DOUBLE ENTRY SYSTEM AND THE LEDGER
2010
May 1 Owner started business Gummy Sweets with $5 000 cash in hand.
May 3 The business borrowed $10 000 from C. Wuggot which was put to the bank account.
May 4 Bought goods on credit for $400 from M. Dyall. May 6 Goods
returned to M. Dyall $50.
May 11 Rent Received by cheque $200
May 14 Paid wages by cheque $30
May 16 Owner took $ 250 cash from business for personal use May 19 Sold
goods on credit to H. Hannis for $200.
May 23 Goods returned from H. Hannis $20.
May 26 Paid M. Dyall $150 by cheque.
Posting Entries to the General and Subsidiary Ledgers
Balancing of Accounts
The respective accounts for most businesses are closed off at the last day of each month and reopened for the first day of
the following month. The steps by which this is done is referred to as balancing off the accounts. An account balance is
the difference between the totals on the debit side, and the totals on the credit side of the account of the same account.
The account balance always belongs to the greater side.
The account balance is entered on the lesser side at the end of the month as a balance carried down. This may be written
as ‘balance c/d’. When the account is reopened the first day of the following month the same balance is entered on the
opposite side as a balance brought down. This may be written as “balance b/d.’
If the debit side exceeds the credit side, the account is said to have a ‘debit balance’. If the credit side exceeds the debit
side, the account is said to have a ‘credit balance.’
THE TRIAL BALANCE AND BASIC FINANCIAL STATEMENTS
The double entry system of accounting states that every transaction will affect two accounts. If the first account is
debited then the second one will be credited or vice versa. It means that every value that is placed on the debit side of a
first account must be placed on the opposite credit side of a second account.
To ensure that a proper matching credit entry for every debit entry is being observed a Trial Balance is prepared. A trial
Balance is said to be a statement of arithmetic proof to ensure that proper double entry is being done. This statement is
made of a list of account balances arranged according to whether they are debit balances or credit balances.
Steps to Trial Balance Entry
The accounts should first be entered.
The accounts should secondly be balanced off.
The accounts balances should be entered in the Trial Balance on the same side as the balance b/d in the
accounts.
Total both debit and credit columns.
If the totals of both columns are not equal then it means that there may be one or more accounting errors. If both column
totals are in agreement, then it is assumed that proper double entry was observed.
The Uses and limitations of the Trial Balance
The Trial Balance assists in detecting accounting errors
It provides closing balance figures for accounts to enter for Final Accounts
It provides a summary of relevant accounts to assist management in making decisions.
The trial Balance will only detect some types of accounting errors. There are roughly seven errors which will not be
revealed by the trial balance. These errors will be looked at separately a little later.
Quiz
Question
Garvey had the following transactions for the month of January 2007.
2007 $
January 1 Started business with cash 50,000.
January 1 Paid cash for rent 500
January 2 Paid cash for fixtures. 5,000
January 3 Purchased on credit goods from E. John. 475
January 5 Cash Purchases 1599
January 13 Cash sales 300
January 18 Sold goods on credit to A. Goodman 742
January 27 Received cash from A. Goodman 500
January 31 Stock of goods sold for cash 520
Required:
a) Record and balance transactions in the relevant accounts including a cash account in the ledger of A. Garvey.
b) Extract a Trial Balance.
Solution
Financial Statements
Financial Statements are summary accounting reports prepared at stated time periods to inform the owner, creditors,
and other interested parties as to performance of the business. Financial Statements uses summarized data to prepare
the business’s financial reports.
Financial statements have generally agreed-upon formats. There are three main financial statements:
Trading and Profit and Loss Account
Balance Sheet
Statement of Cash Flows
Each financial statement provides a different perspective Combined the financial statements provide a general
overview of the company, the impact of its activities, its financial strength, and an overview of its cash flow.
Evaluating allows directors to formulate effective strategic policies, and implement factors that will increase
efficiency.
The Trading and Profit and Loss Account
One of the main aims of operating a business is to make profit. Profit is calculated in a Trading and Profit and Loss
Account. This is divided in a Trading Account which calculates the Gross Profit for the period, and a Profit and Loss
Account which calculates Net profit for the period.
The Trading Account ─ calculates the profit made strictly from trading activities. Trading involves
buying and selling. In the trading account the cost of goods sold is subtracted from Net Sales for the
period to calculate Gross Profit.
Cost of Goods Sold ─ the value of the goods sold at cost.
Net Sales ─ the actual sales made after all adjustments have been made for goods returned.
Gross Profit ─ this is the excess of Net Sales over Cost of Goods Sold.
Gross Loss ─ this is the excess of Cost of goods sold over Net Sales.
At the end of a financial period, all expense and revenue accounts are closed to a summarizing
account usually called a Profit and Loss Account. This is the financial statement that summarizes
revenues and expenses for a specific period of time, usually a month or a year.
The Profit and Loss Account reflects a Period of Time – Month, Quarter, Year. It shows financial the
activity of a business during that period and indicates any profit or loss earned.
Revenue ─ is the value of goods and services which have been delivered to customers.
Expenses ─ costs incurred in earning these revenues.
Net Profit ─ is the excess of Revenue over Expenses, on the Profit and Loss Account.
Net Loss ─ is the excess of Expenses over Revenue, on the Income Statement.
