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TheAccountingCycle

TheAccountingCycle
LessonOne:AccountingCycle(thislesson)
LessonTwo:SourceDocuments
LessonThree:BasicAccountingJournalEntries
LessonFour:AccountingJournals
LessonFive:TAccounts
LessonSix:BalancingTAccounts
LessonSeven:PostingJournals
LessonEight:ControlAccounts
LessonNine:TrialBalance

Thereisacycleofactioninaccountingforanybusiness.Thiscycleisdepicteddiagrammatically
below:

Whatdoallthesenewwordsmean?
1. SOURCEDOCUMENTSSourcedocumentsaredocuments,such
ascashslips,invoices,etc.thatformthesourceof(andserveasproof
for)atransaction.Inotherwords,theyarethefirstdocumentsthat
existrelatingtoatransaction.
Inmylessononsourcedocumentsyouwillseeexamplesofinvoices,
cashslips,receipts,checkcounterfoils,bankdepositslipsandeven
internetpaymentconfirmations.

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2. JOURNALSThesearechronological
(dateorder)recordsoftransactionsentered
intobyabusiness.Journalsarethatfirstbasic
entryofdebitandcreditforeachtransaction.
Intheexampleswehavebeendoinginthe
previouschapters,wherewehavedebitedoneaccountandcreditedanother,wehavebeen
doingjournals.

Readthroughthisfirstlessononbasicaccountingjournalentriesforabriefoverview.
Thereareactuallyafewtypesofjournals,andtheydon'talllookexactlyliketheabovedebitand
credit.We'llrunthrougheachoftheminthesecondlessononaccountingjournals,fromthecash
receiptsjournaltothegeneraljournal,soyougetagoodideaofwhateachoneisforandhowitworks.

3. LEDGER(TACCOUNTS)Theledgerisacollectivetermfortheaccountsofabusiness(aledgerof
accountsislikeaschooloffish).TheaccountsareintheshapeofaTandthusareoftenreferredto
asTaccounts.Inthisstepwetakeallthedebitsandcredits(journals)relatingtooneaccountlets
saybankanddrawupanaccountforbankthatshowsallthetransactionsrelatingtoit.

ThereafewlessonsavailableonTaccounts.InourfirstTaccountlessoncalledTAccountswe'lllookat
howtodrawupaTaccount.
Afterthisbasicgroundingwe'lllookatbalancingTaccounts.

Nextwe'lllookatpostingjournals(postingmeanstransferringinformation
fromthejournalstotheTaccounts).
And,inourfinallessononTaccounts,we'llgoovercontrolaccountsandtake
acloserlookatthedebtorsandcreditorsledgers.
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4.TRIALBALANCEAsheetdisplayingalltheaccountsofabusiness,
drawnupasatrial(test)ofwhetherthetotalofallthedebitbalancesequal
thetotalofallthecreditbalances(Abalanceistheamountofanitemata
pointintime.Forexample,Thebalanceinthebankaccountonthe1stof
Januarywas$5,000.).Thetrialbalanceispreparedasafinalcheckjust
beforethefinancialstatementsaredrawnup.Clickhereforabrieflesson
onthetrialbalance.

5.FINANCIALSTATEMENTSAstatementisareport.Financial
statementsarethemostimportantreportsofabusiness.These
statementsarepreparedfromtheinformationinthetrialbalance.The
purposeofthesestatementsistoshowthereaderthefinancial
position,financialperformanceandcashflowsofabusiness,aswellas
otherusefulinformationconcerningthebusiness.Financialstatements
areusuallypreparedonceayear.
Financialstatementsconsistof(amongstotherthings)anincomestatement,statementofchangesin
theownersequity,balancesheet,cashflowstatementand(whereneeded)anauditorsreport.
Wewilldealwiththevariouscomponentsofthefinancialstatementsinournextsection,
entitledAccountingReports.

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WhatAreSourceDocuments?

