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McGraw-Hill Ryerson

College Accounting First Canadian Edition Price • Haddock • Brock • Hahn • Reed. McGraw-Hill Ryerson. 1. CHAPTER 4. THE GENERAL LEDGER AND FINANCIAL STATEMENTS. 2. OBJECTIVE 1 Post to the general ledger. 3. GENERAL LEDGER.

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McGraw-Hill Ryerson

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  1. College Accounting First Canadian Edition Price • Haddock • Brock • Hahn • Reed McGraw-Hill Ryerson 1

  2. CHAPTER 4 THE GENERAL LEDGER AND FINANCIAL STATEMENTS 2

  3. OBJECTIVE 1 Post to the general ledger. 3

  4. GENERAL LEDGER • The master reference file for the accounting system. • Provides a permanent, classified record of every financial element involved in a firm’s operations. 4

  5. ACCOUNTCashACCOUNT NO. 1001 DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF. DEBIT CREDIT 20X5 Nov. 6 J1 40,000.00 40,000.00 ACCOUNTJohn Arrow, CapitalACCOUNT NO. 3001 DATE EXPLANATION POST. DEBIT CREDIT BALANCE REF. DEBIT CREDIT 20X5 Nov. 6 J1 40,000.00 40,000.00 All the accounts together are referred to as a ledger. In this chapter you will be working with the general ledger. 5

  6. GENERAL JOURNAL Page 1 • POST. • DATE DESCRIPTION REF. DEBIT CREDIT • 20X5 • Nov. 6 Cash 40,000.00 • John Arrow, Capital Beginning investment of • owner ACCOUNT John Arrow, Capital ACCOUNT NO.POST BALANCE DATE EXPLANATION REF. DEBIT CREDIT DEBIT CREDIT ACCOUNT Cash ACCOUNT NO. POST BALANCE DATE EXPLANATION REF. DEBIT CREDIT DEBIT CREDIT 1001 3001 1001 20X5 Nov. 6 J1 40,000.00 40,000.00 3001 J1 40,000.00 40,000.00 20X5 Nov. 6 6 23

  7. GENERAL JOURNAL Page 1 POST. DATE DESCRIPTION REF. DEBIT CREDIT 20X5 Nov. 7 Prepaid Rent 20,000.00 Cash 20,000.00 Paid rent in advance for an eight-month period (December 20X5 through July 20X6), Cheque1001 2 3 1 5 ACCOUNT Prepaid Rent ACCOUNT NO. POST BALANCE DATE EXPLANATION REF. DEBIT CREDIT DEBIT CREDIT 4 1031 1031 20X5 Nov. 7 20,000.00 20,000.00 J1 7

  8. ACCOUNTCASHACCOUNT NO.1001 POST.BALANCE DATE EXPLANATION REF. DEBIT CREDIT DEBIT CREDIT 20X5 Nov. 6 J1 40,000.00 40,000.00 7 J1 20,000.00 20,000.00 9 J1 10,000.00 10,000.00 28 J1 1,000.00 9,000.00 30 J1 1,000.00 8,000.00 Dec. 31 J2 10,500.00 18,500.00 31 J2 1,500.00 20,000.00 31 J2 2,500.00 17,500.00 31 J2 300.00 17,200.00 31 J2 1,000.00 16,200.00 This is an example of the Cash account. This type of document is called a balance ledger form. 8

  9. CORRECTING ENTRY A journal entry made to correct an erroneous entry. Made when the journal entry that contains an error has already been posted. Must be journalized and posted. 9

  10. OBJECTIVE 2 Prepare a trial balance From the ledger. 10

  11. TRIAL BALANCE • The trial balance is prepared after transactions have been recorded and account balances have been determined. • The trial balance is prepared to determine whether total debits equal total credits. 11

  12. ACCOUNTCASHACCOUNT NO.1001 POST.BALANCE DATE EXPLANATION REF. DEBIT CREDIT DEBIT CREDIT 20X5 Nov. 6 J1 40,000.00 40,000.00 7 J1 20,000.00 20,000.00 9 J1 10,000.00 10,000.00 28 J1 1,000.00 9,000.00 30 J1 1,000.00 8,000.00 Dec. 31 J2 10,500.00 18,500.00 31 J2 1,500.00 20,000.00 31 J2 2,500.00 17,500.00 31 J2 300.00 17,200.00 31 J2 1,000.00 16,200.00 POSTED GENERAL LEDGER ACCOUNTS 12

