A ledger account is a tool used for classifying and summarizing information about increases, decreases, and balances of financial statements items.

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FINAL A/C AND LEDGERFINAL A/C AND LEDGER
-RITESH SINGH
-riteshsingh197@outlook.com

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Tools of The Recording ProcessTools of The Recording Process
Debits and Credits
Journal Entries
Ledger Accounts

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Analyze
source
documents.
Journalize
transactions
in the general
journal.
Post entries to
the accounts
in the general
ledger.
Prepare financial
statements.
Prepare a trial
balance.
Steps in The Accounting CycleSteps in The Accounting Cycle

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Let’s start withLet’s start with
The General Ledger AccountThe General Ledger Account
A ledger account is a tool used for
classifying and summarizing
information about increases,
decreases, and balances of
financial statements items.
Think of it as a storage
container like a bucket.
Dollars, which are used to measure
economic transactions

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Two General Ledger AccountTwo General Ledger Account
FormatsFormats
Three-Amount Column Format
(Debit, Credit, Balance)
Used in general ledgers in the business
world
T-Account Format
Used primarily for teaching and analysis
of complex transactions

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General Ledger AccountGeneral Ledger Account
Three-Amount Column FormatThree-Amount Column Format
ACCOUNT NAME: ACCOUNT No.
Date Description PR Debit Credit Balance
1 2 3

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For the sake of
simplicity, we
often use this
format in teaching
accounting even
though it is no
longer used in
practice.
Debit Credit
Account Name
General Ledger AccountGeneral Ledger Account
T-Account FormatT-Account Format

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The T-AccountThe T-Account
Increases to the
T-account are
recorded on
one side of the
T-account, and
decreases are
recorded on the
other side.
Debit Credit
Account Name

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The T-AccountThe T-Account
The side which
increases and
the side which
decreases is
determined by
the type of
account.
Debit Credit
Account Name

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What Are Debits and Credits?What Are Debits and Credits?
Tools used for recording transactions
Debit (DR)
Credit (CR)
Debit refers to the LEFTLEFT and Credit to
the RIGHTRIGHT side of the T-Account.
Debit and Credit are neutral terms and
do not connote value judgments.
Neither is “good” or “bad”!

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Tools used for recording transactions
Debit (DR)
Credit (CR)
Debit refers to the LEFTLEFT and Credit to
the RIGHTRIGHT side of the T-Account
Account Name
LEFT RIGHT
What Are Debits and Credits?What Are Debits and Credits?

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Tools used for recording transactions
Debit (DR)
Credit (CR)
Debit refers to the LEFTLEFT and Credit to
the RIGHTRIGHT side of the T-Account
Account Name
LEFT RIGHT
DEBIT
SIDE
CREDIT
SIDE
Used as
Adjectives:
What Are Debits and Credits?What Are Debits and Credits?

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Tools used for recording transactions
Debit (DR)
Credit (CR)
Debit refers to the LEFTLEFT and Credit to
the RIGHTRIGHT side of the T-Account
Account Name
LEFT RIGHT
DEBIT CREDITUsed as
Verbs:
Synonym
for Debit?
What Are Debits and Credits?What Are Debits and Credits?

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Let’s see how
debits and
credits affect
the different
types of
accounts.
Debit Credit
Account Name
Types of Ledger AccountsTypes of Ledger Accounts

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Assets
Liabilities
Stockholders’ Equity
Revenues
Expenses
Assets
Liabilities
Stockholders’ Equity
Revenues
Expenses
Types of Ledger AccountsTypes of Ledger Accounts

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Again, debits and credits are used to
increase or decrease account balances.
Determining whether to use a debit or
credit to record an increase or decrease
depends on the type of account in
question.
The Balance Sheet equation is the basis
for the determination.
Using Debits and CreditsUsing Debits and Credits

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Balance Sheet ModelBalance Sheet Model
((Revisited)Revisited)
A = L + SE

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Account Name
Debit Credit
Account Name
Debit Credit
Assign a T-Account to each element of the
Balance Sheet Model
Assign a T-Account to each element of the
Balance Sheet Model
A = L + SE
Account Name
Debit Credit
Balance Sheet ModelBalance Sheet Model
((Revisited)Revisited)

