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INTRODUCTION TO ACCOUNTING

INTRODUCTION TO ACCOUNTING. UNIT 4: Posting to the Ledger. TouchText. Bala nces Accumulate Transactions Get Posted to the Ledger Examples of Postings End-of-Period Balances and Financial Statements. Problems and Exercises. Next. Transactions Amounts vs. Account Balances.

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INTRODUCTION TO ACCOUNTING

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  1. INTRODUCTION TO ACCOUNTING UNIT 4: Posting to the Ledger TouchText • Balances Accumulate • Transactions Get Posted to the Ledger • Examples of Postings • End-of-Period Balances and Financial Statements Problems and Exercises Next

  2. Transactions Amounts vs. Account Balances In recording transactions in the Journal, we are recording the changein the balance of an account, not the actual account balance. Dictionary Example: ATM cash withdrawal Account Balance Before: $2,350 After: $2,200 Δ = - $150 $ 150 Transaction = change Δ in account balance. Take Notes Back Next

  3. All Accounts Accumulate Until The End of the Accounting Cycle Current Balance: Electricity Expense Account = $342. Dictionary Accounting Cycle Going Concern……. Forever ∞ * Though, as we’ll see, the Revenue and Expense accounts get transferred to the Balance Sheet at the end of each accounting cycle. Take Notes Back Next

  4. The (General) Ledger In addition to the Journal, which lists transactions, there is a (general) Ledger which keeps records of the balances of individual accounts. Before computers, periodically, transactions entered into the Journal were “posted” to the various accounts in the Ledger. Now, with modern computer softer, posting to the journal is done instantaneously and automatically. Dictionary Ledger (update account balances) Journal (enter transactions) Post to Ledger Take Notes Back Next

  5. Journal vs. Ledger Post Journal (enter transactions) Ledger (update account balances) The owner invests $25,000 cash into a new business. The business rents an office, paying $850 refundable deposit, plus $850 for the first month’s rent. A secretary is hired, who will be paid $1,200 per month, at the end of each month. Office furniture is purchased for $682 cash. Cash (A) $25,000 Owner’s Capital (OE) $25,000 Rent Expense (E) $850 Refundable Deposit (A) $850 Cash (A) $1,700 Furniture (A) $682 Cash (A) $682 Dictionary Cash (asset) + $25,000 - $1,700 - $682 $22,618 Balance Furniture (asset) + $682 $682 Balance * Account balances are always positive (or zero). Take Notes Back Next

  6. Omitted Information (as presented here) In actual accounting “books”, the following information would be included: A transaction number: used for cross-referencing the Journal and Ledger entries. The Date at which the transaction took place. Account Numbers: in addition to, or in place of, account names. Dictionary To save space and to focus on how transactions affect account balances, these bits of information are omitted (for now). Ledger (update account balances) Journal (enter transactions) Post to Ledger Take Notes Back Next

  7. Journal vs. Ledger: Example Transaction: Owner invests $10,000 into business. Journal (enter transactions) Ledger (update account balances) Dictionary Now Cash (A) $10,000 Owner’s Capital (OE) $1,000 Now Back Next

  8. Journal vs. Ledger: Example Example: Pay electricity bill of $124 with cash. Journal (enter transactions) Ledger (update account balances) Dictionary Now Cash (A) $124 Electricity (E) $124 So Far * Accounting practice is to use ( ) for negative numbers. Back Next

  9. Journal vs. Ledger: Example Example: Buy $1,545 of inventory (things to sell) with cash. Journal (enter transactions) Ledger (update account balances) Dictionary Now Cash (A) $1,545 Inventory (A) $1,545 Now Back Next

  10. Journal vs. Ledger: Example Example: Do work “on credit” for a customer, who now owes you $675. Journal (enter transactions) Ledger (update account balances) Dictionary Service Income (R) $675 Accounts Receivable (A) $675 So Far When a business sells goods or services to a customer “on credit” instead of cash (A), the business receives a promise to pay later (Account Receivable (A)). Now Back Next

  11. Journal vs. Ledger: Example Example: Buy $1,267 of inventory on credit. Journal (enter transactions) Ledger (update account balances) Dictionary Now Inventory (A) $1,267 Accounts Payable (L) $1,267 When a business buys goods or services from a supplier “on credit” instead of paying cash (A), the business promises to pay the supplier later (Account Payable (L)). Now Back Next

