Financial Accounting

Recording changes in Financial

Position
 The Role of Accounting records

• How business transactions are analyzed ,

entered in the accounting records, and
classified for use in preparing a balance sheet?
• The accounting records contains the data
necessary to prepare an Income statement
and other financial reports.
 The Ledger
• An accounting system includes a separate record
for each item that appears in the balance sheet.
• A separate record is kept for each type of asset,
liability and owner’s equity.
• The form of record used to record increases and
decreases in a single balance sheet item is called
an account or sometimes a ledger account and
the entire group of accounts is called a ledger.
 The Use of Ledger Accounts
• A ledger account for the asset cash provides a
record of the amount of cash receipts, cash
payment, and the current cash balance.
• This information can be used for planning
future operations and advance planning of
applications for bank loans.
• In its simplest form, an account has only three
elements:
• 1. A title of account
• 2. A left side which is called as Debit side
• 3. A right side which is called the Credit side
 T Account (Ledger)
Title of Account

Debit side Credit side

 T Account (Ledger)
Cash (Current Asset)

$ $
1/9 180,000 3/9 141,000
20/9 1,500 5/9 15,000
30/9 3,000
------------------------------------------------------------
30/9 Balance 22,500
 Rules of Debit and Credit
• Asset Accounts Liability and
Owner’s Equity Account

Increases are recorded Increases are recorded

By debits By credits
Decreases are recorded Decreases are recorded by
By credits debits
 Double Entry Accounting-The Equality of
Debits and Credits
• The rules of debits and credits are designed as
that every transaction is recorded by equal
dollar amounts of debits and credits.
• Assets = Liabilities + Owner’s Equity
 Recording Transactions in Ledger Accounts: Illustration
Transaction (a)

Roberts invested $ 180000 cash in the Business on September 1.

Analysis Rule Entry

The asset cash was Increase in assets are Debit: Cash $ 180000
increased recorded by debts
The owner’s Equity was Increases in owner’s equity
increased are recorded by credits
 Recording Transactions in Ledger Accounts: Illustration
Transaction (b)

On September 1. Robert Real Estate company purchased land for cash

$ 141000
Analysis Rule Entry

The asset Land was Increase in assets are Debit: Land $ 141000
increased recorded by debts

The asset Cash was Decreases in assets are Credit Cash $ 141000
decreased recorded by credits
 Transaction (c)
• On September 5, Robert Real Estate Company
purchased a building from Kent Company at a
total price of $ 36000. The term of purchase
require a cash payment of $ 15000 with the
remainder $ 21000 payable within 90 days.
 Transaction (d)
• On September 10. Robert Real Estate
Company sold a portion of its Land on credit
to Carter’s Drug Store for a price of $ 11000.
The Land was sold at its cost, so there was no
gain or lesson the transaction.
 Transaction (e)
• On September 14, Robert Real Estate
Company purchased office equipment on
credit from General Equipment Inc., in the
amount of $ 5400
 Transaction (f)
• On September 20. Cash of $ 1500 was
received as partial collection of the Accounts
Receivable from Carter Drugstore
 Transaction (g)
• A cash payment of $ 3000 was made on
September 30 in partial payment of the
amount owing to General Equipment Inc.,
 Running Balance form of Accounts
Cash
Date Explanation Ref. Debit $ Credit $ Balance $
Sept. 1 180000 180000
3 141000 39000
5 15000 24000
20 15000 25500
30 30000 22500
The Normal Balance of an Account
• Assets when increase Debit, when decrease Credit
• Liabilities when increase Credit, when decrease Debit
• Owner’s Equity (Capital) when increase Credit, when
decrease Debit.
• Revenues when increase Credit, when decrease Debit.
• Expenses when increase Debit, when decrease Credit
• Profit when increases Credit, when decrease Debit.
• Loss when increases Debit, when decrease Credit
The Journal (The book of original entry)

• In an accounting system the information a

bout each business transaction is initially
recorded in an accounting record called the
Journal.
• After the transaction has been recorded in the
journal, the debit and credit changes in the
individual account are entered in the Ledger.
The Journal (The book of original entry)

• The journal is a chronological (day-by-day)

record of business transactions.
• At convenient intervals the debt and credit
amount in the journal are transferred (posted)
to the accounts in the ledger.
• The updated ledger accounts then serve as
the basis for preparing the balance sheet and
other financial statements.
 Why Use a Journal?
• It is possible to record transactions directly in
the ledger, but we maintain Journal because
the unit of organization for the journal is the
transactions, whereas the unite of transactions
for the ledger is account.
• By having both a journal and a ledger, we
achieve several advantages which would not
be possible if transactions were recorded
directly in the ledger account.
 Advantages of keeping Journal
• 1. The journal shows all information about a
transaction in one place and also provides an
explanation of the transaction.
• 2. The journal provides a chronological record
of all the events in the life of a business.
• 3. The use of journal helps to prevent error.
 Example of a Journal entry
General Journal
Date Accounts Title and Explanation LP Debit $ Credit $
Sept. 1, 2019 Cash 180000
James Robert’s Capital 180000
Invested cash in the business
 Ledger Posting
• The process of transferring the debits and
credits from the general journal to the proper
ledger accounts is called posting.
 The Trial Balance
• Before using the account balances to prepare final accounts, it
is desirable to prove that the total of accounts with debit
balances is equal to the total of accounts with credit balances.
• This proof of the equality of debit and credit balances is called
a trial balance.
• A trial balance is a two column schedule listing the names and
balances of all the accounts in the order in which they appear
in the ledger.
• The debit balances are listed on the debit left-hand column
and the credit balances in the right-hand column.
• The total of two columns should agree.
 Trial Balance
ROBERT REAL ESTATE COMPANY
Trial Balance
Sept 30, 2019

Cash $ 22500
Accounts receivable 9500
Land 130000
Building 36000
Office equipment 5400 $ 23400
James Roberts, capital 180000
203400 203400
 Uses and Limitations of the Trial
Balance
• The trial balance provides proof that the
ledger is in balance. The agreement of the
debit and credit totals of the trial balance
gives assurance that;
• 1. Equal debits and credits have been
recorded for all transactions
• 2. The debit r credit balance of each account
has been correctly computed.
• 3. The addition of the account balances in trial
balance has been correctly performed.
 THE ACCOUNTING CYCLE

• 1. Record transaction in the journal

• 2. Post to ledger accounts.

• 3. Prepare a trial balance.

• 4. Prepare financial statement