Accounting & Financial Analysis 1 Lecture 3 The General Ledger.

Accounting & Financial Analysis 1

Lecture 3

The General Ledger

Owner’s equityOwner’s equity

Aka Proprietorship For accounting purposes the business

exists separately from the owner. The start up capital that the owner puts

into the business (money and assets) is considered as money owing back to the owner

In addition the owner is also entitled to the profits that the business makes

Aka Proprietorship For accounting purposes the business

exists separately from the owner. The start up capital that the owner puts

into the business (money and assets) is considered as money owing back to the owner

In addition the owner is also entitled to the profits that the business makes

Owner’s equity (2)Owner’s equity (2)

The capital plus retained profits is known as Owner’s Equity.

The capital plus retained profits is known as Owner’s Equity.

General Ledger General Ledger

A General Ledger is a combination of accounts that make up the financial statements of a business

It is where all business transactions are recorded under their appropriate account heading.

A General Ledger is a combination of accounts that make up the financial statements of a business

It is where all business transactions are recorded under their appropriate account heading.

Account HeadingsExamples

Account HeadingsExamples

Sales a/c, Purchases a/c, Wages a/c, Telephone a/c, Postage a/c, etc., etc.

A business could have a hundred different accounts

Sales a/c, Purchases a/c, Wages a/c, Telephone a/c, Postage a/c, etc., etc.

A business could have a hundred different accounts

CHART OF ACCOUNTSCHART OF ACCOUNTS

A listing of all these accounts for easy reference is called a “Chart of Accounts”

A listing of all these accounts for easy reference is called a “Chart of Accounts”

Format of Accounts : “ T ” accounts

Format of Accounts : “ T ” accounts

Each account is generally a separate page in the ledger and split vertically down the middle. This is why they are referred to as “ T ” accounts.

The account name is written at the top of the account page

The left hand side is called the “ DEBIT ”“ DEBIT ” side.

The right hand side is called the

“ “ CREDIT ”CREDIT ” side.

Each account is generally a separate page in the ledger and split vertically down the middle. This is why they are referred to as “ T ” accounts.

The account name is written at the top of the account page

The left hand side is called the “ DEBIT ”“ DEBIT ” side.

The right hand side is called the

“ “ CREDIT ”CREDIT ” side.

Computer based accountsComputer based accounts

If using a computer based system the accounts are printed in three column fashion.

Debit, Credit & Balance (not “ T ” a/c)

If using a computer based system the accounts are printed in three column fashion.

Debit, Credit & Balance (not “ T ” a/c)

Principle of double entry book-keeping

Principle of double entry book-keeping

Every transaction that is recorded in the General Ledger:

must have a “ DEBIT ” in one account(s) and a corresponding “CREDIT” in another account(s)

Therefore the total of all the debit amounts should equal the total of all the credit amounts.

Every transaction that is recorded in the General Ledger:

must have a “ DEBIT ” in one account(s) and a corresponding “CREDIT” in another account(s)

Therefore the total of all the debit amounts should equal the total of all the credit amounts.

Principle of double entry book-keeping (2)

Principle of double entry book-keeping (2)

Double entry accounting is a system for recording transactions to ensure that the accounting equation always remains in balance.

Double entry accounting is a system for recording transactions to ensure that the accounting equation always remains in balance.

The General LedgerThe General Ledger

All these accounts assembled together are known as the “General Ledger”

These accounts are classified into groups that are known as accounting elements.

There are five accounting elements.

All these accounts assembled together are known as the “General Ledger”

These accounts are classified into groups that are known as accounting elements.

There are five accounting elements.

5 Accounting elements5 Accounting elements

Assets Liabilities Proprietary

Ledger

Owner’s Equity

Revenue Nominal Ledger

Expenses

Assets Liabilities Proprietary

Ledger

Owner’s Equity

Revenue Nominal Ledger

Expenses

Division of the General Ledger:

Division of the General Ledger:

Although the general ledger is a combination of all the accounts put together for practical purposes it is separated into two distinct sections.

The NOMINAL ledger The PROPRIETARY or PRIVATE

ledger

Although the general ledger is a combination of all the accounts put together for practical purposes it is separated into two distinct sections.

The NOMINAL ledger The PROPRIETARY or PRIVATE

ledger

The NOMINAL ledger The NOMINAL ledger

Where all the trading transactions (activities) are recorded and

from which we can calculate the profit or loss made during the accounting period

Account is debited: Expenses and Losses

Account is credited: Income, gains

Where all the trading transactions (activities) are recorded and

from which we can calculate the profit or loss made during the accounting period

Account is debited: Expenses and Losses

Account is credited: Income, gains

The PROPRIETARY or PRIVATE ledger

The PROPRIETARY or PRIVATE ledger

Where all the Assets, Liabilities and Owner’s Equity of the business are recorded.

