Chapter 4
The Accounting Cycle: Journals and Ledgers
86
If a journal entry only affects two accounts, one account will be debited and one account will be
credited. This type of entry is fairly straightforward to complete. However, some journal entries
may affect three or more accounts.These entries are called
compound journal entries
and will have
multiple debits or multiple credits.
To illustrate a compound journal entry, suppose you purchase equipment for $5,000 on May 25.
You will pay $1,000 cash at the time of the purchase, but will not pay the remainder until sometime
later (accounts payable). This transaction will increase equipment, increase accounts payable and
decrease cash.The journal entry is illustrated in Figure 4.7 below.
JournAl
Page 1
date
2016
Account Titles and explanation
Pr
debit
Credit
May 25 equipment
5,000
Accounts Payable
4,000
Cash
1,000
Purchased equipment
________________
FIgure 4.7
Post to ledger Accounts
Although all the activities for the month have been recorded in the general journal, the ending
balance for each account has not yet been determined. For example, there may have been several
transactions relating to cash. To calculate the closing cash balance, the accounts need to be
sorted into a manageable format where all transactions affecting that account will be recorded.
The
general ledger
organizes the accounts used by the business. Each account is given a unique
number to help identify it and is assigned a separate page to track the balance of the account.
The list of all the accounts in the general ledger is called a
chart of accounts
. Combined with the
journal introduced in the previous section, the journal and ledger can be referred to as the books
of the business.
To set up a chart of accounts, first define the various accounts to be used by the business and then
give each account an identifying number. For small businesses, three-digit account numbers may
be sufficient, although more digits allow for new accounts to be added as the business grows. Large
organizations may have thousands of accounts and require longer account numbers.
