Page 37 - Account for Ag - 2019

CH 4] Ledgers 4-1

CHAPTER FOUR: LEDGERS

During any fiscal period many transactions are completed by the agricultural firm and they result in many
changes in assets, liabilities, and equity. If an accurate balance sheet and income statement are to be prepared,
the results of all transactions must be recorded. It is the purpose of this chapter and the next 3 to discuss and
illustrate an effective method to record individual transactions. This method makes use of the ACCOUNT,
from which the subject of accounting derives its name.
THE ACCOUNT
When transactions are recorded by a business, a separate account is required for each asset, liability, and
equity item. Consequently, a large number of accounts would be needed by even a small business. Each
account should be identified and placed on a separate page in a bound or a loose-leaf book, or on a separate
card in a tray of cards.
A group of accounts used by a business in recording its transactions is known as a ledger. For example, an
enterprise might have thirty accounts, each one being a record of a particular asset, liability, equity, income, or
expense item. The thirty accounts, which would ordinarily be kept together in a binder, would be referred to as
the ledger. If the accounts are kept in a book, the book is also known as a ledger; and if the accounts are kept
on cards in a file tray, the tray of cards is a ledger.
The effect each transaction would have on the business might be shown by preparing a new balance sheet
and a new income statement after the completion of the transaction. Since hundreds of transactions are
performed during each fiscal period and in many businesses during each day, this plan would result in an
unreasonable amount of detailed work. Furthermore, new statements are not desired after each transaction,
since the manager or owner does not have time to observe the effect of each of a great number of transactions.
Information showing the effects of groups of similar transactions is sufficient for this purpose. It is therefore 4
convenient and satisfactory to maintain a separate account of record for each item that appears on the balance
sheet and on the income statement.
The simplest form of an account provides for three things: (1) a title, which is the name of the item
recorded in the account; (2) a space for recording increases in the amount of the item, in terms of money; and
(3) a space for recording decreases in the amount of the item, also in monetary terms. This form of account is
known as a T account because of its similarity to the letter T. There are other forms of the account that provide
spaces for recording additional information. More complete forms will be illustrated later. Regardless of form,
however, the three basic parts of the account are the title, a section for increases, and a section for decreases.

Account Title
Left or Right or

Debit side Credit side
Dr Cr

The left side of the account is called the DEBIT side and the right side is called the CREDIT side. The
word charge is frequently used as a synonym for debit. Amounts entered on the left side of an account,
regardless of the account title, are called debits or charges to the account, and the account is said to be debited
or charged. Amounts entered on the right side of an account are called credits, and the account is said to be
credited.
In the illustration 4-1 the receipts of cash have been listed in vertical order on the debit side of the cash
account. The cash payments have been listed in similar fashion on the credit side of the account. This
arrangement of the increases and the decreases in cash facilitates the determination of the totals of each. The
total of the cash receipts, $9,500, is shown in small pencil figures to distinguish it from debits to the account.
The total of cash payments, $5,200, is also shown in small pencil figures so that it will not be confused with the
credits to the account. (This process of taking a temporary total of a formal column of figures is called pencil

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