Where all the Assets, Liabilities and Owner’s Equity of the business are recorded.

Accounting Equation Accounting Equation

Assets = Liabilities + Owner’s Equity

OR Owner’s Equity = Assets - Liabilities

Assets = Liabilities + Owner’s Equity

OR Owner’s Equity = Assets - Liabilities

Assets Assets

What the business owns - (Debit balances)

Account is generally debited: Value of assets that belong to the

business, and cash or amounts owed to the business.

What the business owns - (Debit balances)

Account is generally debited: Value of assets that belong to the

business, and cash or amounts owed to the business.

The Assets are divided into two categories:

The Assets are divided into two categories:

Current assets: These represent assets that will

change in value within the accounting period (Less than 12 months)

Non-current assets: These represent assets that will be

used by the business for a period in excess of 12 months

Current assets: These represent assets that will

change in value within the accounting period (Less than 12 months)

Non-current assets: These represent assets that will be

used by the business for a period in excess of 12 months

Current assetsCurrent assets

Cash at bank Trade debtors Inventory Input tax credit Prepayments

Cash at bank Trade debtors Inventory Input tax credit Prepayments

Non-current assetsNon-current assets

Land & buildings Motor vehicles Plant & Equipment Furniture & Fittings Patents Trade marks

Land & buildings Motor vehicles Plant & Equipment Furniture & Fittings Patents Trade marks

Liabilities Liabilities

What the business owes - (Credit balances)

Account is generally credited: Cash or amounts owed by the business.

What the business owes - (Credit balances)

Account is generally credited: Cash or amounts owed by the business.

The liabilities are divided into two categories:

The liabilities are divided into two categories:

Current liabilities Non-current liabilities

Current liabilities Non-current liabilities

Current liabilitiesCurrent liabilities

These represent liabilities that will change in value within the accounting period (Less than 12 months). E.g.

Trade creditors GST payable Accruals Bank overdraft Employee entitlements

These represent liabilities that will change in value within the accounting period (Less than 12 months). E.g.

Trade creditors GST payable Accruals Bank overdraft Employee entitlements

Non-current liabilitiesNon-current liabilities

These represent liabilities of a long term nature due to be paid in more than 12 months. E.g.

Long term bank loans Other loans or amounts owing

These represent liabilities of a long term nature due to be paid in more than 12 months. E.g.

Long term bank loans Other loans or amounts owing

Owner’s Equity Owner’s Equity

= (Credit balances) Capital that the proprietor puts into

the business and any accumulated profits retained by

the business. (Owed by the entity to the shareholders)

= (Credit balances) Capital that the proprietor puts into

the business and any accumulated profits retained by

the business. (Owed by the entity to the shareholders)

As a general rule any transaction that affects the Nominal ledger has the contra

entry in the Proprietary ledger.

As a general rule any transaction that affects the Nominal ledger has the contra

entry in the Proprietary ledger.

Example 1 : Sale of goods for cash $253 Sales are recorded in the Nominal ledger

(trading transaction) : GST payable is recorded in the Proprietary

ledger (amount owing) Sales a/c Credit $230 GST payable Credit $ 23 The other side of the entry, which has to be a

Debit, is the cash. Cash is not a trading transaction it is an

increase in Property, and therefore it is an account recorded in the Proprietary ledger.

Cash or Bank a/c Debit $253

Example 1 : Sale of goods for cash $253 Sales are recorded in the Nominal ledger

(trading transaction) : GST payable is recorded in the Proprietary

ledger (amount owing) Sales a/c Credit $230 GST payable Credit $ 23 The other side of the entry, which has to be a

Debit, is the cash. Cash is not a trading transaction it is an

increase in Property, and therefore it is an account recorded in the Proprietary ledger.

Cash or Bank a/c Debit $253

Any transaction that affects the Nominal ledger has the contra entry in the

Proprietary ledger (2)



Example 2 : Sale of goods on credit $385 Sales are recorded in the Nominal ledger : GST payable is recorded in the Proprietary

ledger Sales a/c Credit $350 GST payable Credit $ 35 The other side of the entry, which has to be a

Debit, is money owing to the business by somebody else – a Trade Debtor

Debtors are not a trading transaction, and therefore it is an account recorded in the Proprietary ledger.

