The range of emotion from government notes and bonds is similar to that for short-term securities. While many may be asking why corporate notes and bonds are not included here, the answer is simple. Corporate debt is risky. Only investors and speculators should consider it. U.S. government notes and bonds are for savers whose primary concern is the return of their principal and whose secondary concern is the receipt of interest. There is a
real possibility of losing some principal with corporate debt.

Before purchasing treasuries, you will be exposed to complexity. The possibilities in government bonds are great. You can invest for one year or 29 years or any period in between. Certain bonds, such as Series EE, H, and I have tax advantages. Interest rates differ for every maturity and every type of bond. For most notes and bonds, the principal value is fixed.

For inflation-indexed treasuries, known as TIPs, the principal value increases every year we experience inflation. The principal value of I bonds also adjusts with inflation. However, even though the principal value of most bonds or notes is fixed, bonds sell at prices higher or lower than the principal value, depending on the current level of interest rates and the supply and demand of similar bonds and notes. The mathematics of computing the proper price for a note or bond is complex.

During ownership, some savers also experience a sense of regret. High inflation in the 1970s reduced the purchasing power of savings and was not compensated for by interest paid. When real estate was hot in the early 1980s, savers regretted they were not participating. The stock bubble of the late 1990s also led to regrets and jealousy. However, savers who hold out experience a sense of satisfaction when bubbles burst and speculators scramble to place their remaining funds in savings instruments.

When CDs mature and must be rolled over, savers experience a mixed set of emotions. Higher interest rates can lead to joy unless inflation has risen such that purchasing power will be lost. Lower rates can lead to regret that a long-term investment was not made.

Liquidating savings often triggers many emotions. A source of security is dying. When savings must be substantially liquidated, a grieving process begins. The saver may experience a wide range of emotions including sadness, regret, anger, resentment, helplessness, confusion, and free-floating fear. Generally, the cause of liquidation will compound the emotional mix. A divorce often requires a non-working spouse to both watch her savings dwindle as she reenters the work force and grieves the loss of her marriage.

The biggest issues with money market funds involve impulse buying of stuff you do not need and becoming a target for sales pitches from the sales force that sold you the money market fund. Money market funds can be tapped with checks, credit cards, and online transfers. Impulse buyers may want to avoid the opportunity to make quick purchases. Some brokers who are slightly unscrupulous tell money market fund owners that they should “put their money to work” and that “cash is trash.” Lured by potentially higher returns in stocks and other high-commission, high-spread investments, money market funds are easily and quickly converted. With CDs, you lose your interest if you liquidate before the term. Savings accounts often require several steps to convert into risky investments. Money market funds, particularly those attached to brokerage accounts, can be converted at the click of a mouse. If you are vulnerable to sales pitches or impulse buying, you may not want to own money market funds.

Important as it is, the general ledger doesn’t exist in a vacuum, but interacts rather cleverly with other parts of a company’s accounting system. This occurs through a process called posting.

Posting is simply entering into the G/L a summary of posted directly to the general ledger include returns of merchandise, allowances from a supplier for credit, asset acquisitions, asset sales, investor capital contributions, loan drawdowns, and loans. These are called journal entries.

Transactions transactions recorded in the subledgers or journals, with a reference number. We’ll get further into the entire process later.

Some transactions are posted only to the general ledger and not to the subledgers. These transactions tend to be unusual. But proceed with caution. Items that should be entered in subledgers but are simply posted to the general ledger for the sake of convenience can throw the bookkeeping out of whack and unbalance your balance. That’s an error no accounting system can afford.

The general ledger exists for three main purposes: It serves as a summary of every transaction as recorded in the books of original entry; it’s the source document for all financial reports; and it offers an audit trail for tracking individual transactions, should that become necessary.

As the heart of the company’s financial body, the G/L records all transactions that occur within the company’s business activities. It also functions as the center of the firm’s books of original entry. When individual transactions are recorded anywhere within the subsidiary ledgers (subledgers), such as accounts payable or accounts receivable, they feed up to the G/L. (If a business is relatively small, there may not be any subledgers. However, even if you work in a company with such a simplified accounting system, it’s good to know how a more sophisticated system works.)

But the G/L is not a single document. Its content is augmented by receipts, journal entries, invoices—paperwork known as “source documents” that support the transactions recorded within. They all roll together, in fact, to form the company’s accounting system, with the G/L at its heart.

