a good idea to prepare a trial balance.

This will provide us with a useful summary of all the accounts and their balances.

Page 125 in your text shows a sample trial balance.

Trial Balance

Remember, even though the trial balance looks like a financial statement, it is not.

The trial balance is a tool we use to prove that the total debits and total credits are equal.

What if our trial balance doesn’t balance?

We have to look for our errors...

Locating Trial Balance Errors

Many out-of-balance conditions can be discovered by calculating the difference between total debits and total credits on the trial balance.

Then, try one or more of the following...

Locating Trial Balance Errors

Search for a missing account. The amount that your debits and credits don’t

match by may be the balance of the missing account.

Trace each account from the ledger to the trial balance to locate the missing account.

Search the journal for the amount of the difference.

The difference may be the result of an incorrect journal entry or posting.

Locating Trial Balance Errors

Divide the difference between the debits and credits by 2.

If you transferred a debit as a credit or a credit as a debit, the amount of the error is doubled.

Look in the journal for the quotient and trace the account affected.

Locating Trial Balance Errors

Divide the out-of-balance amount by 9. If the result is evenly divisible by 9, the

error may be a slide. (example: writing $54 as $540) or a transposition (example writing $54 as $45).

Limitations of the Trial Balance

The trial balance simply proves that the total ledger debits equal the total ledger credits.

It does not guarantee that ...all transactions have been recorded, ...all transactions have been recorded correctly, …all journal entries are posted once and only

once, or that ...the correct accounts and amounts were used

in journalizing and posting.

Use of Dollar Signs

Do we use dollar signs in the journals or ledgers? No

In the trial balance and financial statements? Yes, but only for the first item in the column and

for the total of that column.

Use of Underlines

Place one underline under a column of figures to be added or subtracted.

Place a double underline under the final sum of a column.