Chapter 3 - The General Ledger

AED =D LRC = C

Assets, expenses, drawings = debit (left) Liabilities, revenues, capital = credit (right)

When a question says to complete a ledger

Balance it

If Capital isn't Given

Calculate using A - L = OE Always looks for the balance and work it out

Rules of Double Entry Accounting

1. Every transaction will affect at least two items in the accounting equation: a double entry 2. After recording these changes, the accounting equation must still balance

Trial Balance

A list of all the accounts in the general ledger, and their balances to determine if total debits equal total debtors - Must balance (debit = credit) - Purpose is to check that the accounting equation balances

Double Entry Accounting

A system that records two effects on the accounting equation as a result of each transaction - Every transaction will have a two fold effect the accounting equation; at least two items must change if the equation is remain to balance - Much more complex system then single entry accounting - Uses ledger accounts to record the double effect on the accounting equation of each transaction

Ledger Accounts

Accounting records showing all the transactions that affect a particular item - seperate ledger account for each and every item in the firms records - No limit to the number of accounts a business can have

Errors Revealed in a Trial Balance

If the trial balance does not balance, the ledger entries have not been recorded correctly perhaps because: - Two entries have been recorded on the same side of the general ledger (for example, two debits and two credits, instead of one debit and one credit) - Only one entry has been recorded, part has been omitted (for example, one debit entry without a corresponding credit entry, or vice versa) - Different amounts have been recorded on each side (for example, $450 on the debit side, but $4500 on the credit side) Where debit doesn't equal credit

Errors not Revealed in a Trial Balance

In spite of its benefits, the usefulness of a trial balance as a diagnostic tool in detecting errors is limited; it will only detect errors if total debits do not equal total credits. One or more of the following errors may be present in the ledger accounts even when the trial balance balances: - A transaction has been omitted altogether - The debit and the credit entries have been reversed (For example, instead of recording a payment to a creditor by debiting Creditors Control and crediting Bank, the entry is erroneously recorded as a debit to Bank and a credit to Creditors Control) - The transaction has been recorded in the wrong ledger accounts (for example. instead of recording a payment of wages as a debit to the wages account, the transaction is incorrectly debited to rent) - An incorrect amount is recorded on both sides of the ledger None of these incorrect entries would be revealed by a trial balance because each of them still has a matching debit and credit entry Basically any entry where debit equals credit

Debit and Credit

Mean nothing more then left and right side of an account

Balancing

Ruling off an asset, liability or owners equity account to determine its balance at the end of the reporting period and transferring that balance to the next reporting period

When the trial balance does not balance

STUDY TIP: if the trial balance does not balance, look for a transaction involving the amount identified as the difference, or half or twice the difference, and check this entry first - check you added the columns correctly - check that all the accounts from the general ledger had been put in the trial balance - Check that the balances are on the correct side - Check that the balances have been calculated correctly

General Ledger

The collective name for the main group of ledger accounts

The Cross Reference

The name of the other account affected by a transaction, so that both accounts affected by a particular transaction can be identified

Single Entry Accounting

used for relatively small/simple businesses