2.9: The Use of Ledger Accounts

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A journal entry is like a set of instructions. The carrying out of these instructions is known as posting. As stated earlier, posting is recording in the ledger accounts the information contained in the journal. A journal entry directs the entry of a certain dollar amount as a debit in a specific ledger account and directs the entry of a certain dollar amount as a credit in a specific ledger account. Earlier, we posted the journal entries for MicroTrain Company to T-accounts. In practice, however, companies post these journal entries to ledger accounts.

Using a new example, Jenks Company, we illustrate posting to ledger accounts. Later, we show you how to post the MicroTrain Company journal entries to ledger accounts.

In Exhibit 10, the first journal entry for the Jenks Company directs that USD 10,000 be posted in the ledger as a debit to the Cash account and as a credit to the Capital Stock account. We post the debit in the general ledger Cash account by using the following procedure: Enter in the Cash account the date, a short explanation, the journal designation ("G" for general journal) and the journal page number from which the debit is posted, and the USD 10,000 in the Debit column. Then, enter the number of the account to which the debit is posted in the Posting Reference column of the general journal. Post the credit in a similar manner but as a credit to Account No. 300. The arrows in Exhibit 10 show how these amounts were posted to the correct accounts.

Exhibit 10 shows the ledger account. In contrast to the two-sided T-account format shown so far, the three-column format has columns for debit, credit, and balance. The three-column form has the advantage of showing the balance of the account after each item has been posted. In addition, in this chapter, we indicate whether each balance is a debit or a credit. In later chapters and in practice, the nature of the balance is usually not indicated since it is understood. Also, notice that we give an explanation for each item in the ledger accounts. Often accountants omit these explanations because each item can be traced back to the general journal for the explanation.

Posting is always from the journal to the ledger accounts. Postings can be made (1) at the time the transaction is journalized; (2) at the end of the day, week, or month; or (3) as each journal page is filled. The choice is a matter of personal taste. When posting the general journal, the date used in the ledger accounts is the date the transaction was recorded in the journal, not the date the journal entry was posted to the ledger accounts.

Frequently, accountants must check and trace the origin of their transactions, so they provide cross-indexing. Cross-indexing is the placing of (1) the account number of the ledger account in the general journal and (2) the general journal page number in the ledger account. As shown in Exhibit 10, the account number of the ledger account to which the posting was made is in the Posting Reference column of the general journal. Note the arrow from Account No. 100 in the ledger to the 100 in the Posting Reference column beside the first debit in the general journal. Accountants place the number of the general journal page from which the entry was posted in the Posting Reference column of the ledger account. Note the arrow from page 1 in Exhibit 10 the general journal to G1 in the Posting Reference column of the Cash account in the general ledger. The notation "G1" means general journal, page 1. The date of the transaction also appears in the general ledger. Note the arrows from the date in the general journal to the dates in the general ledger.

JENKS COMPANY

General Journal

Date		Account Titles and Explanation							Post. Ref.	Debit							Credit
2010 Jan.	1(B)	Cash (+A)							(C)100		1	0	0	0	0	(A)
		Capital Stock (+SE)							300									1	0	0	0	0	(D)
		Stockholders invested $10,000 cash in the business.

	5	Cash (+A)							100			5	0	0	0
		Notes Payable (+L)							201										5	0	0	0
		Borrowed $5,000 from the bank on a note.

:-		General Ledger Cash														Account No 100(C)
		Explanation	Post Ref.	Debt						Credit							Balance
2010 -Jan.	(B)1	Stockholders investment	G1	(A)	1	0	0	0	0									1	0	0	0	0	Dr
	5	Bank loan	G1			5	0	0	0									1	5	0	0	0	Dr


Notes Payable Account No. 201

Date		Explanation	Post Ref.	Debt						Credit							Balance
2010 Jan.	5	Borrowed cash	G1									5	0	0	0				5	0	0	0	Cr

Capital Stock Account No. 300
		Explanation	Post Ref.	Debt						Credit							Balance
2010 " Jan.	(B)1	Cash from stockholders	G1							(D)	1	0	0	0	0			1	0	0	0	0	Cr

Exhibit 10: General journal and general ledger; posting and cross-indexing

Cross-indexing aids the tracing of any recorded transaction, either from general journal to general ledger or from general ledger to general journal. Normally, they place cross-reference numbers in the Posting Reference column of the general journal when the entry is posted. If this practice is followed, the cross-reference numbers indicate that the entry has been posted.

MICROTRAIN COMPANY

General Journal


Date		Account Titles and Explanation	Post. Ref.	Debit						Credit
2010 Nov.	28	Cash (+A)	100*		5	0	0	0	0
		Capital Stock (+SE)	300								5	0	0	0	0
		Stockholders invested $50,000 cash in the business.

