FUNDAMENTALS OF ACCOUNTING

Chapter 9: Ledger and Trial Balance

Expectation
Specifically, this chapter will help you to:
1. describe a general ledger and understand what purpose it serves;
2. post entries from the general journal to the general ledger;
3. distinguish between permanent and temporary accounts;
4. prepare a trial balance; and
5. perform steps in locating and correcting errors.

Lecture
THE LEDGER

A group of entity’s accounts is referred to as ledger. Although some firms may use
various ledgers to accumulate certain detailed information, all firms have a general ledger. A
general ledger is the “reference book” of the accounting system and is used to classify and
summarize transactions, and to prepare data for basic financial statements. The accounts in the
general ledger are classified into two general groups:
1. Balance sheet accounts or permanent accounts / real accounts. This
includes the assets, liabilities and owner’s equity.
2. Income statements accounts or temporary accounts. This includes the income
and expenses. Temporary accounts are also called nominal accounts which are used
to gather information for a particular accounting period. At the end of the period, the
balances of these accounts are transferred to a permanent owner’s equity account.

Each accounts has its own record in the ledger. Every account in the ledger maintains the
basic format of the T-account but offers more information (e.g. the account number at the upper
right corner and the journal reference column). Compared to a journal, a ledger organizes
information by account.

CHART OF ACCOUNTS

A listing of all the accounts and their account numbers in the ledger is known as the
chart of accounts. The chart is arrange in the financial statement order, that is, assets first,
followed by liabilities, owner’s equity, income and expenses. The accounts should be numbered
in a flexible manner to permit indexing and cross-referencing. When analyzing transactions, the
accountant refers to the chart of accounts to identify the pertinent accounts to be increased or
decreased. If an appropriate account title is not listed in the chart, an additional account may be
added. Presented in the next is the chart of accounts for the illustration:

Chapter 9: Recording Business Transaction – Ledger and Trial Balance 1 | Page

 Wedding “R” Us
Chart of Accounts

Balance Sheet Accounts Income Statement Accounts

(Permanent Accounts) (Temporary Accounts)

Assets Income
110 Cash 410 Consulting Revenues
120 Accounts Receivable 420 Referral Revenues
130 Supplies
140 Prepaid Rent Expenses
150 Prepaid Insurance 510 Salaries Expense
160 Service Vehicle 520 Supplies Expense
165 Accumulated Depreciation 530 Rent Expense
170 Office Equipment 540 Insurance Expense
175 Accumulated Depreciation 550 Utilities Expense
560 Depreciation Expense -
Liabilities Service Vehicle
210 Note Payable 570 Depreciation Expense -
220 Accounts Payable Office Equipment
230 Salaries Payable 580 Miscellaneous Expense
240 Utilities Payable 590 Interest Expense
250 Interest Payable
260 Unearned Referral Revenues

Owner’s Equity
310 Diaz, Capital
320 Diaz, Withdrawal
330 Income Summary

Posting (Step 3)

Posting means transferring the amounts from the journal to the appropriate accounts in
the ledger. Debits in the journal are posted as debits in the ledger, and credits in the journal as
credits in the ledger. The steps are illustrated as follows:
1. Transfer the date of the transaction from the journal to the ledger.
2. Transfer the page number from the journal to the journal reference (J.R) column of
the ledger.
3. Post the debit figure from the journal as a debit figure in the ledger and the credit
figure from the journal as a credit figure in the ledger.
4. Enter the account number in the posting reference column of the journal once the
figure has been posted to the ledger.

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STEP 1. Transfer the date of the transaction from the journal to the ledger.