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Account Name
Debit Credit
Account Name
Debit Credit
Debits and credits affect the Balance Sheet
Model as follows:
Debits and credits affect the Balance Sheet
Model as follows:
A = L + SE
Account Name
Debit Credit
Balance Sheet ModelBalance Sheet Model
((Revisited)Revisited)

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Account Name
AA = L + SE
Account Name
Debit Credit Debit Credit
Debits and credits affect the Balance Sheet
Model as follows:
Debits and credits affect the Balance Sheet
Model as follows:
ASSETSASSETS
Debit
for
Increase
Credit
for
Decrease
Balance Sheet ModelBalance Sheet Model
((Revisited)Revisited)

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AA = LL + SE
Account Name
Debit Credit
Debits and credits affect the Balance Sheet
Model as follows:
Debits and credits affect the Balance Sheet
Model as follows:
LIABILITIESLIABILITIES
Debit
for
Decrease
Credit
for
Increase
ASSETSASSETS
Debit
for
Increase
Credit
for
Decrease
Balance Sheet ModelBalance Sheet Model
((Revisited)Revisited)

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AA = LL + SESE
Debits and credits affect the Balance Sheet
Model as follows:
Debits and credits affect the Balance Sheet
Model as follows:
ASSETSASSETS
Debit
for
Increase
Credit
for
Decrease
EQUITIESEQUITIES
Debit
for
Decrease
Credit
for
Increase
LIABILITIESLIABILITIES
Debit
for
Decrease
Credit
for
Increase
Balance Sheet ModelBalance Sheet Model
((Revisited)Revisited)

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Recall that Stockholders’ Equity consists
of the following components:
Recall that Stockholders’ Equity consists
of the following components:
+ Retained EarningsCapital Stock
C/S + R/E
Stockholders’ EquityStockholders’ Equity
A Closer LookA Closer Look

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Therefore, the Capital Stock and Retained
Earnings accounts are affected in the
following manner by debits and credits
because they are part of Stockholders’
Equity:
Therefore, the Capital Stock and Retained
Earnings accounts are affected in the
following manner by debits and credits
because they are part of Stockholders’
Equity:
CAPITAL STOCKCAPITAL STOCK
Debit
for
Decrease
Credit
for
Increase
RET. EARNINGSRET. EARNINGS
Debit
for
Decrease
Credit
for
Increase
Stockholders’ EquityStockholders’ Equity
A Closer LookA Closer Look

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Also, because RevenueRevenue accounts increase
Stockholders’ Equity, they are affected by
debits and credits as follows:
Also, because RevenueRevenue accounts increase
Stockholders’ Equity, they are affected by
debits and credits as follows:
REVENUESREVENUES
Debit
for
Decrease
Credit
for
Increase
Stockholders’ EquityStockholders’ Equity
A Closer LookA Closer Look

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And because ExpenseExpense accounts decrease
Stockholders’ Equity, they are affected by
debits and credits as follows:
And because ExpenseExpense accounts decrease
Stockholders’ Equity, they are affected by
debits and credits as follows:
EXPENSESEXPENSES
Debit
for
Increase
Credit
for
Decrease
Stockholders’ EquityStockholders’ Equity
A Closer LookA Closer Look

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Normal BalancesNormal Balances
Each of the 5 account types also has a
normalnormal balancebalance side. It is always the
side which is used to record increases
in the account.

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Normal BalancesNormal Balances
The normal balances for each of the FIVEFIVE
types of accounts are as follows:
Account Name
Debit Balance Credit Balance
AssetsAssets
ExpensesExpenses
LiabilitiesLiabilities
Stockholders’Stockholders’
EquityEquity

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Alternative Approach #2Alternative Approach #2
Expanded Accounting EquationExpanded Accounting Equation
ASSETS + EXP. = LIAB. + S/H EQUITY + REV.
A + E = L + S/E + R
Dr. Cr.
+ -
Bal.
Dr. Cr.
+-
Bal.