  13. ARROW EMPLOYMENT SERVICES Trial Balance December 31, 20X5 ACCOUNT NAME DEBIT CREDIT Cash 16,200.00 Accounts Receivable 2,000.00 Supplies 1,000.00 Prepaid Rent 20,000.00 Equipment 15,000.00 Accounts Payable 4,000.00 John Arrow, Capital 40,000.00 John Arrow, Drawing 1,000.00 Fees Income 14,000.00 Salaries Expense 2,500.00 Utilities Expense 300.00 Totals 58,000.00 58,000.00 13

  14. OBJECTIVE 3 • Develop a chart • of accounts. 14

  15. CHART OF ACCOUNTS • A chart of accounts is a list of all the accounts used by a business for recording its financial transactions. • Each account is given a number as well as a name. • The number is assigned on the basis of the type of account. 15

  16. ARROW EMPLOYMENT SERVICES Chart of Accounts Account NumberAccount Name Balance Sheet Accounts 1000-199 ASSETS 1001............................................................................. Cash 1011............................................................................. Accounts Receivable 1021…………………………………………………. Supplies 1031…………………………………………………. Prepaid Rent 1041…………………………………………………. Equipment 2000-2099 LIABILITIES 2002............................................................................. Accounts Payable 3000-3099 OWNER’S EQUITY 3001............................................................................. John Arrow, Capital Statement of Owner’s Equity Account 3002............................................................................. John Arrow, Drawing Income Statement Accounts 4000-4099 REVENUE 4001................................................................. ........... Fees Income 5000-5099 EXPENSES 5011.................................................................. .......... Salaries Expense 5014................................................................... ......... Utilities Expense 16

  17. PERMANENT, OR REAL, ACCOUNTS • An account that is kept open from one accounting period to the next. 17

  18. TEMPORARY, OR NOMINAL, ACCOUNT • An account whose balance is transferred to another account at the end of an accounting period. 18

  19. OBJECTIVE 4 Describe the relationship between assets and expenses. 19

  20. ASSETS & EXPENSES • Are both increased by debit entries, because both are costs incurred by a business to generate profit. • Assets: resources owned and in use, e.g. Prepaid Rent. • Expenses: resources already used up, e.g. Rent. 20

  21. OBJECTIVE 5 Prepare adjustments for unrecorded business transactions. 21

  22. ADJUSTMENTS OR ADJUSTING ENTRIES • Journal entries made to record business transactions that are not recorded during the accounting period. 22

  23. Supplies Expense Supplies 1,000 500 500 On December 31, 20X5, the supplies on hand total $500. $1,000 Balance - $500 On Hand = $500 Supplies Used 23

  24. GENERAL JOURNAL Page 3 POST. DATE DESCRIPTION REF . DEBIT CREDIT 20X5 Dec. 31 Supplies Expense 500.00 Supplies 500.00 To record the supplies used during December 24

  25. GENERAL JOURNAL Page 3 POST. DATE DESCRIPTION REF . DEBIT CREDIT 20X5 Dec. 31 Rent Expense 2,500.00 Prepaid Rent 2,500.00 To record the rent that expired during December 25

  26. PURCHASE OF EQUIPMENT • On November 9 & 10th, the firm purchased equipment at a total cost of $15,000. • This equipment was put to use in December when the firm opened for business. • At the time the equipment was bought, its cost was debited to the asset account Equipment. 26

  27. AMORTIZATION • Amortization is the process of allocating the cost of a long-term asset to operations during its expected useful life. • It has been determined that the equipment we have purchased has a useful life of 5 years. 27

  28. SALVAGE VALUE • Salvage valueis the amount an item can be sold for after it has been used by the business. • The $15,000 worth of equipment we purchased has no salvage value. 28

  29. Formula: • Amortization = Cost - Salvage Value • Estimated months of useful life STRAIGHT-LINE AMORTIZATION • One of many different ways to figure amortization. • The formula results in an equal amount of amortization being charged to each accounting period during the asset’s useful life. 29