The Journal
Page 1
Date Account Titles and Explanation P.R. Debit Credit
2014
1 MAY 1 Cash ₱ 250,000.00 1
2 Diaz, Capital ₱ 250,000.00 2
3 3

The Ledger
Account: Cash Account No. 110
Date Explanation J.R. Debit Credit Balance
2014
1 MAY 1 1
2 2

Account: Diaz, Capital Account No. 310

Date Explanation J.R. Debit Credit Balance
2014
1 MAY 1 1
2 2

STEP 2. Transfer the page number from the journal to the journal reference (J.R) column
of the ledger.
The Journal
Page 1
Date Account Titles and Explanation P.R. Debit Credit
2014
1 MAY 1 Cash ₱ 250,000.00 1
2 Diaz, Capital ₱ 250,000.00 2
3 3

The Ledger
Account: Cash Account No. 110
Date Explanation J.R. Debit Credit Balance
2014
1 MAY 1 J-1 1

2 2

Account: Diaz, Capital Account No. 310

Date Explanation J.R. Debit Credit Balance
2014
1 MAY 1 J-1 1

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 2 2
STEP 3. Post the debit figure from the journal as a debit figure in the ledger and the credit
figure from the journal as a credit figure in the ledger. Then compute for balances.
The Journal
Page 1
Date Account Titles and Explanation P.R. Debit Credit
2014
1 MAY 1 Cash ₱ 250,000.00 1
Diaz, Capital ₱ 250,000.00

2 2

3 3

The Ledger
Account: Cash Account No. 110
Date Explanation J.R. Debit Credit Balance
2014
1 MAY 1 J-1 ₱ 250,000.00 ₱ 250,000.00 1
2 2

Account: Diaz, Capital Account No. 310

Date Explanation J.R. Debit Credit Balance
2014
MAY 1 ₱ 250,000.00 ₱ 250,000.00
1 J-1 1

2 2

STEP 4. Enter the account number in the posting reference column of the journal once the
figure has been posted to the ledger.
The Journal
Page 1
Date Account Titles and Explanation P.R. Debit Credit
2014
MAY 1 Cash 110 ₱ 250,000.00

1 1

2 Diaz, Capital 310 ₱ 250,000.00 2

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 3 3

The Ledger
Account: Cash Account No. 110
Date Explanation J.R. Debit Credit Balance
2014
1 MAY 1 J-1 ₱ 250,000.00 ₱ 250,000.00 1
2 2

Account: Diaz, Capital Account No. 310

Date Explanation J.R. Debit Credit Balance
2014
1 MAY 1 J-1 ₱ 250,000.00 ₱ 250,000.00 1
2 2
Ledger Accounts after Posting

What does ledger accounts looks like after posting?

At the end of an accounting period, the debit or credit balance of each account must be
determined to enable us to come up with a trial balance.

Illustration. The ledger accounts of Wedding “R” Us after posting are shown below. The balance
of each account has been determined. See the journal summary at the last page of this module for
references.

Account: Cash Account No. 110

Date Explanation J.R. Debit Credit Balance
2014
1 MAY 1 J-1 ₱ 250,000.00 ₱ 250,000.00 1
2 1 J-1 ₱ 8,000.00 242,000.00 2
3 2 J-1 210,000.00 452,000.00 3
4 4 J-1 420,000.00 32,000.00 4
5 4 J-1 14,400.00 17,600.00 5
6 5 J-1 15,000.00 2,600.00 6
7 9 J-1 10,000.00 (7,400.00) 7
8 10 J-1 26,400.00 19,000.00 8
9 13 J-1 6,600.00 12,400.00 9
10 15 J-1 10,000.00 22,400.00 10
11 25 J-2 14,000.00 8,400.00 11
12 27 J-2 7,200.00 1,200.00 12
13 30 J-2 24,000.00 25,200.00 13
14 31 J-2 3,000.00 22,200.00 14
15 15

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 Account: Accounts Receivable Account No. 120
Date Explanation J.R. Debit Credit Balance
2014
1 MAY 19 J-1 ₱ 36,000.00 ₱ 36,000.00 1
2 30 J-2 ₱ 24,000.00 12,000.00 2
3 3