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Alternative Approach #3Alternative Approach #3
““A L O R E” AcronymA L O R E” Acronym
A (ssets)A (ssets)
L (iabilities)L (iabilities)
O (wners' equity)O (wners' equity)
R (evenues)R (evenues)
E (xpenses)E (xpenses)
Debit Credit
+ -
- +
- +
- +
+ -

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Debits and CreditsDebits and Credits
Question 1Question 1
Which of the following accounts would
normally be expected to have a debit
(or left-side) balance?
a. Accounts Payable
b. Buildings
c. Interest Revenue
d. Capital Stock

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Debits and CreditsDebits and Credits
Solution 1Solution 1
Which of the following accounts would
normally be expected to have a debit
(or left-side) balance?
a. Accounts Payable
b. Buildings
c. Interest Revenue
d. Capital Stock
BUILDINGS is an asset
account and normally
has a DEBIT balance.
The other three
accounts normally
have CREDIT balances.
BUILDINGS is an asset
account and normally
has a DEBIT balance.
The other three
accounts normally
have CREDIT balances.

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Debits and CreditsDebits and Credits
Question 2Question 2
Which of the following accounts would
normally be expected to have a credit
(or right-side) balance?
a. Accounts Receivable
b. Salary Expense
c. Salary Payable
d. Land

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Debits and CreditsDebits and Credits
Solution 2Solution 2
Which of the following accounts would
normally be expected to have a credit
(or right-side) balance?
a. Accounts Receivable
b. Salary Expense
c. Salary Payable
d. Land

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Which of the following accounts would
normally be expected to have a credit
(or right-side) balance?
a. Accounts Receivable
b. Salary Expense
c. Salary Payable
d. Land
SALARY PAYABLE is a
liability account and
normally has a CREDIT
balance.
The other three accounts
normally have DEBIT
balances.
SALARY PAYABLE is a
liability account and
normally has a CREDIT
balance.
The other three accounts
normally have DEBIT
balances.
Debits and CreditsDebits and Credits
Solution 2Solution 2

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Debits and CreditsDebits and Credits
ExampleExample
If the balance in Accounts Receivable
(an asset) is $750 (debit side balance),
Accounts ReceivableAccounts Receivable
750

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Debits and CreditsDebits and Credits
ExampleExample
If the balance in Accounts Receivable
(an asset) is $750 (debit side balance),
What would we do to increaseincrease the account by
$200?
750
Accounts ReceivableAccounts Receivable

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If the balance in Accounts Receivable
(an asset) is $750 (debit side balance),
What would we do to increaseincrease the account by
$200?
750
200200
Debits and CreditsDebits and Credits
ExampleExample
Accounts ReceivableAccounts Receivable

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Debits and CreditsDebits and Credits
ExampleExample
If the balance in Accounts Receivable
(an asset) is $750 (debit side balance),
What would we do to increaseincrease the account by
$200?
What would we do to decreasedecrease the account by
$350?
750
200200
Accounts ReceivableAccounts Receivable

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Debits and CreditsDebits and Credits
ExampleExample
If the balance in Accounts Receivable
(an asset) is $750 (debit side balance),
What would we do to increaseincrease the account by
$200?
What would we do to decreasedecrease the account by
$350?
750
200200
350350
Accounts ReceivableAccounts Receivable

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Debits and CreditsDebits and Credits
ExampleExample
Note the lack of $. It is understood that
the yardstick is dollars.
It is not “money”!
750
200200
350350
Accounts ReceivableAccounts Receivable

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Balancing The T-AccountBalancing The T-Account
To get the balance of the T-Account . . .
. . . net the totals on the two sides
against each other. Place the residual
amount on the appropriate side.
750
200200
350350
Accounts ReceivableAccounts Receivable

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To get the balance of the T-Account . . .
. . . net the totals on the two sides
against each other. Place the residual
amount on the appropriate side.
Balancing The T-AccountBalancing The T-Account
750
200200
350350
600
Accounts ReceivableAccounts Receivable

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Balancing The T-AccountBalancing The T-Account
To get the balance of the T-Account . . .
(Can use the either the approach above
to show the balance, the text’s
approach or Rice’s approach)
750
200200
350350
600
Accounts ReceivableAccounts Receivable

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Debits and CreditsDebits and Credits
Question 3Question 3
The Cash account has three entries: a
debit for $1,200, a credit for $300, and
another credit for $400. What is the
balance in the Cash account?
a. $ 1,900 Debit.
b. $ 500 Credit.
c. $ 700 Credit.
d. $ 500 Debit.