Dec	1	Truck (+A)	150		4	0	0	0	0
		Cash (-A)	100								4	0	0	0	0
		To record the purchase of four trucks.

	1	Prepaid Insurance (+A)	108			2	4	0	0
		Cash (-A)	100									2	4	0	0
		Purchased truck insurance to cover a one-year period.

	1	Prepaid Rent (+A)	112			1	2	0	0
		Cash (-A)	100									1	2	0	0

	Paid three months' rent on a building.

4	Supplies on Hand (+A)	107	1	4	0	0
	Accounts Payable (+L)	200					1	4	0	0
	To record the purchase of training supplies for future use.

7	Cash (+A)	100	4	5	0	0
	Unearned Service Fees (+L)	216					4	5	0	0
	To record the receipt of cash from a customer in payment
	for future training services.

15	Cash (+A)	100	5	0	0	0
	Service Revenue (+SE)	400					5	0	0	0
	To record the receipt of cash for performing training
	services for a customer.

17	Accounts Payable (-L)	200	1	4	0	0
	Cash (-A)	100					1	4	0	0
	Paid the account payable arising from the purchase of
	supplies on December 4.

General Journal


Date		Account Titles and Explanation	Post. Ref.	Debit					Credit
2010 Dec.	20	Accounts Receivable (+A)	103		5	7	0	0
		Service Revenue (+SE)	400							5	7	0	0
		To record the performance of training services on account
		for which a customer was billed.

	24	Advertising Expense (-SE)	505				5	0
		Accounts Payable (+L)	200									5	0
		Received a bill for advertising for the month of December.

	26	Cash (+A)	100			5	0	0
		Accounts Receivable (-A)	103								5	0	0
		Received $500 from a customer on accounts receivable.

	28	Salaries Expense (-SE)	507		3	6	0	0
		Cash (-A)	100							3	6	0	0
		Paid training personnel salaries for the first four weeks
		of December.

	29	Utilities Expense (-SE)	511			1	5	0
		Cash (-A)	100								1	5	0
		Paid the utilities bill for December.

	30	Gas and Oil Expense (-SE)	506			6	8	0
		Accounts Payable (-A)	200								6	8	0
		Received a bill for gas and oil used in the trucks for
		December.


31	Dividends (-SE)	320	3	0	0	0
	Cash (-A)	100					3	0	0	0
	Dividends were paid to stockholders.

Exhibit 11: General journal (after posting)

To understand the posting and cross-indexing process, trace the entries from the general journal to the general ledger. The ledger accounts need not contain explanations of all the entries, since any needed explanations can be obtained from the general journal.

Look at Exhibit 11 to see how all the November and December transactions of MicroTrain Company would be journalized. As shown in Exhibit 11, you skip a line between journal entries to show where one journal entry ends and another begins. This procedure is standard practice among accountants. Note that no dollar signs appear in journals or ledgers. When amounts are in even dollar amounts, accountants leave the cents column blank or use zeros or a dash. When they use lined accounting work papers, commas or decimal points are not needed to record an amount. When they use unlined paper, they add both commas and decimal points.

Next, observe Exhibit 12, the three-column general ledger accounts of MicroTrain Company after the journal entries have been posted. Each ledger account would appear on a separate page in the ledger. Trace the postings from the general journal to the general ledger to make sure you know how to post journal entries.

All the journal entries illustrated so far have involved one debit and one credit; these journal entries are called simple journal entries. Many business transactions, however, affect more than two accounts. The journal entry for these transactions involves more than one debit and/or credit. Such journal entries are called compound journal entries.

As an illustration of a compound journal entry, assume that on 2011 January 2, MicroTrain Company purchased USD 8,000 of training equipment from Wilson Company. See below.

MICROTRAIN COMPANY

General Ledger

Cash


Date		Explanation	Post Ref.	Debit					Credit						Balance
2010 Dec.	1	Beginning balance*														5	0	0	0	0	Dr
	1	Trucks	G1							4	0	0	0	0		1	0	0	0	0	Dr
	1	Prepaid insurance	G1								2	4	0	0			7	6	0	0	Dr
	1	Prepaid rent	G1								1	2	0	0			6	4	0	0	Dr
	7	Unearned service fees	G1		4	5	0	0								1	0	9	0	0	Dr
	15	Service revenue	G1		5	0	0	0								1	5	9	0	0	Dr
	17	Paid account payable	G1								1	4	0	0		1	4	5	0	0	Dr
	26	Collected account receivable	G2			5	0	0								1	5	0	0	0	Dr
	28	Salaries	G2								3	6	0	0		1	1	4	0	0	Dr
	29	Utilities	G2									1	5	0		1	1	2	5	0	Dr
	31	Dividends	G2								3	0	0	0			8	2	5	0	Dr