WhatAreSourceDocuments?
Whataresourcedocuments?Whyaretheyimportant?
Asmentionedpreviously,thesourcedocumentisthefirstdocumentthatexistsrelatingtothe
transaction.
Bookkeepersandotheraccountspersonnelareadamantthatabusinesskeepsphysicalcopiesof
everything.Sourcedocumentsarethosephysicalcopies.Theyareevidenceofthetransactiontakingplace,
onwhatdaysandatwhatamounts.Ifsourcedocumentsdonotexistforatransaction(duetobeinglostor
thrownawayornotrecordedinthefirstplace),accountingforthetransactionbecomesverydifficultindeed.

TypesofSourceDocuments
Herearesomeofthemostcommonsourcedocuments:

Invoices
Thesearedocumentslistinggoodsorservicesprovided,aswellastheirprices.Suppliersnormallysendan
invoicetogetherwithgoods(oronceserviceshavebeendelivered)soastoindicatetheamountofpayment
requiredtobepaidtothem.Inaddition,invoicesoftenindicatehowsoonthepaymentistobemade,the
businessbankingdetails,etc.Invoicesthusnormallyrelatetocredittransactions.

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WhatAreSourceDocuments?

Receipts
Thesearedocumentsconfirmingthatcashorgoodshavebeenreceived.Receiptsthusnormallyrelateto
paymentthathasbeenmadebycashorthroughadebitorcreditcard.

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WhatAreSourceDocuments?

DepositSlips
Thesearedocumentsservingasproofthatcashhasbeendepositedinabankaccount.

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WhatAreSourceDocuments?

ChequeandChequeCounterfoil
Thisisthepartofthecheque(orcheckintheU.S.)keptbythedrawer(writer)ofthechequeasarecordof
thetransaction.

Eachcheckwouldhaveacounterfoilonthesamepageofthecheckbook.Theimageaboveshowsthe
checkontheright,whichwouldbetornout,whilethecounterfoilontheleftisthestubthatwouldremainin
thecheckbook.
Somecheckbooksdon'thavecounterfoils.Insteadtheyhaveseparatepagesatthebackofthecheckbook
(behindallthechecks)whereyoucanhandwritethedetailsofchecksyouhaveissuedincludingthecheck
number,thevalueandwho/whattheywerefor.

Statement
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WhatAreSourceDocuments?

Areportshowingtheamountowedbyonebusinesstoanother,aswellasdetailsoftransactionsbetween
thetwobusinesses.

PaymentConfirmations
Thesearedocumentsservingasproofthatpaymenthasbeenmade,oftenusedasproofofelectronic
transfers(paymentsthroughtheinternetorusingotherelectronicmeans).

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WhatAreSourceDocuments?

6
Thosearethemostcommonsourcedocumentsthatyouwillfindinthebusinessworld.
Thenextstepintheaccountingcycleistotakethedatafromthesesourcedocumentsandusethisdatato
makeajournalentry.
Wehavenowansweredthequestion"Whataresourcedocuments?"andcanmoveontothenextlessonon
journalentries.

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BasicAccountingJournalEntries

BasicAccountingJournalEntries
Previouslesson:SourceDocuments
Nextlesson:AccountingJournals

Thejournalisthebookoffirstentry.
Itusedtobeanactualbookthatthebookkeeperwouldusetomakeaccounting
entries.
Thesedaysbookkeepersentertransactionsonthecomputerusinganaccounting
program.
Ourrecordinginthejournalisalsocalledajournalorajournalentry.
Thejournalentrieslooklikethis:

Doesthislookatallfamiliar?Itshouldwehavebeendoingthesebasicaccountingjournalentries
throughouttheprevioussectionondoubleentryaccounting.
Journalsaresimplydebitsandcreditsinchronological(date)order.
Thepurposeofjournalsistokeepadaytodayrecordofabusinessanditstransactions.
Eachtransactionalsorequiresabriefexplanationofthetransaction(belowthedebitandcredit).This
explanationshouldaccuratelydescribewhattookplace,sothatanyonewhoglancedatitforthefirst
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timecouldeasilyidentifywhatoccurred.
Eachjournalcanalsobematchedtotherelevant
supportingdocument(suchasacheckstuborareceipt)
byuseofacrossreferencingcodeorfolio
number.Thiscodeorfolionumbersimplycross
referencesbetweenonedocumentandanother.Ifthe
firsttransactionaboveof$15,000capitalwasmadeby
issuingchecknumber38,thenonecouldwriteCh38
(forexample)underthefolionumber.