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The Cash account has three entries: a
debit for $1,200, a credit for $300, and
another credit for $400. What is the
balance in the Cash account?
a. $ 1,900 Debit.
b. $ 500 Credit.
c. $ 700 Credit.
d. $ 500 Debit.
Debits and CreditsDebits and Credits
Question 3Question 3
$1,200
$ 400$ 400
$ 500
Cash
$ 300$ 300

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ImplicationsImplications
QuestionQuestion 11
If the company made a Credit entry to
Notes Payable, would the account
increase or decrease?

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ImplicationsImplications
QuestionQuestion 11
If the company made a Credit entry to
Notes Payable, would the account
increase or decrease?
ANSWER:
Notes Payable would increase.

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ImplicationsImplications
QuestionQuestion 22
Notes Payable is the account where we
record long-term borrowings. What
event would cause us to record an
increase in our long-term borrowings?

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ImplicationsImplications
QuestionQuestion 22
Notes Payable is the account where we
record long-term borrowings. What
event would cause us to record an
increase in our long-term borrowings?
ANSWER:
Such an increase could imply that the
company borrowed money.

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ImplicationsImplications
QuestionQuestion 33
If the company borrowed money, which
account would also be affected and in
what way?

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ImplicationsImplications
QuestionQuestion 33
If the company borrowed money, which
account would also be affected and in
what way?
ANSWER:
There would also be an equal-sized
increase in the Cash account.

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ImplicationsImplications
QuestionQuestion 44
Suppose instead of an increase to Cash,
you find an increase to the Land
account. How do you interpret the
increase in Notes Payable?

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ImplicationsImplications
QuestionQuestion 44
Suppose instead of an increase to Cash,
you find an increase to the Land
account. How do you interpret the
increase in Notes Payable?
ANSWER:
The company acquired land and gave a
note that promised to pay for the land
in the future.

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Recording TransactionsRecording Transactions
Initially, all transactions are recorded
in the GeneralGeneral JournalJournal.

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Recording TransactionsRecording Transactions
Each transaction always affects at
least two different accounts.
One account has a debit effect.
The second account has a credit effect.
This methodology was named “double
entry”
Initially, all transactions are recorded
in the GeneralGeneral JournalJournal.

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General Journal PageGeneral Journal Page
GENERAL JOURNAL
Page:
Date Description PR Debit Credit

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Journal EntriesJournal Entries
Example 1Example 1
On January 1, 19X7, Caldwell Company
borrows $10,000 from the bank.
Prepare the appropriate general journal
entry for the above transaction.

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Journal EntriesJournal Entries
Solution 1Solution 1
Two accounts are affected:
Cash is increased by $10,000.
Notes Payable is increased by $10,000.

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Journal EntriesJournal Entries
Solution 1Solution 1
Two accounts are affected:
Cash is increased by $10,000.
Notes Payable is increased by $10,000.
GENERAL JOURNAL
Page: 1
Date Description PR Debit Credit
1-Jan Cash 100 10,000
Notes Payable 201 10,000
to record loan from bank
Typically, accounts
are numbered. The
account numbers are
used as references for
posting to the General
Ledger. More on
account numbers will
come later.
Typically, accounts
are numbered. The
account numbers are
used as references for
posting to the General
Ledger. More on
account numbers will
come later.

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More About The GeneralMore About The General LedgerLedger
It is a complete collection of all the
accounts of a company
Accounts are individually numbered for
easy reference
It is used to collect the information about
all of the transactions affecting a specific
account

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Categories ofCategories of
General Ledger AccountsGeneral Ledger Accounts
The five types of accounts fall into
one of two categories
Real Accounts
Nominal Accounts
Real Accounts
Nominal Accounts

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Real AccountsReal Accounts
This category includes Assets,
Liabilities, and Stockholders’ Equities
(i.e., Balance Sheet accounts)
Accounts are permanent.
Account balances are carried forward
from one fiscal year to the next.

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Nominal AccountsNominal Accounts
Nominal accounts include revenues
and expenses.
Nominal accounts are temporary.
Nominal account balances are closed
out to zero at the end of the fiscal year.