HI5001 Accounting for Business Decisions

Lecture 3
Recording Business Transactions
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Overview
Lecture Lecture Topic Readings/Preparation
1 Role of Accounting for Decision Making Textbook Chapter: 1
2 Financial Statements & Decision Making Textbook Chapter: 2
3 Recording Business Transactions Textbook Chapter: 3
4 Adjusting Entries & Preparing Financial Statements Textbook Chapter: 4
5 The Accounting Cycle Textbook Chapters: 5
6 Accounting Systems Textbook Chapter: 7
7 Cash Management & Control Textbook Chapter: 11
8 Receivables Textbook Chapter: 12
9 Inventories Textbook Chapter: 6 & 13
10 Non-current Assets Textbook Chapter: 14 & 15
11 Liabilities Textbook Chapter: 16
12 Analysis & Interpretation of Financial Reports Textbook Chapter: 19

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Overview

Lecture 2 Lecture 3

Financial Statements & Recording Transactions

Decision Making

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 Topics
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Here’s what you will learn from this lecture:

1 Transactions & Source Documents

2 The Accounting Cycle

3 Ledgers

4 Types of Accounts

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 Topics
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Here’s what you will learn from this lecture:

5 Rules of Debits and Credits

6 General Journal

7 Introduction to Trial Balance

8 Introduction to GST

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Transactions & Source
titleDocuments
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What are transactions?

Transaction

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Transactions & Source
titleDocuments
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Recorded in
Economic events
accounting system

Transaction

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Transactions & Source
titleDocuments
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Types of
transactions

External Internal Non transaction

transactions transactions events

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Transactions & Source
titleDocuments
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Types of
transactions

External Internal Non transaction

transactions transactions events

Entity’s transaction Eg. Purchase of

with outside party equipment

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Transactions & Source
titleDocuments
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Types of
transactions

External Internal Non transaction

transactions transactions events

Affect internal
relationships
between Eg. Use of office
entity’s assets, suppies
liabilities and
equity

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Transactions & Source
titleDocuments
style

Types of
transactions

External Internal Non transaction

transactions transactions events

Transactions
not recorded as
Eg. Hiring an
no exchange
employee
of goods and
services

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Transactions & Source
titleDocuments
style

At least one
For each Provide new
supporting
external financial Trigger action
source
transaction information
document

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Transactions & Source
titleDocuments
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Source document purposes

Provides written Serves to control

evidence of the entity’s
transactions resources

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Transactions & Source
titleDocuments
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Source document examples

Cash register
Tax invoice Purchase order Credit card slips
tapes

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Types of transactions
• External transactions with outside parties
• Internal transactions based on economic events that do not involve
external transactions
• Non-transaction events are not usually recorded because there has been no
exchange of goods or services
Source Documents
• Provide new financial information that would trigger an action.
• Provide written evidence of transactions
• Serve to control the entity’s resources
• Examples of source documents
• What could be some others?

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 ClickAccounting
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Cycle
title style

Steps in the cycle Accounting records

1. Recognise & record

Source documents
transactions
Start of
new
period

2. Prepare financial
Financial statements
statements

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Types ofedit
Accounts
Master title style
Role of To classify In categories Summarise
accounting effects of Assets result in
function transactions financial
statements
Liabilities

Equity

Income

Expenses

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Types ofedit
Accounts
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Financial
In ledger account
Statement Data

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 ClickLedger
The to editAccount
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• Where the effect of transactions is recorded.
• Three basic parts
✓Title
✓Place for recording increases
✓Place for recording decreases

Basic parts of
account

Title Place for recording Place for recording

increases decreases

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Account Formats
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• T-accounts are a convenient way of showing the effects of
transactions on individual accounts
• Running balance accounts are generally used in practice
• Computerized accounting systems

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Account Formats
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• T-accounts are a convenient way of showing the effects of
transactions on individual accounts

Account Title
Date Explanation Amount Date Explanation Amount

Debit (Dr) side Credit (Cr) side

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Account Formats
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Account Title
Date Explanation Amount Date Explanation Amount

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Account Formats
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Account Title
Date Explanation Amount Date Explanation Amount