Date		Explanation	Post Ref.	Debit					Credit				Balance
2010 Dec.	20	Service revenue	G2		5	7	0	0						5	7	0	0	Dr
	26	Collections	G2							5	0	0		5	2	0	0	Dr

Supplies on Hand Account No. 107

Date		Explanation	Post Ref.	Debit					Credit				Balance
2010 Dec.	4	Purchased on account	G1		1	4	0	0						1	4	0	0	Dr

Prepaid Insurance Account No. 108

Date	Explanation	Post Ref.	Debit	Credit	Balance

2010 Dec.	1	One-year policy on trucks	G1			2	4	0	0											2	4	0	0	Dr

General Ledger Page 1 Prepaid Rent Account No. 112
Date		Explanation	Post Ref.	Debit						Credit					Balance
2010 Dec.	1	Three-month payment	G1			1	2	0	0								1	2	0	0	Dr

Trucks Account No. 150

Date		Explanation	Post Ref.	Debit						Credit					Balance
2010 Dec.	1	Paid cash	G1		4	0	0	0	0							4	0	0	0	0	Dr

Accounts Payable Account No. 200

Date		Explanation	Post Ref.	Debit						Credit					Balance
2010 Dec.	4	Supplies	G1								1	4	0	0			1	4	0	0	Cr
	17	Paid for supplies	G1			1	4	0	0									-	0	-
	24	Advertising	G2										5	0					5	0	Cr
	30	Gas and oil	G2									6	8	)				7	3	0	Cr

Unearned Service Fees Account No. 216

Date		Explanation	Post Ref.	Debit						Credit					Balance
2010 Dec.	7	Received cash	G1								4	5	0	0			4	5	0	0	Cr

Capital Stock Account No. 300

Date		Explanation	Post Ref.	Debit						Credit					Balance
2010 Dec.	1	Beginning balance														5	0	0	0	0	Cr

General Ledger Page 3 Dividends Account No. 320
Date		Explanation	Post Ref.	Debt					Credit					Balance
2010 Dec.	31	Cash	G2		3	0	0	0								3	0	0	0	Dr

Service Revenue Account No. 400

Date		Explanation	Post Ref.	Debt					Credit					Balance
2010 Dec.	15	Cash	G1							5	0	0	0			5	0	0	0	Cr
	20	On account	G2							5	7	0	0		1	0	7	0	0	Cr

Advertising Expense Account No. 505

Date		Explanation	Post Ref.	Debt					Credit					Balance
2010 Dec.	24	On account	G2				5	0										5	0	Dr

Gas and Oil Expense Account No. 506

Date		Explanation	Post Ref.	Debt					Credit					Balance
2010 Dec.	30	On account	G2			6	8	0									6	8	0	Dr

Salaries Expense Account No. 507

Date		Explanation	Post Ref.	Debt					Credit	Balance
2010 Dec.	28	Cash paid	G2		3	6	0	0			3	6	0	0	Dr

Utilities Expense Account No. 511

Date		Explanation	Post Ref.	Debt					Credit	Balance
2010 Dec.	29	Cash paid	G2			1	5	0				1	5	0	Dr

Exhibit 12: General ledger - Extended illustration

MICROTRAIN COMPANY Trial Balance December 31, 2010
Acct.
No.	Account Title	Debits	Credits
100	Cash	$ 8,250
103	Accounts Receivable	5,200
107	Supplies on Hand	1,400
108	Prepaid Insurance	2,400
112	Prepaid Rent	1,200
150	Trucks	40,000
200	Accounts Payable		$ 730
216	Unearned Service Fees		4,500
300	Capital Stock		50,000
320	Dividends	3,000
400	Service Revenue		10,700
505	Advertising Expense	50
506	Gas and Oil Expense	680
507	Salaries Expense	3,600
511	Utilities Expense	150

Exhibit 13: Trail balance

MicroTrain paid USD 2,000 cash with the balance due on 2011 March 3. The general journal entry for MicroTrain Company is:

			Debit	Credit
2011
Jan.	2	Equipment (+A)	8,000
		Cash (-A)		2,000
		Accounts Payable (+L)		6,000
		Training equipment purchased from Wilson Company.

Note that the firm credits two accounts, Cash and Accounts Payable, in this one entry. However, the dollar totals of the debits and credits are equal.