Usingthefolionumbertomatchajournalentrytoasourcedocumentwould
enableapersontoeasilytracetherecordedtransactionbacktothesource
documentandverifythatthetransactionactuallytookplace(asevidencedby
thesourcedocument).
Journalsmayalsooftenincludeacrossreferencingcodeorfolionumberto
crossreferencebetweenthejournalentriesandtheTaccounts(thenextstepintheaccountingcycle).
Eachspecificitem,suchasbank,wouldhaveitsownfolionumber,andthiswouldbeusedtocross
referencefromthejournalentryinvolvingbanktothebanksTaccountintheledger(thiswillbe
coveredinthenextsection).Thefolionumbersmakeitsimpletotraceinformationthroughthestepsin
theaccountingcycle.
Thesecrossreferencingnumbersorcodeswouldworklikethis:

Sal1istheindividualcodeforthesalariesaccount.J1isthecodeforjournalpage1.Onecould
thusfollowinformationfromthejournalentrytoanaccountintheledger,orfromanaccountin
theledgerbacktothejournalentries.

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BasicAccountingJournalEntries

Thereareactuallyvariousdifferenttypesofjournals,andinournextlessonwe'regoingtoseewhat
theylooklikeandhowtheywork.

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AccountingJournals

AccountingJournals
Itiscommonforabookkeepertokeepsevendifferentaccountingjournals(i.e.sevenbooksoffirstentry).
Eachjournalcoversadifferentaspectofthebusiness.
Thebasicformatforeachofthesejournalsisthedebitandcreditaslistedpreviously.Thereis,however,a
moreexactformatofeachjournal,andthisisshownbelow...

CashReceiptsJournal(CRJ)
Thecashreceiptsjournalisthejournalwhereyourecordallcashthathasbeenreceived.
Theformatofthecashreceiptsjournalisasfollows:

2
Majorcategoriesofreceipts,suchasfromincomeorfromdebtors,receivetheirowncolumn.
Thecategorycalledsundryisusedtorepresentvariousmiscellaneous(andlessregular)items,suchas
capitalorreceivingcashfromaloan.Thewordsundryactuallymeans"various,""miscellaneous"or
"general."
The"bank"columnisaddeduptoshowthetotalcashreceivedfortheperiodconcerned.
CashPaymentsJournal(CPJ)
Thecashpaymentsjournalistheoppositeofthecashreceiptsjournal.Itisthejournalwhereyourecordall
transactionswherecashhasbeenpaidout.

2
Onceagainthe"bank"columnisaddeduptoshowthetotalpayments.Thetotalsoftheotherthreecolumns
showhowmuchwaspaidtowhat."Expenses"and"creditors"wouldbethemajorcategoriestowardswhich
paymentswouldbemade.

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Bearinmindthatthecashreceiptsjournalandcashpaymentsjournalcanbereplacedbythecashbook,
whichissimplyacombinationjournalshowingallreceiptsandallpaymentstogether.
Thetotalofthecashbook(andofthecashonhand)forGeorgesCateringafterallthetransactionswould
cometo$14,800,whichisthesameasthetotalofthecashreceiptsjournal($35,500)minusthetotalofthe
cashpaymentsjournal($20,700).
Additionally,pettycash,whichissimplyasumofcashonhandkepttopaysmallexpenses,canalsohave
itsownseparatejournals(similartotheabove,comprisingthepettycashreceiptsjournalandpettycash
paymentsjournal).Pettycashisalsooftenaccountedforinaseparatejournalcombiningreceiptsand
payments,calledthepettycashbook.
SalesJournal(SJ)
Thesalesjournaliswhereallsalesoncreditarerecorded(orinthiscase"servicesrendered"oncredit).
Theformatofthejournalisasfollows:

