Third Year Finance and Accounting Major

Chapter two: Lecture Two

1. What is Bookkeeping?

Bookkeeping involves the recording, on a regular basis, of a company’s financial

transactions. With proper bookkeeping, companies are able to track all
information on its books to make key operating, investing, and financing
decisions. It is concerned with the proper maintenance of the books, i.e., Journal,
Ledger, Cash Book, and other subsidiary books.
It must be noted that bookkeeping is not concerned with disclosing or
interpreting the results of the business, unlike accounting.
Bookkeeping consists of the following steps:

• Identifying a financial transaction

• Recording or posting debit or credit
• Producing invoices
• Preparing financial statement
• Maintaining and balancing subsidiaries and other accounts

Difference between Bookkeeping and Accounting:

Basis Bookkeeping Accounting

Accounting is the process of

Bookkeeping includes
measuring and recording all
Definition identifying and recording all
financial transactions that
financial transactions.
happened in a financial year.

The objective of Accounting

The objective of
is to record, analyze, and
Objective Bookkeeping is to prepare
interpret all the
original books of accounts.
transactions.

Management cannot take With the help of accounting,

decisions on the basis of
Decision
bookkeeping because it is
Making
only concerned with the
management of books.
management can take
decisions as it is responsible
for communicating the
information.
 Basis Bookkeeping Accounting

The information is only In Accounting, analysis is

Analysis recorded in the bookkeeping done to obtain important
and not analyzed. insights into the business.

Accounting shows the net

Bookkeeping does not show
Reflecting results of the business,
the financial position of the
Position of including profit earned and
business as it is only
Business the assets and liabilities of
concerned with recording.
the business.

2. Preparing Journal entries:

A. What is Journal Entry?

A Journal is a book in which all the transactions of a business are recorded for
the first time. The process of recording transactions in the journal is called
journalising.
Every transaction affects two accounts, one is debited and the other one is
credited. ‘Debit’ (Dr.) and ‘Credit’ (Cr,) are the two terms or signs used to
denote the financial effect of any transaction. The word ‘journal’ has been
derived from the French word ‘JOUR’ meaning daily records. Journal Book is
maintained to have prime records for small firms. After preparing the journal
book, the transactions are then posted to Ledger.

B. What to Include in a Journal Entry?

One important key to journal entries is that they need to contain enough
information to clearly reflect the actual transaction. That way, instead of only
having account balances, we can look back at journal entries to see what really
happened and if anything was recorded incorrectly.

A journal entry has the following components:

• The date of the transaction
• The account name and number for each account impacted
• The credit and debit amount
• A reference number that serves as a unique identifier for the transaction
• A description of the transaction
Third Year Finance and Accounting Major
C. The difference between a Journal and a ledger:
When it comes to tracking the finances of a business, a double-entry accounting
system that uses both a general ledger and a general journal is arguably the best
method for tracking a company's overall financial data and keeping operations
running smoothly and profitably.

D. What Are Debits and Credits?

Under the double-entry bookkeeping method, debits and credits in a journal entry
must be equal. Journal entries must also be consistent with the general accounting
equation which describes the balance sheet:

Assets = Liabilities + Owner’s Equity

Using this equation, debits are recorded on the left, and credits on the right. This
means that debiting an account on the left side of the equation — an asset account
— increases that account. Debiting an account on the right side of the equation —
a liability or an equity account — will decrease the balance in that account.

A credit amount has the opposite effect. Crediting an asset account decreases
the balance, while crediting a liability or equity account increases it. Over on
the income statement, revenue accounts are increased by credits, and expense
accounts are increased by debits.
The combination of the accounting equation and the actions of debiting or
crediting an account means that the different categories of accounts will normally
have either a debit balance or a credit balance. This chart shows how that works:

Account Type Normal balance

Asset Debit

Liability Credit

Equity Credit

Revenue Credit

Expense Debit

Example:
Take a look at this sample using the model of the Orion Computer Repair Company:

- Melody adds $50,000 capital to start her new business, Orion Computer Repair
Company .

- Melody pays $25,000 deposit for 10 months' rent for her new business space.

- Melody obtains $7,500 credit for purchasing computer spare parts to run her
new computer repair company.

- Melody receives $18,000 in computer repair orders.

- Melody orders $6,500 more spare computer parts, payable within 30 days.

- Melody issues two checks, one for $7,500, and the other for $6,500, totaling
$14,000 in order to pay off her outstanding credits from the computer part
supplier store.

Using the above information, here is how it would play out in the general journal:
Third Year Finance and Accounting Major