Mark Farber: Hi, I’m Mark Farber and this is Accounting Fundamentals.
Today what we're going to do is we're going to take the transactions that we put into
the journal in the last video and we're going to post them to the ledger.
Now, remember what we said; when we put the entries into the journal and have abbreviated
them over here we can see the first one was a debit to cash of $5000, credit to capital,
debit equipment 2000, credit cash 2000, so on and so forth.
Those are the five transactions that we’ve been looking at so far.
The problem that we have is that if you wanted to know how much cash the company had you'd
have to go through and start saying, okay, well, here's a debit to cash, so that's plus
5000, and here's we've credited cash, that's minus 2000, so that's 3000 net, and then we
credit cash 2000.
So I'm down to $1000 in cash.
Well again, imagine doing that for a really big company.
You’re working at Apple and somebody says, "How much cash do we have," and you have to
go through a list of millions of these things to figure out how much cash the company has.
So we need a way of keeping track of it.
The way that we do it is in a bunch of accounts called the "ledger."
Now, you can go and look at what an actual ledger account looks like when it’s formally
written, but one way that we keep track of ledger accounts is using T accounts.
Remember we looked at those before.
We have a T account for each one of our accounts, so cash, accounts receivable, equipment, rent
expense, revenue, etc.
What we're going to do ... All that posting means is it means that we're going to take
the information in our journal and we're going to record it in the T accounts.
You’ll see how that allows us to keep track of how much we have.
So let's go through very quickly and do that.
The first transaction we have a debit to cash of $5000.
So debit remember is the left side of the T account.
I'm just going to put 5000 over here, and I'm going to put a little one next to it.
That corresponds to this being transaction number one.
Just in case I want to know where that $5000 came from, I can always go back to my journal
and see that it was transaction number one and referred to this transaction over here.
Then we have a credit to capital of 5000.
We have to be really careful; credit is on the right-hand side, 5000.
And again, I'll put a little one there.
Just to note that it’s transaction number one.
Then I check it off to show that I’ve done it.
We just keep doing.
So debit equipment $2000 ... 2000 ... and I'll put a little two.
And credit cash $2000 ... 2000 and a little two.
Nothing harder than that.
That’s all that posting is really.
In fact, in a computerized accounting system when journal entries are created they tend
to get posted immediately, but in the old days when this was all done with paper and
pencil you had to go through this process.
Debit rent expense $2000.
So we'll find our rent expense account ... $2000, and that’s transaction three.
And credit cash $2000.
So again on the right-hand side, 2000.
That's a number three.
Check it off.
Debit accounts receivable $3000.
So it's over here.
I'm just going to write it down here just give myself some room.
That's transaction number four.
And credit revenue $3000.
Transaction number four.
Check it off.
Finally, we're going to debit withdrawals 500, and we're going to credit cash 500.
Now we've posted all of these.
Well, we can now kind of ignore this.
It doesn't go away.
It stays there in the journal, but now we can focus our attention over here.
We can see that accounts receivable there's $3000.
We can very quickly see that the company has $3000 owing to it.
It has $2000 of equipment.
It's earned $3000 of revenue and so forth.
Generally, there'll be a lot more transactions then just one in a T account.
So what we do when there's more than one is we draw a line at the point that we want to
calculate how much we have of a particular account.
In this case we'll do cash.
We add up the left side; 5000.
And we add up the right side, so 2000, 4000, 500.
So it's $5000 of debits and $4500 of credits.
Then what we do is we subtract thee smaller number from the larger one.
So 4500 we're going to subtract from 500.
That gives us a net amount of 500.
We create another line and we write it on the side of the larger amount.
So because there was more debits than credits what we say is that we have $5000 of debits,
minus 4500 of credits, leaves a balance of $500 of debits.
In other words, the company has $500 of cash, and we can see that very easily from our ledger
accounts.
Now that we’ve seen how we do ledgers, what we need to understand is, okay, remember what
we said, the accounting equation always has to be in balance.
We knew it was in balance here because for each transaction we can see the debits are
equal to the credits.
Of course, over here we can't see that anymore.
Here’s a credit of $3000 and unless you want to go looking through all your accounts
to find the corresponding debit, which is over here, then you’ll never know if you're
still in balance or not.
What if you made a mistake?
We can't afford to make mistakes here.
What we're going to see in the next video is how we reconcile that, how we make sure
that once we’ve copied everything over to our ledger accounts, and we've calculated
the balance in each of these ledger accounts, how do we make sure that it's still in balance,
that the accounting equation still holds.
We'll see that in the next video.