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BookkeepingInstruction Pack 1 Lessons 1-6

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Bookkeeping

Instruction Pack 1

Lesson 1: Getting Started: Course Introduction and Overview

Lesson 2: Bookkeeping ExplainedLesson 3: Bookkeeping EquationsLesson 4: The Accounting CycleLesson 5: The Journal and Entry SystemsLesson 6: The Ledger

No part of this document may be reproduced or transmitted in any form or by any means, electronic or mechanical, for any purpose, without the express written permission of U.S. Career Institute.

Copyright © 2014, Weston Distance Learning, Inc. All Rights Reserved. 0201202LB01B-64

AcknowledgmentsAuthorsRobert James

Editorial StaffKimberly FieldsChristine DunlapElizabeth MunsonBrian KaufmanCarolina TownsendKaryn Madison

Design/LayoutConnie HunsaderSandy PetersenJessica Babb-Raymundo

U.S. Career InstituteFort Collins, CO 80525

www.uscareerinstitute.edu

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Table of Contents

Lesson 1: Getting Started: Course Introduction and OverviewStep 1: Learning Objectives for Lesson 1...................................................................................................................... 1Step 2: Lesson Preview.................................................................................................................................................... 1Step 3: Where You Can Work ........................................................................................................................................ 2Step 4: The Importance of Bookkeeping ...................................................................................................................... 2Step 5: A Career in Bookkeeping .................................................................................................................................. 3Step 6: U.S. Career Institute’s Bookkeeping Course ...........................................................................................................5Step 7: Practice Exercise 1-1 ........................................................................................................................................... 6Step 8: Review Practice Exercise 1-1 ............................................................................................................................. 6Step 9: Lesson Summary ................................................................................................................................................. 6Step 10: Quiz 1 ................................................................................................................................................................. 6

Lesson 2: Bookkeeping ExplainedStep 1: Learning Objectives for Lesson 2...................................................................................................................... 1Step 2: Lesson Preview .................................................................................................................................................... 1Step 3: Terms You Will Need to Know ......................................................................................................................... 2Step 4: Record of Transaction ........................................................................................................................................ 2

The Journal—Debits and Credits ................................................................................................................... 3Two Financial Statements ................................................................................................................................ 4

Step 5: Practice Exercise 2-1 ........................................................................................................................................... 7Step 6: Review Practice Exercise 2-1 ............................................................................................................................. 7Step 7: Define Some Common Terms .......................................................................................................................... 8

Classifying Assets ............................................................................................................................................. 8Classifying Liabilities ....................................................................................................................................... 9

Step 8: Practice Exercise 2-2 ......................................................................................................................................... 10Step 9: Review Practice Exercise 2-2 ........................................................................................................................... 10Step 10: Lesson Summary ............................................................................................................................................. 10Step 11: Quiz 2 ............................................................................................................................................................... 11

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Lesson 3: Bookkeeping EquationsStep 1: Learning Objectives for Lesson 3...................................................................................................................... 1Step 2: Lesson Preview .................................................................................................................................................... 1Step 3: Terms You Will Need to Know ......................................................................................................................... 1Step 4: Accounting Equation.......................................................................................................................................... 2Step 5: Balance Sheets ..................................................................................................................................................... 4Step 6: Practice Exercise 3-1 ........................................................................................................................................... 5

About Forms for Practice Exercises ............................................................................................................... 6Step 7: Review Practice Exercise 3-1 ............................................................................................................................. 6Step 8: Net Income Equation ......................................................................................................................................... 6Step 9: Practice Exercise 3-2 ........................................................................................................................................... 7Step 10: Review Practice Exercise 3-2 ........................................................................................................................... 7Step 11: Income Statement ............................................................................................................................................. 8Step 12: Practice Exercise 3-3 ........................................................................................................................................ 9Step 13: Review Practice Exercise 3-3 ........................................................................................................................... 9Step 14: Lesson Summary ............................................................................................................................................... 9Step 15: Quiz 3 ............................................................................................................................................................... 10

Lesson 4: The Accounting CycleStep 1: Learning Objectives for Lesson 4...................................................................................................................... 1Step 2: Lesson Preview .................................................................................................................................................... 1Step 3: Terms You Will Need to Know ......................................................................................................................... 1Step 4: Eight Parts of the Accounting Cycle ................................................................................................................. 2

The Transaction ................................................................................................................................................ 4The Journal ........................................................................................................................................................ 4

Step 5: Practice Exercise 4-1 ........................................................................................................................................... 5Step 6: Review Practice Exercise 4-1 ............................................................................................................................. 5Step 7: The Double-entry System .................................................................................................................................. 6Step 8: Practice Exercise 4-2 ......................................................................................................................................... 10Step 9: Review Practice Exercise 4-2 ........................................................................................................................... 11Step 10: The Ledger ....................................................................................................................................................... 11

Posting and the Ledger .................................................................................................................................. 12Step 11: Practice Exercise 4-3 ...................................................................................................................................... 13Step 12: Review Practice Exercise 4-3 ......................................................................................................................... 14Step 13: Trial Balance .................................................................................................................................................... 14

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Step 14: Practice Exercise 4-4 ...................................................................................................................................... 15Step 15: Review Practice Exercise 4-4 ......................................................................................................................... 16Step 16: Final Half of the Accounting Cycle .............................................................................................................. 16

The Worksheet ................................................................................................................................................ 16Financial Statements ...................................................................................................................................... 17Adjustments..................................................................................................................................................... 17Closing the Books ........................................................................................................................................... 17

Step 17: Practice Exercise 4-5 ...................................................................................................................................... 18Step 18: Review Practice Exercise 4-5 ......................................................................................................................... 19Step 19: Lesson Summary ............................................................................................................................................. 19Step 20: Quiz 4 ............................................................................................................................................................... 19

Lesson 5: The Journal and Entry SystemsStep 1: Learning Objectives for Lesson 5...................................................................................................................... 1Step 2: Lesson Preview .................................................................................................................................................... 1Step 3: Terms You Need to Know .................................................................................................................................. 1Step 4: Book of Original Entry ...................................................................................................................................... 2

Constructing the Journal ................................................................................................................................. 2Debits and Credits ............................................................................................................................................ 3

Step 5: Practice Exercise 5-1 ........................................................................................................................................... 5Step 6: Review Practice Exercise 5-1 ............................................................................................................................. 5Step 7: Normal Account Balances ................................................................................................................................. 6Step 8: Practice Exercise 5-2 ........................................................................................................................................... 6Step 9: Review Practice Exercise 5-2 ............................................................................................................................. 6Step 10: Double-entry System of Accounting .............................................................................................................. 7Step 11: Practice Exercise 5-3 ...................................................................................................................................... 14Step 12: Review Practice Exercise 5-3 ......................................................................................................................... 15Step 13: Journalizing ..................................................................................................................................................... 15Step 14: Practice Exercise 5-4 ...................................................................................................................................... 18Step 15: Review Practice Exercise 5-4 ......................................................................................................................... 19Step 16: Lesson Summary ............................................................................................................................................. 19Step 17: Quiz 5 ............................................................................................................................................................... 19

Lesson 6: The LedgerStep 1: Learning Objectives for Lesson 6...................................................................................................................... 1Step 2: Lesson Preview .................................................................................................................................................... 1Step 3: Terms You Will Need to Know ......................................................................................................................... 1

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Step 4: Comparing the Ledger and Journal .................................................................................................................. 2The Ledger Format ........................................................................................................................................... 2Constructing the Ledger .................................................................................................................................. 2

Step 5: Practice Exercise 6-1 ........................................................................................................................................... 4Step 6: Review Practice Exercise 6-1 ............................................................................................................................. 4Step 7: Account Numbers and Titles ............................................................................................................................. 5

Numbers ............................................................................................................................................................ 5Titles ................................................................................................................................................................... 6

Step 8: Practice Exercise 6-2 ........................................................................................................................................... 6Step 9: Review Practice Exercise 6-2 ............................................................................................................................. 6Step 10: Practice Exercise 6-3 ........................................................................................................................................ 7Step 11: Review Practice Exercise 6-3 ........................................................................................................................... 7Step 12: Posting and Referencing .................................................................................................................................. 8Step 13: Practice Exercise 6-4 ...................................................................................................................................... 11Step 14: Review Practice Exercise 6-4 ......................................................................................................................... 13Step 15: Trial Balance .................................................................................................................................................... 13Step 16: Practice Exercise 6-5 ...................................................................................................................................... 15Step 17: Review Practice Exercise 6-5 ......................................................................................................................... 15Step 18: Practice Exercise 6-6 ...................................................................................................................................... 15Step 19: Review Practice Exercise 6-6 ......................................................................................................................... 16Step 20: Finding and Correcting Errors ..................................................................................................................... 16Step 21: Practice Exercise 6-7 ...................................................................................................................................... 17Step 22: Review Practice Exercise 6-7 ......................................................................................................................... 17Step 23: Lesson Summary ............................................................................................................................................. 17Step 24: Quiz 6 ............................................................................................................................................................... 17

Answer KeyLesson 1 ............................................................................................................................................................................ 1

Practice Exercise 1-1 ........................................................................................................................................ 1Lesson 2 ............................................................................................................................................................................ 1

Practice Exercise 2-1 ........................................................................................................................................ 1Practice Exercise 2-2 ........................................................................................................................................ 2

Lesson 3 ............................................................................................................................................................................ 3Practice Exercise 3-1 ........................................................................................................................................ 3Practice Exercise 3-2 ........................................................................................................................................ 4Practice Exercise 3-3 ........................................................................................................................................ 4

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Lesson 4 ............................................................................................................................................................................ 5Practice Exercise 4-1 ........................................................................................................................................ 5Practice Exercise 4-2 ........................................................................................................................................ 5Practice Exercise 4-3 ........................................................................................................................................ 6Practice Exercise 4-4 ........................................................................................................................................ 6Practice Exercise 4-5 ........................................................................................................................................ 6

Lesson 5 ............................................................................................................................................................................ 7Practice Exercise 5-1 ........................................................................................................................................ 7Practice Exercise 5-2 ........................................................................................................................................ 8Practice Exercise 5-3 ........................................................................................................................................ 8Practice Exercise 5-4 ........................................................................................................................................ 9

Lesson 6 .......................................................................................................................................................................... 11Practice Exercise 6-1 ...................................................................................................................................... 11Practice Exercise 6-2 ...................................................................................................................................... 11Practice Exercise 6-3 ...................................................................................................................................... 11Practice Exercise 6-4 ...................................................................................................................................... 12Practice Exercise 6-4 Continued .................................................................................................................. 13Practice Exercise 6-4 Continued .................................................................................................................. 14Practice Exercise 6-4 Continued .................................................................................................................. 15Practice Exercise 6-4 Continued .................................................................................................................. 16Practice Exercise 6-4 Continued .................................................................................................................. 17Practice Exercise 6-4 Continued .................................................................................................................. 18Practice Exercise 6-4 Continued .................................................................................................................. 19Practice Exercise 6-5 ...................................................................................................................................... 20Practice Exercise 6-5 Continued .................................................................................................................. 21Practice Exercise 6-5 Continued .................................................................................................................. 22Practice Exercise 6-5 Continued .................................................................................................................. 23Practice Exercise 6-5 Continued .................................................................................................................. 24Practice Exercise 6-5 Continued .................................................................................................................. 25Practice Exercise 6-5 Continued .................................................................................................................. 26Practice Exercise 6-5 Continued .................................................................................................................. 27Practice Exercise 6-6 ...................................................................................................................................... 28Practice Exercise 6-7 ...................................................................................................................................... 28

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Course ObjectivesThe Bookkeeping Course prepares a student for an entry-level position in an accounting department or firm while enabling the student to effectively manage individual finances. Students learn the basic elements and concepts of maintaining journals and ledgers, as well as how to maintain and process the steps in the accounting cycle, including basic elements of accounts payable, accounts receivable and financial report preparation. Additionally, students learn about computerized bookkeeping and computerized personal finance.

This course trains students to:

● Manage individual finances.

● Perform competent, entry-level bookkeeping skills.

● Set up and manage a home-based bookkeeping.

Lesson 1 Getting Started:

Course Introduction and Overview

Welcome to U.S. Career Institute’s Bookkeeping Course! Congratulations on your decision to become a professional bookkeeper. As a professional bookkeeper, you’ll possess valuable skills that are very much in demand. This course will show you the ins and outs of bookkeeping and will give you the skills you need to work as a professional bookkeeper in a business or—if you choose—to establish and market your own bookkeeping business.

We make your course work easy to follow. Work through each lesson at your own pace by following the step-by-step instructions. And remember, if you have any questions, be sure to call our student support line. Our students are the most important asset we have.

Step 1: Learning Objectives for Lesson 1After completing the instruction in this lesson, you will be trained to do the following:

● Describe situations where bookkeeping skills are needed.

● Explain how U.S. Career Institute’s Bookeeping Course works and what you can expect in every lesson. (For example, the format of each lesson will be the same, step-by-step instruction.)

● Determine the skills you will need to begin working as a professional bookkeeper.

● Identify employment and business opportunities for a professional bookkeeper.

Step 2: Lesson PreviewWhat is bookkeeping? It is a skill needed by many—small business persons and individuals at home all need to know how much money they have. You will begin your journey toward the mastery of these skills here in Lesson 1. It is a lesson designed to show you the big picture of bookkeeping—from an introduction to people who need bookkeeping to an overview of the skills you will need to be a successful professional bookkeeper.

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Step 3: Where You Can WorkYour career as a professional bookkeeper means that you can work for a wide variety of businesses. Your local ice cream store, doggie daycare and hair salons all have employees. That means they need you to handle their payroll.

Who pays taxes? Everyone! You’ve heard the saying that the only certain things in life are death and taxes? And everyone hates doing their own taxes, so they’ll love it when you show up at their door with the right skills.

Do you want to work in a business? If you are someone who likes variety, you could become a bookkeeping professional who gets different jobs through temporary agencies. Or you could work in the corporate offices of a chain of sub sandwich shops.

What about keeping sales and purchase records for a nail salon, small restaurant or coffee shop? The gas station, bookstore or kitchenware store?

Maybe you want to stay home, see the kids off to school, settle in for a second cup of coffee, and tackle the accounts of different clients.

If you don’t want to work for a business, advertise yourself to individuals. Maybe you have a desire to help a certain group of people? You can advertise your services at a discount rate for low-income, senior citizens who need help doing their income taxes.

It’s up to you! This course will provide you with the basic skills to begin your career in a wide choice of settings. Congratulations on making a great choice to improve your future!

Step 4: The Importance of BookkeepingDo you like to eat out in nice restaurants? Ever wonder why some restaurants succeed and others fail? You may have watched a favorite restaurant go out of business and wondered how great food and service didn’t result in long-term success. As a future bookkeeping professional, you might be pleased to learn that the difference-maker is often the bookkeeper!

Picture the owner of a small restaurant. This owner knows food. She knows the most scrumptious ways to prepare beef and potatoes. She knows the best supplier with the freshest ingredients. She also knows she is not an expert in finances. Because she is a smart businessperson, she brings in someone who is a bookkeeping professional. She makes her money by being a great cook, and she pays out a little of that money to a professional bookkeeper, who keeps track of the finances for her. Because she doesn’t have to worry about calculations, she can concentrate on making her scrumptious beef dishes.

The restaurant owner’s bookkeeper performs many important tasks. She keeps track of the payroll records (how much each employee earned). She tabulates expenses (which keeps the beef supplier happy!). She records daily, monthly and yearly income. And she compiles and submits tax records so that the restaurant owner—and the Internal Revenue Service (IRS)—are satisfied.

And after all these records are put together, this bookkeeping professional presents the restaurant owner a year-end report that reveals the bottom line: what her business is worth. This enables the owner to plan for the next year.

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Now consider the restaurant across the street—a gourmet Italian place with wonderful pasta and cannoli. The cook is terrific. The atmosphere is grand. But the books are shambles! You see, this restaurant owner knows the best ways to cook linguine, but he “doesn’t know noodles” about keeping accurate records! Instead of paying a professional bookkeeper, the restaurant owner tried to save a few dollars by keeping his own records. Now, his suppliers are mad because they haven’t been paid. His employees are confused because their tax forms (you’ll learn about Form W-2 later) are inaccurate. Worse, the Internal Revenue Service is planning an audit of the restaurant, and the owner can’t produce accurate records of his accounts.

The first restaurant owner recognized the value of a good bookkeeper. The second restaurant owner made the mistake many people do. He tried to do a job he didn’t know enough about. If he had taken this course, he would have known about the importance of bookkeeping and the services available to him through a bookkeeping professional.

This course will not show you the most scrumptious ways to cook beef or make you an excellent Italian cook, but it will certainly teach you the necessary skills to keep the businessperson satisfied that his or her records are accurate.

Business people are not the only ones who need a good bookkeeper. Many individuals find it difficult to keep track of finances. Some have mortgages and even rental property they must keep track of. Others would gladly pay someone just to balance their checkbook or reconcile bank accounts for them. As a professional bookkeeper, you can offer your services to virtually anyone who handles money or other assets.

Step 5: A Career in BookkeepingSo what do professional bookkeepers do exactly? Bookkeepers keep track of “the books”—the financial records for a business. In short, they prepare and examine financial records. They take raw information like sales receipts and time cards and turn that information into data that organizations can use to make smart business decisions.

The duties of a bookkeeper include the following:

● Inspect account books and systems for efficiency and for proper accepted procedures.

● Organize and maintain financial records.

● Examine financial statements for accuracy and for compliance with the law.

● Prepare tax liability information and tax forms in a timely fashion.

Bookkeeping is often a full-time profession, with nearly a fifth of the work force working more than 40 hours per week. Bookkeeping is somewhat seasonal—the end of the business year requires a large number of additional forms and reports, which means that the bookkeeper has her hands full!

What kind of person makes a good bookkeeper? Probably the single most important attribute of a successful professional bookkeeper is attention to detail. You’ll soon discover that bookkeeping is built on accuracy. Imagine a builder who erects a five-story building. Now imagine that the bottom floor was poorly constructed. It doesn’t matter how well-built the next four floors are. If the bottom floor is structurally weak, the whole building is in danger.

Like the builder, a bookkeeper depends on accurate work to ensure that the reports that are created out of that work aren’t built on “shaky ground.” Bookkeepers are fanatics for detail and precision.

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Bookkeepers are good at analytical thinking. Are you logical? Can you analyze a problem and come to a reasonable decision? If so, then bookkeeping might be perfect for you!

Bookkeeping professionals are independent. Bookkeeping is a job that’s done without much supervision. The job requires developing one’s own methods and routines. If you like the responsibility of being self-directed, you may love bookkeeping!

And bookkeeping requires integrity. Businesses need honest, ethical evaluations of their situations and practices.