Why is it important for any manager not responsible for financial matters to understand general ledger processing? Well, why is it important for a salesperson to understand the nature, properties, and construction of the item he or she is selling? Financial management is a crucial part of your position. The more you know about what takes place on the accounting side of the fence, the better off you’ll be.

Henry David Thoreau wasn’t an accountant when he said, “Simplify! Simplify!” but he captured the essence of balance sheet management. Keep it simple at first. Your accounting system will grow as your business grows.

Accrual accounting is used by all businesses of any size because it allows for better cash management, providing a better match between expenses and revenues, whether transactions are for cash or on credit. Without an accrual system, in fact, there’s no need for more complex accounting functions. It’s a way to better match revenues with the means for producing those revenues and gives a clearer picture of the actual profits your company makes.

In cash-based accounting, on the other hand, you record nothing until actual cash has traded hands. Whether you’re purchasing raw materials for manufacture from a vendor or selling finished goods to a distributor, nothing is entered in the ledger without a money transaction attached to it.

In applying the ARTS formula identified earlier—Accurate, Relevant, Timely, and Simple—the accounting function can be a major source of information vital to the success of a business. The discipline of the balance sheet, although it may seem foreign to some, gives it the strength and application to help you master all accounting steps within your business cycle.

One more distinction to understand is the difference between cash basis and accrual basis. The choice depends on the type of business, and we don’t need to enter into the reasons here. What you do need to know is how the basis used by your company affects how financial transactions are handled.

The difference focuses to some degree on the question of cash flow. Accrual accounting, popular with large businesses, records transactions when they are made—regardless of whether any money has changed hands. The company is accruing sales revenue that will be deposited at a future date. The difference is that it is immediately posted to the general ledger. The actual cash is incidental to the accounting procedure under accrual accounting.

The next figure shows the same kind of relationship between the assets and liabilities accounts. If we add $100 to assets, the debits go up $100, and the credits go down $100. At the same time, in the liabilities account, debits go down $100 and credits go up $100.

The figure shows how an accountant would record four common transactions in terms of debits and credits:

The company borrows $8,000. Cash (an asset) is debited and Notes Payable (a liability) is credited.

The company sells $5,000 in merchandise on credit. Sales Income (an income account) is credited and Accounts Receivable (an asset) is debited.

The company pays its electricity bill of $200 immediately. Utilities Expense (an expense account) is debited and Cash (an asset) is credited.

The company sells some of its older computers for $1,500. Office Equipment (an asset) is credited and Cash (an asset) is debited.

Simple as it should be, the concept of debits and credits is a little like a Zen koan (a paradox). Terms are easily defined, but how they integrate into your balance sheet and income statement and the effect they have on your accounts… Well, that’s not so clearly understood without first understanding how liabilities and owners’ equity are treated in relation to assets. That may take a little getting used to.

As you now know, asset and liability accounts go together, as opposite sides of a balanced equation—with owners’ equity, of course. That’s why they make up the balance sheet, which shows the financial position of the company. In a similar way, income and expense accounts go together and make up the income statement, which shows what’s coming in and going out.

It’s really two simple systems that become a little complicated when they’re put together, because the double-entry system sometimes requires entries that may at first seem strange, because of the need to balance. It’s usually easy enough to understand how assets and liabilities are affected by a transaction, but it may be harder with the effect of a transaction on income and expense accounts.

So, we’ll provide a few examples to show it all makes sense, with a little effort.

Debits are always listed on the left-hand side of T accounts. They represent an increase in asset and expense accounts, or a decrease in liabilities.

Sometimes, the accounting process appears to be a mirror image of what logical thought says it should be. But there’s a root of logic to it that makes it more than just an algebraic equation. Remembering the following formula may help:

Assets = Liabilities + Owners’ Equity

Assets are goods owned by the company—real estate, inventory, and other items of value. Liabilities are obligations, generally owed to suppliers. Owners’ Equity is what belongs to the owners.

If the owners decided to sell all the assets and pay all the liabilities, what would remain belongs to them—their equity. The formula would then work as follows:

Assets – Liabilities = Owners’ Equity

from this simple equation we derive the basic method for recording all business transactions in terms of their effect on the various accounts.

It’s clear that owners’ equity is increased by amounts invested by the owners, and de creased by what they withdraw from the company. It’s also clear that if we order some materials, we’re increasing our assets and increasing our liabilities. Unfortunately, it’s not all that easy. However, you should understand the basic concept of T account diagrams and how they reflect business activity in terms of debits and credits while maintaining the balance of the assets = liabilities + equity equation.