Skills Development:

Financial Statement Introduction part 3 of 3

"If done accurately and timely, [accounting] is a very useful tool to tell us where we have been and where we are going."

There are many accounts within the Balance Sheet and the Income Statement. These accounts collectively are called a “general ledger”. Entries into the general ledger accounts are made via the book of original entry called a “journal”. There are many specialized journals but the simplest and the one most commonly used and could be used for all entries is called a “general journal”. Entries are made into the general journal and then posted to the general ledger accounts.

The method used for recording these journals is called “double entry" bookkeeping, because “debits” are made and an equal amount to the debits are made and called “credits”.

Think of the accounts in the general ledger as the letter “T”, each account has a left side and a right side. The left side is called debits and the right side is called credits. The asset accounts normally have debit balances. The liability and equity accounts normally have credit balances. Since assets normally have debit balances, in order to increase an asset account takes a debit. To decrease an asset, takes a credit. The liability and equity accounts are normally credit balances, a credit will increase them and a debit will decrease them. For every debit, there must be a credit; therefore, it is double-entry or self balancing.

Since there are debits and credits and they offset each other, if all accounts in a general ledger were listed, the total should add to zero. This listing of accounts with their balances is called a “trial balance”. The trial balance only tells us that the debits and credits are equal but will not reflect whether or not we have other errors in our postings, such as to the wrong accounts.

Training Pros International
Adjusted Trial Balance
December 31, 20xx

Cash	$20,000
Accounts Receivable	10,000
Furniture and Fixtures	3,000
Automobiles	15,000
Land	20,000
Building	50,000
Accounts Payable		$11,000
Notes Payable		18,000
Stockholders' Equity		59,000
Sales		200,000
Cost of Sales	120,000
Salaries	36,000
Advertising	8,000
Telephone	1,000
Depreciation	4,000
Insurance	1,000

	288,000	288,000

At the end of the accounting period or cycle, usually one year, the revenue and expense accounts making up the income statement are closed out and the net of those are added to or reduced to the owner’s equity accounts ($29,000 + 30,000 = $59,000).

This is a very brief overview of accounting, how it works, and two of the financial statements used in meeting generally accepted accounting principles.

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