Another way of looking at a career in bookkeeping is to spend a day with a real-world bookkeeper. Judith is a bookkeeper for a Colorado oil drilling firm with offices in several other states. How does she spend her time?

“I start with e-mails,” she notes. With oil wells in Colorado, Montana, Wyoming and the Dakotas, Judith has to keep track of operations and employees hundreds of miles away. Luckily, computer technology allows her to keep in touch in several ways, including the phone, fax and computer.

Early in her daily routine, Judith addresses invoices that arrive in the mail. “Invoices have to be journalized,” she explains. (Journalizing is something you’ll learn about in Lesson 2.) Not every letter has an invoice—some contain checks! “I code the checks and log them in the ledger” (something else you’ll learn early in your course). “Then I run a report to see what bills need to be paid. I cut checks, have them signed by the operations manager and then head to the post office and the bank.”

Because oil drilling is a rough job, Judith’s company has a lot of employee turnover. New hires have to be processed. Terminated employees need to have their paperwork brought up to date and closed. The oil company sends employees from state to state, depending on which rig needs help the most. Each rig has its own paperwork. Payroll is a complicated job! Luckily, Judith is detail-oriented, and able to keep up with the job’s demands.

Sometime during the day, Judith prints off a general ledger account to see how the month is shaping up. She has a logical mind, and she understands what she’s looking at, so if there’s a mistake anywhere, she spots it. The combination of proper training, a little experience and an analytical mind all come into play as she scans for errors that might haunt her later if she doesn’t catch them right away!

The end of the month is approaching. The company’s accountant reviews that information and compiles it in monthly reports. Judith has to do the preparatory work to help her compile those reports. Doing a little bit of work every day helps keep her from suffering a monthly time-crunch!

Just as Judith is about to take a lunch break, the boss pokes his head in her office and asks for a certain report. He’s trying to evaluate the company’s gas credit policies, and wonders how many credit cards are in use and which employee has which card. If Judith had been casual in her approach to the day, this request might have thrown her off schedule. Luckily, Judith is self-directed, and allows extra time for management requests. In her business, she’s learned that those requests are the rule, rather than the exception!

When running the report, she realizes that some of the credit cards are unaccounted for. This is a security issue, and she’s quick to report the situation to her boss. Because bookkeepers handle the company’s money, they are very sensitive to issues that involve ethics or security.

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Judith’s afternoon is taken up with inventory concerns. The oil company has dozens of work vehicles, from fuel trucks to heavy equipment. Some are in use. Others are “in the shop” for maintenance and repairs. Keeping track of everything is a major endeavor. Luckily, Judith had a hand in selecting inventory management software, and she understands how to get the most out of the company’s tracking efforts. She sends an e-mail to the Montana supervisor, listing two trucks that are overdue for engine maintenance.

And so Judith finishes her day as it began—on the computer with her e-mails. A number of late hires have been reported. She notes that tomorrow will begin with new hire paperwork. And she’ll want to get her accounts receivable and accounts payable ledgers up-to-date. It seems that a bookkeeper’s work is never done. That’s just fine with Judith—a busy day is a challenging day! “I just love coming to work,” Judith explains. “It’s never dull, never the same and what I do makes a difference for everyone who works for my company.”

Can you see yourself in an office position, helping to determine the financial fate of a company? Perhaps you see yourself working from home, with a number of interesting clients. Either way, a career in bookkeeping may be your path to fulfilling success!

Step 6: U.S. Career Institute’s Bookkeeping CourseYou will be glad you decided to enroll in U.S. Career Institute’s Bookkeeping Course. We are the home study experts with more than 30 years of experience!

Some courses simply give you a book about the subject, but we walk you through each new lesson, one step at a time. This course is designed by both experienced educators and accounting experts so that you get the best of both worlds—a wealth of up-to-date bookkeeping knowledge presented in a fun, easy-to-understand format. If you have any questions, answers are just a phone call away. Use the student support line to reach our knowledgeable staff and get all the one-on-one help you need.

Numbers are the core of the bookkeeping profession. Because of that, we’ve included a math supplement with this course that will help you brush up on the skills you need.

As you move through the lessons in this Bookkeeping Course, you will find yourself becoming knowledgeable about every aspect of bookkeeping. You will be able to read and use the ledger and journal. The concepts of assets and capital will become second nature to you, as will checking accounts and the reconciliation process. You’ll understand the difference between debits and credits, and you’ll learn how to use these items. You’ll learn how to calculate payroll, handle tax issues, create balance sheets, and much more!

When you have completed this course, you will be ready to begin work as a professional bookkeeper, either in a company or organization, or by starting your own bookkeeping business from your home. If you decide to begin your own at-home business, this course will teach you how to get started, obtain clients and put you on the road to success.

Each lesson uses the same, step-by-step instruction so you don’t have to learn everything at once. Work at your own pace. Take the Practice Exercises to gauge your progress. Most importantly, dive in and have fun!

When most people think of numbers, they think of confusing scribbles on a blackboard. But professional bookkeepers see numbers differently. Numbers tell stories—stories of transactions, stories of businesses, stories of wealth. Some of the greatest success stories in history are written in numbers and pretty soon, not only will you be able to read those stories, you’re going to help write them!

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Once again, congratulations on taking this first step toward an exciting, new career. You are on your way to becoming a qualified professional bookkeeper.

Step 7: Practice Exercise 1-1Read the following statements. For each statement below, write True or False on scratch paper.

1. Professional bookkeepers are independent and must have integrity.

2. Businesses such as restaurants can benefit from having an accurate bookkeeper.

3. Tax records and payroll records are NOT kept by a professional bookkeeper.

4. Accurate records are essential to the success of a business.

5. Individuals rarely have any use for a professional bookkeeper.

Step 8: Review Practice Exercise 1-1Check your answers with the Answer Key at the back of this book. Correct any mistakes you may have made.

Step 9: Lesson SummaryThis lesson introduced you to bookkeeping—both the career and your course. You discovered the kinds of businesses that need bookkeeping, including nearly every business in the marketplace! You learned that you will have a choice between working for a company as a professional bookkeeper, or setting up your own home business to provide bookkeeping services to small businesses, from bookstores to gas stations. And you learned just how important bookkeeping is. Without the information and regulatory assistance provided by bookkeepers, organizations would not be able to make good, solid business decisions.

You explored the characteristics that successful bookkeeping professionals have, and then followed Judith—a real-world bookkeeper for an oil company—through her busy workday. Along the way, you had a chance to see those success characteristics in action. As a professional bookkeeper, you will face your own fast-paced challenges.

In the next lesson, we’ll dive right into bookkeeping. You’ll be introduced to the journal and two of the most important financial reports. But first, test your understanding of the material so far by taking your first graded Quiz.

Step 10: Quiz 1Once you’ve mastered the course content, locate this Quiz in your Assignment Pack. Read and follow the Quiz instructions carefully.

Lesson 2Bookkeeping Explained


● Explain what the record of transaction is and how it relates to bookkeeping.

● Distinguish between assets and liabilities, and explain how each one fits into the record of transaction.

● Define many of the most common terms used in bookkeeping.

Step 2: Lesson PreviewOne hundred years ago, in a small general store, bookkeeping simply meant writing down what was sold each day and counting the cash in the drawer. Today, a business’ finances are far more complex, requiring an expert to handle them—a professional bookkeeper. Taken as a whole, managing a business’ books may seem daunting at first, but by focusing on small, easy-to-master steps, you’ll soon become an expert. The secret to handling complicated financial matters as a professional bookkeeper is the consistent, careful, and diligent use of basic accounting principles.

In this lesson, you will begin to understand these principles—the foundation of your successful career in bookkeeping. A word of caution: You will be introduced to many new phrases and terms in this lesson. However, you do not have to have them all perfectly memorized or be able to completely understand how they all fit together. This will come with practice in later lessons. For now, focus on the big picture!

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Step 3: Terms You Will Need to KnowHere are the bookkeeping terms you will learn about in this lesson:

● accounts

● accounts payable

● accounts receivable

● assets

● balance sheet

● buildings

● capital

● cash

● credit (Cr)

● current assets

● current liabilities

● debit (Dr)

● double-entry accounting

● equipment

● equity

● expenses

● financial reports

● fixed assets

● general ledger

● income statement

● journal

● land

● liquidity

● long-term liabilities

● net income

● net loss

● net worth

● posting

● prepaid expenses

● revenue

● supplies

● transaction

Step 4: Record of TransactionAny business dealing that involves money is called a transaction. As a professional bookkeeper, you will be responsible for keeping track of the transactions your clients conduct. You will keep the record of transaction. There are many examples of transactions in business.

● When a restaurant owner pays for supplies, that is a transaction.

● When an employee collects a paycheck, that is a transaction.

● Consumers make transactions by purchasing goods and services.

Transactions are recorded in a journal. The journal is the starting point for a bookkeeping system.

Suppose that you have a pile of loose coins—some pennies, nickels, dimes and quarters. You might sort those coins into a tray, putting pennies with pennies and nickels with nickels. When you were finished, you might write down the amount of each denomination. That written report would tell you how much money you had altogether.

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The journal is like that pile of unsorted coins; only the journal has unsorted transactions of all types. Like sorting coins into a tray, the bookkeeper transfers information from the journal to accounts in the general ledger. This sorting and recording process is called posting. Then, the bookkeeper uses the accounts to compile financial reports that tell business owners how much money they have altogether.

JOURNAL ACCOUNTS REPORTS

Let’s take a closer look at the first step in bookkeeping: the journal.

The Journal—Debits and CreditsAlthough we will cover the journal in more detail in a future lesson, there are some components to the journal you need to know now. First, there are Debits and Credits. Actually, debits and credits are essential to nearly all parts of the bookkeeping process, but the first time you will use these two items is in the journal. Every bookkeeping entry will be either a debit or credit. A debit is always entered in the left-hand column and a credit is in the right-hand column (Figure 2-1).

Company NameGeneral Journal

1 2Date Description P/R Dr Cr

12345

Figure 2-1: General Journal

At the top of the journal page, you’ll find the name of the company. You’ll also find a column for the Date and a space for the Description of each transaction you record. For example, suppose the restaurant you work for bought a supply of steaks from a purveyor. You would list the date of the invoice and list the specific accounts that were affected by the transaction in the description space.

The column marked 1 is the left-hand column, reserved for debits. (Dr is the accepted abbreviation for debits.) The column marked 2 is the right-hand column, reserved for credits. (Cr is the accepted abbreviation for credits.)

You might wonder, what’s the difference between debits and credits? Why split transactions into debits and credits anyway? All modern accounting is called double-entry accounting. An easy way to understand double-entry is to imagine that you own a lemonade stand. Suppose you sell a glass of lemonade to a passerby. Two things happen from that single transaction. First, your total sales go up. And, your total cash-on-hand goes up. Two accounts (Revenue and Cash) are affected by one transaction. The tricky part is this—one entry must be a credit, and one must be a debit to keep your accounts in balance.

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Confused? Don’t worry. You’ll learn all you need to know about credits and debits in future lessons. For now, understand that each transaction is listed in the journal twice—once as a debit and once as a credit. From there, the information will be transferred into accounts in the general ledger. Finally, the information will be processed into financial reports. Those financial reports will provide a summary of the financial condition of the business.

Two Financial StatementsAfter you post to the accounts the information in your journal, you use this information to prepare various financial statements or reports. The first two kinds we will talk about are the balance sheet and the income statement.

The balance sheet is a summary of the business’ assets, liabilities and equity. Assets are what the business owns, such as vehicles and inventory. Liabilities include what the business owes, such as loans and accounts payable. Equity consists of what would remain of the assets if all the liabilities were paid.

Look at the balance sheet example of Jerry’s TV Repair (figure 2-2). Jerry Silver owns his own television repair shop. His assets include a delivery van, his repair tools, five televisions he has for sale (inventory), the spare parts in his shop and the money in the cash register and the bank. He also has an accounts receivable (people who owe him money) set-up that is also an asset. The breakdown of assets is as follows:

Cash $ 1,000Accounts Rec. 250Van 12,500Tools 1,500Televisions 1,500Parts 800Total: $17,550

Now, the TV repair shop also has some liabilities. Jerry buys parts from a local supplier. The supplier allows Jerry to buy the parts he needs and then bills Jerry later for his purchases. This arrangement is known as accounts payable. The money that is owed to the supplier is a liability. The company also owes the bank for a loan on the van. Basically, the company’s liabilities break down like this:

Notes Payable: 10,400Accounts Payable: 1,400Total: $11,800

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Jerry’s Computer Repair Balance Sheet July 31, 20XX

ASSETS LIABILITIES

CURRENT ASSETS SHORT-TERM LIABILITIES Cash $1,000 Accounts Payable $1,400 Accounts Rec. 250 Total Short-Term Liabilities $1,400 Inventory 1,500 Parts 800 LONG-TERM LIABILITIES Total Current Assets $3,550 Notes Payable $10,400 Total Long-Term Liabilities $10,400FIXED ASSETS Van $12,500 Tools 1,500 TOTAL LIABILITIES $11,800 Total Fixed Assets $14,000 EQUITY Owner’s Equity $5,750 Total Capital $5,750

TOTAL ASSETS $17,550 TOTAL LIABILITIES AND CAPITAL $17,550

Figure 2-2: Balance Sheet

If we look at these numbers, we can determine the equity in Jerry’s TV Repair. The formula for equity is Assets – Liabilities = Equity. Equity is sometimes called capital or net worth. For now, we will refer to it as equity. So, let’s figure the equity Jerry has in his business. Take his assets ($17,550) and subtract his liabilities ($11,800). What is the answer? Jerry has $5,750 worth of equity in his business. Or another way of saying this is Jerry’s TV Repair has a net worth of $5,750.

Overall, a business’ assets include such things as:

● buildings, land, equipment, tools, cash (both on hand and in the bank), accounts receivable, inventories, materials and spare parts.

Liabilities include:

● accounts payable (money owed to suppliers), payroll due (what the company owes its employees), loans and mortgage payments.

You will learn how to prepare a balance sheet in a future lesson. You will also learn how to create an operating statement. The income statement (also called a profit-and-loss statement) shows expenses subtracted from income for a specific length of time (a month or year, for example). This statement shows whether or not a business is turning a profit.

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You just learned that the balance sheet is a summary of assets, liabilities and capital. An income statement is a summary of a company’s revenues, expenses and net income. Revenue is the process of collecting monies in exchange for goods and services. Expenses include those items that are used or needed to produce revenue. Net income consists of what’s left over after the expenses have been subtracted from the revenue. If for some reason expenses are greater than revenue, then the company has a net loss—that is, the company lost money.

Let’s look at an example of an operating statement, so you can see how these terms and concepts fit together. Jerry’s Computer Repair is a small, one-man operation. Jerry fixes computers (a service). He also sells refurbished computers (goods). Because Jerry sells goods as well as services, he has two revenue accounts. They are as follows:

Sales Revenue: $2,000Service Revenue: 1,000Total: $3,000

Jerry also has several expense accounts. They are as follows:Advertising Expense: $100Fuel Expense: 200Salary Expense: 500Utilities Expense: 50Total: $850

In simple terms, Jerry took in more money than he spent. That is, his revenues were greater than his expenses. So, Jerry made a profit—his net income was $2,150.

Jerry’s Computer Repair

Income Statement

July 31, 20XX

REVENUESSales Revenue $2,000Service Revenue 1,000 Total Revenues $3,000

EXPENSESAdvertising Expense $100Fuel Expense 200Salary Expense 500Utilities Expense 50 Total Expenses $850

NET INCOME $2,150

Figure 2-3: Income Statement

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Step 5: Practice Exercise 2-1Select the best single answer for the following items. Write your answers on scratch paper.

1. As a professional bookkeeper, you keep track of your client’s transactions. The first place these are recorded are in the _____.a. profit-and-loss statementb. journalc. balance sheetd. income statement

2. Debits are always entered in the _____ column while credits are entered in the _____ column.a. left-hand/right-handb. right-hand/left-handc. bottom/topd. top/bottom

3. “Posting” refers to _____.a. figuring a company’s net worthb. balancing debits and creditsc. transferring journal information to the correct accountsd. creating the operating statement

For the following questions, identify the following items as either assets or liabilities. Write your answers on scratch paper.

Joan’s Trucking has the following items as assets and liabilities. Classify them accordingly. Write assets for question 4 and liabilities for question 5.

15 delivery trucks Mortgage for warehouse Warehouse

Wages owned to drivers 35 spare tires Forklift

$20,000 in the bank Two computers Loan balance on 15 trucks

$50 owed to suppliers $200 owed to credit card company


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Step 7: Define Some Common TermsNow let’s talk a little more about assets and liabilities. You’ve already learned what those two terms mean, but here you’ll learn the different classifications of assets and liabilities.

Classifying AssetsAssets, as you learned earlier in this lesson, are what the business owns. They can be classified into two categories: Current Assets and Fixed Assets.

Current AssetsCurrent assets are assets that constantly change. On the balance sheet, list them according to how fast they can be converted to cash. This conversion is called liquidity. So, logically, the first current asset a company has is its cash. From there, it descends according to an asset’s liquidity. Overall, current assets are items that will either become cash soon (they are intended for sale), or they will be used by the business within a year. Here is an example list of current assets.

● Cash: This is the company’s total of dollars, coins, money orders, checks, letters of credit and bank drafts that it has on hand or in accessible bank accounts. Examples of accessible bank accounts (also called demand accounts) include checking and a normal savings account. Certificates of deposit and mutual funds typically are NOT demand accounts.

● Accounts Receivable: The amount of money customers owe the company for goods or services purchased but not yet paid for.

● Inventory: The dollar value of goods a company has in stock (for sale).

● Supplies: Materials used in the daily conducting of business. These include office supplies and store supplies.

● Prepaid Expenses: Items the company has purchased and paid for, but not received yet (insurance, for example).

Now that you have an idea what current assets are, let’s look at the second type of assets: Fixed Assets.

Fixed AssetsFixed assets are what the business uses to produce its product or service. This includes everything from a computer system for producing invoices to a truck used to transport the finished product. Basically, if an item puts the product together, transports the product or is used by people producing the product, it is considered a fixed asset.

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Fixed Assets include the following items:

● Land: The value of land owned by the company (figured at actual purchase price).

● Buildings: The purchase price or construction costs of all structures owned by the company. This includes permit fees, engineering fees and surveys.

● Equipment: Machines and vehicles along with interior structures, such as shelving and office furniture.

Like assets, liabilities are also classified into different categories.

Classifying LiabilitiesLiabilities are put into one of two categories: current and long-term. Current liabilities must be paid within the current year. Long-term liabilities are, logically, those liabilities to be paid after the current year.

Payroll, the company’s accounts payable (to creditors for supplies, for example) and short-term loans are examples of current liabilities.

