Video Transcript: The Ledger

Hello and welcome back now we're going to discuss the ledger. Accounts fall into two general groups, one, balance sheet accounts, which are assets, liabilities  and stockholder equity, and two, income statement accounts, your revenues and your expenses, the terms real accounts and permanent accounts also refer to  balance sheet accounts. Balance Sheet accounts are real accounts because  they are not sub classifications or subdivisions of any other account. They are  permanent accounts because their balances are not transferred or closed to any other account at the end of the accounting period. Income statement accounts  and the dividends accounts are nominal accounts because they are merely sub  classifications of the stockholders equity accounts. Nominal literally means in  name, only nominal accounts are also called temporary accounts because they  temporarily contain revenue, expenses and dividend information that is  transferred or closed to the retained earnings account at the end of each  accounting period, individual accounts are in sequence in the ledger. Each  account typically has an identification number and a title to help locate accounts  when recording data. For example, a company might number asset accounts,  100 through 199, the liability accounts. 200 through 299, stockholder equity  accounts and dividend accounts. 300 to 399, revenue accounts, 400 to 499, and expense accounts, 500 to 599, while using the numbering system in this text,  the information chart of accounts used in the first 11 chapters appears in a  separate file at the end of the text. You should print that file and keep it handy  for working certain problems and exercises. Companies may use other  numbering systems. For instance, sometimes a company numbers its accounts  in sequential starting with one, two and so on. The important idea is that  companies use the numbering system. For instance, the company that I work  for, we have a lot of departments, so therefore we have our asset account, say,  cash 100 but within our company, we have different owners, and each owner  has different accounts. So for that one cash account, we may have 10 different  cat the same cash account with 10 different departments all belonging to that  cash account. So that's how you can number in different sequences. The micro  train company is a small corporation that provides on site personal computer  software training using the client's equipment. The company all first be Oh, I'm  sorry. Let me start this slide over. I'm so sorry. Whenever you're ready. Oh, okay, okay. Microtrain company is a small corporation that provides on site personal  computer software training using the client's equipment. The company offers,  beginning through advanced training with convenient scheduling a small fleet of  trucks transports professional and teaching supplies to the client sites. The  company rents a building and is responsible for paying the utilities. We illustrate  the capital stock transaction that occurred to form the company in November  and the first month of operations, which is December. The accounting process  used by this company is similar to that of any small company. The ledger  accounts used by Microtrain company are okay. So here is your listing of your 

accounts that you have. So as you can see, all your assets, your cat, all your  assets start with 100 cash through trucks, and then your liabilities, your  accounts payable, unearned service fees. Those are all your liabilities. So those  are your 200 accounts, then your 300 which are your equity and dividend  accounts, and then your revenues, your 400 service revenue and your expenses start with the 500 accounts, okay, and each one has a description of what goes  into that account. So what makes up cash, what makes up accounts receivable  and so forth, okay, and this is called your chart of accounts. To begin a  transaction must be journalized. Journalizing is the process of entering the  effects of a transaction action into a journal then the information is transferred or posted to the proper accounts in the ledger. Posting is the process of recording  the ledger accounts, the information contained in the journal. In the following  example, notice that each business transaction affects two or more accounts in  the ledger. Also note that the transaction date in both the journal, the general  journal and the general ledger accounts, is the same. In the ledger accounts, the date used is the date that the transaction was recorded in the general journal,  even if the entry is not posted until seven days later. Our example shows the  journal entries posted to T accounts. In practice, firms post general entries to  ledger accounts. Accountants use the accrual basis of accounting. Under the  accrual basis of accounting, they recognize revenues when the company makes a sale or performs a service, regardless of when the company actually receives  the cash, they recognize expenses as incurred whether or not the company has  paid out the cash for that expense. In the following Microtrain company,  example, transaction one increases cash and increases capital stock by  $50,000 first Microtrain records a transaction in the general journal, and then it  posts the entry to the accounts in the general ledger. Okay, so for instance, the  top one is your is your journal again, the very first entry has the date, or if you  flip to the next page, that's the first entry at the top of that page. So you need the year there as well. Okay, so here the stock owner invested $50,000 informed the train company. So Cash is debited, that's your asset, and capital stock is  credited, because they are investing the money into the business, and then at  the bottom, you see your two accounts. You have your cash account and you  have your capital stock account. And as you can see, the account is numbered  100 and the other account is numbered 300 Okay, so you're going to debit the  50,000 and you're going to credit the 50,000 on the capital stock, therefore  keeping in balance your equation. No other transactions occurred in November.  The company prepares financial statements at the end of each month. Exhibit  nine shows the company's balance sheet at 2010, November 30, the balance  sheet reflects ledger account balances as of the close of business on November 30, 2010, these closing balances are the beginning balances for December 1.  The ledger accounts show these closing balances as beginning balances. Now  assume that in December 20, Microtrain company engaged in the following 