Trade Debtors Debit $385

Example 2 : Sale of goods on credit $385 Sales are recorded in the Nominal ledger : GST payable is recorded in the Proprietary

ledger Sales a/c Credit $350 GST payable Credit $ 35 The other side of the entry, which has to be a

Debit, is money owing to the business by somebody else – a Trade Debtor

Debtors are not a trading transaction, and therefore it is an account recorded in the Proprietary ledger.

Trade Debtors Debit $385





Example 3 : Bought stationery on credit $110

Stationery a/c Debit $100 (Nominal Ledger)

Input tax credit a/c Debit $ 10 (Proprietary ledger)

Trade Creditors a/c Credit $110 (Proprietary ledger)

Example 3 : Bought stationery on credit $110

Stationery a/c Debit $100 (Nominal Ledger)

Input tax credit a/c Debit $ 10 (Proprietary ledger)

Trade Creditors a/c Credit $110 (Proprietary ledger)

When does the rule not apply?When does the rule not apply?

The rule does not always apply to the Proprietary ledger.

Many transactions dealing with the Bank a/c have the Debit and the Credit entries within the Proprietary ledger.

The rule does not always apply to the Proprietary ledger.

Many transactions dealing with the Bank a/c have the Debit and the Credit entries within the Proprietary ledger.

Example 1 : Example 1 :

A Trade Debtor pays us a cheque for amount owing of $385

This has an affect of reducing the amounts owed to us by Trade Debtors

We know that Trade Debtors are within the Proprietary ledger. Therefore we have to Credit the Trade Debtors a/c.

The trading transaction took place when the sale occurred. The late payment is merely a settlement of property.

The cheque is deposited into the bank increasing our balance or reducing the overdraft.

A Trade Debtor pays us a cheque for amount owing of $385

This has an affect of reducing the amounts owed to us by Trade Debtors

We know that Trade Debtors are within the Proprietary ledger. Therefore we have to Credit the Trade Debtors a/c.

The trading transaction took place when the sale occurred. The late payment is merely a settlement of property.

The cheque is deposited into the bank increasing our balance or reducing the overdraft.

Example 1 - AnswerExample 1 - Answer

The entry will be: Trade Debtors a/ CreditCredit

$385$385 Bank a/c DebitDebit $385$385

The entry will be: Trade Debtors a/ CreditCredit

$385$385 Bank a/c DebitDebit $385$385

Example 2 Example 2

We paid the Trade Creditor by cheque the amount owing for stationery of $110

This has an affect of reducing the amounts owing by us to Trade Creditors

We know that Trade Creditors are within the Proprietary ledger. Therefore we have to Debit the Trade Creditors a/c.

The trading transaction took place when the purchase occurred. The late payment is merely a settlement of property. The cheque is drawn on our bank account reducing our balance or increasing the overdraft

We paid the Trade Creditor by cheque the amount owing for stationery of $110

This has an affect of reducing the amounts owing by us to Trade Creditors

We know that Trade Creditors are within the Proprietary ledger. Therefore we have to Debit the Trade Creditors a/c.

The trading transaction took place when the purchase occurred. The late payment is merely a settlement of property. The cheque is drawn on our bank account reducing our balance or increasing the overdraft

Example 2 - AnswerExample 2 - Answer

The entry will be: Trade Debtors a/c DebitDebit

$110$110 Bank a/c CreditCredit $110$110

The entry will be: Trade Debtors a/c DebitDebit

$110$110 Bank a/c CreditCredit $110$110

JournalsJournals

Transactions are recorded in the general ledger by the process of “JOURNALS “

The journal identifies the accounts effected by the transaction and the relevant $ value.

Transactions are recorded in the general ledger by the process of “JOURNALS “

The journal identifies the accounts effected by the transaction and the relevant $ value.

Journals – Debit or Credit?Journals – Debit or Credit?

The following schedule indicates whether the $ value should be a Debit (DR) or Credit (CR) entry in the journal.

The following schedule indicates whether the $ value should be a Debit (DR) or Credit (CR) entry in the journal.

Accounting element Increase Decrease Assets Dr Cr

Liabilities Cr Dr Owner’s equity Cr Dr

Revenue Cr Dr Expenses Dr Cr

Have a go!Have a go!

CLASS EXERCISE 3 At the back of your handouts

CLASS EXERCISE 3 At the back of your handouts

Accounting & Financial Analysis 1 Lecture 3 The General Ledger.

Documents

Transcript of Accounting & Financial Analysis 1 Lecture 3 The General Ledger.