Long-term liabilities include mortgage payments and long-term loans.

BookkeepingImagine a jar, full to the top with loose change. How much money is in there? To guess the total, take a random sample of coins to see how many are pennies, nickels, dimes, quarters or halves. Then calculate the total volume of coinage by multiplying the jar’s circumference by the height of the jar. (Of course, some of the space is taken up by air. You can fill the jar with water, dump the water out and measure it separately and then subtract the water volume from the total volume to get pure “coin volume.”) Worse, each coin denomination is a different size. You’d have to set up a ratio that accounts for the coin denomination’s size versus its relative presence in the jar. Armed with that information, you could multiply the estimate of the total number of each coin type by that coin’s value and then total the values.

Or you could count the money. Bookkeepers count.

Bookkeeping professionals make sense of financial information for clients. They do this by recording and organizing transactions. They examine assets and liabilities. Armed with this complex information, they deliver their findings in useful, easy-to-understand reports. And grateful clients are spared having to “guess” how their business is doing!

Before we wrap up this lesson, let’s pause for a Practice Exercise.

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Step 8: Practice Exercise 2-2Match the account with the proper classification. Write your answers on scratch paper.

1. Cash a. Current assetb. Fixed assetc. Current liabilityd. Long-term liability

2. Accounts Payable

3. Equipment

4. Inventory

5. Mortgage Payable (30 years)

6. Accounts Receivable

7. Land

8. Payroll

9. Loan Payable (less than 1 year)

10. Prepaid Insurance

11. Building


Step 10: Lesson SummaryThis lesson introduced you to the transaction—the starting point for all bookkeeping activity. You learned that bookkeeping is a process of recording and interpreting all of the transactions that a company makes. Recording transactions happens in the journal. You were introduced to debits and credits—a way of ordering transaction information. Interpreting transactions happens in financial reports. You were introduced to two of them—the income statement and the balance sheet. The income statement tells a business what their net income was for a given period of time. The balance sheet is a financial “snapshot” of a business, including assets (what the business owns), liabilities (what the company owes) and owner’s equity (the actual value of the business.)

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Then, you took a deeper look at assets and liabilities. You differentiated current and long-term liabilities. You learned about different kinds of assets, including fixed assets and current assets. And, you had a chance to practice making the proper asset and liability classifications.

Along the way, you were introduced to a number of terms that you will find useful in your journey to a career in accounting.

In the next lesson, you’re going to learn about the accounting equation, the foundation for everything you’ll do as an accountant. But first, take the graded Quiz to see how well you understand the material so far.


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Lesson 3Bookkeeping Equations


● Define and use the accounting equation.

● Fill out balance sheets.

● Define and use the net income equation.

● Prepare income statements.

Step 2: Lesson PreviewIn this lesson, you’ll learn all about the accounting equation. This single equation is the foundation of modern bookkeping—the starting point for everything you’re going to learn in this course. Sound intimidating? Don’t worry—the equation is simple and easy to remember.

The accounting equation has to do with the relationship between assets, liabilities and capital. From this relationship, double-entry accounting was created. (You received a brief introduction to double-entry accounting in the last lesson.) And, certain financial statements are based directly on the same accounting equation.

What’s the best way to learn? By doing! Roll up your sleeves because you’re about to crunch your first set of numbers. You’re going to use the accounting equation to prepare simple balance sheets and operating statements. This lesson marks the beginning of your career as a professional bookkeeper!

Step 3: Terms You Will Need to KnowHere are the accounting services terms you will learn about in this lesson:

● accounting equation

● initial capital

● net income equation

● sales revenue

● service revenue

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Step 4: Accounting EquationThe accounting equation is the basis of all bookkeeping activity. This equation shows the relationship between assets, liability and equity. Assets, you remember from Lesson 2, are what a business owns. (For example, restaurants own ovens, grills, refrigerators and food.) Liabilities consist of what the business owes. (For example, our restaurant owes for utilities and the labor it uses, as well as loans on the building and equipment.) And equity is the ownership in any asset after all debts associated with the asset are paid off. (For example, suppose the restaurant has a delivery truck worth $15,000. If you still owe $10,000, then your equity in the truck is $5,000.)

These principles establish the accounting equation:

Assets = Liabilities + Equity

Or

A = L + E

In the example of the delivery truck, the equation reads like this:

Truck Value ($15,000) = Amount Still Owed ($10,000) + Equity ($5,000)

Like any equation, the accounting equation can be switched around to solve for other variables. For example, in Lesson 2 you learned that equity equals asset value minus liabilities:

Equity = Assets – Liabilities

Or

E = A – L

This is just a restatement of the accounting equation. In the case of the delivery truck, suppose you want to know how much equity you have. The equation says you have $5,000 equity in the truck because the truck is worth $15,000, but you still owe $10,000.

Here’s another form of the same equation:

Liabilities = Assets – Equity

Or

L = A – E

Suppose you know the truck is worth $15,000. Your bookkeeper says you have $5,000 equity in the truck. How much do you still owe? According to the equation, you still owe another $10,000 (because assets minus equity is $15,000 - $5,000).

As you can see, these are all forms of the same basic equation. If you want to learn one form right away, memorize A = L + E. Knowing this form of the accounting equation will help you understand double-entry accounting, especially debits and credits.

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One note: You will sometimes see equity referred to as capital. For clarity, we’re going to use the term equity because capital has other meanings. Capital can mean equity. Capital can mean assets. Capital can be a generalized term meaning any financial resources available for doing business. And capital can also include any money and assets the business owner put into starting up the business. This beginning investment is called initial capital.

Now let’s see how the accounting equation works for a more complex situation. Susan owns Big Rig Trucking Company. Susan’s company has assets that amount to $550,400. Included in her assets are the following items:

Cash: $ 22,400Accounts Receivable: 15,000Trucks: 475,000Building: 38,000 Total Assets $550,400

The company has the following liabilities, totaling $436,000:Accounts Payable: $ 21,000Loans on Trucks: 395,000Loan on Building: 20,000 Total Liabilities $436,000

So how much equity does Susan have? We know that Equity = Assets – Liabilities. Let’s plug numbers into that formula:

Total Assets = $550,400Total Liabilities = $436,000

A – L = $550,400 -436,000Equity = $114,400

Now let’s look at the A = L + E form of the equation. Susan has a list of her assets. She also has a list of her liabilities. She will have to figure out her equity to complete the equation. Since equity equals assets minus liabilities, the accounting equation might be restated as:

A = L + (A – L)

For Susan’s company, the equation looks like this:

$550,400 = $436,000 + ($550,400 – $436,000)

Or

$550,400 = $436,000 + $114,400

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The accounting equation will help you check for errors, since the equation must be in balance. If the numbers don’t balance, then you may have made an error when tabulating assets and liabilities.

Let’s see if our trucking company’s accounting equation balances. $550,400 = $436,000 + $114,400$550,400 = $550,400

Yes, it does.

What does that tell us? It tells us we have accurately figured the company’s assets, liabilities and capital. Once we have established that, we can take the next step in bookkeeping: filling out a balance sheet.

Step 5: Balance SheetsThe balance sheet summarizes assets, liabilities and equity in a standard format. The report is organized in the same way every time you use it. Assets go in the left column. Liabilities and capital go in the right column. This left-right format mirrors the accounting equation. Look at this example from Billy Bob’s Donut Shoppe (Figure 3-1).

Billy Bob’s Donut Shoppe Balance Sheet July 31, 20XX

ASSETS LIABILITIES

CURRENT ASSETS SHORT-TERM LIABILITIES Cash $22,500 Accnts Payable $7,900 Inventory 3,000 Wages Payable 4,000 Accnts Rec. 950 Notes Payable 5,750 Insurance 500 Total Current Liabilities $17,650 Total Current Assets $26,950 FIXED ASSETS LONG-TERM LIABILITIES Building $25,000 Mortgage $16,500 Van 17,000 Van Loan 8,000 Donut Oven 2,500 Total Long-Term Liabilities $24,500 Display Cases 1,000 Total Liabilities $42,150 Total Fixed Assets $45,500 EQUITY Owner’s Equity $30,300 Total Equity $30,300

TOTAL ASSETS $72,450 TOTAL LIABILITIES and EQUITY $72,450

Figure 3-1: Balance Sheet

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As you can see, the asset side of the balance sheet is equal to the liabilities and equity side. That’s why this particular report is called a “balance sheet”—as with the equation, the left side must equal the right side. If the assets balance with the liabilities and equity, you are well on your way to keeping accurate books.


Initial capital can be handled as both an asset and as equity. How can it be both? Let’s see how this works. Suppose your first step in starting the company is to put a check for $10,000 in the company bank account. According to the equation, you have an asset worth $10,000. You have no liabilities. And, your equity is $10,000. So, our equation balances:

A = L + E

$10,000 = $0 + $10,000

Did you notice that the capital deposit is listed twice? That’s the basis of double-entry accounting. One transaction—entered twice to keep the equation in balance. You’ll learn more about this in a future lesson!

$14,000 = $0 + $14,000

Use the following Practice Exercise to sharpen your accounting equation and balance sheet skills.

Step 6: Practice Exercise 3-1Set up and complete the balance sheet for Jill’s Stained Glass (Figure 3-2).

Jill’s Stained Glass has the following items. Classify them in the appropriate place on the balance sheet and then complete the balance sheet. (You can find the balance sheet in your Forms for Practice Exercies under Practice Exercise 3-1.)

Building: $40,500 Accounts Receivable: $250 Cash: $2,750 Accounts Payable: $14,750 Mortgage: $22,500

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Jill s Stained Glass has the following items. Classify them in the appropriate place on the balance sheet and then complete the balance sheet.

Building: $40,500Accounts Receivable: $250Cash: $2,750Accounts Payable: $14,750Mortgage: $22,500

Jill’s Stained GlassBalance SheetJuly 31, 20XX

ASSETS LIABILITIES

CURRENT ASSETS CURRENT LIABILITIES (1) _________________ $_________ (7) ____________________ $______ (2) _________________ _________ Total Current Liabilities (8) $ ______ Inventory 2,500 Total Current Assets (3) $_______

FIXED ASSETS LONG-TERM LIABILITIES (4) _________________ $_________ (9) ____________________ $______ Equipment 1,250 Total Long-Term Liabilities (10) ______ Total Fixed Assets (5) $_______ _______ Total Liabilities (11) ______

EQUITY Owner’s Equity $10,000 Total Equity $10,000

TOTAL ASSETS (6) $_______ TOTAL LIABILITIES and EQUITY (12) $______

Figure 3-2: Practice Exercise 3-1 Balance SheetFigure 3-2: Balance Sheet

About Forms for Practice ExercisesThe completion of some Practice Exercises requires special forms. You will find a packet of required forms called Forms for Practice Exercises in your original course shipment. You can also find a downloadable, PDF version on the Student Web Site. The first form in the packet is a chart you’ll need for Practice Exercise 3-1!


Balance sheets may vary slightly depending on the type of business you keep books for. If it is a sales business (a retail store, for example), the balance sheet might be a little different than if it is a service business.

Step 8: Net Income EquationImagine being a business person. What’s the most important thing to know about your business? Is it where your competition is? Maybe. But most likely, the most important thing about your business is the profit: How much money is the company making? The net income equation is the way to find out how much money a business is making.

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Very simply, the net income equation states that Revenue – Expenses = Net Income. Revenue refers to what money a business makes—the earnings of a company. The revenue can come from selling merchandise or from selling time and talent. When you sell a product, it is referred to as sales revenue. When you sell a talent or time, that is called service revenue.

Expenses are the cost of doing business. Salaries, rent, commissions and even gasoline for the company’s fleet of cars all qualify as expenses. In fact, anything purchased for use by the business in a business-related manner is considered an expense.

When you subtract expenses from revenue, you are left with the net income for a company. Net income is not exactly the same as profit. Profit could be either gross profit or net profit (something you’ll learn about in a future lesson). Net income is just that—net. Net income is what’s left after all expenses have been paid. It is sometimes called “the bottom line” because net income appears on the bottom of the page on an income report.

Let’s look at a simple example. Susan’s trucking company had service revenue of $18,000 last month. And, she had sales revenue of $2,000. Her total revenue for the month was $20,000.

Susan’s expenses included rent ($2,000), fuel ($4,000), salaries ($9,000) and office expenses ($1,000). Her total expenses were $16,000.

So, her net income was $4,000 (revenue minus expenses; $20,000 - $16,000).

Try a couple examples of this equation in the following Practice Exercise.

Step 9: Practice Exercise 3-2Answer the following questions on a sheet of scratch paper.

1. If Jon’s Tree Service needs $5,250 to operate each week and it brings in $12,250 each week, what is the company’s net income?

2. Harold’s Hardware pays out $22,350 in expenses every month. The company brings in $14,000 in service revenue and $50,000 in sales revenue during the same amount of time. What is Harold’s Hardware’s net income?

3. Rondell’s Thrift Shop makes $22,000 each month, but it costs Rondell $16,000 each month to keep the shop open. Now, if Rondell’s salaries in April cause his expenses to rise to $19,000, what is his shop’s net income for that month? What is his net income during each of the other 11 months of the year?

4. Sharon owns a beauty shop. The shop cuts through its competition and makes $35,000 each month. It is located in a popular mall, and it costs Sharon $27,000 each month to keep the shop open. What is Sharon’s net income?


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Step 11: Income StatementJust as the balance sheet summarizes assets, liabilities and capital, the income statement summarizes revenue, expenses and net income for a business for a certain amount of time. It can be a week, a month, a quarter (meaning one-quarter of a year or three months), a year or longer.

Translating your records of a business’ revenues and expenses and assets and liabilities and then summarizing those into income statements and balance sheets is the basic function of all bookkeeping professionals. These important reports are primary decision-making tools for business owners!

Once you start keeping books for businesses, you may notice people calling the income statements by other names. “P&L” (or “profit-and-loss statement”) refers to what you’re learning here: the income statement.

If you complete an operating statement for a 12-month period, it is a “yearly statement.” Obvious, you say. But remember, most people think of a year as being between January and December. That is called a calendar year. If you keep a statement for a different 12-month period, July through June, for example, then that is called a fiscal year.

When you prepare an income statement, you begin by listing revenues. The first one listed is sales revenue, then under that is service revenue. These two numbers are added together, and their total is set out to the right. (Don’t worry, we’ll outline this whole idea in a little bit.) After revenue, you list expenses. These should be broken down into categories (not just lumped together). Wages, rent, insurance and utilities are examples of these categories. Total the expenses together and put that total to the right and underline it. Then subtract the expenses from the revenue. Write that number directly under the expense total and double underline it. That is your net income.

Look at this example of a simple operating statement. Nora’s Notes—Secretarial Service

Income Statement for the Year Ended 12/31/20XX

REVENUESSales Revenue $12,000Service Revenue 55,000 Total Revenues $67,000

EXPENSESSalaries $19,000Rent 7,000Insurance 13,000Advertising 4,000Utilities 2,000 Total Expenses $45,000

NET INCOME $22,000

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The underline below a series of numbers means “add the numbers above,” while a double-underlined number is the “bottom line,” meaning “stop.”

Now, you’ve learned about balance sheets and income statements. The components of the balance sheet include assets, liabilities and equity. Revenue and expenses make up the operating statement.

Step 12: Practice Exercise 3-3Complete the following statement. Write the missing amounts on a sheet of scratch paper.

PDT Auto Repairs Income Statement

for the Year Ended 12-31-20XX

REVENUESSales Revenue $4,000Service Revenue 12,000 Total Revenues $___________

EXPENSESSalaries $2,000Rent 1,000Purchases 1,000Utilities 2,000 Total Expenses $___________

NET INCOME $ ______


Step 14: Lesson SummaryIn this lesson, you were introduced to the accounting equation in several forms, including the one that is the basis for double-entry accounting and the format for several important financial reports:

Assets = Liabilities + Owner’s Equity

You learned that the equation mimics the balance sheet, which details these three variables. The lesson built on your understanding of terms like asset and liabilities by explaining the relationship between them through the equation.

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Then, you were introduced to the net income equation:

Revenue – Expenses = Net income

Having learned about revenue and expenses in a previous lesson, you now understand the relationship between them and how they affect a company’s “bottom line.”

In the next lesson, you’ll be introduced to the accounting cycle—an ongoing process of recording and interpreting transactional information. Along the way, you’ll learn a little more about the challenging topic of debits and credits. But first, let’s measure your understanding of the material so far by taking a graded Quiz.


Lesson 4 The Accounting Cycle


● Define the eight parts of the accounting cycle.

● Explain how these parts fit together and relate to each other.

Step 2: Lesson PreviewYour base of bookkeeping knowledge is nearly complete! Don’t forget, nearly all of the complex tasks a professional bookkeeper performs can be reduced to a small number of easy-to-learn accounting principles. With this lesson, you will lay the cornerstone of your foundation in bookkeeping.

The accounting cycle brings together everything you’ve learned so far and organizes it into an “order of operations.” The steps of the accounting cycle are like the seasons of the year. They both always happen in the same order. The accounting cycle is a “how-to” guide to bookkeeping, and in it you will see your entire journey mapped out, from the beginning point of journalizing to the final destination of closing the books.

Remember, these early lessons are designed to introduce you to the tools a professional bookkeeper uses in his or her trade. Don’t worry if you don’t have it all under your belt yet. We’ll go back and review all of this information in more detail later to reinforce what you’ve learned.


● accountant

● certified public accountant (CPA)

● controller

● chart of accounts

● unadjusted trial balance

● journalizing

● trial balance

● worksheet

● adjusted trial balance

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Step 4: Eight Parts of the Accounting CycleNo matter what type of business you provide bookeeping for, you will use the accounting cycle. The accounting cycle is a process consisting of eight parts. The cycle begins when you record the transaction. A receipt is usually the record you use for that. After that, you enter the transaction in the business’ journal. From there, you post the journal entry to an account in the general ledger. From time to time, you will use a trial balance at this point to check your accuracy. After your trial balance is correct, you prepare worksheets that reflect any unrecorded changes you make to balance sheets and income statements. Usually, these changes are adjustments that are not documented by records such as sales slips and invoices. Next, you enter your adjusted entries into your ledger and prepare your financial statements. Finally, you close the books, and the accounting cycle is complete.

This may sound a little complicated to you now. One of the advantages to the accounting cycle is that your work is broken into eight steps, depicted in the chart that follows. Each step leads to the next. And each step depends on the previous step, so accuracy is very important.

At the end of the cycle, you’ll make adjusting entries and “close the books.” These final steps involve setting the books up for the following month—starting from zero, so to speak. We call this process the accounting cycle because it circles back around to the starting point every bookkeeping month.

In this lesson, you’ll be introduced to the individual steps in the accounting cycle. Future lessons will focus on each step in depth. For now, you want a glimpse of the “big picture.” Are you ready? Let’s begin.