transactions. We show the proper recording of each transaction in the journal  and then in the ledger accounts and describe the effects of each transaction.  Okay, so here's your balance sheet at the end of November. Okay, and  remember I said the balance sheet has for a specific time, so November 30 is  it's not for a period in between, as with the income statement, your balance  sheet is just a specific time. Okay, so what's the time you're doing your balance  sheet on the last day of the month? Okay, so your assets are listed first, and  then on the other side, your liabilities and your stockholder equities again, for  the balance. Okay? So your cash is 50,000 your capital stock is 50,000 again,  your total assets equal your total liabilities and stockholders equity. Okay? On  December 1, we are going to record cash. You paid cash for four small trucks  totaling $40,000 so on your general journal the first of the month, 2010,  December, one, you purchase trucks. Trucks is your asset, and cash is an  asset. Trucks will be recorded first because it's the it's a debit. Okay, so your  trucks is recorded first, and then your cash is actually being credited. Okay, so if  it were the reverse, then you sold the trucks for cash, cash would be listed first,  and then trucks, because you're adding to, which is a debit, and you're taking  away which is a credit. Okay, so and you want to put a brief description of what  this journal entry entails. So to record the purchase of four trucks, simple and to  the point, okay, then underneath you have your truck account and you have,  excuse me, and your cash account. Okay, so the posting reference, so the  $40,000 that you of trucks, you're going to post it to account 150 so if you look at the posting reference, it says 150 that's the number of the account. Okay, so  account number 150 is for trucks, and then with the. Cash. It's posting to posting reference 100 which is the number 100 of your account for your cash, okay?  And then the next December 1, you're going to pay cash for insurance on trucks  to cover one year period from this date, okay, so, because you are paying for the whole year you're prepaying for your insurance. So therefore we're going to  create a new asset account, an account called prepaid insurance, and it's  considered an asset at this moment because you've paid in advance. It doesn't  become an expense until it's used up. Okay? So you're going to create a new  account called prepaid insurance. That is your debit of 2400 and then you're  spending cash, so that's a credit of 2400 and just simply purchase truck  insurance to cover a one year period. Okay? And then at the bottom, you're  going to post you're posting references to account 108 the debit of your  insurance. And then you're going to credit account 100 for the spending of the  cash. An asset prepaid insurance increases and an asset cash decreases by  $2,400 the debit is to prepay the insurance rather than expense, because the  policy covers more than the current accounting period of December, which I had explained to you earlier, as you will see in chapter three, prepaid items are  expense as They are used up. If this insurance policy was only written for  December, the entire $2,400 would have been an insurance expense. Okay, on 

December 4, I'm sorry, December 1, they rented a building and paid $1,200 to  cover a three month period for this date. Again, prepaid you're covering, you're  paying one amount for three months. So therefore, you created a new asset  account, prepaid rent, because it's an asset right now. Until once it's used, they'll become an expense. Okay? And that's where your adjusting entries come in on  the the trial balance, which we'll go into later. Okay, so again, record your entries debiting credit. What needs to be debiting credit, like the prepaid rent is debited  for $1,200 the cash is credited for $1,200 and a brief description, pay three  months rent on a building. Okay? And then you're going to post them to the  ledger. So you're posting the $1,200 debit to the prepaid rent, and you're posting the $1,200 credit to the cash because you paid for that an asset, supplies on  hand increases and a liability accounts payable increases by $1,400 the debit is  to supplies on hand rather than supplies expense, because the supplies are to  be used over several accounting periods. In each of the three proceeding  entries, we debit in an asset rather than an expense. The reason is that the  expenditure applies to more than just the current accounting period whenever a  company will not fully use up an item, such as insurance, rent or supplies, in the  period when the purchase usually debits as an asset in practice. However,  sometimes the expense is initially debited. In these situations, companies  sometimes buy items that they fully use up within the current accounting period.  For example, during the first part of the month, a company may buy supplies  that it intends to consume fully during that month, if the company fully consumes the supplies during the period of purchase, the best practice is to debit supplies  expense at the time of the purchase, rather than supplies on hand. The same  advice applies to insurance and rent. If a company purchases insurance that is  fully consumed during the current period, the company should debit insurance  expense at the time of the purchase, rather than prepaid insurance. Also, if a  company pays rent, that applies only to the current period, Rent Expense should be debited at the time of the purchase. So on December 7, we're going to  receive $4,500 from a customer and payment for future training services. Okay,  so again, we're receiving in advance money for something that we are going to  perform later. So we are going to we're going to receive. The cash. So that's a  debit of 4500 and then we're going to open a new account, which is called  unearned service fees, and we're going to post the full $4,500 to that account.  And the explanation simply to record the receipt of cash from a customer and  payment for future training services. Okay? And again, you're going to post the  cash to account 100 as a debit and to the new account department account 216, unearned service fees. You're going to credit $4,500 an asset, cash increases  and a liability. Unearned service revenue increases by $4,500 the credit is to be  unearned service fees rather than service revenue, because the 4500 applies to more than just the current accounting period, unearned service fees is a liability,  because if the services are never performed, the 4500 will need to be refunded. 