2
Notethatonlytheincomeoncreditisrecordedhere.WhentheSmithsfinallypayGeorgesCatering,thisis
recordedinthecashreceiptsjournal.
SalesReturnsJournal(SRJ)
Thisjournalisusedspecificallyfortransactionswheregoodsthatwereoriginallysoldhavenowbeen
returned.ItwouldnotreallyapplytoaservicebusinesssuchasGeorgesCatering,butrathertoatrading
ormanufacturingbusinessthathasproductsreturnedtothem.(Atradingbusinessbuysgoodsatalow
priceandsellsthematahigherprice.Amanufacturingbusinessmakesproductsusingmaterialsandthen
sellsthefinishedproducts.George'sCateringisaservicebusiness.)
Theformatofthisjournalis:

2PurchasesJournal(PJ)
Thepurchasesjournalisusedtorecordallpurchasesofinventoryoncredit.(Inventoryarestockor
goods.SeethelessonentitledWhatisInventory?formoreinformation.)
Thepurchasesjournaldoesnotapplytojustanyassetsonlytoinventory.
Also,notethatthepurchasesjournalappliesonlytoatradingormanufacturingbusinessthatpurchases
inventoryoncredit.

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AccountingJournals

2PurchasesReturnsJournal(PRJ)
Thepurchasesreturnsjournalshowsallreturnsofinventorythatwereoriginallypurchasedon
credit(byyourbusiness).Itislikewiseonlyapplicabletotradingandmanufacturingbusinesses.

2GeneralJournal(GJ)
Thegeneraljournalshowsalljournalentriesforanythingnotrecordedinanyofthejournalsabove,
suchasadjustmentsofaccounts.
Thisjournalhasthesimpleformatthatwesawearlier:

2
Dependingonthesyllabusofthecourseyouaredoing,theformatsoftheaboveaccountingjournalsmayor
maynotbeabsolutelycrucial.Inanycasetheysimplyfollowthedebitsandcreditsformatthatwehavebeen
gettingusedtouptonow,soitisn'trocketscience.
Ifthejournalsappearslightlydifferentlyinyouraccountingtextbookthaninthesematerials,thenfollowthe
formatinyourtextbook(theaccountingjournalsabovehavebeenshownintheirsimplestformssothey're
easiertograsp).Theformatinyouraccountingtextbookiswhatyouwillbeexaminedonanyway,right?
Letsgotothenextstepoftheaccountingcycle.

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TAccounts

TAccounts
Previouslesson:AccountingJournals
Nextlesson:BalancingTaccounts
HaveyoueverheardofTaccounts?
Inaccountingweopenanaccountforeachiteminourrecords.Theaccounthasthefollowingformat:

Asyoucansee,theconventionalaccounthastheformatoftheletterThencetheyareoftenreferredtoas
Taccounts.
Byaccount,werefertothesummaryrecordofalltransactionsrelatingtoaparticulariteminabusiness.
AledgerisawholebunchofTaccountsgroupedtogether.
Themainledgeriscalledthegeneralledger.VirtuallyallTaccountsinabusinessfallunderthegeneral
ledger.
SubsidiaryLedgers:
Wealsohavetwosubsidiary(supporting)ledgers:
Debtors(orReceivables)Ledger:ThisledgeronlycontainsTaccountsforeachperson/businessthat
owesourbusiness(eachdebtor).
Creditors(orPayables)Ledger:ThisledgeronlycontainsTaccountsforeachperson/businessthatour
businessowes(eachcreditor).
Wewilldiscussthesesubsidiaryledgersandtheirrelationtothegeneralledgerinmoredetailabitlater.
DrawingupaTAccount
Letustakeourprevioustransactionsrelatingtothebankaccount(orcash)ofGeorgesCateringandsee
howthiswouldbeappliedindrawingupthebankTaccount.Thefirsttransactionthatinvolvesthebank
accountoccursonthe1stofApril,whereMr.Burnhaminvested$15,000inthebusiness.

