HC1011/HF1008

HC1011(BPA & Bbus) and HF1008(BoF)

Topic 5
Accounting Cycle
&
Accounting systems
1

Recording adjusting entries

Overview
In topic 5, we will look at:

The accounting cycle,

Closing temporary accounts
Accrual entries
Reversing entries
A quick look at accounting for partnerships
(unincorporated) and companies (incorporated)
Basics of an accounting system
Developing an accounting system
Internal control
We look at subsidiary ledgers (from a manual system)
Special journals (again from a manual system)
We finish up considering the benefits & disadvantages
of a computerised system.

From worksheet formal adjusting entries

are entered in general journal
Entries are dated the last day of the
accounting period
Data for determining the entitys closing
entries for the period are found in income
statement columns of worksheet which
contain temporary income and expense
accounts

The complete accoun.ng process

The complete accoun.ng process

The next few slides present the various

steps.
It should be noted that there are timing
considerations for the various steps.
It should also be noted that for regular events,
such as cash sales, wages paid, purchases, they
are generally journalised into special journals
such as the Cash Receipts journal or Purchases
journal, etc
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1. Recognise and record transac0ons

Source documents

2. Journalise transac0ons

General journal

3. Post to ledger accounts

General ledger

4. Prepare unadjusted trial balance of GL

Trial balance (unadjusted)

5.Determine adjus0ng entries and journalise

General journal

6. Post adjus0ng entries to general ledger

General ledger (accounts adjusted)

7.Prepare adjusted trial balance of GL (adjusted)

Trial balance (adjusted)

8. Journalise closing entries

General journal

Continued next slide

The complete accoun.ng process

GL temporary accounts
closed

9. Post closing entries to GL

Trial balance (post closing)

10. Prepare post closing trial balance

11. Prepare nancial statements

work
sheet

Financial statements

12. Journalise reversing entries

General journal

13. Post reversing entries to GL

GL temporary accounts
opened

Did you no.ce the work sheet in the charts?

Do you remember (from Session 4) what this is?
Simply it is an internal worksheet called the trial
balance which lists all accounts and where any
adjustments are recognised and then a nished
adjusted trial balance is determined. Any
adjustments are then made to the respec.ve
ledgers

CLOSING TEMPORARY ACCOUNTS

Using the Worksheet

Income and expense accounts must be closed

at the end of each period to determine the
prot or loss for the period
They begin and end each accoun.ng period
with a zero balance
Prot and loss summary account is used to
facilitate closing process and determina.on
of prot

Gathers informa.on together in one place

Enables prepara.on of interim nancial
statements
Adjus.ng entries easily reected
Facilitates closing journal prepara.on

Recording Adjus.ng Entries

The Closing Process

From worksheet formal adjus.ng entries are

entered in general journal
Entries are dated the last day of the
accoun.ng period
Data for determining the en.tys closing
entries for the period are found in income
statement columns of worksheet which
contain temporary income and expense
accounts
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Income accounts closed to P & L summary

Debit income
Credit P & L summary

Expense accounts closed to P & L summary
Debit P & L summary
Credit expense

12

THE CLOSING PROCESS continued

The Closing Process con.nued

(CLOSE INCOME ACCOUNT)

Prot & Loss summary balances to determine

prot/loss then closed to capital (aZer tax)

P&L
SUMMARY

INCOME
28,500

Debit P & L summary (assuming a prot)

Credit capital account (retained earnings)

12,000
7,500
9,000

SALARY EXP
1,500
1,800

Drawings closed to capital

Debit capital account
Credit drawings account

4,450

(CLOSE
EXPENSE
ACCOUNTS)

800

Drawings are those amounts that the owner

withdraws from the business (not salary)

(CLOSE P & L SUMMARY)

CAPITAL ACCOUNT

3,300

2,500

RENT EXP
800

24,050

DRAWINGS
2,500

SUPPLIES EXP
350

28,500
24,050

24,050

350

2,500

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(CLOSE DRAWINGS ACCOUNT)

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13

The post-closing trial balance

Account balances after the closing process

Reflects all accounts with balances after the

closing process
Assets
Liabilities
Equity

All income accounts have nil balances

All expense accounts have nil balances
The drawings account has a nil balance
The capital account has been increased or
decreased by the profit or loss and
decreased by the drawings

Note: All the above are found in the

Balance Sheet (Statement of Financial
Position)

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ACCRUAL ENTRIES IN SUBSEQUENT PERIODS

ACCRUAL ENTRIES IN SUBSEQUENT PERIODS

Adjusting entry (30 June)

Adjusting entries are made at the end

of the accounting period to record
accruals

Jun 30 Salary Expense

Salary Payable
(To accrue salaries owing to 30 June)

Cash received or paid in subsequent

periods for accruals must be analysed
to correctly apportion amount between
the two periods

1 990

1 990

Normal entry (6 July)

