Ledger and Trial Balance

Lesson 4

Lesson Overview

Topics covered:
I. Ledger and T-Accounts
II. Preparing T- Accounts
III. Preparing a Ledger
IV. Prepare an unadjusted Trial Balance

Learning Objectives:

At the end of this lesson, you are expected to:

1. Define Ledger and T- Accounts and its importance to accounting.
2. Able to prepare T-accounts from journals
3. Able to post ledgers from journals.
4. Able to make an unadjusted trial balance

Assessment:

∙ Activity 1 – Posting to ledgers

∙ Activity 2 – Making Trial Balance

If you've been studying accounting for even a short amount of time then you've probably heard of
T-accounts and ledgers. In this lesson we're going to learn exactly what these are, we'll look at a detailed
example of how to put a T account together, and we'll learn why they're so important.

What are T-Accounts?

In accounting we open an account for each

item in our records.

A T-account has the following format:

As you can see, the conventional account

has
the format of the letter T; hence they are
often
referred to as T accounts.

By account, we mean a summary record of all

transactions relating to a particular item in a business. Now Let's Define Ledger
Figure 4. 1 T- Account

According to the Collins English

 Dictionary, the ledger is "the principal book in
which the commercial transactions of a
company are recorded."

Before the days of accounting

software, bookkeepers and accountants
actually kept physical books, and each ledger
was a separate physical book.

However, times have changed. And a

simpler definition is probably more
appropriate now too .So these days, this might
Figure 4. 2 Report Book
be a better description.

“A ledger is simply a whole bunch of T-accounts grouped together.”

Now, there can be a number of different ledgers, each one dealing with a specific aspect of the
business and listing T-accounts only in that category. We'll meet some of these further below.

General Ledger Definition

You may have heard of the general ledger. The general ledger is simply our main ledger in
accounting.
All the main T-accounts in a business fall under the general ledger.

For example, land and buildings, equipment, machinery, vehicles, financial investments, bank
accounts, inventory, owner's equity (capital), liabilities - the T-accounts for all of these can be found in the
general ledger.

Figure 4. 3 Sample Ledger

Subsidiary Ledgers (or Sub Ledgers):

Subsidiary ledgers, or sub ledgers, are supporting ledgers - ledgers that support the main ledger
- the general ledger.

We have two subsidiary (supporting) ledgers:

1. Debtors (or Receivables) Ledger

The Debtors (or Receivables) Ledger contains T accounts for each individual debtor - meaning for
each person/business that owes our business.

2. Creditors (or Payables) Ledger

The Creditors (or Payables) Ledger contains T-accounts for each individual creditor - meaning for
each person or business that our business owes.
How to Prepare a T-Account

We're going to draw up a T-account for Sheirlyn’s Cake Shop, the example we've been
using throughout our tutorials.

Transaction # 1
Sheirlyn decided to open a cake shop. On January 2, she invested P 20,000 to start her business.
DATE DESCRIPTION REF. DEBIT CREDIT

Jan. 2 Cash P 20,000

Sheirlyn, Capital P 20,000

To record investment for business

Table 4. 1 Journal

Now, what happens to the cash account here? It is debited, as it increases.

When drawing up the T-account for cash, we do the exact same thing.

We debit the cash account.

Remember, to debit means to make

an entry on the left-hand side.

To credit means to make an entry on

the right-hand side.

As you can see, when recording a transaction in a T-account, we record the date of the transaction

too. The Contra Account

As a general rule, we use the opposite or contra account to describe the transaction. In this
transaction the contra account is capital. The source of this increase to the bank account is capital - the
owner investing in the business
.
If we were to describe each transaction occurring within the T-account above as "cash," it would
not adequately describe why our cash account increased or decreased. All transactions would just be listed
as "cash." Using the opposite or contra account gives us a much better description of the transaction.

Remember that with every transaction and journal entry there will be two accountsthat are
affected. The above transaction would not only affect the Cash T account but also affect the contra
account or second account, Capital.

Here's what the Capital T-account would look like:

We Credit the Capital Account

As you can see, it's basically a mirror

image of what we recorded in the
CASH T account.

For Comparison:
Transaction # 2

On January 3, Sheirlyn is short of money to renovate the building for her cake shop. After some
thoughts she decided to loan cash from a bank for P 15,000.
DATE DESCRIPTION REF. DEBIT CREDIT

Jan. 3 Cash P 15,000

Loan Payable P 15,000

To record loan from the bank

Table 4. 2 Journal

Now, what happens to the cash account here? It is debited, as it increases due to the borrowed
money. And we have an increase of liability; Normal balance of liability is credit, meaning if there is an
increase of liability we put it on the credit account. As you can see Loan payable is a liability so we put it
on the credit side. Remember that in every debit there is a corresponding credit.