Whathappenstothebankaccounthere?Itisdebited,asitincreases.SowewilldothesametotheT
accountforthebankaccount.

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TAccounts

Wedebitthebankaccount.(Todebitanaccountmeanstomakeanentryonthelefthandsideand
tocreditanaccountmeanstomakeanentryontherighthandside.)
Asyoucansee,werecordthedateofthetransactionalso.Asageneralrule,weusetheopposite
orcontraaccount(inthiscasecapital)todescribethesourceofthisincreasetothebankaccount.Ifwe
weretodescribeeachtransactionoccurringwithintheTaccountaboveas"bank",itwouldnotadequately
describewhyourbankaccountincreasedordecreased.Usingtheoppositeorcontraaccountgivesusa
muchbetterdescriptionofthetransaction.
Thenexttransactionrelatingtothebankaccountwasonthe7thofApril.

Letsinsertthisinourbankaccount:

Onceagain,ourjournalentryrelatingtobankwasadebit.Sowedebitourbankaccount.Thecreditwasto
loan,sothisisusedtodescribewhathashappenedtoourbankaccountabove.
Thethirdtransactionwasasfollows:

Thistimebankwascredited,sowedothesametoourTaccount:

Thisisthesameastheprevioustransaction,justontheoppositeside.
Herearetheremainderofthejournalsrelatingtobank:

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TAccounts

Nowletsseewhatourbankaccountlookslikeafterallthetransactionsabove:

Aspreviouslymentioned,anaccountisthesummaryrecordofalltransactionsrelatingtoaparticularitemin
abusiness.AbusinessownercanquicklylookoverTaccountssuchastheoneaboveinordertoextract
information.Forexample,ifyouexaminetheTaccountabove,youcanseethatallincreasestothebank
account(receipts)occurontheleftside.Allthedecreasestothebankaccount(payments)occuronthe
rightside.
Thenatureofeachtransactioncouldalsobequicklydetermined.Forexample,ifonelookedatthe
transactiononthe17thofApril,onecouldquicklyascertainthatonthisday$10,500wasreceiveddueto
"servicesrendered"(incomewasreceivedimmediatelyincash).
Ifoneexaminedthe"creditors"entryonthe13thofMayonecouldquicklydeterminethat$200waspaidto
creditors.Inthiscaseonecouldaddtheword"telephone"inbracketsnextto"creditors"tomakethe
descriptionevenmoreclearthebusinesspaidthetelephonecompanyforthebillowing.
Inournextlessonwe'regoingtocontinueworkingwithTaccountsandfocusspecificallyonhowtobalance
aTaccount.
Previouslesson:AccountingJournals
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BalancingTaccounts

BalancingTaccounts
Previouslesson:TAccounts
Nextlesson:PostingJournals
Thelastelementoftheaccountthatweneedtocoverisitsbalance.
Anaccountsbalanceistheamountofthatitemataparticularpointintime.
InaTaccountweshowthebalanceoftheitematthestartoftheperiod(monthoryear)andattheendof
theperiod.
LetssaythatforourexamplesregardingGeorge'sCatering,thiswasnotthefirstperiod(year)covered.
LetssayGeorgesCateringhadactuallybeenoperatingfor3yearsbeforethisyear,andthatthebank
accounthadanopeningbalance(thebalanceatthebeginningofaperiod)of$4,300.
Thiswouldbeshownasfollows:

The"b/f"standsfor"broughtforward".Sometimesthisiswrittenas"b/d",whichstandsfor"broughtdown".
Attheendoftheperiod(monthoryear)abriefcalculationisdonetoworkouttheclosingbalance(the
balanceattheendofaperiod)oftheaccount.
Thisisdoneasfollows:
1.Quicklylookovertheaccounttofindthesideoftheaccountthathasthebiggertotal.