Jul 6

Salary Payable
Salary Expense
Cash at Bank
(To record payment of salaries from
23 June to 6 July)

e.g. payment for salaries

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continued

1 990
1 710

3 700

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REVERSING ENTRIES

REVERSING ENTRIES

continued

Adjusting entry

Reversal of accrual entries

Jun 30 Salary Expense

Salary Payable
(To accrue salaries owing to 30 June)

Dated the first day of the subsequent

1 990

1 990

Reversing entry

accounting period

Jul 1

Salary Payable
1 990
Salary Expense
1 990
(To reverse the adjusting entry to accrue unpaid salaries at end of previous
month)

Exactly reverse certain adjusting entries

An accounting technique used to simplify the

July 6 entry

recording of regular transactions in the next

Jul 6 Salary Expense

Cash at Bank
(Payment of salaries for period 27 June to 6 July)

period

3 700

3 700

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REVERSING ENTRIES continued

REVERSING ENTRIES continued

Not required for all adjusting entries

Reversal of deferral entries

Adjusting entries are made for prepaid
expenses and unearned or pre-collected
revenue (revenue paid in advance where a
customer has paid before receiving the
product from the supplier)

Only used where adjustment is

temporary
Accrued expenses
Accrued income
Prepayments originally recorded as expenses
Unearned income originally recorded as income

Need for reversal entries depends on whether

initial recording occurred in a permanent
account

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ACCOUNTING PROCEDURES APPLICABLE TO A

PARTNERSHIP OR A COMPANY

ACCOUNTING PROCEDURES APPLICABLE TO A

PARTNERSHIP OR A COMPANY continued

Accounting for a partnership (similar to a sole

trader but with two or more owners).
Separate capital and drawings accounts for
each partner
Profit/loss at the end of the period is allocated
to each partner in accordance with the
partnership agreement
Each drawings account is closed off to the
partners capital account

Accounting for a company (an incorporated

structure where the company is seen to be a
separate legal entity to the owners)
Owners are referred to as shareholders
Owners interests are called share capital
Not all profits/losses are distributed to
shareholders (from Retained Earnings)
Share capital represents retained profits (or
accumulated losses) + share of assets

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ACCOUNTING PROCEDURES APPLICABLE TO A

PARTNERSHIP OR A COMPANY continued

ACCOUNTING PROCEDURES APPLICABLE TO A

PARTNERSHIP OR A COMPANY continued

Equity section of balance sheet

Profits distributed as dividends

FLETCHER HO FASHIONS LTD
Statement of Changes in Equity
For the year ended 31 December 2011

FLETCHER HO FASHIONS LTD

Balance Sheet (extract)
as at 31 December 2011

Share Capital, 1 January 2011

Share Capital, 31 December 2011

$120 000
120 000

Retained earnings, 1 January 2011

Add: Profit for the year
Less: Cash dividends for the year
Retained earnings, 31 December 2011

Share capital (120 000 shares issued for $1)

Retained earnings
Total equity

-25 000
12 000
$13 000

$120 000
13 000
$133 000

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Converting data to information

OPERATION OF AN ACCOUNTING SYSTEM

3 basic phases
Input
Source documents entered into journals
Processing
Journals posted to general ledger
Output
Financial statements

Business
Transactions

Source
documents

Journals

Ledgers

Reports

Interested
Parties
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DEVELOPMENT OF AN ACCOUNTING SYSTEM

Cost versus benefits

Compatibility
Flexibility and adaptability
Internal control

Understanding information
requirements and sources
of information

Implementing systems,
training staff, preparing
accounting manual,
test-runs, evaluation
and review

Systems design

Consideration of the users must also be

considered. Today, systems have evolved to
become much more user-friendly though risks
have increased.
Why?

Determining personnel
requirements, source
documents, accounting
records and procedures,
reports and reports format

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Important considerations in developing an accounting system

Must give consideration to:

Systems analysis

Systems implementation
and review

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INTERNAL CONTROL SYSTEMS

Principles of internal control systems

Efficient use and protection of an entitys

asset is a primary management function
All procedures adopted by an entity to
control its activities and protect its assets
are described collectively as an internal
control system.

Clearly established lines of responsibility

Separation of record keeping and custodianship
Division of responsibility for related transactions
Mechanical and electronic devices
Adequate insurance
Internal auditing
Programming controls
Physical controls
Other controls

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Limitations of internal control systems

32

MANUAL ACCOUNTING SYSTEMS SUBSIDIARY LEDGERS

Absolute assurance not possible

Effectiveness influenced by size of entitys
operations
Good controls can break down due to tiredness,
indifference or carelessness
Heavy reliance on segregation of duties
Difficulties in detecting computer fraud

Control accounts and subsidiary ledgers

Summary information
Control account
Detailed information
Subsidiary ledger
Accounts receivable
Accounts payable
Inventory

