BUS103: Introduction to Financial Accounting

A ledger (general ledger) is the complete collection of all the accounts of a company. The ledger may be in loose-leaf form, in a bound volume, or in computer memory.

Accounts fall into two general groups: (1) balance sheet accounts (assets, liabilities, and stockholders' equity) and (2) income statement accounts (revenues and expenses). The terms real accounts and permanent accounts also refer to balance sheet accounts. Balance sheet accounts are real accounts because they are not subclassifications or subdivisions of any other account. They are permanent accounts because their balances are not transferred (or closed) to any other account at the end of the accounting period. Income statement accounts and the Dividends account are nominal accounts because they are merely subclassifications of the stockholders' equity accounts. Nominal literally means "in name only". Nominal accounts are also called temporary accounts because they temporarily contain revenue, expense, and dividend information that is transferred (or closed) to the Retained Earnings account at the end of the accounting period.

The chart of accounts is a complete listing of the titles and numbers of all the accounts in the ledger. The chart of accounts can be compared to a table of contents. The groups of accounts usually appear in this order: assets, liabilities, stockholders' equity, dividends, revenues, and expenses.

Individual accounts are in sequence in the ledger. Each account typically has an identification number and a title to help locate accounts when recording data. For example, a company might number asset accounts, 100-199; liability accounts, 200-299; stockholders' equity accounts and Dividends account, 300-399; revenue accounts, 400- 499; and expense accounts, 500-599. We use this numbering system in this text. The uniform chart of accounts used in the first 11 chapters appears in a separate file at the end of the text. You should print that file and keep it handy for working certain problems and exercises. Companies may use other numbering systems. For instance, sometimes a company numbers its accounts in sequence starting with 1, 2, and so on. The important idea is that companies use some numbering system.

Now that you understand how to record debits and credits in an account and how all accounts together form a ledger, you are ready to study the accounting process in operation.

The accounting process in operation

MicroTrain Company is a small corporation that provides on-site personal computer software training using the clients' equipment. The company offers beginning through advanced training with convenient scheduling. A small fleet of trucks transports personnel and teaching supplies to the clients' sites. The company rents a building and is responsible for paying the utilities.

We illustrate the capital stock transaction that occurred to form the company (in November) and the first month of operations (December). The accounting process used by this company is similar to that of any small company. The ledger accounts used by MicroTrain Company are:

Notice the gaps left between account numbers (100, 103, 107, etc.). These gaps allow the firm to later add new accounts between the existing accounts.

To begin, a transaction must be journalized. Journalizing is the process of entering the effects of a transaction in a journal. Then, the information is transferred, or posted, to the proper accounts in the ledger. Posting is the process of recording in the ledger accounts the information contained in the journal.