Week 2

Recording Business Transactions

BUSN7008

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Gentle reminders:
1. Registered and attended A.I.R. Workshop?
2. Quick quiz?
3. Tutorial sign-up?
4. Access to textbook?

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Learning Objectives
1. Understand accounting procedures
behind transactions
2. Record transactions using the double-
entry accounting system
3. Trial balance preparation
4. Exercise

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Review – Accounting Equation
• Assets = Liabilities + Equity
 A = L + (Cap. –Draw .+Rev. –Exp.)
Cash Accounts payable Owner, Capital Owner, Draw. Sales Rev. Water Exp
Acc. Receivables Bills payable Service Electricity Exp
Inventory Xxx payable Rev. Rent Exp
Prepaid exp Unearned Wage Exp
Supplies Revenue Salary Exp
Marketing Exp
Land
Building
Equipment
Furniture
Goodwill

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Review – accrual accounting
• Asset: Prepaid Expense
– E.g. I paid $1200 to subscribe magazines for the next
12 months:
– Cash (A) Prepaid expense (A)

• Liability: Unearned Revenue

– E.g. I have a cleaning company. I collected $1000 for
the service to be performed next week:
– Cash (A) Unearned revenue (L)

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Review – accrual accounting
• Revenue: Service revenue
– Revenue Cash
– Revenue delivery of good/service to others
• E.g. I cleaned your house, I got paid $100:
– Service Rev. (R) Cash (A)
• E.g. I cleaned your house, I will get paid in the near future:
– Service Rev (R) Acc Rec (A)

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Review – accrual accounting
• Expense: Salary expense
– Expense Cash
– Expense delivery of goods/services by others
– E.g.You worked for me for an hour, and I have not
paid you yet:
• Salary Exp (Exp) Acc Payable (L)
– You worked for me for an hour, I just paid you $50:
• Salary Exp (Exp) Cash (A)

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Review
• The entity principle
– Record and report an economic transaction only if it
relates to the accounting entity

Consider three scenarios:

1. Spend business money on a business trip to Shanghai
2. Spend personal money on a business trip to Shanghai
3. Spend business money on a personal trip to Shanghai

Are these related to the entity?

Which accounts are affected?
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 Rules of Debit and Credit
• The account cat egory det ermines how increases and
decreases in t he account are recorded as debit s and
credit s

• The pat t ern of recording debit s and credit s is based on t he

account ing equat ion
DEBITS
= CREDITS

Nat ural Debit Nat ural Credit Nat ural Credit

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 Rules of Debit and Credit
Assets = Liabilities + Owner’s Equity

Owner’s Equit y

Asset s=Libilit ies+ ( Capit al-Drawings+Revenue-Expenses)

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Summary of Debit/Credit Rules
Account Normal Increases Decreases
Balance
Asset s DR DR CR
Liabilit ies CR CR DR
Equit y: CR CR DR
+Capit al CR CR DR
+Revenue CR CR DR
-Expenses DR DR CR
-Drawings DR DR CR

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The account, the ledger and the journal
• An account is the detailed record of a particular asset,
liability or owners’ equity (including income/expenses)
• The ledger is the record holding all the accounts
• The journal is the chronological record of the
transactions
– Journal entries are the instructions of what accounts are to be changed
– Just that debiting some accounts may mean an increase, debiting other
accounts may mean decrease.

• A list of all the ledger accounts, along with their balances,

is called a trial balance.
– The trial balance allows the user to check that debits equal
credits in the ledger accounts
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Accounting Terms
General Journal
 For initial recording of transactions
 Provides a complete record of all transactions in chronological order

General Ledger
 A collection of all individual accounts
• T-account: An individual account within the general ledger
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An Account
• Basic Format of a T-account

Account Name
Debit Credit

Dr Cr

Lef t -hand side Right -hand side

• See Text book f or alt ernat ive f ormat

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Double-Entry System
• Based on the accounting equation
• Dual aspects of each transaction
– Each transaction affects at least 2 accounts
• Every debit must have corresponding credit
• Total debits MUST EQUAL total credits