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MANUAL ACCOUNTING SYSTEMS SPECIAL JOURNALS

Subsidiary Ledger
General Ledger
Accounts Receivable Control
Date

Debit

Credit

Nov 1
Nov 30
Nov 30

5500
6900

Balance

Subsidiary Ledger
P. Able
Date
Debit
Nov 1

6500

Nov 8

11000

Nov 16

Credit

1800

General journal inefficient where there are

many transactions
Group like transactions and record in a
special purpose journal

Balance
3200
5000

3200

1800

Credit

Balance
1100
-

4700
Subsidiary Ledger
R. Baker
Date
Debit
Nov 1
Nov 3

Schedule of Accounts Receivable

as at 30 November
P. Able
$1 800
R. Baker
2 400
D. Cane
500
$4 700

Nov 20

Nov 28

1100

2400

Subsidiary Ledger
D. Cane
Date
Debit
Nov 1
Nov 12

credit sales
credit purchases
cash receipts
cash payments

2400

Credit

900

sales journal
purchases journal
cash receipts journal
cash payments journal

There can be other special journals and

depends on the company and how it operates

Balance
2200
3100

2600

500

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Sales journal

Sales journal continued

Sales Journal

Records only credit sales of inventory

Total posted to general ledger monthly
Detail (by debtor) posted to subsidiary
ledger daily
Advantages
Each transaction recorded on a single line
Entries do not require a narration
Posting efficiency achieved

Date

Invoice
no.

Account

Jan 2
5
7
9
19
21
26
29

401
402
403
404
405
406
407
408

R Abbot
D Ball
N Camp
R Abbot
A Evans
J Ford
A Evans
N Camp

Post
Ref. Sales

1 100
900
820
1 410
920
850
1 550
750
8 300

GST
Collections

A/C
Receivable

110
90
82
141
92
85
155
75
830

1 210
990
902
1 551
1 012
935
1 705
825
9 130

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Purchases journal continued

Purchases journal

Purchases Journal

Records only credit purchases

Can be used for items other than inventory
Total posted to general ledger monthly
Detail (by debtor) posted to subsidiary
ledger daily
Advantages

Date
Record
Jan 3
6
8
13
20
24
27
30

as for sales journal

Date of
Invoice
Jan 2
Jan 4
Jan 8
Jan 12
Jan 18
Jan 24
Jan 26
Jan 29

Account
Kirby Ltd
Risk Ltd
Dunn Supply
Dunn Supply
CSR Ltd
Cooper Ltd
Risk Ltd
CSR Ltd

Terms
n/30
n/30
n/30
n/30
2/10, n/30
2/10, n/30
2/10, n/30
n/30

Post
Ref.

GST
A/Cs
Purchases Outlays Payable
1 900
190
2 090
1 200
120
1 320
1 410
141
1 551
1 820
182
2 002
820
82
902
900
90
990
2 810
281
3 091
900
90
990
11 760
1 176
12 936

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Cash payments journal

Cash receipts journal

Records all receipts of cash

Records each receipt and total banked
Totals posted to general ledger monthly
Detail (debtors only) posted to subsidiary
ledger daily
Columns set up for common receipts

Records all payments of cash

Records each payment and cheque number
Totals posted to general ledger monthly
Detail (creditors only) posted to subsidiary
ledger daily
Columns set up for common payments

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Use of the general journal

General Journal (example)

Generally inefficient as each event is

recorded as DR/CR along with
notation
Used for

25/7/2012
DR

Asset Plant & Equipment

65,000

CR
Cash/Bank
65,000
(To recognise the purchase of Plant & Equipment)

Infrequent transactions
Adjusting entries
Closing entries
Reversing entries
Correcting entries

You can see this is a capital purchase of a

fixed asset so use of GJ would be
appropriate

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Other Issues

Accounting Software

Abnormal balances in subsidiary ledgers

Electronic spreadsheets

Credit balances in accounts receivable

Debit balances in accounts payable

General ledger programs

Excel, Lotus 123

Account set-offs

ACCPAC, Attache, MYOB, QuickBooks, Sybiz,

Peoplesoft, etc.
MYOB and Quickbooks suitable for SMEs
whereas some entities
Data input obtained from source documents
Output produced by the program

Buying and selling from same customer/supplier

Need legal right to set-off

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COMPUTERISED ACCOUNTING

Accounting Functions

Advantages

Reduction in processing costs

Speed of processing
Error reduction
Automatic posting
Automatic production of documents and
reports
Improved reporting and decision making
Faster response time
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COMPUTERISED ACCOUNTING continued

Topic 5 Tutorial

Disadvantages

Prescribed Textbook (compulsory):

Trotman, K. Gibbins, M. & Carson, E. (2013), Financial Accounting (5th

edition), Cengage Learning.

Failed systems
Power failure
Viruses
Hackers
Fraud
Loss of control by way of having many
users input data.

Reading: Chapter 5
Tutorial:
Chapter 5:
Discussion: 6, 13
Problem: 5.1, 5.4, 5.13, 5.23, 5.3

Chapter 13
Problem: 13.3

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