Teaching PowerPoint Slides - Chapter 4

4
Recording Process and the Double-entry

System
Learning Outcomes
After studying this chapter, you should be able to:

Record transactions in accounts using the double-
entry system
Record transactions in journals
Post (transfer) the journal entries to the ledgers
Balance off the ledgers
Identify errors in recording accounting transactions
Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T), 2018 4–3
4.0 Introduction
This chapter will demonstrate how business

transactions are recorded.
T-accounts and using the double-entry system
The three-column account
Function and the importance of the chart of accounts
How the journal and the ledger are used
How to draw up a trial balance
Identify the various classifications of errors

4.1 Basic Steps in the Recording
Process
The recording process involves three basic steps:

4.2 The Account
 An account is a basic summary tool of

accounting.
 It is an individual accounting record of
increases and decreases in specific asset,
liability and owner’s equity items.
 Accounts are grouped in a record called the
ledger.

4.2 The Account (cont.)
T-account and the Rules of Debits and Credits

The simplest account format: the T-account.
– It takes the form of the capital letter ‘T’.
– The three parts of the T-account:
– It helps you understand the double-entry system.

T-account and the Rules of Debits and Credits

(cont.)
Rules of debit and credit
– Assets, expenses and drawings
• Increases are recorded on the left (debit) side
• Decreases are recorded on the right (credit) side
– Liabilities, capital and revenues
• Increases are recorded on the right (credit) side
• Decreases are recorded on the left (debit) side

Three-column Account
A widely used format in a manual system that has
three money columns—debit, credit and balance
Note: A simple T-account form of accounts is ideal for illustration and

analysis only.
Chart of Accounts
Lists the accounts and the account numbers to
indicate their location in the ledger. It uses a
numbering system to identify the accounts.

Chart of Accounts (cont.)

4.3 Double-entry Bookkeeping
Accounting is based on the double-entry system.

Every transaction affects two or more items to
satisfy the basic accounting equation.
Each time we record a business transaction, at
least two accounts will be involved.
Total debits must always be equal to the credits.

(cont.)
The entry of a few transactions can now be illustrated:
Hassan starts a business by investing RM55,000 in cash
on 1 August 20x6.
These are then entered into ledger accounts:

(cont.)
 A motor van is bought for RM30,000 cash on 2 August

20x6
Ledger accounts:

(cont.)
 Fixtures are bought on credit from Eco Sdn. Bhd. for
RM2,000 on 3 August 20x6
Ledger accounts:

(cont.)
 The amount owing in cash to Eco Sdn. Bhd. is paid
on 17 August 20x6
Ledger accounts:

4.4 Important Books and Their
Processes
The Journal and Journalising
Transactions are first recorded in a journal (the book
of original entry) following these four steps:
Identify the transaction from source documents.
Specify the account affected by the transaction.
Determine the increase/decrease by the
transaction.
Enter the transaction into the general journal
– dates, account titles and explanation, references
and two money columns
Processes (cont.)
 Based on two transactions of the worked example
earlier:
 When three or more accounts are required in one

journal entry, the entry is referred to as a
compound entry.
Processes (cont.)
The Ledger and Posting
Every business has a general ledger. It contains all
the assets, liabilities & owner’s equity accounts.
Posting is the procedure of transferring journal
entries to ledger accounts, using these steps:
– In the ledger, enter the accounts debited/credited,
the date, journal page, and debit/credit the
amount shown in the journal.
– In the reference column of the journal, write the
account number to which amount was posted.
Processes (cont.)
Balancing Off the Ledger—T-accounts

The balance of a three-column form of account is
determined after each transaction.
The balance of an account using T-accounts has to be
determined.
– If total debit > total credit  debit balance
– If credit side > total debit  credit balance
– If total debit = total credit  zero balance

Processes (cont.)
Balancing Off the Ledger—T-accounts (cont.)

4.5 Preparing the Trial Balance
A trial balance is a list of all accounts and their

balances at a given time.
It is to verify that total debits equals total credits.
It is usually prepared at the end of the accounting
period.
Uncovers errors in journalising and posting
Procedures for preparing a trial balance:
– List all account titles and their balances
– Total the debit and credit columns
– Prove the equality of the two columns
(cont.)
Limitations of a Trial Balance

Even though its purpose is to prove the accuracy
of the double-entry system, a trial balance does not
prove that all transactions have been recorded
correctly.
Two categories of the errors:
– Errors not Affecting the Trial Balance – it will still
balance despite the recorded errors.
– Errors Affecting the Trial Balance – errors will
lead to a disagreement in the total debits/credits.
(cont.)
 Errors Not Affecting the Trial Balance

– Error of omission: A transaction is omitted and not
recorded at all.
– Error of commission: A transaction is recorded on
the wrong account of the same class.
– Complete reversal of entries: Offsetting errors are
made in recording the amount of a transaction.
– Error of principle: A transaction is recorded in the
wrong class of account.
– A journal entry is posted twice.
(cont.)
 Errors Affecting the Trial Balance

– Error of omission of one entry: Only one entry is
made for a transaction.
– Error of posting to the wrong side of an account
– Error of transposition: This occurs when the
amount is correctly recorded in one side of the
accounts, but wrongly recorded in the other
side.


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4

Recording Process and the Double-entry

After studying this chapter, you should be able to:

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

This chapter will demonstrate how business

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

The recording process involves three basic steps:

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

 An account is a basic summary tool of

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

T-account and the Rules of Debits and Credits

– It helps you understand the double-entry system.

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

T-account and the Rules of Debits and Credits

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

Note: A simple T-account form of accounts is ideal for illustration and

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

Chart of Accounts (cont.)

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

Accounting is based on the double-entry system.

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

These are then entered into ledger accounts:

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

 A motor van is bought for RM30,000 cash on 2 August

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

 When three or more accounts are required in one

Balancing Off the Ledger—T-accounts

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

Balancing Off the Ledger—T-accounts (cont.)

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

A trial balance is a list of all accounts and their

Limitations of a Trial Balance

 Errors Not Affecting the Trial Balance

 Errors Affecting the Trial Balance

Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved

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