When drawing up the T-account for cash, we do the exact same thing

Transaction # 3

Example: On January 5, Sheirlyn bought equipment, specifically oven for baking the cakes. It
amounted to P 8,000.
DATE DESCRIPTION REF. DEBIT CREDIT

Jan. 5 Equipment P 8,000

Cash P 8, 000

To record equipment

Table 4. 3 Journal

Now, what happens to the cash account here? It is credited, as it decreases due to the purchase of
equipment. Note, that the normal balance of an asset is debit meaning if there is an increase in asset it will
 be put on the debit side. But, if there is a decrease in asset put the amount on the credit side. As we can see
we have a new account, which is the equipment. Equipment is also an asset; we bought equipment through
our cash. Meaning we have an increase in asset in terms of equipment. So there is a debit in equipment.

Transaction # 4

Example: On January 14, Withdraw P 1,500 from her investment.

DATE DESCRIPTION REF. DEBIT CREDIT

Jan. 14 Sheirlyn, Drawing P 1, 500

Cash P 1, 500

To record drawing

Table 4. 4 Journal

In this transaction, what happens to the cash account here? It is credited, as it decreases due to
Sheirlyns’ withdrawal of cash in her investment. This means her cash decreases by P1, 500. The
corresponding account is drawing account which is the normal balance is debit.

Transaction # 5

Example: On January 15, Sheirlyn sold 10 pieces of cakes, which amounted to P 4,000
paid in cash.
DATE DESCRIPTION REF. DEBIT CREDIT

Jan. 15 Cash P 4, 000

Sales Revenue P 4, 000

To record sales revenue

Table 4. 5 Journal

What happened on this transaction is Sheirlyn sold her cake for P 4,000. Remember that if we
have a sale we need to record our revenue. The normal balance of Revenue or Income is Credit. As we
can see we recorded revenue in the credit side while we record cash on the debit since we received cash
during this transaction. That means there is an increase of cash, Cash is an asset so meaning there is an
increase on asset. Normal balance of asset is debit.

For the remaining transactions from Sheirlyns’ Cake Shop you can get a paper and try to practice.

The Importance of T-Accounts

As previously mentioned, an account is the summary record of all transactions relating to a

particular item in a business.

How does it help a manager or business owner?

A business owner can quickly look over T-accounts (such as the one in our example) in order to extract
information.

For example, if you examine the T-account above, you can see that all increases to the cash
account (receipts) occur on the left side. All the decreases to the cash account (payments) occur on the
rightside.

Now, let’s go to the proper posting in Ledger.

Example: Post this general journal below in the ledger.

GENERAL JOURNAL J3

DATE DESCRIPTION REF DEBIT CREDIT

 Mar. 1 Cash P 15, 000 P 25, 000
Land P 10, 000
Farhan, Capital

To start business with cash and land

8 Inventory P 3, 000 P 3, 000

Accounts Payable

To record purchase of inventory

on account

13

Cash P 5, 000 P 6, 500

Accounts Receivable P 1, 500
Sales Revenue

To record sales revenue in cash and

on account

21 Accounts Payable P 3,000 P 3,000

Cash

To record payment of accounts payable

to Bilal and friends with discount

28 Cash P 1, 500 P 1,500

Accounts Receivable

To record accounts receivable that

is received.

Total P 39, 000 P 39, 000

Table 4. 6 General Journal used for posting on Ledger

POSTING LEDGER
Table 4. 7 Posted Ledgers from Journal

In posting the accounts from general journal to the ledger you need to group the same account.
Follow the format above in making the Ledger.

1. Put the account name above. (ex. Cash, Land, Capital, and others.)
2. Don’t forget to put the date, description, reference, debit, credit, and the balance.
3. In the date just follow what is recorded in the journal.
4. The description says what transaction happened to the account that caused an increase or decrease.
5. Reference means where you got the amount. In this example it came from the J3 or Journal 3.
6. In debit and credit just follow what is recorded from the journal.
7. You have to get the balance of the account. Know the “normal balance” first before subtracting and
adding the amount. For example, Cash has a normal balance of debit, so everytime there is a
record posted in debit it means you need to add and if there is a credit you need to subtract.
8. Lastly, get the final balance so we can proceed to the trial balance.

TRIAL BALANCE

A trial balance is a report that lists the balances of all general ledger accounts of a company at a
certain point in time. The accounts reflected on a trial balance are related to all major accounting items,
including assets, liabilities, equity, revenues, expenses, gains, and losses. It is primarily used to identify
the balance of debits and credits entries from the transactions recorded in the general ledger at a certain
point in time.

Let’s use the ledger for example:

 Figure 4. 7 Adjusted Trial Balance from the ledger

In making unadjusted trial balance, you just need to get the balances from each account on the
ledger and to complete the unadjusted trial balance, add the balances in the debit column and, separately,
add those in the credit column. Write each respective total on the last line of the table in the appropriate
column. The total debit balance should equal the total credit balance.