  12. Journal vs. Ledger: Example Example: Borrow $16,500 cash from the bank. Journal (enter transactions) Ledger (update account balances) Dictionary Now Cash (A) $16,500 Bank Loan (L) $16,500 Now Back Next

  13. Journal vs. Ledger: Example Example: Pay back a loan from the bank of $16,500 with cash. Journal (enter transactions) Ledger (update account balances) Dictionary Now Cash (A) $16,500 Bank Loan (L) $16,500 Now Back Next

  14. General Rules Regarding Account Balances Through the preceding examples, some general rules about accounts have become apparent. Dictionary • All accounts will have a positive balance (or, at minimum, zero balance). • Revenue and Expense accounts only go up throughout the accounting cycle. • Asset, Liability, and Owners Equity accounts can go up or down, but their balance will always be non-negative. Balance ≥ 0 Revenues Expenses Assets Liabilities Owners’ Equity Take Notes Back Next

  15. Journal vs. Ledger: Example Example: The owner takes $2,000 cash out of the business for personal use. Journal (enter transactions) Ledger (update account balances) Dictionary Now Cash (A) $2,000 Owners’ Draw (OE) Now Owner’s Draw is a special, contraequity account (see next slide). Back Next

  16. Contra Accounts All account balances are positive (non-negative), and they usually add to the total of similar accounts. (Example) Dictionary Cash Inventories Total Assets However, there are some accounts called “contra” accounts. They will also have a positive (non-negative balance), but their balance will take away from the total of similar accounts. Draws (or Dividends paid to stockholders) are contra-equity accounts. Owner’s Capital $10,000 (less) Owner’s Draw $2,000 Total Owner’s Equity $8,000 In the previous examples … Take Notes Back Next

  17. Journal vs. Ledger: Example Example: The business pays off a $169 Account Payable with cash. Journal (enter transactions) Ledger (update account balances) Dictionary Now Cash (A) $169 Accounts Payable (L) $169 Now Back Next

  18. Journal vs. Ledger: Example Example: A customer pays off her $67 bill to the business with cash. Journal (enter transactions) Ledger (update account balances) Dictionary Now Cash (A) $67 Accounts Receivable (A) $67 Now Back Next

  19. Lists Some accounts (e.g. Accounts Receivable, Inventories) are really a collection of individual account items contained on a “list”. Dictionary Maintaining and managing lists is an important part of working capital management. Accounts Receivable Adams, Hank $185 Barnes, Shelley 47 Henry, Bill 256 Jones, Nancy 67 Williams, Tony 120 Total Acct.s Receivable $675 New 185 47 256 0 120 $608 A/R List Changes in A/R are added to, or subtracted from, individual accounts in the list. *This is the A/R balance that appears on the balance sheet. Take Notes Back Next

  20. Journal vs. Ledger: Example Example: Buy $1,267 of inventory on credit. Journal (enter transactions) Ledger (update account balances) Dictionary Now Inventory (A) $1,267 Accounts Payable (L) $1,267 Now Back Next

  21. Journal vs. Ledger: Example Example: Sell $411 inventory for $675 cash. Journal (enter transactions) Ledger (update account balances) Dictionary Sales (R) $675 Cash (A) $675 Inventory (A) $411 Cost of Goods Sold (E) $411 * Sales is for cash (or A/R). Once something is sold, Inventory becomes COGS. Back Next

  22. End of Accounting Period Account Balances Income Statement Ending Account Balances Dictionary Balance Sheet + Notice that $9,808 + $815 = $9,913 (same as Assets) Take Notes Back Next

  23. End of Unit 4 Questions and Problems The following problems require the calculation of various statistics using MS Excel. The problems are linked to actual Excel spreadsheets, where students should do their work. Dictionary Exercise: Just as in the examples in this unit….. (a) For each transaction below, make a Journal entry and post it to the Ledger. Create new accounts as necessary, as you go along. Maintain account balances. (b) After the last transaction, list all account balances and place them as appropriate on the financial statements. (transactions listed next page) Take Notes Back Next

  24. End of Unit 4 Questions and Problems Transactions Dictionary Take Notes Back End

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