Itshouldbefairlyapparentthatthedebitsideisthebiggerside.
2.Nowaddupthetotalofalltheindividualentriesonthissideandputitasatotalbelowalltheother
amountsonthisside.

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BalancingTaccounts

3.Putthesametotalontheothersidebelowalltheentries.

4.Addupalltheindividualamountsonthesmallerside.
Thiscomesto$20,700inthisexample.
5.Workoutthedifferencebetweenthisamountandthetotalinsertedatthebottom.
$39,800$20,700=$19,100
6.Putthisamountinjustabovethetotalanddescribeitas"Balancec/f"or"Balancec/d",togetherwiththe
date.
Thiswillensurethatthesmallersidealsoaddsuptothetotal.

7.Takethissameamount($19,100)andinsertitontheoppositesidebelowthetotal,anddescribethisas
"Balanceb/f"or"Balanceb/d".

The"Balanceb/f"istheactualclosingbalanceofthebankaccount(adebitbalance)."Balancec/f"isjustan
entryusedincalculatingthattheclosingbalanceis$19,100onthedebitside.The"Balanceb/f"indicates
thatthedebitsideisgreaterthanthecreditsideby$19,100,andthatwehave$19,100inourbankaccount
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BalancingTaccounts

attheendofMay(theclosingbalanceoftheaccount).
Indeed,onecouldmerelyhavetakenthetotalofthedebitside($39,800)andsubtractedthetotalofthe
creditside($20,700)fromthis.Wewouldarriveatthesameanswer:thebankaccounthasabalanceof
$19,100onthedebitside.
However,thestepstakenaboverepresentthesystemthatisusedinaccountingtoworkouttheclosing
balances,andthusshouldbelearnedandpracticedsothatoneknowswhatisgoingonwithonesaccounts
whenoneexaminesthem.
So,wehaveouropeningbalance(debit)of$4,300andourclosingbalance(debit)of$19,100.Onceagain,
thiscanbedeterminedbyaquickexaminationoftheaccount.
Letstryanotheraccounttheaccount"loan".Thereweretwojournalsinvolvingtheloan:

WhatwouldtheTaccountlooklike?

Fromthisaccountwecandeterminethat$5,000wasloanedonthe7thofApril(acredittotheloan,
meaningmoreofaliability),then$4,000wasrepaidonthe13thofMay(adebit,meaninglessofthe
liability),leavinguswithanoutstandingbalance(credit)of$1,000.
Onecaneasilycrossreferencebetweentwoaccountsbecauseofthecontraaccountbeingusedasthe
descriptionofthetransaction.Inthe"loan"account,"bank"isusedasthedescriptionforthecreditonthe
7thofApril.Ifyoulookinthe"bank"accountabove,"loan"isinsertedonthedebitsideoftheTaccounton
thesamedate.Wethushaveaneasycrossreference.
Withanaccountwithoneentryononeside,wedothefollowingtoshowtheclosingbalance:

Wedonotmakeanyfurtherentriestoworkouttheclosingbalancethe$4,000balanceisselfevidentfrom
thesingleentry.
Remember,eachaccounthasitsowncodeornumber(calledafolionumber),andthiswouldnormallybe
insertednexttotheaccountname.SothefinalpreparedTaccountwouldlooklikethis:

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BalancingTaccounts

"Sal1"istheindividualcodefortheaccount"salaries"andwouldalsobereferredtointhejournalentries
relatingtosalaries."J1"isthecodefor"journalpage1".Thefolionumberorcodethushelpswithtracing
informationfromthejournalentrytotheindividualTaccounts,orfromtheledger(Taccounts)backtothe
journalentries.
HopeyouenjoyedthelessonandthatbalancingTaccountsismucheasiernow!
Previouslesson:TAccounts
Nextlesson:PostingJournals
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PostingJournalstotheTaccounts