  30. Amortization = Cost - Salvage Value Estimated months of useful life FORMULA Equipment cost $15,000, had 0 salvage and an estimated life of 5 years. (5 yr. X 12 mo. = 60 months) Amortization = $15,000 - 0 = $250.00 60 30

  31. BOOK VALUE • The portion of an asset’s original cost that has not yet been amortized. 31

  32. Book Value $14,750 BOOK VALUE Equipment $15,000 Accumulated Amortization - 250 32

  33. CONTRA ASSET ACCOUNT • A contra asset account has a balance “contra” or opposite to the normal balance of an asset account. • An example of a contra asset account is: Accumulated Amortization - Equipment. 33

  34. Amortization Expense - Equipment Accumulated Amortization-Equipment 250 250 34

  35. GENERAL JOURNAL Page 3 POST. DATE DESCRIPTION REF . DEBIT CREDIT 20X5 Dec. 31 Amortization Expense 250.00 Accumulated Amortization 250.00 To record the cost of equipment allocated to producing revenue in December 35

  36. OBJECTIVE 6 Journalize and post adjusting entries. 36

  37. GENERAL JOURNAL Page 3 POST. DATE DESCRIPTION REF . DEBIT CREDIT 20X5 Adjusting Entries Dec. 31 Supplies Expense 5017 500.00 Supplies 1021 500.00 31 Rent Expense 5020 2,500.00 Prepaid Rent 1031 2,500.00 31 Amor. Expense--Equipment 5023 250.00 Accum. Amor.--Equipment 1042 250.00 ACCOUNT Supplies ACCOUNT NO. 1021 POST. BALANCE DATE EXPLANATION REF. DEBIT CREDIT DEBIT CREDIT 20X5 Nov. 28 J1 1,000.00 1,000.00 Dec. 31 Adjusting Entry J3 500.00 500.00 37

  38. OBJECTIVE 7 Prepare an adjusted trial balance from the ledger. 38

  39. ARROW EMPLOYMENT SERVICES Adjusted Trial Balance December 31, 20X5 ACCOUNT NAME DEBIT CREDIT Cash 16,200.00 Accounts Receivable 2,000.00 Supplies 500.00 Prepaid Rent 17,500.00 Equipment 15,000.00 Accumulated Amortization: Equip. 200.00 Accounts Payable 4,000.00 John Arrow, Capital 40,000.00 John Arrow, Drawing 1,000.00 Fees Income 14,000.00 Salaries Expense 2,500.00 Utilities Expense 300.00 Supplies Expense 500.00 Rent Expense 2,500.00 Amortization Expense 200.00 Totals 58,200.00 58,200.00 39 32

  40. OBJECTIVE 8 Prepare an income statement, statement of owner’s equity, and balance sheet from the adjusted trial balance. 40

  41. ARROW EMPLOYMENT SERVICE Income Statement Month Ended December 31, 20X5 Revenue Fees Income 14,000.00 Expenses Salaries Expense 2,500.00 Utilities Expense 300.00 Supplies Expense 500.00 Rent Expense 2,500.00 Amort. Expense--Equipment 250.00 Total Expenses 6,050.00 Net Income for the Month 7,950.00 41

  42. ARROW EMPLOYMENT SERVICE Statement of Owner’s Equity Month Ended December 31, 20X5 John Arrow, Capital, December 1, 20X5 40,000.00 Net Income for December 7,950.00 Less Withdrawals for December 1,000.00 Increase in Capital 6,950.00 John Arrow, Capital, December 31, 20X5 46,950.00 42

  43. REPORT FORM • A balance sheet that lists the asset accounts first, followed by liabilities and owner’s equity. 43

  44. ARROW EMPLOYMENT SERVICES Balance Sheet December 31, 20X5 Assets Cash 16,200.00 Accounts Receivable 2,000.00 Supplies 500.00 Prepaid Rent 17,500.00 Equipment 15,000.00 Less Accumulated Amortization 250.00 14,750.00 Total Assets 50,950.00 Liabilities & Owner’s Equity Liabilities Accounts Payable 4,000.00 Owner’s Equity John Arrow, Capital 46,950.00 Total Liabilities & Owner’s Equity 50,950.00 44

  45. ACCOUNT FORM • A balance sheet that lists liabilities and owner’s equity to the right of assets. 45

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