Account: Supplies Account No. 130

Date Explanation J.R. Debit Credit Balance
2014
1 MAY 8 J-1 ₱ 18,000.00 ₱ 18,000.00 1
2 2
Account: Prepaid Rent Account No. 140
Date Explanation J.R. Debit Credit Balance
2014
1 MAY 1 J-1 ₱ 8,000.00 ₱ 8,000.00 1
2 2

Account: Prepaid Insurance Account No. 150

Date Explanation J.R. Debit Credit Balance
2014
1 MAY 4 J-1 ₱ 14,400.00 ₱ 14,400.00 1
2 2

Account: Service Vehicle Account No. 160

Date Explanation J.R. Debit Credit Balance
2014
1 MAY 4 J-1 ₱ 420,000.00 ₱ 420,000.00 1
2 2

Account: Office Equipment Account No. 170

Date Explanation J.R. Debit Credit Balance
2014
1 MAY 5 J-1 ₱ 60,000.00 ₱ 60,000.00 1

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 2 2

Account: Notes Payable Account No. 210

Date Explanation J.R. Debit Credit Balance
2014
1 MAY 2 J-1 ₱ 210,000.00 ₱ 210,000.00 1
2 2

Account: Accounts Payable Account No. 220

Date Explanation J.R. Debit Credit Balance
2014
1 MAY 5 J-1 ₱ 45,000.00 ₱ 45,000.00 1
2 8 J-1 18,000.00 63,000.00 2
3 9 J-1 10,000.00 53,000.00 3
4 4

Account: Utilities Payable Account No. 240

Date Explanation J.R. Debit Credit Balance
2014
1 MAY 30 J-2 ₱ 1,400.00 ₱ 1,400.00 1
2 2

Account: Unearned Referral Revenues Account No. 260

Date Explanation J.R. Debit Credit Balance
2014
1 MAY 15 J-1 ₱ 10,000.00 ₱ 10,000.00 1
2 2

Account: Diaz Capital Account No. 310

Date Explanation J.R. Debit Credit Balance
2014
1 MAY 1 J-1 ₱ 250,000.00 ₱ 250,000.00 1
2 2

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 Account: Diaz, Withdrawals Account No. 320
Date Explanation J.R. Debit Credit Balance
2014
1 MAY 25 J-2 ₱ 14,000.00 ₱ 14,000.00 1
2 2

Account: Consulting Revenues Account No. 410

Date Explanation J.R. Debit Credit Balance
2014
1 MAY 10 J-1 ₱ 26,400.00 ₱ 26,400.00 1
2 19 J-1 36,000.00 62,400.00 2

Account: Salaries Expense Account No. 510

Date Explanation J.R. Debit Credit Balance
2014
1 MAY 13 J-1 ₱ 6,600.00 ₱ 6,600.00 1
2 27 J-2 7,200.00 13,800.00 2
3 3

Account: Utilities Expense Account No. 550

Date Explanation J.R. Debit Credit Balance
2014
1 MAY 30 J-2 ₱ 1,400.00 ₱ 1,400.00 1
2 31 J-2 3,000.00 4,400.00 2
3 3

Trial Balance (Step 4)

The trial balance is a list of all accounts with their respective debit and credit
balances. It is prepared to verify the equality of debits and credits in the ledger at the end of each
accounting period or at any time the posting are updated.

The trial balance is a control device that helps minimize accounting errors. When the
totals are equal, the trial balance is in balance. This equality provides an interim proof of the
accuracy of the records but it does not signify the absence of errors. For example, if the
bookkeeper failed to record payment of rent, the trial balance columns are equal but in reality,
the accounts are incorrect since rent expense is understated and cash overstated.

The procedures in the preparation of a trial balance follow:

1. List the account titles in numerical order.

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 2. Obtain the account balance of each account from the ledger and enter the debit balances
in the debit column and the credit balances in the credit column.
3. Add the debit and credit columns.
4. Compare the totals.