Periodically, accountants use a trial balance to test the equality of their debits and credits. A trial balance is a listing of the ledger accounts and their debit or credit balances to determine that debits equal credits in the recording process. The accounts appear in this order: assets, liabilities, stockholders' equity, dividends, revenues, and expenses. Within the assets category, the most liquid (closest to becoming cash) asset appears first and the least liquid appears last. Within the liabilities, those liabilities with the shortest maturities appear first. Study Exhibit 13, the trial balance for MicroTrain Company. Note the listing of the account numbers and account titles on the left, the column for debit balances, the column for credit balances, and the equality of the two totals.

When the trial balance does not balance, try re-totaling the two columns. If this step does not locate the error, divide the difference in the totals by 2 and then by 9. If the difference is divisible by 2, you may have transferred a debit-balanced account to the trial balance as a credit, or a credit-balanced account as a debit. When the difference is divisible by 2, look for an amount in the trial balance that is equal to one-half of the difference. Thus, if the difference is USD 800, look for an account with a balance of USD 400 and see if it is in the wrong column.

If the difference is divisible by 9, you may have made a transposition error in transferring a balance to the trial balance or a slide error. A transposition error occurs when two digits are reversed in an amount (e.g. writing 753 as 573 or 110 as 101). A slide error occurs when you place a decimal point incorrectly (e.g. USD 1,500 recorded as USD 15.00). Thus, when a difference is divisible by 9, compare the trial balance amounts with the general ledger account balances to see if you made a transposition or slide error in transferring the amounts.

An ethical perspective:

Financial Deals, Inc.

Larry Fisher was captain of the football team at Prestige University. Later, he earned a master's degree in business administration with a concentration in accounting.

Upon graduation, Larry accepted a position with Financial Deals, Inc., in the accounting and finance division. At first, things were going smoothly. He was tall, good looking, and had an outgoing personality. The president of the company took a liking to him. However, Larry was somewhat bothered when the president started asking him to do some things that were slightly unethical. When he protested mildly, the president said: "Come on, son, this is the way the business world works. You have great potential if you don't let things like this get in your way."

As time went on, Larry was asked to do things that were more unethical, and finally he was performing illegal acts. When he resisted, the president appealed to his loyalty and asked him to be a team player. The president also promised Larry great wealth sometime in the future. Finally, when he was told to falsify some financial statements by making improper entries and to sign some documents containing material errors, the president supported his request by stating: "You are in too deep now to refuse to cooperate. If I go down, you are going with me." Through various company schemes, Larry had convinced some friends and relatives to invest about USD 10 million. Most of this would be lost if the various company schemes were revealed.

Larry could not sleep at night and began each day with a pain in his stomach and by becoming physically ill. He was under great strain and believed that he could lose his mind. He also heard that the president had a shady past and could become violent in retaliating against his enemies. If Larry blows the whistle, he believes he will go to prison for his part in the schemes. (Note: This scenario is based on an actual situation with some facts changed to protect the guilty.)

If you still cannot find the error, it may be due to one of the following causes:

• Failing to post part of a journal entry.

• Posting a debit as a credit, or vice versa.

• Incorrectly determining the balance of an account.

• Recording the balance of an account incorrectly in the trial balance.

• Omitting an account from the trial balance.

• Making a transposition or slide error in the accounts or the journal.

Usually, you should work backward through the steps taken to prepare the trial balance. Assuming you have already re-totaled the columns and traced the amounts appearing in the trial balance back to the general ledger account balances, use the following steps: Verify the balance of each general ledger account, verify postings to the general ledger, verify general journal entries, and then review the transactions and possibly the source documents.

The equality of the two totals in the trial balance does not necessarily mean that the accounting process has been error-free. Serious errors may have been made, such as failure to record a transaction, or posting a debit or credit to the wrong account. For instance, if a transaction involving payment of a USD 100 account payable is never recorded, the trial balance totals still balance, but at an amount that is USD 100 too high. Both cash and accounts payable would be overstated by USD 100.

You can prepare a trial balance at any time—at the end of a day, a week, a month, a quarter, or a year. Typically, you would prepare a trial balance before preparing the financial statements.

An accounting perspective:

Uses of technology

The computers of persons in a given department or building are frequently connected in a Local Area Network (LAN). These persons can then access simultaneously the programs and databases stored in the LAN and can communicate with all other persons in the LAN through email. A more advanced type of computer network is called Client/Server Computing. Under this structure, any computer in the network can be used to update the information stored elsewhere in the network. For example, accounting information stored in one computer could be updated by authorized persons from a number of other computers in the system. The use of networks is designed to improve efficiency and to reduce software and hardware costs.