LEARNING OUTCOME NO.

3
Summarize ledger.

Contents:

1. Debit and credit

Assessment Criteria:

1. Debits & Credits for each ledger account are added correctly
2. Balances are extracted with 100% accuracy.

Conditions:

The participants will have access to:

1. Contextual Learning Laboratory

2. Learning Materials
3. Supplies
 Paper
 Pencil
 Eraser

Assessment Method:

1. Written test
2. Practical exercises
3. Interview

Document No. NTTA-TM1-07

Date Developed: Issued by:
September 2019 NTTA
Bookkeeping NC III Date Revised:

Checking Policy Developed by:

Compliance Vangie D. Manguil
Revision #
00
 Learning Experiences
Learning Outcome 3

Summarize Ledger

Learning Activities Special Instructions

Read Information Sheet 2.3-1
Internal Control Fundamentals
Answer Self-check 2.3-1 Read and understand the
Compare and check the answers Information Sheets and check
with the answer keys in yourself by answering the Self-check.
information sheet 2.3-1 You must answer all questions
correctly before proceeding to the
next activity.
Perform the Task Sheet and Job
Sheet to help you practice your
skills.
You may refer to the Information
Sheets to determine if you are doing
the right procedures.
The Performance Criteria Checklist
will guide you and help you evaluate
your work as you are practicing your
skill.
Evaluate your own work using the
Performance Criteria. When you are
ready, present your work to your
trainer for final evaluation and
recording.
If you have questions about the Task
Sheet and Job Sheet, please ask your
trainer.
 INFORMATION SHEET 2.3-1

Debit and Credit Definitions

Business transactions are events that have a monetary impact on the financial statements of
an organization. When accounting for these transactions, we record numbers in two
accounts, where the debit column is on the left and the credit column is on the right.

 A debit is an accounting entry that either increases an asset or expense account, or

decreases a liability or equity account. It is positioned to the left in an accounting entry.

 A credit is an accounting entry that either increases a liability or equity account, or

decreases an asset or expense account. It is positioned to the right in an accounting entry.

Debit and Credit Usage

Whenever an accounting transaction is created, at least two accounts are always impacted,
with a debit entry being recorded against one account and a credit entry being recorded
against the other account. There is no upper limit to the number of accounts involved in a
transaction - but the minimum is no less than two accounts. The totals of the debits and
credits for any transaction must always equal each other, so that an accounting transaction is
always said to be "in balance." If a transaction were not in balance, then it would not be
possible to create financial statements. Thus, the use of debits and credits in a two-column
transaction recording format is the most essential of all controls over accounting accuracy.

There can be considerable confusion about the inherent meaning of a debit or a credit. For
example, if you debit a cash account, then this means that the amount of cash on hand
increases. However, if you debit an accounts payable account, this means that the amount of
accounts payable liability decreases. These differences arise because debits and credits have
different impacts across several broad types of accounts, which are:

 Asset accounts. A debit increases the balance and a credit decreases the balance.

 Liability accounts. A debit decreases the balance and a credit increases the balance.

 Equity accounts. A debit decreases the balance and a credit increases the balance.
 The reason for this seeming reversal of the use of debits and credits is caused by the
underlying accounting equation upon which the entire structure of accounting transactions
are built, which is:

Assets = Liabilities + Equity

Thus, in a sense, you can only have assets if you have paid for them with liabilities or
equity, so you must have one in order to have the other. Consequently, if you create a
transaction with a debit and a credit, you are usually increasing an asset while also
increasing a liability or equity account (or vice versa). There are some exceptions, such as
increasing one asset account while decreasing another asset account. If you are more
concerned with accounts that appear on the income statement, then these additional rules
apply:

 Revenue accounts. A debit decreases the balance and a credit increases the balance.

 Expense accounts. A debit increases the balance and a credit decreases the balance.

 Gain accounts. A debit decreases the balance and a credit increases the balance.

 Loss accounts. A debit increases the balance and a credit decreases the balance.

If you are really confused by these issues, then just remember that debits always go in the
left column, and credits always go in the right column. There are no exceptions.

Debit and Credit Rules

The rules governing the use of debits and credits are as follows:

 All accounts that normally contain a debit balance will increase in amount when a
debit (left column) is added to them, and reduced when a credit (right column) is added to
them. The types of accounts to which this rule applies are expenses, assets, and dividends.

 All accounts that normally contain a credit balance will increase in amount when a
credit (right column) is added to them, and reduced when a debit (left column) is added to
them. The types of accounts to which this rule applies are liabilities, revenues, and equity.

