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CO5117 Introduction to Accounting

Topic 2 2013

Revision Week 1

CO5117 Introduction to Accounting


Lecture 2 The accounting information system

Accounting process Forms of business Conceptual Framework accounting assumptions & definitions Reports - Income Statement, Statement of financial Position & Statement of Cash Flow Statement & their respective equations. Links between the financial statements.

Ref Ch 2 Carlon et el

Lecture Overview

Accounting Transactions & Events

Transaction analysis Rules of debit & credit Recording transactions in the general journal The posting process Purpose of a trial balance.

Accounting Information System - collection & processing transaction data & its communication to interested parties. Development of technology has led to an increase in the use of computerised accounting. The focus of this course is the manual system, why? Transactions are external exchanges of something of value between two or more entities Events include price increases in assets during an accounting period or the allocation of the cost of the longlived assets of an entity to different accounting periods Accounting transactions and events must be recorded because they have an effect on assets, liabilities & equity
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Analysing transactions

Accounts

Transaction analysis is the process of identifying the specific effects of transactions & events on the accounting equation There are at 2 sides to every transaction: assets = liabilities or equity

An account is an individual accounting record of increases & decreases in a specific asset, liability or equity item Presentation formats: T Format

assets = assets assets = liabilities or equity


Debit
Title of Account Left or debit side Right or credit side Debit balance Credit balance

Credit

ASSETS = LIABILITIES + EQUITY


Regardless - accounting equation must ALWAYS balance Class Exercise - Prepare a transaction analysis for PSA2.5 pg 134, download Excel worksheet Private Study - Work through transaction analysis pgs 92 - 96 5

CO5117 Introduction to Accounting

Topic 2 2013

Accounts cont.

Rules of Debit & credit


Double entry system: each transaction affects at least two accounts total debits must equal total credits 1. Dr/Cr procedures for assets & liabilities

Presentation formats: columnar or running balance ledger This format will be used predominately in classes & in the prac set

Accou nt Na m e : Da te P a rticula rs

P ost Re f

De bit

Acco unt Num be r : Cre dit Ba la n ce De bit Cre d it

Assets Increase Decrease debit credit Normal balance

Liabilities Decrease Increase debit credit Normal balance

Rules of Debit & credit cont.


2. Dr/Cr procedures for Equity: Share Capital a. Share Decrease Increase Capital
debit credit Normal balance

Rules of Debit & credit cont.


3. Dr/Cr procedures for Revenue & Expenses:

b.

Retained Earnings
Retained Earnings Decrease Increase debit credit Normal balance

c.

Dividends

Expenses Increase Decrease debit credit Normal balance

Revenues Decrease Increase debit credit Normal balance

Dividends Increase Decrease debit credit Normal balance

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Rules of Debit & credit cont.

Equity relationships
Statement of Financial Position

Another way to remember Debits & Credits - PALER Rules!!

Cr

Dr

Cr

Dr

Cr

Equity
Share Capital (investments by shareholders) Retained Earnings (profit retained in business)

A
Cr

L
Dr

E
Cr

R
Dr

Dr

P = Proprietorship or Owners Equity For normal account balances refer to increasing rules
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Beginning balance in + Retained Earnings

Profit (or minus loss)

Income Statement
(revenues minus expenses)

Dividends

Calculation of Retained Earnings

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CO5117 Introduction to Accounting

Topic 2 2013

The Accounting Cycle


Transactions Financial Statements Documents

Steps in the recording process


Begins with a transaction evidenced by a source document 1. Analyse the transaction in terms of its effects on the accounts 2. Enter transaction information in a journal 3. Transfer / Post the journal information to appropriate accounts in the ledger

Post Cl T.Bal

Journals

Journal
Closing Entries Ledger

Adj T.Balance BDAs

Trial Balance
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A journal is a chronological record of all transactions The complete effect of a transaction is disclosed in one place This helps prevent errors as debit & credit amounts are easily compared Also records a narration brief description of the transaction 14

Journal cont.
Wong Pty Ltd: 1st three transactions

The Chart of accounts

GENERAL JOURNAL Date Account titles and explanations 2013 Oct 1 Cash Share Capital (Issued shares for cash) 1 Cash Bank Loan (Borrowed money from a bank) 2 Office Equipment Cash (Purchased office equipment for cash) Post ref. 100 300 100 230 130 100 Debit Credit 10 000 10 000 5 000 5 000 5 000 5 000

List of all entity's ledger account names with a corresponding number for reference Like together sections of ledger are grouped & in order they appear in the financial statements Particularly important in a computerised accounting system because the computer posts on the account number!!!

