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THE RECORDING PROCESS

IVANA DRAŽIĆ LUTILSKY, PhD

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• Double-entry bookkeeping is governed by the accounting equation. If revenue equals expenses, the following (basic) equation must be true: assets = liabilities + equity

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• At any point in time, revenue may not equal expenses. If so, the equation can be further expanded, so that the (extended) equation becomes: assets = liabilities + equity + (revenue − expenses) • or assets = liabilities + (capital − drawings) + (revenue − expenses)
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for any time period. an error has occurred. • If it is. 4 . then the accounts are said to be in balance.• This equation must be true. • If the accounts are not in balance.

• For the accounts to remain in balance. a change in one account must be matched with a change in another account. • These changes are made by debits and credits to the accounts. 5 .

liability or owner’s equity item. 6 .• An ACCOUNT is an individual accounting record of increases and decreases in a specific asset.

.There are five basic types of accounts: assets. liabilities.A title. revenue and expenses.a left side (debit side) and . . • T-accounts have three basic elements: . pound.To make an entry in a t-account.) amount on the appropriate side (debit or credit). etc. put the currency (dollar. 7 . .a right side (credit side). equity.• T-ACCOUNT is the basis for journal entry in accounting.

Revenue and expenses are an income statement accounts. liabilities and equity are the balance sheet accounts.Assets. 8 . ..

• debit: an increase in one of the accounts with a normal balance of debit or a decrease in one of the accounts with a normal balance of credit. A debit is recorded on the left hand side of a “T” account 9 .

A credit balance is recorded on the right hand side of a 'T' account 10 .• credit: an increase in one of the accounts with a normal balance of credit or a decrease in one of the accounts with a normal balance of debit.

notes or loans payable: debts promised to outsiders but not yet paid • Revenue • Capital 11 .The following accounts have a normal balance of debit: • Assets • Accounts receivables: debts promised by other entities but not yet paid • Drawings by the owners on equity • Expenses The following accounts have a normal balance of credit: • Liabilities • Accounts payable and taxes.

Title of account DEBIT or left CREDIT or right side side Debit balance Credit balance 12 .

RULES FOR BOOKKEPPING D ASSET C LIABILITIES + D EQUITY C decrease + increase + increase decrease 13 .

Debit/credit Account Debit Credit Assets ▲ ▲ ▼ ▼ ▼ ▲ Expenses Liabilities Shareholder Equity ▼ ▼ ▲ ▲ Revenue 14 .

15 .• Credit and debit items are summarized at the end of a recording period in a trial balance which is a list of all the debit and credit balances. • The trial balance acts as a self checking mechanism for the correctness of entries in the individual accounts and also as a starting point for the preparation of the financial statements which is made up of the balance sheet and profit and loss account.

Transfer the journal information to the appropriate accounts in the ledger (book of the account) 16 . 3. Analyze each transaction for its effects on the accounts. 2.• Steps in recording process are: 1. Enter the transaction information in a journal.

• TRANSACTION is an economic event of an enterprise that are recorded. • They could be: 1. External transactions 2. 17 . Internal transactions • Accounting or book – kepping document is a written proof about some business event.

18 .• External transactions involve economic events between the company and some outside enterprise. • Internal transactions are events that occur entirely wizhin one company.

Y.Events: 1. 2.purchase of computer. 3. Y 19 . 2. N.discuss product design with potential customer. 3.paying the bill Criterion: Is the financial position of the company changed? Recording: 1.

20 .• The equality of the basic equation must be preserved. • Therefore.The equality of debits and credits provides the basis for the double – entry system of recording transactions. each transaction must have a dual effect on the equation: ASSETS = LIABILITIES + EQUITY .

a bill or a cash register tape. • For example: sales slip. a check. 21 .• Evidence for transaction is provided by a business document.

Business books • The Journal • The Ledger • Analitycal book – keeping or support books (subledgers) 22 .