1. Transaction Record receipts

The Accounting Cycle

2. Journalizing Enter transactions in a journal

3. PostingTransfer journal entries to ledger accounts

5. Worksheet Make adjustments to prepare financial statements

6. Financial Statements Prepare balance sheet and

income statement

7. Adjusting Journal Entries Post to ledger worksheet/financial statements

8. Closing Prepare books for next cycle

4. Trial Balance Verify, total and balance accounts

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What are the Differences Between Bookkeepers and Accountants?You may have wondered at the differences between the job responsibilities of bookkeepers and accountants. In practice, there are no firm lines that separate job duties of these two types of accounting services professionals. Both bookkeepers and accountants keep records (journals and ledgers), both compile financial information and both maintain tax documentation.

There was a time when bookkeepers kept “day books”—financial records of day-to-day transactions. In terms of the accounting cycle, the bookkeeper completed the first four steps, up to and including the trial balance. The accountant finished the final steps of the cycle, and was considered to be a higher level employee than the bookkeeper.

Bookkeepers need to know the same basic principles as accountants.

With the advent of the Certified Public Accountant (CPA), the differences between bookkeepers and accountants became less clear. A long time ago, it was normal for an accountant to get a Master’s degree in accounting. That happens less often now, because CPA certification is so widely recognized. The important differences in job duty and description lie, not between bookkeeper and accountant, but between CPA and support staff.

Small businesses often hire bookkeepers (or accountants!) to keep and compile daily records (including all eight steps of the accounting cycle). Those records are then turned over to an independent CPA, who verifies the work on a period-by-period basis. Larger companies may have an in-house controller (head accountant) with CPA certification, rather than an independent CPA.

The modern bookkeeper (or accountant) is now involved in the entire accounting cycle. Accountants are more likely to be involved in interpreting financial reports, and will probably be more involved in tax and payroll processes, but bookkeepers with substantial work experience may venture into those responsibilities as well!

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The TransactionAs we discussed before, a transaction is any business dealing that involves the exchange of goods and/or services for money or another valuable asset. The transaction is the beginning of the accounting cycle. Imagine a transaction in which a customer purchases a package of bolts from Ed’s Hardware. The bolts cost $1. The beginning of that accounting cycle, therefore, is a $1 transaction.

After you determine the transaction type and amount (in this case a sale worth $1), enter that transaction into the journal. We will discuss exactly how you fill out the journal in the next lesson. For now, just read this overview and stay tuned.

A transaction is any business dealing that involves the exchange of goods and/or services for money or another valuable asset.

The JournalIn the journal, you write down each transaction as it happens. This is called “entering,” and the items entered are called “entries.” Because the journal is the first place a transaction is entered, it is often called the “book of original entry.” Entries in the journal are in chronological order—that is, the first transaction that happens is the first one entered, the second is second, and so on.

In the journal, you record transactions that are documented by written records. Receipts are one type of written record. Others are invoices, bank deposit records, bills of sale and lading (shipping) and credit account records. Each entry is given a description of the type of transaction involved. These descriptions will correspond to accounts in the ledger. Examples of accounts include supplies, transportation, salaries and equipment. The types and names of the accounts will vary according to the type of business. We will discuss this in detail in a later lesson.

The journal is divided into five columns, including a column for the date, a column to record the description of the transaction, a post reference column, a debit column, and finally, a credit column.

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As you set up the journal, you need to remember two rules. The first we have already discussed: The journal is in chronological order. The second is just as important: Debits go on the left side, while credits go on the right. Always. You will also see a column labeled “P/R.” This stands for “Posting/Reference.” You’ll learn more about this later. Look at the following example (Figure 4-1).

Company NameGeneral Journal


12345

Figure 4-1: A Journal

Step 5: Practice Exercise 4-1Set up an account with the following entries. (Remember to list Debits on the left side and Credits on the right): Write your answers on scratch paper.

$150.75 credit $45.50 debit

$230.00 debit $71.50 credit

$45.75 debit $99.00 credit

Dr Cr


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Step 7: The Double-entry SystemThe question most students ask at this point is, “How do I know whether something is a credit or a debit?” That’s an important question. The answer depends on the type of transaction and the account it affects. At first, it may seem difficult to decide whether something is a debit or a credit, but with some practice, you’ll find it easier and easier to label entries as one or the other.

As you learned in earlier lessons, when you record transactions in a journal, you’ll find that each transaction is entered into at least two accounts—once as a debit and once as a credit. This system, as you have already learned, is called double-entry accounting. And the debit you enter must equal the credit.

There is a systematic method to recording a transaction in a journal. Journalizing is the act of following these three steps. The steps include:

1. Decide what accounts the transaction affects.2. Decide what category (assets, liabilities, equity, revenue or expenses) the affected

accounts are in.3. Determine how the transaction affects these accounts (does it increase or decrease them).

So far, you’ve had an introduction to the categories you’ll be dealing with. Assets, liabilities and equity are used in the balance sheet report you saw in Lesson 2. Revenue and expenses are used to build the income statement. But what are accounts?

Simply stated, an account is a way of separating entries into categories. Do you recall the analogy from an earlier lesson about sorting loose change into denominations? Accounts allow you to sort financial information to make it easier to use—particularly when it comes to building financial reports.

What accounts might you see? Here is a list of accounts you will probably encounter as you work in the bookkeeping field:

● cash

● accounts payable

● salaries expense

● transportation

● inventory

● accounts receivable

● supplies

● utility expense

● office equipment

● purchases

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Let’s look at an example of recording a transaction in a journal. Suppose Ed’s Hardware sells a wrench for $10. What two accounts are affected? When Ed sells product, he increases sales and increases cash. Sales belongs in the revenue category. Cash is an asset. So how is the increase in these two accounts posted? Take a look at the chart that follows:

Type of Account Increases With Decreases With

Assets Debits CreditsExpenses Debits CreditsLiabilities Credits Debits

Equity Credits DebitsRevenues Credits Debits

When journalizing this transaction, you’ll enter $10 on the debit side of the journal for the cash account. That’s because an asset account is debited when it increases. The sales account is a revenue account, so it’s credited $10. That’s because revenue is credited when it increases. You have one debit and one credit resulting from the sale of a wrench.

That’s how journalizing works. Follow the three steps, then make your entries in the journal. Later, you’ll transfer the entries to the ledger—a book organized into different, separate accounts.

You probably still have questions. For example, some students have a hard time understanding the difference between expenses and liabilities. Liabilities are debts owed to outside creditors. For example, loans for a company vehicle are liabilities. Liabiliies are listed on the balance sheet. Expenses are not. Expenses are listed on the income statement. A mortgage on a factory building is a liability. Janitorial service for that same building is an expense.

And if you’re like most students, you still don’t “get” the idea of debits and credits. You have a three-step method for journalizing. And you have a chart to reference. But that doesn’t explain why. Why are credits and debits different, depending on the account? Why do you need double-entry accounting anyway?

A double-entry accounting system uses credits and debits to check for possible mistakes. For every credit, there must be a debit (and visa versa). To explain, let’s look at an example. Suppose you keep the books for a small gift shop. The shop owner buys a brand new cash register for $1,000 on credit. So how do you decide what two entries need to be made in the journal?

Your company added a cash register. That’s an asset. So we know that assets have increased. Your company also added a liability—the cash register was purchased on credit and needs to be paid for. In this case, these are the two entries to satisfy the double-entry system. But which is the debit and which is the credit?

Let’s return to the accounting equation and see how it applies to our cash register example:

A = L + E

$1,000 = 1,000 + $0

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The gift shop increased its assets and increased its liabilities. Right now, your logical side might ask where a debit comes from when there are two increases. Part of the problem lies in the words credit and debit. Credit is always positive, isn’t it? And debit sounds pretty negative. And when someone gives you praise, they’re giving you credit, right?

The word meanings you are used to don’t work in bookkeeping. Let’s learn a new way to think of credits and debits. Remember the accounting equation?


With the equation in mind, think of debits and credits in terms of the following formula:

Left side—debit/Right side—credit

If the entry increases the left side of the equation (assets), the entry is a debit. If the entry increases the right side of the equation (liabilities/equity), the entry is a credit. Credits and debits aren’t about the meanings you’ve attached to them in the past. They’re all about which side of the equation they affect.

Let’s return to the cash register example. Assets are increased. Assets are on the left side of the equation, so the entry is a debit. Liabilities are increased, too. Since liabilities are on the right side of the equation, that increase is a credit. So, you have one debit, and one credit, both for $1,000 dollars.

The important thing is, the equation is kept in balance. You may have come across this rule from your previous Math classes: If you do something to one side of the equation, you have to do the same thing to the other side of the equation.

Picture a scale. If the weights on both sides of the scale are equal, the scale balances. A balanced scale is like an equation. If you add something to one side, you have to add the same amount to the other side—or else the scale will not balance. If you take away some of the weight from one side, you have to take from the other side as well.

And in fact, some entries decrease accounts on both sides of the equation. Let’s see what happens when the gift shop uses cash to pay off the cash register bill. Cash is used, which decreases that asset. And, liabilities are decreased because the gift shop has one less bill to pay.

So which is the debit and which is the credit? Let’s start with the left side of the equation. If increasing the left side causes a debit, then decreasing the left side causes a credit.

What about the liability? If increasing the right side causes a credit, then decreasing the right side causes a debit.

So, when the gift shop owner pays off the cash register, she credits the asset (decreases cash by $1,000) and debits the liabilities (decreases liabilities by $1,000). The debit matches the credit, and both sides of the equation are treated equally. The equation stays in balance.

(A – $1,000) = (L – $1,000) + E

From these two examples, you can begin to get an idea of how credits and debits work. Remember: The thing that matters with credits and debits is which side of the equation you are working. If you increase the left side, you have a debit. If you increase the right side, you have a credit.

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Do you recall the journal sheet (Figure 4-1)? Notice that debits are on the left column and credits are on the right. This placement mimics the accounting equation, as well as the basic operation of the double-entry system.

Now take another look at the example of a balance sheet you first saw in Lesson 2.

Billy Bob’s Donut Shoppe Balance Sheet July 31, 20XX

ASSETS LIABILITIES

CURRENT ASSETS SHORT-TERM LIABILITIES Cash $22,500 Accnts Payable $7,900 Inventory 3,000 Wages Payable 4,000 Accnts Rec. 950 Notes Payable 5,750 Insurance 500 Total Current Assets $26,950 Total Current Liabilities $17,650 FIXED ASSETS LONG-TERM LIABILITIES Building $25,000 Mortgage $16,500 Van 17,000 Van Loan 8,000 Donut Oven 2,500 Total Long-Term Liabilities $24,500 Display Cases 1,000 Total Liabilities $42,150 Total Fixed Assets $45,500 EQUITY Owner’s Equity $30,300 Total Equity $30,300

TOTAL ASSETS $72,450 TOTAL LIABILITIES and EQUITY $72,450

Notice that assets are on the left. Liabilities and equity are on the right. And both sides of the form—like the equation—must be in balance.

Let’s return to two important financial statements—the balance sheet and the income statement. As you’ve discovered, the balance sheet mirrors the accounting equation. The income statement, on the other hand, reveals net income by subtractng expenses from revenue.

Some journal entries support the balance sheet (assets, liabilities and equity). And some support the income statement (revenues and expenses). But how do income statement journal entries affect the balance sheet?

When a company makes a profit, that profit belongs to the owners. Because revenues and expenses reveal income and because income becomes owner equity, the revenue account acts as if it were a right side transaction. That is, an increase in revenue is a credit. A decrease in revenue is a debit.

Since expenses are subtracted from revenue (to reveal profit), they act the opposite way: an increase in expenses is a debit. A decrease in expenses is a credit. That is: Left-side expenses/right-side revenue. Look at the figure that follows. The expanded accounting equation shows how the five basic categories of journal entries fit within the accounting equation format.

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Assets

Increases with a debit

Revenue

Increases with

a credit

Expenses

Increases with

a debit

Liabilities

Increases with a credit

Equity

Increases with a credit.=

–

+

The Expanded Accounting Equation

Figure 4-2: The Expanded Accounting Equation

Whew! That’s a lot of information! Even if you understand everything so far, you might forget it 10 minutes after you put down your text! So, before you take a break, try the following Practice Exercise. Then, revisit the material in this Step, even after you move on in the course. You’ll find that things will make a lot more sense to you the third and fourth reading. This is difficult material, but with practice, you’ll get it! And, you’ll know as much or more about credits and debits as industry professionals!

Step 8: Practice Exercise 4-2Try these practice problems.

For each situation, we’ve indicated what transaction took place and which two accounts were affected. Complete the entry for each transaction, using your chart to determine if you should enter a debit or a credit. Write your answers on a sheet of scratch paper.

Use the following list of accounts for this exercise:

Asset accounts: Cash, Equipment, Supplies

Liability accounts: Accounts Payable, Notes Payable

Revenue accounts: Sales

1. Barb’s Doll Making Company sells a $50 doll to John Smith. He pays cash. Both the cash and the sales accounts are increased.

Cash Sales

Dr Cr Dr Cr

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2. Barb’s Doll Making Company purchased $1,500 worth of supplies on credit. The Supplies Account is increased (the company has $1,500 more of supplies), and Accounts Payable is also increased (the company owes $1,500 more to the supplier).

Supplies Accounts Payable

Dr Cr Dr Cr

3. Yvonne’s Donut Shoppe takes out a $10,000 loan to buy a truck. The Equipment Account is increased (the company has more equipment), and the Notes Payable Account is also increased (a new loan has been added to the books).

Equipment Notes Payable

Dr Cr Dr Cr

4. Ed’s Hardware pays off a $500 credit account with a wholesale paint supplier. The Cash Account is decreased by making the payment, and the Accounts Payable Account is also decreased (Ed now owes less).

Cash Accounts Payable

Dr Cr Dr Cr


Step 10: The LedgerYou will get more practice with debits and credits as you work through future lessons. But make sure to revisit the information until you are comfortable with the material in this lesson.

One final note about debits and credits: In the journal, you do not total these columns. This will be done as a trial balance and then transferred to a financial statement. We will touch on those concepts a little later in this lesson. For now, let’s move on to posting journal entries to accounts.

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Posting and the LedgerIn the previous section, you had a brief glimpse into the debit and credit universe. You also saw how these entries can be applied to different accounts. When the entries are put into the journal, they are simply listed in chronological order. In order to separate and sort entries into different accounts, you must post the entries to your ledger.

The ledger is simply a book that is organized into different accounts. Remember the section about how debits and credits affect different accounts? Well, the accounts themselves are listed in the ledger. Accounts generally are listed separately, one per page. That is, a cash account might be on page one, while the inventory account might be listed on page two and so on. An account is a specific listing for an individual group of transactions. These transactions may be grouped by customer or by type of transaction. For example, if you bake pies and sell them to Bill’s Bakery, you would have an account in your ledger to list all of the sales you have made to Bill’s Bakery. You may also have an account called “Purchases” where you list all the transactions involving the purchase of flour, sugar, shortening, etc. As mentioned earlier, the type and number of accounts depend on the type of business and the items that the business owner needs to keep track of.

The process of transferring journal entries into the ledger is called posting. You post entries into specific accounts on the appropriate pages in the ledger. The format of the ledger is similar to the journal. Again, the debits are listed on the left, the credits on the right. The two headings are underlined, and the two columns are separated by a line. Post each journal entry into the ledger by writing the entry into the appropriate account.

Each account is assigned a title and a number. The title simply describes what the account is—cash, salaries payable or accounts payable, for example. The account number further identifies the type of account.

The account number has two parts: The first number represents the general section the account fits into, and the second number is the subsection number of the account. For example, you could designate “Assets” as your number one account. That means any asset category (cash, for example) would have the number 1 as its first numeral. If cash is your first subsection in your assets accounts, then label cash as account number “10.” The 1 stands for assets, and the 0 is the first subsection. Generally, accounting ledgers are organized so cash is the only subsection that ends in 0. Listed below is an example of the organization of a ledger, complete with account categories, titles and numbers.

A summary like this one is called a chart of accounts. You can think of it as a table of contents for the ledger. It is divided not only into the account categories, but also into two halves: balance sheet accounts and income statement accounts. These tell which accounts make up each of these financial statements.

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Ed’s Hardware Chart of Accounts

Balance Sheet Accounts Income Statement Accounts

1. Assets 4. Revenues

10. Cash 41. Sales

11. Accounts Receivable 42. Service

12. Supplies 5. Expenses

13. Inventory 51. Purchases

14. Office Equipment 52. Salaries Expense

15. Building 53. Transportation Expense

16. Prepaid Insurance 54. Electric Expense

2. Liabilities 55. Telephone Expense

21. Accounts Payable

22. Mortgage Payable

23. Taxes Payable

3. Capital

31. Ed Young, Owner’s Equity

32. Ed Young, Owner’s Drawing

As you can see, asset accounts are labeled as “tens” accounts with a 1 as their first number. Liabilities are in the “twenties” and have the number 2 at their beginnings. Look at the rest of the account numbers, and you’ll see they are organized in a similar fashion: capital = 3, revenue = 4 and expenses = 5.

This is an example of a Chart of Accounts. Sometimes these vary from business to business, but in general they are all similar to the one shown.

Step 11: Practice Exercise 4-3Take this time to practice assigning account numbers to these accounts (based on the chart above). Write your answers on scratch paper.

____ Building____ Telephone Expense____ Accounts Payable____ Salaries Expense____ Cash____ Owner’s Equity

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Step 13: Trial BalanceSo far, you’ve been recording transactions and transferring those entries from the journal into the ledger. Each transaction has two parts—a debit and a credit. But what if you made a mistake? How do you know if there’s an error?

Periodically, you need to check to make sure the debits and credits in the ledger balance. The purpose of double-entry accounting is to set up a system that is checkable. Credits have to balance debits. The process of checking to see if credits and debits match is called a trial balance. This procedure is usually done monthly, but trial balances can occur at the end of any arbitrary accounting period. (Though most companies do their books monthly, some do them every 28 days. Others do the books quarterly or semi-annually.)

There are two steps to the trial balance. First, find the account balance for each ledger account. Second, take that account balance and record it in the proper place on the trial balance sheet.

Let’s look at finding the account balances for the ledger accounts you have. To do this, you need to follow these steps for each account:

1. Add up the debit column.2. Add up the credit column.3. Using these totals, subtract the smaller one from the larger. For example, if an account has a

total of $150 in the credit column and $180 in the debit column, you subtract $150 from $180 and get $30.

4. Take the result of your subtraction ($30 in the example above) and enter it on the side of the larger original number. In our example, because the $180 of the debit side is the larger of the two numbers, we enter the $30 in the debit column.