Debit (Dr) side

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Account Formats
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Account Title
Date Explanation Amount Date Explanation Amount

Debit (Dr) side Credit (Cr) side

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Account Formats
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• T-accounts Example:

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Account Formats
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• Running balance accounts are generally used in practice

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Account Formats
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• Computerized accounting systems:

Single column account with Debits (Credits) shown as

positive amount and Credits (Debits) shown as the
negative amount, depending on the nature of the account

Computerised accounting
systems

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Accounts Commonly
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Used
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• Balance Sheet
o Asset accounts
Assets Liabilities Equity
o Liability accounts
o Equity accounts

• Income Statement
o Income Profit/
Income Expenses
Loss
o Expenses

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Accounts Commonly
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Used
style
Asset accounts
Current Assets
✓Cash at bank
✓Accounts receivable (debtors)
✓Bills receivable
✓GST Receivable (GST outlays)
✓Other receivables or debtors
✓Prepaid expenses
✓Supplies
Non-current Assets
✓PPE (Plants, Property and Equipment), Land
✓Intangible Assets

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Accounts Commonly
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Used
style
Liabilities Accounts
Current Liabilities
✓Accounts payable (creditors)
✓Bills payable
✓GST payable (GST Collections)
✓Unearned revenue (advances, deposits by clients)
✓Other current liabilities
Non current Liabilities
✓ Long term loan payables
✓ Mortgage
✓ Other long term liabilities

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Accounts Commonly
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Used
style
Equity accounts

Four main types of transactions

✓ Investment of assets by owner
✓ Withdrawal of assets by owner
✓ Income earned
✓ Expenses incurred
Types of accounts
✓ Capital
✓ Drawings or withdrawals

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Accounts Commonly
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Used
style
• Income
✓Revenues
o Income which arises from ordinary activities
o Usually through the provision of services or sale of
goods.
✓Gains
o Income which does not arise from ordinary activities
o Usually of a non-recurring or sporadic nature
• Expenses
✓ Cost of services and economic benefits consumed or lost
or liabilities incurred during the period

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General Ledger
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• Collection of all the individual

accounts of an entity

• Organized in the order of

appearance on balance sheet

• Each account has a specific

ID number which is drawn
from the Chart of Accounts
(refer to next slide)

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Chart of edit
Accounts
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• Complete listing of
ledger account titles
and ID numbers
• Used as reference
point when analysing
transactions
• A good chart will reveal
✓ Nature of the
organisation
✓ Nature of activity
✓ Types of income and
expenses

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• Understand what is an accounting cycle and an accounting

period
• An entity has an account for each kind of asset, liability, equity, income
and expense item
• Understand what is a ledger and the two types of ledger accounts
• Understand what are balance sheet accounts & income statement
accounts, and how these accounts appear in financial statements
• Understand what is a chart of accounts

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 Effects of Transactions on the Accounting Equation & Financial Statements
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Each transaction Results in an increase Assets

recorded or decrease

Liabilities

Equity

Income

Expenses

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 Effects of Transactions on the Accounting Equation & Financial Statements
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Assets Liabilities Equity Income Expenses

Darren Jones deposits $35,000 in a business bank account.

Assets = Liabilities + Equity
Cash at Bank Darren Jones, Capital
(1) $35,000 = $35,000

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 Effects of Transactions on the Accounting Equation & Financial Statements
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Darren purchases a vehicle and some lawn mowing & gardening

equipment.

Assets = Liabilities + Equity

Cash at bank Equipment Vehicle Darren Jones, Capital

(1) $35,000 = $35,000

(2) -30,000 + 9,000 + 21,000
5,000 + 9,000 + 21,000 =

$35,000 $35,000

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Accounting
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• In analysing transactions, must determine
✓ Which assets, liabilities or equity items are affected
✓ By how much each item must be increased or decreased
• At least two accounts are affected by each transaction
• And the accounting equation must always remain in balance

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Debit andedit
Credit
Master
Rules
title style

Accounts: Balance Sheet

Assets = Liabilities + Equity

Debit to Credit to Debit to Credit to Debit to Credit to
increase decrease decrease increase decrease increase