If the payment had been for services to be provided in December, the credit  would have been to the service revenue, so an asset cash increases and a  revenue, service revenue increases by $5,000 so you can see, on December  15, you have cash of 15,000 debit and service revenue of 5000 credit. And when you post those, you're going to post to account 100 for the 500 debit and  account 400 for the 500 credit. A liability, a liability, account payable decreases  and an asset, cash decreases by $1,400 an asset, accounts receivable  increases and a revenue service, revenue increases by $5,700 so your  accounts receivable, which is an asset, is going to be debited for $5,700 and  your service revenue is going to credit for $5,700 and again posting reference  one oh count 103 you're going to post it to account 103 and the service revenue, post account 400 an expense advertising expense increases and a liability  account payable increases by $50 the reason for the debiting an expense rather than an asset is because all the cost pertains to the current accounting period,  the month of December. Otherwise prepaid advertising would have been debited on December 26 you're going to receive $500 on accounts receivable from a  customer. Okay? So there's your future cash. Someone is going to pay $500 on  their bill that they owe to you. So you're going to debit your cash. You're going to credit your accounts receivable. Okay, so you, in essence, nothing has changed. Your asset account remains the same as a balance, just the accounts are being  either debited or credited. Okay, because they're both asset accounts, and  again, your equation remains in balance because you're taking away from one  and adding to another. Okay, one asset cash increases and another asset  accounts receivable decreases. Okay, of the $500 on December 28 we're gonna pay salaries of $3,600 to training personnel for the first four weeks of December, okay? And we're gonna, we're just going to ignore the payroll and the other  deductions, like the taxes that come that go along with the salary posting, okay,  so for the salary expenses, you have $3,600 as an expense, and then you're  going to, because you're spending your cash, you're going to credit your cash  for $3,600 and again, you're going to post the appropriate journal account. And  expense, salary expense increases and the asset decreases, which is your  cash, okay? And then on December 29 you received and paid the utilities bill,  $450 okay? So immediately going to credit utilities expense, because it's just for  the one month. It's not for a period longer than a month, so it's an expense. And  then your cash of 150 that you've spent in your description paid the utility bill for  December. And then with your posting reference the 511 which is your expense  account, and your 100 which is your cash account, you're going to post debit or  credit, whichever needs to be debited credit. So for your utility expense is a  debit of 150 and. Your cash as a credit for 150 on December 30, you receive a  bill for gas and oil used in the trucks, and it's total $680 and again, cash and oil  expense of 680 because it's an expense and accounts payable, because you've  paid that bill, and you're taking away from the amount that you now owe 

someone $680 and you're going to post using your posting reference column,  the appropriate accounts, 506, for the expense and account 200 for your  accounts payable. On December 31 a dividend of $3,000 was paid to your  stockholders. Okay, so dividend, remember, is included with your revenues,  okay, so therefore you're going to debit your dividends, and your cash, because  you're paying the money out is going to be 3000 credit in the simple description,  dividends were paid to stockholders, okay? And again, posted appropriate  general ledger account, which for dividends, is 300 okay? And your cash is 100  account, 100 the dividend. Account increases and an asset cash decreases.  Transaction 15 concludes the analysis of the Microtrain company transactions.  The next section discusses and illustrates posting to the ledger accounts and  cross indexing