After you have the totals for each account, and have determined into which column (debit or credit) the difference should be entered, you are ready to construct your trial balance. The trial balance is a listing of each account’s name, number and balance. The balances are expressed with the debits on the left and credits on the right. Consequently, if you have a cash account that has a $30 debit balance, you would organize the entry like this:

Acct. No. Title Dr Cr10 Cash $30

The accounts should be listed in numerical order based on their account number. Therefore, cash is always listed first, and the accounts proceed from there. When you have all the accounts written in the trial balance and all the debits and credits correctly listed, you can check your balance. The total of the debits column must equal the total of the credits column. If they are not equal, then you have made an error somewhere in your ledger and you must correct it.

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Check this sample trial balance for Ed’s Hardware. Do the debit and credit columns balance?

Acct. No. Title Dr Cr10 Cash $45021 Accounts Payable 200.0052 Salaries Expense 250.00Total: 450.00 450.00

The columns do balance. The total on the debit side is $450, and the total on the credit side is the same.

You will have plenty of practice later in this course. This lesson is an introduction, not a comprehensive study. Before we move on in our overview of the accounting cycle, check yourself with this Practice Exercise.


1. The journal is sometimes called the _____.a. draft bookb. book of original entryc. book of original transactionsd. trial balance sheet

2. The process of transferring a journal entry to a ledger account is called ____.a. postingb. draftingc. enteringd. transpositioning

3. The trial balance is used to _____.a. check ledger accounts and make sure they balanceb. compare journal accountsc. post ledger accounts to the journald. correct any errors by adjusting entries

4. The first four parts of the accounting cycle are _____.a. drafting, journalizing, totaling and postingb. journalizing, jumping, booking and numberingc. transaction, journalizing, posting and trial balanced. transaction, drafting, entering and posting

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5. Debits are entered on the _____ side and credits are entered on the _____ side.a. top, bottomb. bottom, topc. right, leftd. left, right


Step 16: Final Half of the Accounting CycleIt’s time to introduce you to the last four steps in the accounting cycle. These four include the worksheet, financial statements, adjustments and closing. Let’s look at each of these four items individually.

The WorksheetIn bookkeeping, as in any situation, there may be mistakes to correct and adjustments to make. You’ll need to take special situations into account when you finalize your account balances. The worksheet allows you to make adjustments without written documentation such as invoices and receipts. Often, the worksheet will adjust for things like depreciation.

Inventory of office supplies and business items are also accounted for on the worksheet. Rather than journal the use of every pencil or paper clip, you can count the supplies on hand, subtract that total from the previous supply inventory and find out the value of the supplies were used over the course of the month. That figure can be inserted in the worksheet. As you can imagine, the worksheet is a great convenience to bookkeepers.

Worksheets are set up in a standard format that consists of 10 columns. These 10 columns are divided into five sets of two columns each. The first column (left side) in each set is for debits, and the second (right side) is for credits. The five sets include the following:1. Unadjusted Trial Balance2. Adjustments3. Adjusted Trial Balance4. Income Statement5. Balance Sheet

One big difference between the worksheet and other bookkeeping forms is that the worksheet is for YOU (the bookkeeper) only. It is not presented to anyone. It is simply used to check your figures, correct any errors and make the appropriate adjustments (for depreciation, supplies, etc.).

You learned about trial balances in a previous lesson step. The trial balance is transferred to the first two columns of the worksheet. This is an unadjusted trial balance because you haven’t yet made adjustments to the totals. After adjustments (listed in the next two columns), you’ll double-check your work by running another trial balance—the adjusted trial balance. When you’re sure everything balances, you’re ready to compile financial reports.

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The WorksheetAcct No.

Account Title Unadjusted Trial Balance

Adjustments Adjusted Trial Balance

Income Statement

Balance Sheet

Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr

Financial StatementsIn a previous lesson, you learned the format for both the balance sheet and income statement. Now you know where in the accounting cycle these two items fit in. The adjusted trial balances from your worksheets are used to prepare the financial statements. Using balanced figures ensures accurate financial reports that managers can use to make important business decisions.

If you look back at the worksheet section, you can see the financial statement items have their own columns. The income statement entries are in columns 7 and 8, while the balance sheet entries are listed in columns 9 and 10.

After you complete the worksheets, you will be able to prepare the financial statements as well as journalize the adjustment entries.

AdjustmentsBecause the worksheets are not presented to anyone but you, the professional bookkeeper, the adjustments made on them must appear somewhere else as well. You need to create a paper trail—a written record of a process or activity. A bookkeeper needs to document every action, in case there is a question about how the financial reports were assembled.

After you have completed the adjustments, you will be able to complete the final step in the accounting cycle—closing the books.

Closing the BooksClosing the books consists of simply totaling each account and readying the revenue and expense accounts for the next accounting period. Closing can be done anytime, as long as the period is consistent. Periods can be daily, weekly, monthly, quarterly or annually. Each business may use a different accounting period.

Many transactions take place during an accounting cycle. Transactions such as sales, the paying of expenses and cash draws made by the owner all affect the amount of equity a company has. Because of the difficulty in separating out the various transactions from within the equity account itself, different accounts are set up to keep track of these various business dealings. These accounts are called temporary accounts, and they include the sales, expenses and drawing accounts.

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To reflect these changes to the equity, all the temporary accounts are closed into the equity account at the end of an accounting cycle. When you close temporary accounts into the equity account, it makes the equity account accurately reflect any changes that were made during the cycle. This process also readies the temporary accounts for the next accounting cycle. We will cover this in more detail later on in the course.

That’s it—the eight parts of the accounting cycle, briefly explained. You will go through each segment again in future lessons, practicing and learning how to use each one.


1. The worksheet is useful to the bookkeeping professional because it is _____.a. for you onlyb. to share with othersc. perfect, with no mistakesd. complete with twenty columns

2. The first column in the worksheet is for _____.a. creditsb. debitsc. special situationsd. supplies

3. The worksheet allows you to _____.a. prepare the financial statementsb. close the booksc. journalize adjustment entriesd. both a and c

4. Closing the books means _____.a. quitting your jobb. making adjustment entriesc. totaling each account and readying them for the next accounting period.d. passing the work to a co-worker

5. Temporary accounts include _____.a. salesb. expensesc. drawing accountsd. all of the above

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Step 19: Lesson SummaryThis lesson introduced you to the eight parts of the accounting cycle—an ongoing process of recording and interpreting an organization’s transactions. The cycle begins with the transaction—the exchange of products or services for money or some other valuable asset. The entry is entered in the journal using the double-entry method of accounting. Double-entry is a system of checks and balances that helps the accountant record information so that it can be easily double-checked for accuracy.

Then you were introduced to two ways to differentiate debits and credits. The first involves a three-step process:1. Decide what accounts the transaction affects.2. Decide the category of the affected accounts.3. Determine how the transaction affects these accounts.

Using this method, you determine whether the entry is a debit or credit by using a chart.

A second method involves remembering the primary form of the accounting equation:

Assets = Liabilities + Owner’s Equity

Simply put, the left side of the equation (assets) increases with a debit. The right side of the equation (liabilities and owner’s equity) increases with a credit. This system was established in order to allow similarities between the formats of journals, ledgers, the balance sheet and the accounting equation. Rather than memorize a chart, using this method involves keeping the equation in balance—the whole point of double-entry accounting.

Next, you learned about the chart of accounts—a table of contents for your ledger. By splitting the information in the journal into different ledger accounts, you are preparing for a trial balance (are there any mistakes so far?) and the worksheet. The worksheet is a tool that puts all of your figures in one place—a handy aid to compiling financial statements.

Finally, you were introduced to adjustments and closing the books. These two steps allow you to “reset” your books and start the accounting cycle all over again.

In the next lesson, you’re going to take an in-depth look at the journal and entry systems. But before we delve into hands-on practice with debits and credits, tackle the graded Quiz and see how well you understand the material so far.


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Lesson 5The Journal and Entry Systems


● Explain the “book of original entry” and its components: debits, credits and entries.

● Determine the advantages of the double-entry system.

● Apply the double-entry system in the journal.

● Explain how a compound entry affects the journal.

Step 2: Lesson PreviewIf you look at a recipe, you’ll see it is separated into two sections: the ingredient list and the procedure. Think of the journal as the ingredient list for professional bookkeeping. Later on, you’ll move into the procedure portion of the recipe. For now, we’ll discuss what goes into the “financial recipe.”

This lesson explains the journal, the process called “journalizing,” and the double-entry system for the journal. You will learn how to list the “ingredients” of the financial recipe by entering them correctly in a journal. You will learn more about the journal, debits, credits and account balances, as well as compound entries. You can then apply these skills in either an office or home-business environment.

Step 3: Terms You Need to KnowHere are the bookkeeping terms you will learn about in this lesson:

● compound entry

● normal account balances

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Step 4: Book of Original EntryThe journal is the first, and therefore the most important, step in recording a financial transaction. It is essential to accurately record the appropriate information in the journal—the numbers and transaction description must be correct. Why is this so important?

Consider this: You are going to bake cookies, and you read the list of ingredients in order to assemble all of the items you need. Unfortunately, you don’t notice that the canister you thought contained flour actually contains powdered sugar. Assuming the white powder to be flour, you go ahead and bake your cookies. You follow the recipe’s directions exactly. You make no other mistakes except for the flour/sugar mix-up. How will those cookies taste? Trust me, you don’t want to know. You see, one mistake in the beginning can expand to consume the entire finished product and make everything wrong. These cookies have to be thrown away, and all the time you spent baking them will have been wasted. The same sort of disaster would result if a seemingly small mistake is made in the journal while bookkeeping. This lesson is designed to show you how to avoid these mistakes.

The first step in keeping an accurate journal is getting the layout of the journal right, so let’s take a look at the way a journal is set up.

Constructing the JournalThe journal is the first place a transaction is entered in the books of a business. You already know how important it is to be accurate in the journal. But how do you set up this essential bookkeeping tool? The first thing you’ll need is two-column ledger paper. This is the simplest ledger paper available, and you can find it at a local office supply store. Even grocery stores sometimes carry this type of paper (Figure 5-1).

1 2

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Figure 5-1: Example of Two-column Ledger Paper

NOTE: Paper used for bookkeeping is referred to by the number of columns for entering the numerical information—that would be the number of columns on the right-hand side of the page. Notice that these columns are numbered at the very top of the page, just under the space used to write the title.

Once you get the right type of paper, you’re ready to set up the journal. The first thing you do is “head up” the journal by writing the company’s name on the top line (above the columns), then write “General Journal” under the name. Next, go to the line directly above the double line in the column setup. In the far left column, write the year. Go two columns to the right (the smallest column of all) and write “P/R” at the top of the column. Then set up your last two columns. Remember, debits go on the left and credits go on the right. When you are finished, your journal should look like Figure 5-2.

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Now you’re ready to start making entries in the journal. But before you do, let’s review debits and credits again. Making the entries in the journal will be easier if you first practice using debits and credits.

Company Name General Journal Page 1


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Figure 5-2: Journal Example

Debits and CreditsIn a previous lesson, we explained that an entry in a journal will generally affect two different accounts.

Let’s take a look at the five basic accounts used in bookkeeping and the types of transactions or information that might be included in each account. Each of these accounts will be discussed in detail later in the course. At the present time, you just need to be familiar with the types of things that are included in each of the categories of accounts.

AssetsAnything of value to a business is called an asset. This includes property that the business owns and such things as equipment, tools, cash, materials and supplies.

LiabilitiesLiabilities include the money that the business owes to others. This includes the amount owed to the bank on equipment that is financed, money owed to suppliers, and money owed for taxes.

EquityThis is the amount of money the business owes to the owner of the business. Usually when someone starts a business, they use a certain amount of their own money. For example, Mary Jones decides to start a business selling rubber stamps. She takes $1,000 out of her personal savings account and puts it into a checking account for her new business. Later, profits may increase the initial investment and expand Mary’s equity.

RevenuesRevenues are what the business earns—the money that comes into the company as a result of selling its products or services or from earning interest on an investment. The revenue may be in the form of checks, cash, money orders or credit card purchases.

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ExpensesThis account lists the costs of doing business. This includes salaries paid to employees, advertising costs, the purchase of supplies to make the business’ product, the rent or mortgage payment, and the cost of utilities such as electricity and telephone.

The following chart lists some of the common ledger accounts. It’s important to note that every company has a different chart of accounts, depending on the industry and the specific needs of the company.

The following chart lists common accounts that companies use.

Chart of Accounts SummaryAssets:

♦ Cash ♦ Accounts receivable (money owed to the business by its customers) ♦ Supplies (on hand) ♦ Inventory (products not yet sold, for example) ♦ Equipment ♦ Building (if the business owns its building instead of paying rent) ♦ Prepaid insurance (insurance paid for in advance)

Liabilities: ♦ Accounts payable (money the business owes to other people, such

as its suppliers) ♦ Mortgage payable (money the business owes on the residence of

the business) ♦ Taxes payable (this includes taxes that have not yet been paid) ♦ Notes payable (money the business owes on a loan)

Capital: ♦ Owner’s equity (net worth of the business) ♦ Drawing

Revenues: ♦ Sales (money collected for selling a product) ♦ Service (money collected for performing a service)

Expenses: ♦ Purchases (items bought for resale) ♦ Salaries ♦ Rent ♦ Electricity ♦ Telephone

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As you enter items in the journal, first identify which accounts are affected by the transaction, and then decide whether the account has increased or decreased by that transaction. You will then know whether to enter the transaction in the debit or credit column. The following chart, which you first saw in Lesson 4, summarizes how accounts are affected.

DEBIT/CREDIT CHART

Name of Account Increases With Decreases With

Assets Debits Credits

Expenses Debits Credits

Liabilities Credits Debits

Capital Credits Debits

Revenues Credits Debits

It’s time to get a little practice identifying credits and debits. You’ll find that you are much more comfortable with this process after some repetition. Complete the following Practice Exercise.

Step 5: Practice Exercise 5-1Use the chart above to fill in the blanks below. Write your answers on scratch paper.

1. If a transaction increases the assets account, you enter a(n) ____________________.

2. If a transaction decreases the capital account, you enter a(n) ___________________.

3. If a transaction increases the revenues account, you enter a(n) _________________.

4. If a transaction decreases the liabilities account, you enter a(n) ________________.

5. If a transaction decreases an asset account you enter a(n) ______________________.

6. If a transaction increases the capital account you enter a(n) ___________________.

7. If a transaction decreases the mortgage payable account you enter a(n) ___________________.

8. If a transaction increases the rent expense account you enter a(n) _____________.

9. If a transaction increases the cash account you enter a(n) ______________________.

10. If a transaction decreases the supply account you enter a(n) ____________________.


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Step 7: Normal Account BalancesWith those rules in mind (and in front of you), let’s go on to another item that is affected by debits and credits: normal account balances. All of the accounts in accounting services have a typical balance that is either a debit or a credit. This tendency for an account to have a typical balance is called its normal account balance.

Below is a list of accounts and their normal account balance (a credit or debit).

NORMAL ACCOUNT BALANCES

Assets — Debit

Liabilities — Credit

Capital — Credit

Revenues — Credit

Expenses — Debit

Why is the normal balance of an account important? If you know what the normal account balances are for each account, you can catch errors more easily. For example, you can see by the chart that the normal account balance for the cash account is a debit, because cash is an asset. Suppose your cash account had a credit balance. That would mean that your cash account had negative dollars—not possible! The bookkeeper who knows normal account balances would spot that mistake in a moment.

Step 8: Practice Exercise 5-2Try this Practice Exercise using the chart above:

Match the account to its normal account balance. Write a “Dr” if its normal account balance is a debit and a “Cr” if its normal account balance is a credit. Refer to the Chart of Accounts Summary preceding Practice Exercise 5-1 if you are unsure what account each item fits into. Write your answers on scratch paper.

1. Cash

2. Equipment

3. Accounts payable

4. Sales

5. Owner’s equity


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Step 10: Double-entry System of AccountingAs you’ve learned, when you make entries in the journal, you will need to decide what accounts are affected by a transaction and then correctly debit or credit those accounts. Typically, every transaction is recorded twice. This is because you need to record where the money in the transaction came from and also where it went. This is called the double-entry system.

In accounting services, particularly in the double-entry system, every time you debit an account, you will also credit an account. This system is one of checks and balances. For example, if the owner of a business takes $100 out of the Cash Account to pay the electric bill for the month, the amount of the Cash Account would decrease by $100, and the amount of money listed in the Expenses Account would increase by $100.

The first step in entering transactions in the journal is to decide what accounts are affected by the transaction. Then you need to decide whether each of the affected accounts will increase or decrease. In order to do this, you will need to analyze the transaction.

To get an idea of how this business of analyzing transactions works, let’s take a look at the transactions for Julie’s Floral Shop on May 15th, 20XX. Remember that entries are listed in chronological order in the journal. List the debit first and the credit second.

Transaction

At 8:00 a.m. Julie, the store owner, makes a deposit from her personal account to her business account for the amount of $2,000. The amount will be used later in the day to purchase a piece of equipment.

Descriptiona. The deposit increases the amount of available cash the business has.b. With the increase in the asset of cash is also an increase in the amount of equity Julie has in the

business.

Julie’s Floral ShopGeneral Journal Page 33


1 5 15 Cash 2 0 0 0 002 Equity 2 0 0 0 003 addition to owner equity

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Transaction

Julie opens the store promptly at 9:00 a.m. Mrs. Stevens is the first customer of the day. While in the store, Mrs. Stevens picks out a $30.00 arrangement. She has a charge account and puts the $30.00 on her account.

Descriptiona. Julie has many charge customers. The amount they owe is known as accounts receivable. Because

the amounts owed are to be collected in the future, they are considered an asset. Mrs. Stevens’ purchase increases Julie’s accounts receivable.

b. Mrs. Stevens’ purchase, although on account, constitutes a sale. Her purchase also increases the amount of sales for the day.



1 5 15 Accounts Receivable 3 0 002 Sales 3 0 003 charged sale

Transaction

At 10:00 a.m. Julie’s mail arrives. She finds the telephone bill, which she promptly opens and decides to pay. Julie writes a check for $80.00 to pay the bill.

Descriptiona. The telephone bill constitutes an expense. Expenses are those items used or needed to produce

revenue. Items such as services, labor costs, utilities and rent are expenses. By paying this bill, Julie increases the amount of expenses incurred by the business for this year.

b. The payment of the telephone service decreases the amount of cash the business has.



1 5 15 Telephone Expense 8 0 002 Cash 8 0 003 paid phone bill

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Transaction

Also included in the mail is a bill from a flower supplier. The flowers were purchased previously from a company that extends credit on Julie’s purchases. She writes a check for the amount of $500 to pay the flower supplier.

Descriptiona. Julie’s arrangement of buying items and paying for them later is known as accounts payable.