Normal Normal Normal

balance balance balance

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Debit andedit
Credit
Master
Rules
title style
Accounts: Income Statement

Income (including revenues) Expenses

Debit to Credit to Debit to Credit to
decrease increase increase decrease

Normal Normal
balance balance

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Debit andedit
Credit
Master
Rules
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Assets Liabilities Equity
Debit to Credit to Debit to Credit to Debit to Credit to
increase decrease decrease increase decrease increase

Income
Expenses
Summary of (including revenues)
debit and credit
Debit to Credit to Debit to Credit to
rules and the
accounting increase decrease decrease increase
equation

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Debit andedit
Credit
Master
Rules
title style
Assets = Liabilities + Equity + Income - Expenses
Increase
or Assets Liabilities Equity Income Expenses
Decrease

▲ Dr Cr Cr Cr Dr

▼ Cr Dr Dr Dr Cr

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Balance
title style

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Exercise
From the following information, create the accounts that are
necessary:
• 1/6 David invested $10,000 to set up own business
• 5/6 Bought computer for $1,500 (cash).
• 6/6 Bought office supplies $2,000 from AB P/L, payable in 30 days,
• 14/6 Provided consulting service to a client and received $2,500 in cash.
• 19/6 Borrowed a 6-month bank loan for $20,000
• 29/6 Paid $2,000 to AB P/L
• 30/6 paid wages expense for $5,800 in cash

Required
1. How many accounts will you need?
2. How does each transaction affect the accounting equation?
3. Record the transactions in journal entries.

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Exercise
Check Your Answer:

Accounts needed:
• David, Capital
• Cash at bank
• Computer (Equipment)
• Office supplies
• Accounts payable
• Consulting service revenue
• Loan payable
• Wages expense

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Pause – An
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Exercise

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Exercise

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Expanded Accounting
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1. Recognise & record transactions Source documents

2. Journalise transaction General journal

3. Post to ledger accounts General ledger

4. Prepare trial balance of GL Trial balance

5. Prepare financial statements Financial statements

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General Journal
Master title style

Recording transactions in a journal

• Analyse transaction
✓ determine ledger accounts affected
✓ determine effect on each account
• At least 2 accounts are always affected
• Debits must always equal credits (note:
does not mean equal number of
accounts, just the amount)!
• Equality of accounting equation
maintained

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General Journal
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An example:

Recording transactions
in a journal

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General Journal
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Posting from journal to ledger
• Aim is to classify effects of all
transactions on each individual
asset, liability, equity, income and
expense account
• In computerised accounting
systems, posting process is carried
out automatically by the computer
• Essential initial data entry is
accurate
• Running balance formats are used
for ledger accounts in computerised
systems

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Here is an example of how to post from Journal to ledger:

http://www.johnwiley.net.au/highered/accounting/interactives/
ptl/post_to_ledger.html

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• Lists all ledger accounts and

their balances
• Debits in one column, credits
in another
• Can be prepared at any time
to test equality of debits and
credits
• Limitations
✓ May balance and still
contain errors

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• Error detected before posting
• Cross out with single line and insert correct amount. Correcting
person should also sign next to error to show who did the
amendment.

• Error detected after posting

• Must be corrected with another entry

• Never erase! There must be an auditable trail that is clear and

ensure integrity.

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• Why is a trial balance prepared?

• May accounting errors still exist if total debits equal total
credits?
• How are errors in the general journal and general ledger
corrected?
• Provide examples of errors that require a correcting journal entry

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 Key Take
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Source ledger account

Transaction
document

Impact

Asset Liability Equity Income Expense

Based on debit and credit rules

Financial statement
preparation

End of accounting
period

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 Key Take
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Summary of Lecture 3

• Transactions & source documents

• The accounting cycle
• Ledgers and types of accounts
• Rules of debits and credits
• General journal
• Introduction to trial balance

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• Recommended Readings:
Hoggett & Edwards - Chapter 3

• Tutorial Questions
Hoggett & Edwards - Chapter End Questions

• Discussion Board & Drop-in Session

Post your questions in the discussion board

• Next Lecture
Lecture 4 – Adjusting Entries

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