Chapter 4: Recording transactions and balancing the ledgers

I. Recording transactions
1.1 Recording cash transactions
Cash transactions: payment is made or received immediately and supported by a
receipt. Payment can be in the form of notes and coins, debit or credit card or cheque.

Example 1
Mylee entered into the following transactions:
1. Paid $20,000 capital into a business bank account to start a business

2. Paid $1,200 for rent of shop premises

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3. Purchased goods for resale at a cost of $2,000

4. Sold goods which had cost $300 for $500

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2.1 Recording credit transactions
Credit transactions: goods are sold or purchased and paid for at a later date.

Payment can be in the form of notes and coins, debit or credit card, cheque or direct
payment into a bank account.

1) Money owed from credit customers are called receivables.

2) Money owed to credit suppliers are called payables.

Question 1
Match the transaction to the appropriate accounting entry.

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II. Balancing off a ledger account
1.1 Balancing off a ledger account
When all transactions for an accounting period have been recorded, it will be necessary
to find the balance on each ledger account (T-account) as follows:

1) total both sides of the T-account and identify the larger total.
2) put the larger total in the total boxes at the bottom of the debit side and the credit side.
3) insert a balancing figure to the side of the T-account which does not currently add
up to the amount in the total box. Reference this balancing figure ‘balance c/f’
(carried forward) or ‘balance c/d’ (carried down), and
4) carry the balance down diagonally and reference it ‘balance b/f’ (brought
forward) or ‘balance b/d’ (brought down).

2.1 Extraction a trial balance

A trial balance is simply a list of all of the ledger balances brought down at a particular
point in time.

Note that we use the brought down balance, which sits below the subtotals, to determine
if the figure is included in the debit column or the credit column. An example is shown
below.

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Below are some useful summaries of the items which may appear in a trial balance and
ledger accounts so far on the course.

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Question 1
Arizona has a bakery and her cash account has the following entries:

What is the balance on the account?

Question 2
Which of the below would both appear on the de bit side of the trial balance?

a) Receivables and Capital

b) Payables and Loan account
c) Stationery expense and Delivery van
d) Sales and Purchases

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3.1 Closing off the ledger accounts
At the year-end, the ledger accounts must be closed off in order to:
• transfer income and expense ledger account balances to the statement of profit or
loss

• carry down ledger account balances relating to assets, liabilities and capital for the
start of the next accounting period. These balances will also be used to prepare the
statement of financial position.

Income and Expense ledger accounts

These accounts are shown on the Statement of Profit or Loss and would only show the
impact for a given 12-month period. They have no impact on the figures shown for the
following financial year.

When these accounts are balanced off, rather than showing the balance c/d and b/d, we
would only show the balance as being transferred to the SoPL.

Asset, Liability and Equity accounts

These accounts are shown on the Statement of Financial Position. They reflect what we
own and what we owe at the end of one given period. These will be the starting figures
for the next financial accounting period.

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III. Self-study
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Question 2:

What is the total entry to the debit side of the cash T-account?

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