The companies she has this arrangement with are called creditors. The money Julie owes to her creditors is considered a liability. Julie’s paying of this creditor decreases her liability.

b. With this payment once again Julie is decreasing the amount of cash the business has.



1 5 15 Accounts payable 5 0 0 002 Cash 5 0 0 003 paid creditor

Transaction

Because Julie has the checkbook out she decides to pay this month’s mortgage. Julie writes a check for $800.00, the mortgage payment amount.

Descriptiona. Oftentimes a business owner will take out a loan to pay for the building or location of his or her

business. This loan creates a liability called mortgage payable. Sometimes a business owner will also take out a loan for improvements, equipment, inventory, etc. This type of loan also creates a liability and is often labeled notes payable. Julie’s payment in effect decreases her liability.

b. Once again the payment will decrease the amount of cash the business has.



1 5 15 Mortgage payable 8 0 0 002 Cash 8 0 0 003 paid mortgage

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Transaction

Julie has a part-time employee who helps her in the store. Julie pays her wages on the fifteenth and the first of every month. Julie realizes she has not yet paid her and proceeds to write a check for the amount of $82.50.

Descriptiona. The payment of an employee’s wages constitutes an expense of doing business. In writing the

check, Julie increases her expenses. Generally an account called salaries expense is set up to keep track of payroll expenses.

b. As with any transaction where a check is written, the amount of cash the business has is once again decreased.



1 5 15 Salaries Expense 8 2 502 Cash 8 2 503 paid salaries

Transaction

At 11:00 Julie takes a personal draw of $10.00 out of the register and heads off for lunch.

Descriptiona. Julie’s withdrawal decreases the amount of equity she has in the business. To record the withdrawal

of money from a business, a special type of capital account called the drawing account is set up.b. Julie’s withdrawal decreases the amount of cash in her business.



1 5 15 Drawing 1 0 002 Cash 1 0 003 personal draw

Transaction

While at lunch Julie stops in a store that specializes in display cases. She has had her eye on one and decides to buy it. The case costs $3,000 dollars. Julie pays $2,000 now and will pay the remaining $1,000 in monthly installments.

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Descriptiona. Julie now owns a new piece of equipment (the display case). Property that is used on a long-term

basis in the conduct of business operations is considered equipment. This purchase increases the amount of equipment in the business.

b. Julie now also owes the owner of the display case store $1,000. The amount Julie owes and will pay on in the future is known as accounts payable. This debt constitutes an increase in her liabilities.

c. The last element in this transaction is the amount of money Julie paid on the equipment (the $2,000 down payment). Her business now has $2,000 less than it did when she walked into the case store.Note: Notice that this transaction has two credit entries and one debit entry. An entry with more than one credit entered or more than one debit entered is called a compound entry. Even though the two credits may make this entry seem lopsided, the two credits actually add up to the one debit, making this entry balance.



1 5 15 Equipment 3 0 0 0 002 Cash 2 0 0 0 003 Accounts payable 1 0 0 0 004 new display case

Transaction

On her way back to work, Julie stops at a local flower warehouse. She will need some extra roses for some wedding arrangements she will make later in the day. Julie writes a check for the amount of $200 for the roses.

Descriptiona. Some businesses not only sell services, but also goods. The items that are bought for resale

constitute an expense for the company. To record this transaction, a special expense account called the purchases account is set up. Julie’s purchase of the roses for resale will increase her expenses.

b. Once again the amount of cash the business has is decreased.



1 5 15 Purchases 2 0 0 002 Cash 2 0 0 003 roses for arrangements

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Transaction

One last stop before Julie heads back to the shop. Julie needs some office supplies. She goes to the local office supply store and buys computer paper, invoices, pens, and bubble paper for packaging. Her total bill came to $50.00.

Descriptiona. Supplies are those items that are used on a daily basis in the conducting of a business operation.

They are generally items that will be used in a short period of time, such as invoices, paper clips, pens and computer paper. These items have a value and are therefore an asset. This purchase increases the asset account called supplies.

b. Once again the business has less money than it did at the beginning of the day.



1 5 15 Supplies 5 0 002 Cash 5 0 003 purchased supplies

Transaction

At 4:30 p.m. Mr. Winkler comes into Julie’s shop. Mr. Winkler is a local restaurant owner and has an account with Julie. Today he has come in to pay his bill for the flowers he bought the previous month for his restaurant. He owes Julie $180.00 and pays her with a check.

Descriptiona. With the receipt of Mr. Winkler’s check, the business now has more money than it had at the

beginning of the day.b. Accounts receivable is an agreement between Julie and the customer for future payment of

goods received. Mr. Winkler holds up his part of the agreement by coming in and paying for his previous purchases. Because the accounts receivable is no longer owed by Mr. Winkler, it is, in effect, decreased with this transaction.



1 5 15 Cash 1 8 0 002 Accounts Receivable 1 8 0 003 customer payment

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Transaction

It has come to the end of Julie’s day. In closing the register and printing a tape of the days transactions, she finds that she had $1,200 in cash sales. It’s been a good day.

Descriptiona. The business, from the day’s sales, now has $1,200 more in cash than when it started the day.b. Revenue is the process of collecting monies in exchange for services or the sale of goods. When a

sale is made, it increases the revenue of the business. This revenue is often recorded in an account called sales.



1 5 15 Cash 1 2 0 0 002 Sales 1 2 0 0 003 day’s sales

Now analyze the following examples on your own. Go slowly, and be sure you follow each step as you go. Write the accounts affected and the proper entries (debit or credit) for each of the following transactions. Then, read on to see if you were correct.

1. A clothing company sells one of its clothing lines for $10,000 to a customer, Mr. Jones. Mr. Jones does not pay cash; he charges the entire amount on his account with you.

Which accounts are affected? Do you enter a debit or a credit for each account?

2. A barber buys $67.50 worth of scissors and razors for his business. He does not pay cash; he puts the entire amount on his account with the supplier.

Which accounts are affected? Do you enter a debit or a credit for each account?

Analysis of 1

The transaction affects the sales account in revenue and the accounts receivable account in assets. The sales account in revenue will increase, because the company now has more sales, so you will need to enter a credit to this account. The accounts receivable account in assets will increase because Mr. Jones now owes the company for the line of clothing. The entries are a debit to the accounts receivable account and a credit to the sales account. (Note: If Mr. Jones had paid for the clothing in full, the cash account would have been affected instead of accounts receivable.)

Analysis of 2

The transaction affects the barber’s supplies account in assets and the accounts payable account in liabilities. The supplies account will increase because the barber has now added more supplies to what he already had. This means you would enter a debit to the supplies account in assets. The accounts payable account in liabilities will increase because the barber now owes more money to the supplier than he did before. So you would enter a credit to the accounts payable account in liabilities.

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Don’t be discouraged if it takes you some time at this point to figure out which accounts are affected and what type of entry you need to make. This will become easier with practice. The most important thing now is for you to use the charts provided to help you do it correctly.

NOTE: In most small retail businesses, the Inventory Account is not decreased with every single sale made in the course of the business day. The sales are entered in the Cash Account and the Sales Accounts. The increase or decrease in the inventory is handled separately as Cost of Goods Sold and handled as adjustments. This procedure will be discussed later in the course.

Sometimes you may come across an entry that affects more than two accounts. As you’ve already learned, that’s called a compound entry. An example of a compound entry is if a company buys a new building and pays for part of it with cash and gets a loan for the other part. You would need to enter two separate credits (the cash and accounts payable) to equal the debit (the building account). Look at this situation below.

● New building costs $75,000.

● The company pays $25,000 in cash and takes out a loan for $50,000 for the rest of the price.

For this situation, you need to look at the accounts affected:

● Cash Account—Cash is taken out and used for part of the payment.

● Mortgage Payable—A loan is also secured for the rest of the payment (the company owes this money to the bank now).

● Buildings Account—The company owns a $75,000 building.

The Cash Account will go down with the withdrawal of money to pay for the building, and the Buildings Account will go up with the acquisition of the building. In addition, the Mortgage Payable will go up because the company now owes money to the bank on the loan. Using the Debit/Credit Chart, we know to credit the Cash Account $25,000; credit the Notes Payable $50,000 and debit the Buildings Account $75,000.

The total of the credits must equal the total debit in order for the books to balance. And, in this example, they are equal.

Let’s move on to the Practice Exercise.

Step 11: Practice Exercise 5-3Select the best single answer for the following items.

1. The journal entries are made _____.a. with debits on the left and credits on the rightb. in alphabetical orderc. in a 6-column ledger paper formatd. all of the above

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2. The tendency of an account to have a balance on either the debit or credit side of the account is called its _____.a. accounting habitb. credit increasec. normal account balanced. inventory relay system

Complete the following table by entering the word “debit” or “credit” in the appropriate space. Write your answers on scratch paper.

Category of Account

Transaction increases account, enter a . . .

Transaction decreases account, enter a . . .

Normal Account Account

Assets _____________________ _____________________ _________________

Liabilities _____________________ _____________________ _________________

Equity _____________________ _____________________ _________________

Revenues _____________________ _____________________ _________________

Expenses _____________________ _____________________ _________________


Step 13: JournalizingAs you discovered in an earlier lesson, the act of entering transaction information into the journal is called journalizing. When you journalize a transaction, you follow some simple guidelines. First, as already explained, the journal is kept on two-column ledger paper.

The first step in journalizing a transaction is to enter its date in the far left column of the paper. Remember that journal entries are listed in chronological order, the order in which they occurred. On the journal page, you will notice that the main columns are separated by a heavy double line. Inside columns, there are lighter dividing lines that split the column itself into smaller parts. The far left column has two parts in it. Enter the month in the first space, then enter the date next to it. Note that you do not write the date each time you enter a transaction. You only write the date when it changes. That way, it is obvious which entries go with the same date (Figures 5-3 and 5-4).

After you enter the date, the next step is to enter a description of the account the transaction affects. For example, if you know a transaction will affect the cash account, then you will write “Cash” in the column to the right of the date.

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Next, write in the amount of the transaction. Remember that for each transaction, you will decide whether the affected account increases or decreases; that will tell you whether to enter the amount in the debit column or the credit column. For example, if the transaction increases the Cash Account, you would enter the amount in the debit (Dr) column.

Don’t forget that every time you enter a credit, you must also enter a debit; and every time you enter a debit, you must also enter a credit. So the next step in journalizing is to make the second entry on the next line in your journal. In the above example, the Cash Account was increased. Let’s say that in that transaction, the increase was due to Sales Revenue, so the Sales Revenue Account increased. That means that you need to credit the Sales Account. Follow the same steps you did to enter the debit; this time record Sales as the account and record the amount under the “Cr” heading in your journal.

Finally, after you have journalized both accounts for this transaction, you need to write on the next line what the transaction was. In our example, this description goes on the line directly underneath the credited Sales Account entry. If the transaction we’ve been describing is “Sales for the week of July 4,” then we write that description underneath “Sales” in the journal.

Company Name General Journal


1 6 152 21 3 7 14 145 21

Figure 5-3: Example of the Journal with Columns and the Date Filled In

Bev’s Antique ShopGeneral Journal


1 7 4 Cash 5 0 0 0 002 Sales 5 0 0 0 003 sales for week ending July 4


Look at this process as it appears in the journal (Figure 5-4).

What is shown here is that Bev’s Antique Shop sold $5,000 worth of goods the week of July 4. The bookkeeper entered a $5,000 debit to increase the Cash Account and a $5,000 credit to increase the Sales Revenue Account. The description on the last line indicates that this was the total amount of sales for the week.

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1 7 4 Salaries Expense 5 0 0 0 002 Cash 5 0 0 0 003 salaries pd for wk ending July 4


Let’s look at a general journal entry for the wages Bev paid to her employees (Figure 5-5).



1 7 4 Drawing 1 0 0 002 Cash 1 0 0 003 personal withdrawal


Now let’s look at a general journal entry of Bev’s withdrawal from the business (Figure 5-6).

As a final note on journalizing, take a look at the transactions (Figures 5-5 and 5-6). Notice that they start with the debit entry. Recording the debit entry first makes the posting process easier. For that reason, it is preferred practice to record the debit entry first.

The “P/R” column is not used at this point. It is used during the posting procedure when you transfer the information in the journal into your account ledger.

After you post a journal entry, you will put a check mark in the “P/R” column in the journal. So do not put anything in this column while you are journalizing your transactions.

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Step 14: Practice Exercise 5-4Journalize these transactions for Julie’s Floral Shop. Use the journal pages that follow the transactions to complete your entries. The Chart of Accounts Summary near the beginning of this lesson should be used to help you determine the account titles. You can find journal paper for this Practice Exercise in your Forms for Practice Exercises.

1. January 1, 20XX, Mr. Peterson, a customer, buys a $40.00 arrangement for his wife and charges the amount to his account.

2. January 2, 20XX, Julie the store owner pays the phone bill of $120.00.

3. January 3, 20XX, Julie pays the flower supplier, a creditor, $3,000.00 for flowers received on credit earlier in the month.

4. January 4, 20XX, Julie pays on the mortgage of her business, an amount of $800.00.

5. January 5, 20XX, Julie pays her employees an amount of $350.00.

6. January 6, 20XX, Julie goes to her flower supplier and purchases on credit the flowers she will need for this weekend’s wedding an amount of $1000.00.

7. January 7, 20XX, Mr. Anderson, a customer, buys a $50.00 arrangement and pays cash.

8. January 8, 20XX, Julie takes a personal draw from the business in the amount of $20.00.

9. January 9, 20XX, Julie purchases some vases for resale and pays cash for them in the amount of $150.00.

10. January 10, 20XX, Julie pays the electric bill in the amount of $85.00.

11. January 11, 20XX, Mrs. Winkler buys an arrangement in the amount of $12.00 and pays cash.

12. January 12, 20XX, Julie pays the premium on her insurance in the amount of $350.00.

13. January 13, 20XX, Mr. Jones buys a $50.00 arrangement and charges the amount to his account.

14. January 14, 20XX, Julie purchases on credit ribbon for resale in the amount of $200.00.

15. January 15, 20XX, Julie buys office supplies in the amount of $50.00 and pays cash.

16. January 16, 20XX, Mr. Rodriguez buys a $50.00 arrangement for his wife and pays cash.

17. January 17, 20XX, Mrs. West, a customer, makes a payment on her account in the amount of $150.00.

18. January 18, 20XX, Julie pays the rent on the pop machine in the amount of $120.00.

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19. January 19, 20XX, Julie pays a greenery supplier, a creditor, $1,500.00 for greenery received on credit earlier in the month.

20. January 20, 20XX, Julie makes a cash addition to capital in the amount of $2,000.00.


Step 16: Lesson SummaryIn this lesson, you were reintroduced to the journal—the book of original entry. You learned how the book is set up and what accounts are most often referenced. Then, after some great practice identifying debits and credits, you learned about normal account balances. Normal account balances are important because they help the bookkeeper identify incorrect entries in the journal at a glance.

Next, you tackled a series of real-world transactions and saw how they were recorded in the journal. For each transaction, you entered a debit and a balancing credit. The process of making these entries is called journalizing.

In the next lesson, you’ll learn about the ledger in depth. You’ll discover how journal information is transferred so that the information can be sorted and organized. But first, find out how well you understand the material so far by taking the following graded Quiz.


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Lesson 6The Ledger


● Explain the difference between the journal and the ledger.

● Correctly format a ledger and the accounts in the ledger.

● Correctly use ledger accounts.

● Complete a trial balance.

● Find and correct any errors in the ledger.

Step 2: Lesson PreviewYou may remember the analogy of sorting loose coins. Gathering the coins into a single pile is somewhat like journalizing. Now it’s time to organize the pile—sorting the coins into like denominations for easy counting. Moving transactions from the journal to the ledger is called posting. This lesson will guide you through the ledger—from its design all the way to checking the entries for errors. You will learn all the steps necessary to complete an accurate ledger. Ready? Let’s begin!


● duplicate entry

● slide error

● transposition error

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Step 4: Comparing the Ledger and JournalThe journal and ledger are closely related. You could consider them to be like siblings. The ledger relies on the journal for its information, and the journal needs the ledger to tell its secrets to. In the journal, entries are made in chronological order, that is, you write them down as they happen. The journal has many accounts all mixed together. Keep in mind that in the journal, you make the entry and then enter a description of what the entry is. That entry enables you to post things to the ledger later on. You usually do not use the ledger every day, but instead you post items into it once every set period of time (every week or month, for example).

The ledger is divided into accounts. Each account has its own page so that it does not mix with other accounts. You post the information from your journal entries into these accounts. Posting is simply the transferring of information from the journal to the ledger. If you have an entry in your journal that reflects a $500 cash sale of merchandise, you know it lists the debited account (cash, $500) and the credited account (sales, $500), one above the other on the same page. When you enter that same transaction in the ledger, you first find the Cash Account and debit it $500. Next, you turn to the Sales Account page and credit that account $500. Once again, please note that in the journal, these entries are made on the same page, while in the ledger, each account has its own page and the entries are separated.

Let’s move on now and talk a little about how these accounts are set up.

The Ledger FormatWhen you cook, it helps to know what a dish will look like when it’s made correctly. Usually, cookbooks have pictures of foods that have been prepared using their recipes. Just like the completed dish in cooking, it is important to know the correct format for each book in bookkeeping The ledger is laid out a little different from the journal, so this section will show you what it’s supposed to look like. Something to remember though: Like any good cook, a bookkeeping professional may have to make some adjustments based on different circumstances. If your client or supervisor wants a certain account in a certain place, you make that adjustment. Everyone has little habits and quirks and, oftentimes, those habits and quirks make it into bookkeeping (cooks have to adjust for quirks, too—a dash of salt here, a little more basil there, some garlic thrown in . . . you get the idea).

Constructing the LedgerThe ledger can be a notebook, a set of file folders or even a computer disk. It contains a chart of accounts that acts as a table of contents for the entire ledger. Accounts are assigned a number and title and these are entered on the chart of accounts. Each account has its own page or folder or other means of keeping it separate from other accounts. In the ledger, you keep track of individual accounts and the transactions that affect them. It allows you to instantly access information such as how much cash has been taken in and paid out.

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As mentioned above, the ledger is divided into separate accounts. Ledgers are nearly identical to journals in format—debits on the left and credits on the right. The only difference is their use. The journal documents the entry, the ledger sorts the entries into their specific accounts. The ledger follows the same rules as the journal with regard to debits and credits. Let’s look at our Debit/Credit Chart again:

DEBIT/CREDIT CHART

Name of Account Increases With Decreases With

Assets Debits Credits

Expenses Debits Credits

Liabilities Credits Debits

Capital Credits Debits

Revenues Credits Debits

We will use this chart later on in this lesson. For now, let’s continue with constructing the ledger.