 The total amount of debits must equal the total amount of credits in a transaction.
Otherwise, an accounting transaction is said to be unbalanced, and will not be accepted by
the accounting software.
 Debits and Credits in Common Accounting Transactions

The following bullet points note the use of debits and credits in the more common business
transactions:

 Sale for cash: Debit the cash account | Credit the revenue account

 Sale on credit: Debit the accounts receivable account | Credit the revenue account

 Receive cash in payment of an account receivable: Debit the cash account | Credit
the accounts receivable account

 Purchase supplies from supplier for cash: Debit the supplies expense account |
Credit the cash account

 Purchase supplies from supplier on credit: Debit the supplies expense account |
Credit the accounts payable account

 Purchase inventory from supplier for cash: Debit the inventory account | Credit the
cash account

 Purchase inventory from supplier on credit: Debit the inventory account | Credit the
accounts payable account

 Pay employees: Debit the wages expense and payroll tax accounts | Credit the cash
account

 Take out a loan: Debit cash account | Credit loans payable account

 Repay a loan: Debit loans payable account | Credit cash account

Debit and Credit Examples

Arnold Corporation sells a product to a customer for $1,000 in cash. This results in revenue
of $1,000 and cash of $1,000. Arnold must record an increase of the cash (asset) account
with a debit, and an increase of the revenue account with a credit. The entry is:
  Debit Credit

Cash 1,000  

     Revenue   1,000

Arnold Corporation also buys a machine for $15,000 on credit. This results in an addition to
the Machinery fixed assets account with a debit, and an increase in the accounts payable
(liability) account with a credit. The entry is:

  Debit Credit

Machinery - Fixed Assets 15,000  

     Accounts Payable   15,000

Other Debit and Credit Issues

A debit is commonly abbreviated as dr. in an accounting transaction, while a credit is

abbreviated as cr. in the transaction.

Debits and credits are not used in a single entry system . In this system, only a single
notation is made of a transaction; it is usually an entry in a check book or cash journal,
indicating the receipt or expenditure of cash. A single entry system is only designed to
produce an income statement .
 TASK SHEET 2.3-1

Mr. E. Terry, an engineer, begins a small consulting business. The accounts for the firm are
as follows.

Bank Automobile HST Payable Miscellaneous Expense

A/R—Various Equipment E. Terry, Capital Rent Expense
Office Supplies A/P—Various E. Terry, Drawings Telephone Expense
Office Furniture HST Recoverable Fees Earned

Journalize the following transactions, using the general journal page below. Calculate and
add the HST on all sales transactions. The rate for HST is 13%. Do not provide
explanations. The next page number of the journal is 27.
Transactions
Jul. 3 Cheque Copy
No. 105, Chambers Bros., payment for monthly rent $450 plus HST of $58.50,

total $508.50.
5 Purchase Invoice
From Glen Printing, $86.50 for office supplies plus HST of $11.25, total
$97.75.
8 Sales Invoice
No. 50 to J. Greenley, $250 for services performed, plus taxes.
10 Cash Receipt
From R. Grieve, $200 payment on account.
18 Cash Sales Slip
No. 100 to E. Webb, $85.50 plus taxes.
20 Cheque Copy
No. 106 to E. Terry, $490 for personal use.
24 Bank Debit Memo
$25.00 for bank service charge.
29 Cheque Copy
No. 107 to Star Blueprinting, $500 on account.
29 Cheque Copy
No. 108 to Municipal Telephone for payment of telephone bill, $200 plus HST
of $26, total $226.
31 Cheque Copy
The balances in the HST accounts for the previous period were: HST
Recoverable $890 and HST Payable $1410. Cheque 109 was written to the
Receiver General for $520 to clear the accounts for that period.
 ANSWER KEY 2.3-1

Premium
Decorating
  TRIAL BALANCE
ACCOUNTS Dr Cr
Bank 4 047.50  
Accounts Receivable 7 421.00  
Supplies 3 000.00  
Prepaid Insurance 1 880.00  
Furniture and Equipment 8 500.00  
Automobile 12 800.00  
Accounts Payable   3 250.00
Bank Loan   10 000.00
K. Morris, Capital   23 949.50
K. Morris, Drawings 19 500.00  
Fees Earned   40 072.00
Bank Charges 360.00  
Car Expense 3 547.00  
Miscellaneous Expense 200.00  
Rent Expense 6 000.00  
Telephone Expense 812.00  
Interest Expense 900.00  

Wages Expense 8 304.00  

  77 271.50 77 271.50