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 Posting (general journal to general ledger)
Posting
Transf erring t he amount s f rom t he journal t o t he account s in t he
ledger
Journal Entry
1. May 1: Bright contributed $ 30,000 to start the business
Dr Cash 30,000
Cr Bright, Capital 30,000

2. May 2: credit sale : $40,000

Dr Accounts Receivable 40,000
Cr Sales Revenue 40,000
3. May 3: Salary expense and paid: $20,000
Dr Salary expense 20,000
Cr Cash 20,000
General ledger
Cash Bright , Capit al Sales Revenue
May 1 May 3 May 1 May 2
3 0 ,0 0 0 2 0 ,0 0 0 3 0 ,0 0 0 4 0 ,0 0 0
May 2
Bal.
4 01,0
00,000 0

Acc Receivable Salary Expense

May 2 May3
4 0 ,0 0 0 2 0 ,0 0 0
May 2 May 2
4 0 ,0 0 0 4 0 ,0 0 0 16
Accounting Terms
Chart of Accounts
• Listing of all accounts and related account numbers
• Utilises flexible numbering system for changing business needs

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Summary:
Record Transactions in Journals & Post to Ledgers
1. Identify and analyse a transaction

2. Determine the accounts affected

3. Apply debit and credit rules

4. Record transaction in journal

• Date and Description
• Name of account affected
• Amount

5. Post to appropriate account in the ledger according to journal entry

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Accounting Procedures
Transact ion
General
Buy Equipment List Acc. Balances
Journal
with cash General
Ledger Trial
Balance
+  Equip.
 Cash Record
in Equip
and Cash
account Financial
St at ement
s
Source Document s
Assets
Purchase Invoice, Cash
Tax Invoice Equipment…
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Example: Recording Transactions in journals.
Posting journal entries into ledger.
Record the following business transactions:

1. Owner invested $50,000 cash into business

2. Purchased $1,000 worth of office supplies on credit. Payment due in 30 days.

3. Provided services for $800 cash.

4. Paid $2,000 for office rent

5. Provided services for $1,500. Customer will pay in 30 days

6. Owner withdrew $500 for personal use

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Recording Transactions Example
1. Owner invested $50,000 cash into business
Journal entry:
Account Debit ( $ ) Credit ( $ )

Cash 5 0 ,0 0 0
B.Capit al 5 0 ,0 0 0
Owner invest ed capit al

Cash B.Capit al
$ 5 0 ,0 0 0 $ 5 0 ,0 0
0

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Recording Transactions Example
2. Purchased $1,000 worth of office supplies on credit.
Payment due in 30 days.
Journal entry:
Account Debit ( $ ) Credit ( $ )
Of f ice Supplies 1 ,0 0 0
Account s Payable 1 ,0 0 0
Purchase of of f ice supplies

Of f ice Account s
Supplies Payable
$ 1 ,0 0 0 $ 1 ,0 0 0

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Recording Transactions Example

3. Provided services for $800 cash.

Dr Cash at bank $800
Cr Services Revenue $800

Cash Service Revenue

$ 5 0 ,0 0 0 $800
$800

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Recording Transactions Example

4.Paid $2,000 for office rent

Dr Rent Expense $2,000
Cr Cash $2,000

Cash Rent Expense

$ 5 0 ,0 0 0 $ 2 0 0 0 $ 2 ,0 0 0
$800

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Recording Transactions Example
5. Provided services for $1,500. Customer will pay
in 30 days
Dr Account s Receivable $ 1 ,5 0 0
Cr Service Revenue $ 1 ,5 0 0

Account s Receivable Service Revenue

$ 1 ,5 0 0 $800
$ 1 ,5 0 0

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Recording Transactions Example

6. Owner withdrew $500 for personal use

Dr Drawings $500
Cr Cash $500

Cash Drawings
$ 5 0 ,0 0 0 $ 2 0 0 0 $500
$800 $500

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 The Trial Balance
• All the balances of each account in the
ledger are listed on the trial balance
• For internal use
• Different from journals and ledger (official
books)
– It is a snapshot of the status of all accounts (i.e.
“as at” a date)
– Trial balance can be provided on ad hoc basis. DEBITS CREDITS

• Provides a check on the accuracy of the

double entry system (i.e. debits = credits)
• Once records are confirmed accurate, can
be used to construct financial statements.