We know that each account in the ledger is on its own page, but what does that page look like? It is a simple, two-column format just like the journal. It has columns for dates and descriptions of entries, a “P/R” column and two columns for debits and credits. You can use two-column ledger paper or even draw your own. All you need is a space for the account title and number at the top and then lines for information. Look at this basic Cash Account page:

General LedgerCash Account

Acct. #10Date Description P/R Dr Cr7-7 J1 $3500.00

J1 450.00J1 3650.00

As you can see, you do not enter a credit for every debit and vice versa. When you post information to the ledger, you simply write down the information from the journal in the appropriate accounts.

As far as accounts go, by the time you start posting transactions, you will already know what accounts they affect. Remember, you went through that step when you journalized the transaction.

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Before we move on, briefly review ledger set-up with the following Practice Exercise.

Step 5: Practice Exercise 6-1Fill in the blanks for each question.

1. Label the four parts of the ledger below. Write your answers on scratch paper.

Cash Account ______________________________? Acct. #10 ________________________________?

Date Description P/R ________________? ________________?

J1

J1

J1

2. A ____________________ increases the balance of an asset account while a ____________________ decreases it.

3. A ____________________ increases the balance of a liability account while a ____________________ decreases it.

4. A ____________________ increases the balance of a revenue account while a ____________________ decreases it.


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Step 7: Account Numbers and TitlesWe discussed the assignment of account numbers in Lesson 4. But here’s a quick review.

NumbersAccounts are classified according to the type of account. There are five basic categories of accounts: assets, liabilities, capital, revenues and expenses. In the chart of accounts, a multi-digit number is assigned to each account. The first numeral in the account number refers to the type of account it is. For example, if it is an Asset Account, its account number will begin with a “1.” After that first numeral, you then assign the rest of the number, based on the order of accounts. Cash is a special account within the Asset category, and it is always assigned with the “1” indicating an asset account, followed by a zero or zeroes, depending on your classification system. For example, if you have a two-digit system, the cash account would be assigned the account number “10.” If you have a three-digit system, it would be “100” and so on. The digit system (two, three or more) that you will use depends largely on the company you work for or the client you are serving. If the company has more than ten accounts in any one section (assets, liabilities, capital, revenues or expenses), you will need to use a three-digit system (or four or five or more).

Look at this sample of a two-digit chart of accounts. You will notice that it is similar to the Chart of Accounts for Ed’s Hardware presented in Lesson 4.

Chart of Accounts Hale’s Handy Service

Balance Sheet Accounts Operating Statement Accounts

1. Assets 4. Revenues

10. Cash 41. Sales

11. Accounts Receivable 42. Service

12. Supplies 5. Expenses

13. Inventory 51. Purchases

14. Office Equipment 52. Salaries Expense

15. Building 53. Transportation Expense

16. Prepaid Insurance 54. Electric Expense

2. Liabilities 55. Telephone Expense

21. Accounts Payable

22. Mortgage Payable

23. Taxes Payable

3. Capital

31. Barb Hale, Owner’s Equity

32. Barb Hale, Owner’s Drawing

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Think of the account number as two numbers put together. The first number is assigned by section (1=asset, 2=liability, 3=capital, 4=revenue, 5=expense). The second is assigned by the order of accounts. We can see that the third liabilities account in the above example is Taxes Payable. We know that because of its number. Taxes Payable is account number 23. We can break that number down into its two parts: The 2 indicates it is a liability account and the 3 shows it is the third account in that group. As long as your system has this type of referencing, it will work. Notice that only the cash account ends in zero. It is a special account and its number (10) helps set it apart. In all the other sections, the first account ends in the number “1.”

Now that you have an idea about numbering accounts, let’s go over account titles.

TitlesAn account title is simply a description of the account. “Cash,” “Accounts Payable,” “Salaries Expense,” are all examples of account titles. When you assign a title, the main thing to remember is to be consistent. If in your journal you described an account as “Supplies,” then you should be sure that is what the account is titled in the ledger. An easy way to make sure you’re consistent is to set up as much of the ledger as you can when you start keeping books for a business. Or, if you join a business with its system already in place, study what titles exist and be consistent. Consistency will make the posting process much easier.

Step 8: Practice Exercise 6-2For questions 1 through 5, answer the question on a sheet of scratch paper.

1. If the Accounts Payable account is the fifth liability account at your company, what would its number be (in a two-digit system)?

2. Based on the example chart of accounts above, what is the second expense account?

3. Again, based on the example chart of accounts above, what is the fourth asset account?

4. If you are using a three-digit numbering system, what would be the number for your cash account?

5. Based on the example chart of accounts above, what is the second revenue account?


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1. Ledger accounts have the debits on the _____ side.a. rightb. leftc. topd. out

2. If we see an account that is assigned the number “10,” we know it is _____.a. an errorb. in the Assets categoryc. the cash accountd. both b and c

3. The _____ is a table of contents for the ledger.a. chart of accountsb. ledgerc. journald. worksheet

4. The _____ is a description of an account that goes along with the account number in the ledger.a. account descriptorb. account placementc. account titled. category

5. The process of transferring information from the journal to the ledger is called _____.a. postingb. printingc. journalizingd. ledgerizing


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Step 12: Posting and ReferencingYou’ve got the ledger all set up now and you’re ready to start transferring information from the journal. This, as you learned earlier, is called posting. To post information, you simply transfer each entry in the journal into the appropriate account in the ledger. To do that, follow these steps:

1. First, open the journal to the first entry that is not already in the ledger. Remember, posting is done at the end of an accounting period (weekly, monthly, etc.). There will be some entries in the journal that have already been posted to the ledger.

2. Look at the first entry in the journal. Pay special attention to the first line and what account is recorded here. Now find the page in the ledger for that account. For example, if the first entry in the journal which has not already been posted is a debit of $200 to the Cash Account, turn to the Cash Account page in the ledger. Copy the amount shown in the Cash Account journal entry to the Cash Account page in the ledger exactly as it is shown.

3. After you have posted that first account, look at the journal entry. Between the description and the debit/credit columns there is a narrow column with the heading “P/R.” That “P/R” stands for “Posted/Reference.” In the journal, put a check mark in the “P/R” column to show that you have posted that entry to the ledger. You should mark each debit and credit entry as it is posted.

4. In the ledger, you will find the same “P/R” column. Here also, the “P/R” stands for “Posted/Reference.” In this column, you should write where the information came from. If you are posting a $200 cash debit from a sale recorded in the journal, you need to put into this space what page of the journal that transaction is listed on. Let’s say that the $200 debit is entered on page 6 of the journal. You would write “J6” in the P/R column of the ledger. The “J” to indicate that the information came from the journal, the “6” to indicate page 6 of the journal.

5. Next, post the credits entry for the transaction. Continuing with the example, the credit entry to the journal would be $200 to sales. As with debit posting, be sure to make a journal page reference in the P/R column of the ledger.

6. Finally, move on to the next transaction and post it to the ledger. Be sure to enter a check mark in the journal for each debit and credit entry you post. Repeat these steps until all transactions have been posted.

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Look at these samples that follow (Figures 6-1 and 6-2).

Page 6General Journal

Date Description P/R Dr Cr9 6 Notes Payable 7 5 0 00

Cash 7 5 0 00 payment

General Ledger

Date Notes Payable Acct. #25 P/R Dr Cr9 6 J6 7 5 0 00

General Ledger

Date Cash Acct. #10 P/R Dr Cr9 6 J6 7 5 0 00

Figure 6-1: Posting to the General Ledger

Page 6General Journal

Date Description P/R Dr Cr9 6 Cash 2 0 0 00

Sales 2 0 0 00 cash sale

General Ledger

Date Cash Acct. #10 P/R Dr Cr9 6 J6 2 0 0 00

General Ledger

Date Sales Acct. #41 P/R Dr Cr9 6 J6 2 0 0 00

Figure 6-2: Posting to the General Ledger

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It is very important to post accurately and then reference your postings. The reference page from the journal that you listed by each account posting allows you to quickly find and correct any errors. (Imagine searching through your entire journal to find an entry!) The two seconds you spend writing down that little page number could save you hours of searching.

You may wonder why you would need to search in the first place. There are several situations where you might need to check back on your original journal entries. For example, if your trial balance doesn’t balance, you will need to find where the error is. In fact, you’ll learn more about trial balances in the very next section in this lesson!

Complete the following Practice Exercise, and then we’ll move on to the trial balance.

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Step 13: Practice Exercise 6-4Use the following journal entries and post them into the appropriate general ledger accounts provided. (You can find the necessary forms in your Forms for Practice Exercises.)


1 2Date Description P/R Dr Cr20XX

1 1 1 Accounts Receivable 4 0 002 Sales 4 0 003 charged sale45 2 Telephone Expense 1 2 0 006 Cash 1 2 0 007 paid phone bill89 3 Accounts Payable 3 0 0 0 00

10 Cash 3 0 0 0 0011 paid creditor1213 4 Mortgage Payable 8 0 0 0014 Cash 8 0 0 0015 paid mortgage1617 5 Salaries Expense 3 5 0 0018 Cash 3 5 0 0019 paid salaries2021 6 Purchases 1 0 0 0 0022 Accounts Payable 1 0 0 0 0023 credit purchase2425 7 Cash 5 0 0026 Sales 5 0 0027 cash sale2829 8 Drawing 2 0 0030 Cash 2 0 0031 cash draw3233 9 Purchases 1 5 0 0034 Cash 1 5 0 0035 resale items3637 10 Electricity Expense 8 5 0038 Cash 8 5 0039 paid electricity bill40

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1 1 11 Cash 1 2 002 Sales 1 2 003 cash sale45 12 Prepaid Insurance 3 5 0 006 Cash 3 5 0 007 paid premium89 13 Accounts Receivable 5 0 00

10 Sales 5 0 0011 charged sale1213 14 Purchases 2 0 0 0014 Accounts Payable 2 0 0 0015 credit purchase1617 15 Supplies 5 0 0018 Cash 5 0 0019 bought supplies2021 16 Cash 5 0 0022 Sales 5 0 0023 cash sale2425 17 Cash 1 5 0 0026 Accounts Receivable 1 5 0 0027 customer payment2829 18 Rent Expense 1 2 0 0030 Cash 1 2 0 0031 paid rent3233 19 Accounts payable 1 5 0 0 0034 Cash 1 5 0 0 0035 paid creditor3637 20 Cash 2 0 0 0 0038 Capital 2 0 0 0 0039 addition to capital40

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Step 15: Trial BalanceWhen you practiced journalizing in the previous lesson, using real-world examples, you may have been surprised by the number of different kinds of transactions a business conducts on a daily basis. Money and products change hands for a number of different reasons. It doesn’t take long for the various accounts in your ledger to fill up with information. Often, a business will want to know exactly where its money is coming from, as well as where it’s going. And you’ll want to know if there’s an error hidden somewhere in the ledger. To keep your supervisors or clients up-to-date, and to ensure that you’re on track with accurate information, you will need to complete a trial balance.

The trial balance is done at regular intervals (usually weekly or monthly, depending on how many postings you have—the more postings, the more frequently you should complete a trial balance).

The first step in completing the trial balance is to go through the ledger and find the account balance for each account. This is done in each account individually. First, add up all the debits in the account. Then, add up all the credits. Subtract the smaller answer from the larger and write the remainder on the side with the larger number.

Look at the following example:

General Ledger1 2

Date Description20XX Cash Acct #10 P/R Dr Cr

1 6 2 3 5 002 3 2 5 003 14 2 0 004 20 Totals 5 5 00 2 5 005 Account Balance 3 0 006

The total of the debits is $55, and the total of the credits is $25. Subtract $25 from $55 and you get $30. This is the Account Balance, and it is written under the side with the larger total; in this case, the debit side. The Account Balance figure is always underlined twice. In this example, it would be said that the Cash Account has a $30 debit balance.

This information is then recorded on the trial balance sheet.

The trial balance sheet is set up in four columns: account number, account title and then two columns with debits on the left and credits on the right.

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To record an account balance on the trial balance sheet, simply write the account number and title down, then enter the balance in the appropriate debit or credit column. As you go through the ledger and figure account balances for each account, double-check the balances you find and then enter them on the correct line on the trial balance sheet. You should arrange the trial balance sheet in the same order the accounts are arranged in the ledger (cash is first, then the next account and so on, based on the account number). After all the account balances have been entered, add up the debits and credits in the trial balance. These two totals must be the same!

If the debits and credits are equal, your trial balance is accurate and your ledger is balanced. Look at this sample trial balance:

Frank’s Frankfurters Trial Balance July 31, 20XX

Acct. No.

Title

Dr

Cr

10 Cash $5700

11 Acct. Receivable 2100

14 Inventory 1700

22 Acct. Payable $2000

25 Notes Payable 5500

31 Frank’s Equity 300

41 Sales Revenue 1700

Totals: $9500 $9500

As you can see, the totals for the debit and credit columns agree. That means Frank’s Frankfurters is balanced as of July 31. How, you may ask, can these numbers agree if they seemingly do not correspond at all? Well, to answer that question, think back to the journal. Each journal entry had a debit and a credit entry that are equal to each other. Knowing this, it is logical that if you transfer all the information from the journal (as you do when you post items), these equal entries will turn up somewhere—and they finally do—here on the trial balance sheet.

Let’s look at another example (Figure 6-3).

Company NameLedger—Accounts Receivable Account—Acct. #11

Date 1 220XX Item P/R Dr Cr

1 6 5 J12 5 0 0 002 7 J12 9 0 0 003 10 J14 2 5 0 004 15 J21 3 0 0 005 30 Totals 1 7 0 0 00 2 5 0 006 Account Balance 1 4 5 0 00

Figure 6-3: Ledger Account Example

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First, figure the account balance for this ledger account by totaling the debit and credit columns. You can see that the totals are $1,700 for the Debit column and $250 for the Credit column. Now subtract the smaller amount ($250) from the larger amount ($1,700). Write the remainder ($1,450) in the column with the larger amount (in this case, the debit column) and underline it twice.

From this example, you can see that this company has a balance of $1,450.00 in its Accounts Receivable Account (account number 11).

Step 16: Practice Exercise 6-5Go back to the general ledger accounts from Practice Exercise 6-4 and complete an account balance for each account dated January 31, 20XX.


Step 18: Practice Exercise 6-6Now use the account balances from Practice Exercise 6-5 to complete a trial balance for Julie’s Floral Shop. (The ledger form you need is in the Forms for Practice Exercises.)

Trial Balance Julie’s Floral Shop January 31, 20XX

Acct. # Account Title P/R Dr Cr

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If your trial balance was correct, congratulations! If it wasn’t, don’t despair. Double-check your addition and make sure you put the debits and credits in the correct columns. If that doesn’t work, review this section and try again.

What do you do if your trial balance for a real business doesn’t balance? The first thing to remember is don’t panic. Often, errors are easily found, provided you have referenced as you posted.

Step 20: Finding and Correcting ErrorsBookkepers, like anyone else, sometimes make mistakes. Fortunately, bookkeeping mistakes often are predictable and, therefore, easier to correct than in other professions. In bookkeeping, the trial balance will reveal any errors. From there, as a bookkeeping professional, you need to be able to find and correct the error in the journal. If you do that successfully, everything else will fall into place.

Here are some simple steps for tracking down errors:1. First, determine exactly how much the error is. Subtract the larger number from the smaller

and write the remainder on a piece of paper. This will help you remember the exact amount you’re looking for.

2. Make sure you have correctly transferred account balances to the trial balance itself.3. Check your journal to see if there is an entry that matches exactly with the error amount. If

there is, chances are you either omitted an entry or posted an entry twice. Go through the ledger and double-check your entries and correct them if that is the case. If you still have not found your error, move on to the next step.

4. Is the amount divisible by 2? If it is, you may have had a duplicate entry error. A duplicate entry is one that should be entered once as a debit and once as a credit but instead it is entered twice on the same side. If you have an error of $5200 on the credit side, divide it by 2 (= $2600) and see if step 2 above applies. If you still can’t find the error, even if the amount is divisible by 2, go on to the next step.

5. Check the amount to see if it is divisible by 9. To do that, simply divide the amount by 9 and see if the answer is a whole number. If it is not divisible by nine, you need to check the next step. If it is divisible by 9, then you are probably looking for a transposition error. A transposition error is one where the places of two numbers in an entry have been switched; you wrote 198 instead of 189, for example. To correct a transposition error, go back through the entries posted from the journal and compare them with the journal entries themselves. When you find where your ledger entry disagrees with the corresponding journal entry, simply correct the ledger to accurately reflect the journal.

6. If the amount of the error is a number such as $10, $100 or $1000 you may have made a slide error. A slide error is one where you slide a number one space to the right or left of the decimal point. You write $1300 instead of $130, or $14.32 instead of $143.20, for example. Another possibility is that you simply failed to carry or borrow correctly when you added up the debits and credits for the trial balance. Double-check your addition.Most errors are found by the time you get through step 6. If nothing has surfaced yet, however, there are some more things to check.

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7. Go through and double-check your handwriting and make sure a “1” wasn’t mistaken for a “7” or that a “5” wasn’t supposed to be a “3.”

8. Go through your ledger and double-check your account balances. Make sure a mistake wasn’t made there.

9. Verify each ledger posting with its journal entry. Use your cross-referencing information. Put a check mark beside each posting as you find it in the journal, then go back and look for any numbers without a check mark.

10. Verify your journal credits and journal debits—make sure they balance.

These 10 steps should help you find every possible error you can make in bookkeeping.

Step 21: Practice Exercise 6-7For the following questions, answer the questions on scratch paper.

1. You complete a trial balance and your debits are $81 more than your credits. What type of error is likely?

2. If an error is divisible by 2, but not by 9, what is the most likely type of error?

3. When the amount of an error is a number such as 10, 100 or 1000, what type of error is likely?


Step 23: Lesson SummaryIf you’re accurate in bookkeeping, you will save a lot of time. It may seem like it takes time to reference and double-check entries, but if you ever have to find an error, these hints could save you hours.

You now know how to go through your journal and post the information to the ledger (with the correct account numbers and titles). Then, after that’s all done, you can set up and fill out a trial balance to make sure everything’s correct. Not bad! Now all you have to do is practice what you know and keep going to learn more. For now, complete this lesson by doing the Quiz and then move right along.


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Answer Key

Lesson 1

Practice Exercise 1-11. Professional bookkeepers are independent and must have integrity. True

2. Businesses such as restaurants can benefit from having an accurate bookkeeper. True

3. Tax records and payroll records are NOT kept by a professional bookkeeper. False

4. Accurate records are essential to the success of a business. True

5. Individuals rarely have any use for a professional bookkeeper. False

Lesson 2

Practice Exercise 2-11. As a professional bookkeeper, you keep track of your client’s transactions. The first place these

are recorded are in the b. journal.