The trial balance illustration follows:

Wedding “R” Us
Trial Balance
May 31, 2014

Debit Credit
110 Cash ₱ 22,200.00
120 Accounts Receivable 12,000.00
130 Supplies 18,000.00
140 Prepaid Rent 8,000.00
150 Prepaid Insurance 14,400.00
160 Service Vehicle 420,000.00
170 Office Equipment 60,000.00
210 Notes Payable ₱ 210,000.00
220 Accounts Payable 53,000.00
240 Utilities Payable 1,400.00
260 Unearned Referral Revenues 10,000.00
310 Diaz, Capital 250,000.00
320 Diaz, Withdrawals 14,000.00
410 Consulting Revenues 62,400.00
510 Salaries Expense 13,800.00
550 Utilities Expense 4,400.00
₱ 586,800.00 ₱ 586,800.00
Locating Errors

What will you do if the trial balance debits and credits total is not equal?

An inequality in the totals of the debits and credits would automatically signal the
presence of an error. These errors include:

1. Error in posting a transaction to the ledger:

● an erroneous amount was posted to the account.
● a debit entry was posted as a credit or vice versa.
● a debit or credit posting was omitted.

2. Error in determining the account balances:

● a balance was incorrectly computed.
● a balance was entered in the wrong balance column.

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 3. Error in preparing the trial balance:
● one of the amount of the trial balance was incorrectly added.
● the amount of an account balance was incorrectly recorded on the trial balance.
● a debit balance was recorded on the trial balance as credit or vice versa, or a
balance was omitted entirely.

What is the most efficient approach in locating errors?

The following procedures when done in sequence may save considerable time and effort
in locating errors:

1. Prove the addition of the trial balance columns by adding these columns in the opposite
direction.
2. If the error does not lie in addition, determine the exact amount by which the trial balance
is out of balance. The amount of discrepancy is often a clue to the source of the error. If
the discrepancy is divisible by 9, this suggests either a transposition error or slide error.

a. Transposition error – Reversing the order of numbers.

Example: Assume that the cash account balance is ₱21,750, but in copying
the balance into the trial balance the figures are transposed and written as
₱21,570. The resulting error amounted to ₱180 and is divisible by 9.

₱21,750 ₱21,570
correct account balance wrong account balance

₱21,750 - ₱21,570 = ₱180

₱180 / 9 = 20
which signifies that the discrepancy is divisible by 9

b. Slide error. Incorrect placement of the decimal point.

Example: When ₱21,750 is copied as ₱2,175, the resulting discrepancy in
t the trial balance will also be an amount divisible by 9.

₱21,750 ₱2,175
correct account balance wrong account balance

₱21,750 - ₱2,175 = ₱19,575

₱19,575 / 9 = 2,175
which signifies that the discrepancy is divisible by 9

c. Exact one-half error. Assume that the office equipment account has a debit
balance of ₱42,000 but it is erroneously listed in the credit column of the trial
balance. This will cause a discrepancy of two times (₱42,000 x 2 = ₱84,000) in the
trial balance totals. Since such errors as recording a debit in a credit column are

Chapter 9: Recording Business Transaction – Ledger and Trial Balance 10 | Page

 common, it is advisable, after determining the discrepancy in the trial balance totals,
to scan the columns for an amount equal to exact one-half of the discrepancy.

d. Exact amount error. It is also advisable to look over the transactions for an
item of the exact amount of the discrepancy. An error may have been made by
recording the debit side of the transaction and forgetting to enter the credit side.

3. Compare the accounts and amounts in the trial balance with that in the ledger. Be certain
that no account is omitted.

4. Re-compute the balance of each ledger account.

5. Trace all posting from the journal to the ledger accounts. As this is done, place check
mark in the journal and in the ledger after each figure is verified. When the operation is
completed, look through the journal and the ledger for unchecked amounts. In tracing
postings, be alert not only for errors in amount but also for debits entered as credits, or vice
versa.

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