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Transferring outstanding balances of all
accounts in the Ledger to Trial Balance
General Ledger
Cash Account s Payable Service Revenue
$ 5 0 ,0 0 0 $2000 $ 1 ,0 0 0 $ 1 ,5 0
$800 $500 0
Bal. $ 1 ,0 0 0
Bal. $ 8 0$02 ,3 0 0
Bal.
$ 4 8 ,3 0 0 Rent Expense
Account s Receivable $ 2 ,0 0 0
$ 1 ,5 0 0 Bal. $ 2 ,0 0 0
Bal. $ 1 ,5 0 0

B. Capit al

$ 5 0 ,0 0 0
Of f ice Supplies Bal.
$ 1 ,0 0 0 $ 5 0 ,0 0 0

Bal. $ 1 ,0 0 0 Drawings

$500

Bal. $ 5 0 0
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Example – Trial Balance
B. Brown
Trial Balance as at 31 Dec 2016
Account title Debit ($) Credit ($)
Cash at Bank 48,300
Office Supplies 1,000
Accounts Receivable 1,500
Accounts Payable 1,000
B.Brown, Capital 50,000
B.Brown, Drawings 500
Service Revenue 2,300
Rent Expense 2,000
Total 53,300 53,300

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Trial Balance Errors
• What if Trial Balance does not balance?
– Are all accounts listed?
– Are the additions correct?
– Are all balances correctly calculated?

• Check postings
– Is there a debit/credit balance for this amount posted in the
wrong column?
• Divide difference by two

• Nowadays, chances of getting these wrong are minimal

with computerised accounting systems (e.g. MYOB).
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Trial Balance Errors
• “Silly” mistakes:
1. Slide error – writing $30 instead of $300
2. Transposition error – writing $303 instead of $330
– Hints: Is difference divisible by 9?
– Try, 330 – 303 = 27
– 27 / 9 = 3  hint of transposition error
– Interested to learn more on detecting trial balance errors?
http://www.reallifeaccounting.com/pubs/Article_Theme_Detecting_Accounting_Errors.pdf

• Review accounts for reasonableness

– E.g. in a small business, cleaning expense recorded as
$1,000,000.

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The 10-column accounting worksheet
• A multi-column document used by accountants to
transfer data from the trial balance to the financial
statements
• Not a necessary step of the accounting system

• Assembles all information needed to:

– adjust the accounts, (adjusting entries – e.g. accruals,
depreciation)
– close the accounts (bring temporary accounts to zero) and
– prepare the financial statements (income statement & balance
sheet)

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Example – 10-column worksheet
Trial Balance Adjustments Adjusted TB Profit and Loss Balance Sheet
Accounts
DR CR Ref DR Ref CR DR CR DR CR DR CR

Cash A
Prepaid insurance B
Office supplies C
Machinery D
Unearned subscription revenue E
Insurance expense
Office supplies expense
Subscription revenue
Salaries expense
Salaries payable
Accounts receivable
Service revenue
Depreciation expense
Accumulated depreciation

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Summing up…

• Accounting procedures:
1. Analyse transactions
2. Recording
• Double-entry system
3. Reporting
• Internal preparation – Trial balance
• External – Financial Statements

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Exercise
a) Owner invested $8,000 into Business
b) Purchased equipment for cash -$1,750
c) Paid rent $1,400
d) Bought $15,000 inventory: Paid $9,000 cash; remainder owing.
e) Sales revenue: Cash $6,500; Cost of goods sold $4,000
f) Accrue advertising cost $100
g) Bought $4,200 inventory: Paid $1,200 cash; remainder owing.
h) Sales revenue: Cash $3,900; Credit $9,600; Cost of goods sold
$9,000
i) Wages payable total $1,850
j) Receive $3,160 of accounts receivables
k) Paid $4,720 to our suppliers for amount owed

See Worksheet on Wattle.

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Gentle reminders:
1. Registered and attended A.I.R. Workshop?
2. Quick quiz?
3. Tutorial sign-up?
4. Access to textbook?

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