Chapter 4 Summary
An account is a page specially designed to record the changes in the individual item affecting the financial position. When all these accounts are together, this is called a ledger. A ledger is a group of file or accounts. There are different types of ledgers. But the most useful one that is dominating the business world is the computer ledger. Each individual balance sheet item is given its own special divided page with the name of the item at the top. The dollar figure is recorded on the first line for each item. It is really important to record the dollar figure on the correct side of the account. For any item, the correct side is the side on which the item itself would appear on a simple balance sheet.
-Asset placed on left side
-Liability and Owners equity placed on right side
The ledger and the balance sheet BOTH show financial position but it is in different ways.
There are two sides of an account page are described in the same way by accountants everywhere. Debit is the word associated with the left side and Credit is the word associated with the right side of an account.
Types of Accounts Beginning Value side Increases Decreases
ASSET accounts DEBIT DEBIT CREDIT
Liability and OWNERS CREDIT CREDIT DEBIT
EQUITY accounts
Double-entry system of accounting is that every transaction is recorded in the accounts in two steps. It is recorded first as a debit and second as a credit.
The most common ways to make payments are by cheque and electronic funds transfer. Banks are extremely useful because it prevents businesses from leaving cash on the premises. This reduces the chance of danger of theft or loss of the cash. Also the business has a responsibility to its employees to avoid putting temptation in front of them. The convenience of making payments is a really important reason why businesses use banking services. It is much easier sending a cheque to someone then to deliver cash in person.
Businesses with good reputation are able to buy goods on short-term credit. This is a convenient way to do business. The purchaser is able to delay payment for a short period of time. The buyer has time to test out the item and if they are not satisfied they can simply return them.
A Trial balance is a listing of the account balances in a ledger. If the two totals are the same then the ledger is said to be in balance. If they are not the same then the ledger is said to be out of balance.