2. Debits are always entered in the a. left-hand column while credits are entered in the a. right-hand column.

3. “Posting” refers to c. transferring journal information to the correct accounts.

4. Assets 5. Liabilities

15 Delivery trucks $50 owed to suppliers

35 spare tires Mortgage for warehouse

$20,000 in the bank Wages owed to drivers

Warehouse Loan balance on 15 trucks

Forklift $200 owed to credit card company

Two computers

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Practice Exercise 2-21. Cash a

2. Accounts Payable c

3. Equipment b

4. Inventory a

5. Mortgage Payable (30 years) d

6. Accounts Receivable a

7. Land b

8. Payroll c

9. Loan Payable (less than 1 year) c

10. Prepaid Insurance a

11. Building b

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Pack 1 Answer Key

AK-3

Lesson 3

Practice Exercise 3-1

Jill’s Stained Glass Balance Sheet July 31, 20XX

ASSETS LIABILITIES

CURRENT ASSETS CURRENT LIABILITIES (1) Cash $2,750 (7) Accounts Payable $14,750 (2) Accounts Rec 250 Total Current Liabilities (8) $14,750 Inventory 2,500 Total Current Assets (3) $5,500 FIXED ASSETS LONG-TERM LIABILITIES (4) Building $40,500 (9) Mortgage $22,500 Equipment 1,250 Total Long-term Liabilities (10) $22,500

Total Fixed Assets (5) $41,750 Total Liabilities (11) $37,250

EQUITY Owner’s Equity $10,000

Total Equity $10,000

TOTAL ASSETS (6) $47,250 TOTAL LIABILITIES and EQUITY (12) $47,250 _______

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Practice Exercise 3-21. If Jon’s Tree Service needs $5,250 to operate each week and it brings in $12,250 each week, what

is the company’s net income? $7,000 ($12,250 minus $5,250)

2. Harold’s Hardware pays out $22,350 in expenses every month. The company brings in $14,000 in service revenue and $50,000 in sales revenue during the same amount of time. What is Harold’s Hardware’s net income? $41,650 ($14,000 plus $50,000 equals $64,000 in total revenue, minus $22,350 in expenses)

3. Rondell’s Thrift Shop makes $22,000 each month, but it costs Rondell $16,000 each month to keep the shop open. Now, if Rondell’s salaries in April cause his expenses to rise to $19,000, what is his shop’s net income for that month? What is his net income during each of the other 11 months of the year? $3,000 in April ($22,000 – $19,000) and $6,000/month for the other 11 months. ($22,000 – $16,000)

4. Sharon owns a beauty shop. The shop cuts through its competition and makes $35,000 each month. It is located in a popular mall, and it costs Sharon $27,000 each month to keep the shop open. What is Sharon’s net income? $8,000 ($35,000 – $27,000)

Practice Exercise 3-3PDT Auto Repairs

Income Statement for the Year Ended 12-31-20XX

REVENUESSales Revenue $ 4,000Service Revenue 12,000 Total Revenues $16,000

EXPENSESSalaries $2,000Rent 1,000Purchases 1,000Utilities 2,000 Total Expenses $6,000

NET INCOME $10,000

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Pack 1 Answer Key

AK-5

Lesson 4

Practice Exercise 4-1Dr Cr

230.00 150.7545.75 71.5045.50 99.00


1.Cash Sales

Dr Cr Dr Cr$50 $50

2.

Supplies Accounts Payable

Dr Cr Dr Cr$1,500 $1,500

3.

Equipment Notes Payable

Dr Cr Dr Cr$10,000 $10,000

4.

Cash Accounts Payable

Dr Cr Dr Cr$500 $500

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15. Building55. Telephone Expense21. Accounts Payable52. Salaries Expense10. Cash31. Owner’s Equity

Practice Exercise 4-41. The journal is sometimes called the b. book of original entry.

2. The process of transferring a journal entry to a ledger account is called a. posting.

3. The trial balance is used to a. check your ledger accounts and make sure they balance.

4. The first four parts of the accounting cycle are c. transaction, journalizing, posting and trial balance.

5. Debits are entered on the d. left side and credits are entered on the d. right side.

Practice Exercise 4-51. The worksheet is useful to the bookkeeping professional, because it is a. for you only.

2. The first column in the worksheet is for b. debits.

3. The worksheet allows you to d. both a and c.

4. Closing the books means c. totaling each account and readying them for the next accounting period.

5. Temporary accounts include d. all of the above.

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Pack 1 Answer Key

AK-7

Lesson 5

Practice Exercise 5-11. If a transaction increases the assets account, you enter a debit.

2. If a transaction decreases the capital account, you enter a debit.

3. If a transaction increases the revenues account, you enter a credit.

4. If a transaction decreases the liabilities account, you enter a debit.

5. If a transaction decreases an asset account you enter a credit.

6. If a transaction increases the capital account you enter a credit.

7. If a transaction decreases the mortgage payable account you enter a debit.

8. If a transaction increases the rent expense account you enter a debit.

9. If a transaction increases the cash account you enter a debit.

10. If a transaction decreases the supply account you enter a credit.

0201202LB01B-AK-64

Bookkeeping

AK-8

Practice Exercise 5-21. Dr Cash

2. Dr Equipment

3. Cr Accounts payable

4. Cr Sales

5. Cr Owner’s equity

Practice Exercise 5-31. The journal entries are made a. with debits on the left and credits on the right.

2. The tendency of an account to have a balance on either the debit or credit side of the account is called its c. normal account balance.

Category of Account

Transaction increases account, enter a . . .

Transaction decreases account, enter a . . .

Normal Account Balance

Assets debit credit debit

Liabilities credit debit credit

Equity credit debit credit

Revenue/Sales credit debit credit

Expenses debit credit debit

0201202LB01B-AK-64

Pack 1 Answer Key

AK-9

Practice Exercise 5-4Julie’s Floral Shop

General Journal Page 11 2

Date Description P/R Dr Cr20XX

1 1 1 Accounts Receivable 4 0 002 Sales 4 0 003 charged sale45 2 Telephone Expense 1 2 0 006 Cash 1 2 0 007 paid phone bill89 3 Accounts Payable 3 0 0 0 00

10 Cash 3 0 0 0 0011 paid creditor1213 4 Mortgage Payable 8 0 0 0014 Cash 8 0 0 0015 paid mortgage1617 5 Salaries Expense 3 5 0 0018 Cash 3 5 0 0019 paid salaries2021 6 Purchases 1 0 0 0 0022 Accounts Payable 1 0 0 0 0023 credit purchase2425 7 Cash 5 0 0026 Sales 5 0 0027 cash sale2829 8 Drawing 2 0 0030 Cash 2 0 0031 cash draw3233 9 Purchases 1 5 0 0034 Cash 1 5 0 0035 resale items3637 10 Electricity Expense 8 5 0038 Cash 8 5 0039 paid electricity bill40

0201202LB01B-AK-64

Bookkeeping

AK-10

Julie’s Floral Shop General Journal Page 2


1 1 11 Cash 1 2 002 Sales 1 2 003 cash sale45 12 Prepaid Insurance 3 5 0 006 Cash 3 5 0 007 paid premium89 13 Accounts Receivable 5 0 00

10 Sales 5 0 0011 charged sale1213 14 Purchases 2 0 0 0014 Accounts Payable 2 0 0 0015 credit purchase1617 15 Supplies 5 0 0018 Cash 5 0 0019 bought supplies2021 16 Cash 5 0 0022 Sales 5 0 0023 cash sale2425 17 Cash 1 5 0 0026 Accounts Receivable 1 5 0 0027 customer payment2829 18 Rent Expense 1 2 0 0030 Cash 1 2 0 0031 paid rent3233 19 Accounts payable 1 5 0 0 0034 Cash 1 5 0 0 0035 paid creditor3637 20 Cash 2 0 0 0 0038 Owner’s Equity 2 0 0 0 0039 addition to capital40

0201202LB01B-AK-64

Pack 1 Answer Key

AK-11

Lesson 6


1.

Cash Account Account Title Acct. #10 Account Number

Date Description P/R Dr CrJ1J1J1

2. A debit increases the balance of an asset account while a credit decreases it.

3. A credit increases the balance of a liability account while a debit decreases it.

4. A credit increases the balance of a revenue account while a debit decreases it.

Practice Exercise 6-21. If the Accounts Payable account is the fifth liability account at your company, what would its

number be (in a two-digit system)? 25

2. Based on the example chart of accounts above, what is the second expense account? Salaries Expense

3. Again, based on the example chart of accounts above, what is the fourth asset account? Inventory

4. If you are using a three-digit numbering system, what would be the number for your cash account? 100

5. Based on the example chart of accounts above, what is the second revenue account? Service

Practice Exercise 6-31. Ledgers have the debits on the b. left side.

2. If we see an account that is assigned the number “10,” we know it is d. both b and c.

3. The a. chart of accounts is a table of contents for the ledger.

4. The c. account title is a description of an account that goes along with the account number in the ledger.

5. The process of transferring information from the journal to the ledger is called a. posting.

0201202LB01B-AK-64

Bookkeeping

AK-12


1 2Date Description20XX Cash Acct #10 P/R Dr Cr

1 1 1 Beginning Balance 1 0 0 0 0 002 2 J1 1 2 0 003 3 J1 3 0 0 0 004 4 J1 8 0 0 005 5 J1 3 5 0 006 7 J1 5 0 007 8 J1 2 0 008 9 J1 1 5 0 009 10 J1 8 5 00

10 11 J2 1 2 0011 12 J2 3 5 0 0012 15 J2 5 0 0013 16 J2 5 0 0014 17 J2 1 5 0 0015 18 J2 1 2 0 0016 19 J2 1 5 0 0 0017 20 J2 2 0 0 0 00181920

1 2Date Description20XX Accounts Receivable Acct #11 P/R Dr Cr

1 1 1 Beginning Balance 2 0 0 0 002 1 J1 4 0 003 13 J2 5 0 004 17 J2 1 5 0 0056789

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0201202LB01B-AK-64

Pack 1 Answer Key

AK-13

Practice Exercise 6-4 Continued

1 2Date Description20XX Prepaid Insurance Acct #12 P/R Dr Cr

1 1 1 Beginning Balance 1 0 0 0 002 12 J2 3 5 0 003456789

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1 2Date Description20XX Supplies Acct #13 P/R Dr Cr

1 1 1 Beginning Balance 1 0 0 0 002 15 J2 5 0 003456789

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0201202LB01B-AK-64

Bookkeeping

AK-14


1 2Date Description20XX Building Acct #14 P/R Dr Cr

1 1 1 Beginning Balance 5 0 0 0 0 0023456789

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1 2Date Description20XX Accounts Payable Acct #21 P/R Dr Cr

1 1 1 Beginning Balance 3 5 0 0 002 3 J1 3 0 0 0 003 6 J1 1 0 0 0 004 14 J2 2 0 0 005 19 J2 1 5 0 0 006789

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0201202LB01B-AK-64

Pack 1 Answer Key

AK-15


1 2Date Description20XX Mortgage Payable Acct #22 P/R Dr Cr

1 1 1 Beginning Balance 4 5 0 0 0 002 4 J1 8 0 0 003456789

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1 2Date Description20XX Capital Acct #31 P/R Dr Cr

1 1 1 Beginning Balance 1 5 5 0 0 002 20 J2 2 0 0 0 003456789

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0201202LB01B-AK-64

Bookkeeping

AK-16


1 2Date Description20XX Drawing Acct #32 P/R Dr Cr

1 1 1 Beginning Balance 0 0 002 8 J1 2 0 003456789

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1 2Date Description20XX Sales Acct #41 P/R Dr Cr

1 1 1 Beginning Balance 0 0 002 1 J1 4 0 003 7 J1 5 0 004 11 J2 1 2 005 13 J2 5 0 006 16 J2 5 0 00789

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0201202LB01B-AK-64

Pack 1 Answer Key

AK-17


1 2Date Description20XX Purchases Acct #51 P/R Dr Cr

1 1 1 Beginning Balance 0 002 6 J1 1 0 0 0 003 9 J1 1 5 0 004 14 J2 2 0 0 0056789

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1 2Date Description20XX Salaries Expense Acct #52 P/R Dr Cr

1 1 1 Beginning Balance 0 002 5 J1 3 5 0 003456789

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0201202LB01B-AK-64

Bookkeeping

AK-18


1 2Date Description20XX Telephone Expense Acct #53 P/R Dr Cr

1 1 1 Beginning Balance 0 0 002 2 J1 1 2 0 003456789

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1 2Date Description20XX Electricity Expense Acct #54 P/R Dr Cr

1 1 1 Beginning Balance 0 002 10 J1 8 5 003456789

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0201202LB01B-AK-64

Pack 1 Answer Key

AK-19


1 2Date Description20XX Rent Expense Acct #55 P/R Dr Cr

1 1 1 Beginning Balance 0 002 18 J2 1 2 0 0034567

89

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0201202LB01B-AK-64

Bookkeeping

AK-20


1 2Date Description20XX Cash Acct #10 P/R Dr Cr

1 1 1 Beginning Balance 1 0 0 0 0 002 2 J1 1 2 0 003 3 J1 3 0 0 0 004 4 J1 8 0 0 005 5 J1 3 5 0 006 7 J1 5 0 007 8 J1 2 0 008 9 J1 1 5 0 009 10 J1 8 5 00

10 11 J2 1 2 0011 12 J2 3 5 0 0012 15 J2 5 0 0013 16 J2 5 0 0014 17 J2 1 5 0 0015 18 J2 1 2 0 0016 19 J2 1 5 0 0 0017 20 J2 2 0 0 0 0018 31 Totals 1 2 2 6 2 00 6 5 4 5 0019 Account Balance 5 7 1 7 0020

1 2Date Description20XX Accounts Receivable Acct #11 P/R Dr Cr

1 1 1 Beginning Balance 2 0 0 0 002 1 J1 4 0 003 13 J2 5 0 004 17 J2 1 5 0 005 31 Totals 2 0 9 0 00 1 5 0 006 Account Balance 1 9 4 0 00789

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0201202LB01B-AK-64

Pack 1 Answer Key

AK-21


1 2Date Description20XX Prepaid Insurance Acct #12 P/R Dr Cr

1 1 1 Beginning Balance 1 0 0 0 002 12 J2 3 5 0 003 31 Totals 1 3 5 0 00 0 004 Account Balance 1 3 5 0 0056789

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1 2Date Description20XX Supplies Acct #13 P/R Dr Cr

1 1 1 Beginning Balance 1 0 0 0 002 15 J2 5 0 003 31 Totals 1 0 5 0 00 0 004 Account Balance 1 0 5 0 0056789

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0201202LB01B-AK-64

Bookkeeping

AK-22


1 2Date Description20XX Building Acct #14 P/R Dr Cr

1 1 1 Beginning Balance 5 0 0 0 0 0023 It is not necessary to complete4 an account balance for this account5 because there have not been any6 entries made to the account.789

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1 2Date Description20XX Accounts Payable Acct #21 P/R Dr Cr

1 1 1 Beginning Balance 3 5 0 0 002 3 J1 3 0 0 0 003 6 J1 1 0 0 0 004 14 J2 2 0 0 005 19 J2 1 5 0 0 006 31 Totals 4 5 0 0 00 4 7 0 0 007 Account Balance 2 0 0 0089

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0201202LB01B-AK-64

Pack 1 Answer Key

AK-23


1 2Date Description20XX Mortgage Payable Acct #22 P/R Dr Cr

1 1 1 Beginning Balance 4 5 0 0 0 002 4 J1 8 0 0 003 31 Totals 8 0 0 00 4 5 0 0 0 004 Account Balance 4 4 2 0 0 0056789

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1 2Date Description20XX Capital Acct #31 P/R Dr Cr

1 1 1 Beginning Balance 1 5 5 0 0 002 20 J2 2 0 0 0 003 31 Totals 0 00 1 7 5 0 0 004 Account Balance 1 7 5 0 0 0056 The Capital, Drawing, Sales Revenue7 and Expense Accounts do not need8 to be underlined. Later in the course9 you will learn about the closing

10 process. It is in this process these11 accounts will require the underlines.121314 151617181920

0201202LB01B-AK-64

Bookkeeping

AK-24


1 2Date Description20XX Drawing Acct #32 P/R Dr Cr

1 1 1 Beginning Balance 0 0 002 8 J1 2 0 003 31 Totals 2 0 00 0 004 Account Balance 2 0 0056789

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1 2Date Description20XX Sales Acct #41 P/R Dr Cr

1 1 1 Beginning Balance 0 0 002 1 J1 4 0 003 7 J1 5 0 004 11 J2 1 2 005 13 J2 5 0 006 16 J2 5 0 007 31 Totals 0 00 2 0 2 008 Account Balance 2 0 2 009

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0201202LB01B-AK-64

Pack 1 Answer Key

AK-25


1 2Date Description20XX Purchases Acct #51 P/R Dr Cr

1 1 1 Beginning Balance 0 002 6 J1 1 0 0 0 003 9 J1 1 5 0 004 14 J2 2 0 0 005 31 Totals 1 3 5 0 00 0 006 Account Balance 1 3 5 0 00789

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1 2Date Description20XX Salaries Expense Acct #52 P/R Dr Cr

1 1 1 Beginning Balance 0 002 5 J1 3 5 0 003 31 Totals 3 5 0 00 0 004 Account Balance 3 5 0 0056789

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0201202LB01B-AK-64

Bookkeeping

AK-26


1 2Date Description20XX Telephone Expense Acct #53 P/R Dr Cr


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1 2Date Description20XX Electricity Expense Acct #54 P/R Dr Cr

1 1 1 Beginning Balance 0 002 10 J1 8 5 003 31 Totals 8 5 00 0 004 Account Balance 8 5 0056789

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0201202LB01B-AK-64

Pack 1 Answer Key

AK-27


1 2Date Description20XX Rent Expense Acct #55 P/R Dr Cr


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0201202LB01B-AK-64

Bookkeeping

AK-28

Practice Exercise 6-6Trial Balance

Julie’s Floral Shop January 31, 20XX

Acct. # Account Title P/R Dr Cr10 Cash 5 7 1 7 0011 Accounts Receivable 1 9 4 0 0012 Prepaid Insurance 1 3 5 0 0013 Supplies 1 0 5 0 0014 Building 5 0 0 0 0 0021 Accounts Payable 2 0 0 0022 Mortgage Payable 4 4 2 0 0 0031 Capital 1 7 5 0 0 0032 Drawing 2 0 0041 Sales 2 0 2 0051 Purchases 1 3 5 0 0052 Salaries Expense 3 5 0 0053 Telephone Expense 1 2 0 0054 Electricity Expense 8 5 0055 Rent Expense 1 2 0 00

Totals 6 2 1 0 2 00 6 2 1 0 2 00


1. Transposition2. Duplicate Entry3. Slide

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