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Fig 2.19 pg 107

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Ledger accounts

Posting the Journal to the ledger


1.

Ledger accounts are used to summarise transaction entries for a particular account. Ledger accounts are maintained for each account listed in the chart of accounts. The general ledger is the collective name of the individual ledger accounts.
General Ledger

2.

3.

Individual asset accounts


Equipment Land Supplies Cash

Individual liability accounts


Interest Payable Salaries Payable Accounts Payable Bank Loan

Individual equity accounts


Salaries Expense Service Revenue Share Capital Retained Earnings
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4.

5.

From the General Journal, record the date of the transaction on the debit side of the account to be debited. Next to the date, post the account name of the credit entry in the transaction, this is called cross referencing, where the corresponding account titles are swapped in each ledger account. Enter the $$ amount to the debit side of the ledger. If using running balance, calculate the new balance in the balance column. Place a tick in the general journal to indicate the transaction has been posted. Repeat the steps for the credit side of the transaction

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CO5117 Introduction to Accounting

Topic 2 2013

Posting the Journal to the ledger


General Journal Date Jul-01 Details Bank Capital Post Ref 100 300 Debit 10,000 10,000 Pg 1 Credit

Balancing T Ledger Accounts


Owner contributed cash to commence business

Cash at Bank Jul 1 Capital 10,000

Capital Jul 1 Bank 10,000

Columnar accounts maintain a running balance T accounts : necessary to find the difference between the two amounts on each side of the account. Step 1 identify the type & nature of account i.e. assets Step 2 add up DR side Step 3 add up CR side & deduct from DR side to determine final balance

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Cash at Bank Capital Sales A/C Receivable Interest Receivd 10,000 4,000 2,000 80 Rent Wages Advertising Stationery Inventory Bal at end 16,080 Op Bal 9,720 1,000 1,500 300 60 3,500 6,360 9,720 16,080

Now its your turn!!


Lecture exercise - PSA2.5 pg 134 Requirements: Record the transactions in the general journal Post the journals to the general ledger

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The Trial Balance

The Trial Balance cont.


WONG PTY LTD Trial Balance as at 31 October 2013 No. Account title Debit 100 Cash $ 15 200 110 Advertising Supplies 2 500 112 Prepaid Advertising 600 130 Office Equipment 5 000 200 Accounts Payable 213 Revenue Received in Advance 230 Bank Loan 300 Share Capital 320 Dividends 500 400 Service Revenue 500 Salaries Expense 4 000 510 Rent Expense 900 $ 28 700

A trial balance is a list of all the accounts & their balances at a given time listed in order as they appear in general ledger It proves the mathematical equality of debits & credits after posting Steps to prepare a trial balance 1. List account numbers, titles & balances 2. Total debit & credit columns 3. Verify equality of debit & credit columns Financial reports can then be prepared from the Trial Balance !!

Credit

$ 2 500 1 200 5 000 10 000 10 000 $ 28 700

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CO5117 Introduction to Accounting

Topic 2 2013

Limitations of a trial balance


While we use the Trial Balance as a form of control, there are certain errors that will not be detected in a trial balance: A transaction is not journalised A correct journal entry is not posted A journal entry is posted twice Incorrect accounts used in journalising or posting Offsetting errors made in recording the amount of a transaction Lecture Exercise Liu Advertising: a) Prepare a trial balance, b) Income Statement, c) Calculation of Retained Earnings d) Statement of Financial Position at 30 April 2012

The Accounting Cycle


Transactions Financial Statements Documents

Post Cl T.Bal

Journals

Closing Entries

Ledger

Adj T.Balance
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Trial Balance BDAs


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Demonstration Problems

Summary

In your own time: Work through the illustration of journalising & posting pgs 115 119 Use the demonstration problem - Nikys Dry Cleaning Pty Ltd to test your understanding, check your results with the suggested solution provided

Recording process from input to output. Transaction analysis Recording in General Journal Posting to General Ledger Preparation of Trial Balance Preparation of Financial Reports

Next Week

Reporting & Analysing Inventory (Trading firms & Accounting for GST) Chapters 4 & 5
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