PostingJournalstotheTaccounts
PostingJournalstothe
TAccounts
Previouslesson:BalancingTAccounts
Nextlesson:ControlAccounts
Aspreviouslymentioned,thesecondstepintheaccountingcycleisrecordingtheaccountingjournals.
Thethirdstepispostingjournalstotheledger(Taccounts).
Whatdoesthismean?PostingmeanstotransfertheinformationcalculatedinthejournalstothevariousT
accountsintheledger.
Let'sseeexactlyhowthistransferisdone.LookthroughthejournalsandTaccountbelow,thenreadonfor
theexplanation:

Inpracticewewouldnotputeachindividualtransactionconcerningbankintothe"bank"Taccount.Instead,
wewouldsimplytakethetotalofcashreceiptsfromthecashreceiptsjournal(column"bank")andinsertthis
onthedebitsideofthe"bank"Taccount.Wewouldlikewisetakethetotalofcashpaymentsfromthecash
paymentsjournal(column"bank")andinsertthisonthecreditsideofthe"bank"Taccount.
Thisistheactofpostingthejournalstotheledger.

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PostingJournalstotheTaccounts

Asyoucansee,wegettothesameclosingbalanceasinthepreviouslessonwherewelearnedhow
tobalanceTaccounts.
Inconclusion,theTaccountthusshowstheopeningandclosingbalancesandtheindividualtransactions
duringtheperiodcovered.TheTaccountisasummaryrecordofeverythingthatoccurredwithaspecific
accountingitemduringacertainperiodoftime.
Previouslesson:BalancingTAccounts
Nextlesson:ControlAccounts
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DebtorsandCreditorsControlAccounts

DebtorsandCreditors
ControlAccounts
Previouslesson:PostingJournals
Nextlesson:TrialBalance

Aspreviouslymentioned,wenotonlyhavethegeneralledger,butalsotwo
otherledgers:
TheDebtorsLedger
TheCreditorsLedger

WealsolearnedthatallindividualdebtorTaccountsgointhedebtorsledgerandall
individualcreditorTaccountsgointhecreditorsledger.

NodebtororcreditorTaccountsgointhegeneralledger,right?Onlyinthedebtorandcreditorledgers,
right?
Well...no,notexactly.Thegeneralledgeralsocontainstwospecialaccountsrelatingtotheabove,
calledcontrolaccounts.
Thereisacontrolaccountfordebtorsandanotherforcreditors:

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DebtorsandCreditorsControlAccounts

Thereasontheyarecalledcontrolaccountsisbecause
oneusesthemtoensuretherearenoerrorsor
mistakesinourrecordsrelatingtodebtorsand
creditors.Thusonegetsmorecontrol.Iwillshowyou
exactlyhowthisisdoneshortly.
Notethattheentriesinthecontrolaccountsof"total
sales","totalpurchases"aswellas"bank"comefrom
therelevantaccountingjournals.Forexample,the"total
sales"figureof$16,300inthedebtorscontrolaccount
abovecomesfromthetotalinthesalesjournalbelow
(whichshowssalesoncredit).

Also,the"bank"figureof$7,400inthedebtorscontrolaccountwouldcomefromthetotalofthe
"debtors"columninthecashreceiptsjournal:

Similarly,the"totalpurchases"figureof$3,900inthecreditorscontrolaccountcouldbetracedbackto
thepurchasesjournal(whichshowspurchasesoncredit).Andthe"bank"figureof$6,000inthissame
accountcouldbetracedbacktothecashpaymentsjournal(showingallpaymentsofcash).
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DebtorsandCreditorsControlAccounts

Sohowdothesecontrolaccountsensurethattherearenoerrorsormistakes?
Letstakedebtors.Fordebtors,wecomparetheclosingbalanceofthedebtorscontrolaccountinthe
generalledgertothetotalofalltheclosingbalancesofalltheindividualdebtoraccountsinthedebtors
ledger.Asyoucanseeabove,thedebtorscontrolaccounthasaclosingbalanceof$10,700.Thedebtor
Taccountscometothesamefigure($8,000+$1,400+$1,300=$10,700).
IfthedebtorTaccountscametoadifferentfigurelet'ssay$11,000wewouldknowforsurethat
therewassomeerror,eitherinoneoftheindividualdebtoraccountsinthedebtorsledgerorinthe
debtorscontrolaccount(generalledger).
Traditionallybookkeepersorotheraccountspersonnelperform
areconciliationonaregularbasisbetweenthecontrolaccounts
(generalledger)andthetotalofthedebtorsorcreditorsledger
(Thewordreconciliationcomesfromreconcile,whichmeansto
maketwoamountsagreeinvalue).Accountspersonnelmay
evenproduceadebtorsorcreditorsreconciliationstatement,
whichisareportshowingthediscrepanciesbetweenthecontrol
account(generalledger)andthetotalsoftheindividualT
accountsinthedebtorsorcreditorsledger.

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TheTrialBalance

TheTrialBalance
Previouslesson:ControlAccounts
Nextlesson:AccountingReports

Thetrialbalanceisourpenultimatestepinthe
accountingcycle.
Thefinalstepisthefinancialstatements.
Thefinancialstatementsarethemostimportantreports
ofabusiness.Duetotheirimportance,wedoafinal
checkbeforepreparingthefinancialstatementswedo
thetrialbalance.
Atrialisatest.Thusthisstepisliterallyatestof
balances.
Butwhatbalancesarewetalkingabout?Weretalking
abouttheclosingbalancesthatweworkedoutforeachoftheTaccounts(thefinalamountofeach
item).
Werealsotalkingaboutbalancingtheaccountingequation(i.e.theleftsidemustalwaysequalthe
rightside,asitisanequation).
Letsseehowthisworks.HereisthetrialbalanceforGeorgesCatering,aswellastheledgershowing
eachoftheTaccountsinourrecords(notethatthebankaccountexcludestheopeningbalanceof
$4,300usedintheprevioussection).

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http://www.accountingbasicsforstudents.com/trialbalance.html

TheTrialBalance

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TheTrialBalance

Inthetrialbalanceabove,thetotalofthedebitsisequaltothetotalof
thecredits.Thismakessense,aswehavebeendoingonedebitandonecredit
foreachandeverytransaction.
Shouldthedebitandcredittotalsdifferinvalue,thenitiscertainthatthere
musthavebeenoneormoreaccountingerrors.Thebookkeeperoraccountant
wouldthenrectifytheerrorsbeforepreparingthefinancialstatements.
Thetotalofthedebitbalancesagreeinginvaluewith
thetotalofthecreditbalancesdoesnotguaranteethat
therearezeroerrorsintheaccountingrecords.For
example,thebookkeepercouldhaveincorrectlydebited
the$12,000todebtors(insteadofdebitingthebaking
equipment)andthetotalofthedebitbalanceswould
stillbe$31,500.Nonethelessthetrialbalanceisauseful
toolforlocatinganderadicatingaccountingerrors.
Itshouldalsobenotedthaterrorsarefarlesslikelyto
occurwithaccountingpackagesasthesewilltake
figuresfromtheaccountingjournalstotheaccounting
ledgerandrightthroughtothefinancialstatementswith
completeaccuracy.Thusitcanbearguedthattrial
balancesaremorerelevantformanual(handdrawn)accountingsystems,whereerrorscanbemade
whentransferringinformationthroughthevariousstepsoftheaccountingcycle.
Atrialbalancecanbepreparedonaweekly,monthlyorannualbasis,dependingontheneedsofthe
business.
Thatisthelastofthelessonsontheaccountingcycle.
Ifyoufeelgoodatthispoint,moveontolessonsonthefinancialstatements(accountingreports).

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