The Ledger
Businesses have many different accounts; collectively, these accounts are referred to as a ledger. A system for numbering accounts makes it easy to locate individual accounts in the ledger. Account numbers have two or more digits. While a small company may use a three-digit system, a very large corporation may have 35 or more digits in its account numbers (because they have many, many accounts). A typical numbering system used to prepare a chart of accounts is as follows:
- Asset accounts begin with 1
- Liability accounts begin with 2
- Owner’s Equity accounts begin with 3
- Revenue accounts begin with 4
- Cost of Merchandise (merchandising businesses only) begin with 5 (N/A for service business)
- Expense accounts begin with 5 for service business and 6 for merchandising business
Computing Account Balances
On a ledger form (columns are: Debit, Credit, Balance), each time you post to an account, you also compute a new account balance. Of course, on a computerized accounting system, this posting process occurs automatically and does not require a person to do the posting.
For an account with a Debit Normal Balance (Assets/Expenses), a Debit increases that balance while a Credit decreases that balance.
For an account with a Credit Normal Balance (Revenue, Capital), a Debit decreases that balance while a Credit increases that balance.
Analyzing, journalizing, and posting transactions occur on a daily basis. At the end of the accounting cycle (end of the month, quarter, or year), financial statements are prepared.
This instructional video will show you how to use an electronic spreadsheet to prepare financial statements:
An electronic spreadsheet template is provided to you for your use in preparing financial statements. It has four tabs at the bottom of the worksheet:
- Balance Sheet
- Statement of Changes in Owners Equity
- Income Statement
- Worksheet