Week 2

The recording process

Ch. 2, Carlon et al.

Learning objectives
After studying this presentation, you should be able to:
1. Analyse the effect of accounting transactions and
events on the basic accounting equation.
2. Explain what an account is and how it helps in the
recording process.
3. Define debits and credits and explain how they are
used to record accounting transactions.
4. Identify the basic steps in the recording process.
Learning objectives
5. Explain what a journal is and how it helps in the
recording process.
6. Explain what a general ledger is and how it helps in the
recording process.
7. Explain what posting is and how it helps in the
recording process.
8. Explain the purposes of a trial balance.
Accounting transactions and events
• 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
long-lived assets of an entity to different accounting
periods.
• Accounting transactions and events must be recorded
because they have an effect on assets, liabilities and
equity.

Analysing transactions
• Transaction analysis is the process of identifying the
specific effects of transactions and events on the
accounting equation.

• The accounting equation must ALWAYS balance.

ASSETS = LIABILITIES + EQUITY

Assets: Resources controlled by an entity as a result of past events and from
which future economic benefits are expected to flow to the entity
Liabilities: present obligation arising from past events, the settlement of which
will result in an outflow from the entity of resources
Equity: the residual claim in the assets of the entity after deducting all its
labilities
Analysing transactions

1. Issues shares for $10,000 cash:

Analysing transactions

2. Borrows $5,000 from ANZ bank:

Analysing transactions

3. Purchases office equipment for $5,000 cash:

Analysing transactions

4. Receives $1,200 cash in advance from customer:

Analysing transactions

5. Renders services for $10,000 cash:

Analysing transactions

6. Pays $900 rent in cash:

Analysing transactions

7. Pays $600 for insurance in cash:

Analysing transactions

8. Purchases supplies on credit for $2,500:

Summary of accounting transactions
• Each transaction is analysed in terms of its effect on
assets, liabilities and equity.

• The two sides of the accounting equation must always

be equal:
– Assets must equal liabilities plus equity.

• The cause of each change in equity must be indicated.

The account
• An account is an individual accounting record of
increases and decreases in a specific asset, liability or
equity item.
Debits and credits
• Debit:
– Refers to the left side.
– Commonly abbreviated as Dr.

• Credit:
– Refers to the right side.
– Commonly abbreviated as Cr.

Debit and credit procedures

Double entry system:
– each transaction affects at least two accounts
– total debits must equal total credits.

1. Dr/Cr procedures for assets & liabilities:

Debit and credit procedures
2. Dr/Cr procedures for Equity:

a. Share
Capital:

b. Retained
Earnings:

Debit and credit procedures

c. Dividends:

3. Dr/Cr procedures for Revenue & Expenses:

Equity relationships

Expanded accounting equation

Steps in the recording process
1. Analyse each transaction in terms of its effects on the
accounts.

2. Enter transaction information in a journal.

3. Transfer (POST) journal information to appropriate

accounts in the ledger.

The journal
• A journal is a chronological record of all transactions.

• Discloses the complete effect of a transaction.

• This helps prevent errors as debit and credit amounts

are easily compared.
Chart of accounts
• List of all entity's ledger account numbers and names.

• Like together sections of ledger are grouped and in

order they appear in the financial statements.

The journal
Wong Pty Ltd - first three transactions:
1.

2.

3.
The general ledger
• Contains all asset, liability and equity accounts.

Posting
• Posting is the procedure of transferring journal entries to
ledger accounts.
• Steps in the process:
1. Enter date in account to be debited.
2. Enter name of ledger account to be credited.
3. Enter amount to be debited.
4. Tick account no. in general journal to show entry is posted.
5. Repeat steps 1-4 for the credit side.
 Balancing the accounts
• Cash ledger account – Wong Pty Ltd:
Name of account that was credited with 10,000 General Ledger account name
Account number

Balancing figure, excess of debits over credits

The recording process illustrated

The recording process illustrated

The recording process illustrated

The recording process illustrated

The recording process illustrated

The recording process illustrated

The recording process illustrated

The recording process illustrated

The recording process illustrated

The recording process illustrated

The recording process illustrated

The trial balance
• A trial balance is a list of all the accounts and their
balances at a given time listed in order as they appear in
general ledger.

• It proves the mathematical equality of debits and credits

after posting.

• Steps to prepare a trial balance:

1.List account numbers, titles and balances.
2.Total debit and credit columns.
3.Verify equality of debit and credit columns.

The trial balance

Limitations of a trial balance
• Errors not 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.

Decision toolkit
• Western Farmers’ Cooperative Ltd (page 123 - 124 of
the textbook).

• Work through on your own and check your results with

the suggested solution provided.
Demonstration problem
• Niky’s Dry Cleaning Pty Ltd (page 126 – 129 of the
textbook).

• Work through on your own and check your results with

the suggested solution provided.

Key concepts
Can you:
1. Analyse the effect of accounting transactions and
events on the basic accounting equation.
2. Explain what an account is and how it helps in the
recording process.
3. Define debits and credits and explain how they are
used to record accounting transactions.
4. Identify the basic steps in the recording process.
Key concepts:
5. Explain what a journal is and how it helps in the
recording process.
6. Explain what a general ledger is and how it helps in the
recording process.
7. Explain what posting is and how it helps in the
recording process.
8. Explain the purposes of a trial balance.