• The journal is reffered to as the book of original entry.The Journal • Transactions are initially recorded in chronological order in journals before being transferred to the accounts. 23 . • For each transactions the journal shows debit and credit effects on specific accounts.

• The Journal makes several significant contributions to the recording process like: 1. It disclose in one place the complete effects of a transactions. 24 . 2. It helps to prevent or locate errors because the debit and credit amounts for each entry can be readily compared. 3. It provides a chronological record of transactions.

25 . • The ledger keeps in one place all the information about changes in specific account balances. • The ledger should be arranged in the order in which accounts are presented in the financial statements.The Ledger • The entire group of accounts maintained by a company is called the ledger.

for raw material of finished goods.Analitycal book – keeping or support books • That is a helpfull evidence or books that are mainly serving for better understanding of some transactions. 26 . suppliers. • For example: for customers.

Posting • The procedure of transfering journal entries to the ledger accounts is called POSTING. 27 . • Posting should be performed in chronological order – debits and credits side of one journal entry should be posted before proceeding to the next journal entry. • Posting should be made on a timely basis to ensure that the ledger is up to date.

• Every account should be numbered for easier identification – CHART OF ACCOUNTS. • In Croatia it isn’t determined by Law but every company is making it’s own. 28 .

Accounting cycle 29 .

The completion of the accounting cycle consists of four main steps: • using a Work Sheet • closing the books • summary of accounting cycle • classified Balance Sheet 30 .

• It may be used in preparing financial statements or in an adjustment process.• The work sheet as the same name states is a working device whose usage is optional. • If we use a work sheet trough it we will prepare the financial statements which will be controlled by the adjustment process. 31 . • The work sheet is usually frequent in big companies where lot of transactions are made daily.

Steps in preparing : 1. Extend adjusted trial balance amounts to appropriate Financial Statement columns 32 . Enter the adjustment in the adjustment columns 3.Prepare a trial balance of the Work Sheet 2. Enter adjusted balances in the adjusted trial balance columns 4.

it is essentially an instrument used by the accountants and it is not submitted to other employees as managers.Preparing Financial Statements from a Work sheet: • After the work sheet has been prepared we have all the data needed for the preparation of the financial statements. 33 . • We cannot although say that the work sheet can be a substitute for the financial statements.

• The adjustment entries are prepared from the columns of the adjustment in the Work sheet.Preparing Adjusting entries from a work sheet • The Work Sheet is not a journal as a consequence it must be adjusted for the preparation of the financial statements. 34 .

While doing so we must take into consideration that there are two kinds of accounts. liabilities and owner’s equity that continues in the following accounting period. they are not closed to a zero balance as they contain assets. • Temporary accounts are generally appearing on the Income Statement. • Permanent accounts are appearing on the Balance Sheet.Closing the books • At the end of one accounting period we must close the accounts in order to proceed to the next accounting period. and are closed to the zero balance in the end of the accounting period. This process is called closing the books. 35 . the temporary or nominal one and the permanent or real account.

making them ready for a new set of transactions.Preparing closing entries. 36 . • The closing entry process transfers the net income or net loss for the accounting period to the owner’s equity and reduces owner’s equity for any distributions to owners. they bring the income statement accounts back to a zero balance. posting closing entries • Closing entries are journal entries made at the end of an accounting period.

Close the dividend account 37 . Close the revenues account 2.• Steps in the closing process: 1. Close the income summary account 4. Close the expense accounts 3.

• • • Post-closing trial balance contains permanent accounts and their balances after posting closing entries. Total debits and credits must be equal. The purpose is to assure the equality of the permanent account to enable their transition in the next accounting period. 38 .

Correcting entries • Accountants must make correcting entries when they find errors. when combined with the original but incorrect entry. 39 . • Correcting entries must be posted before closing entries and are usually applied whenever an error is discovered. or make a single journal entry that. fixes the error. • There are two ways to make correcting entries: reverse the incorrect entry and then use a second journal entry to record the transaction correctly.