MEM 5209: FINANCIAL

MANAGEMENT IN
EDUCATION
LESSON FIVE AND SIX
LECTURER: Dr. Ruth Thinguri
EMAIL: nthinguri@yahoo.com or
SEMESTER: April, August, December.2016
MODULE LEADER:
VENUE:
LESSON 5&6:1:BUSINESS TRANSACTION
 Business transactions are ordinarily
summarized in books called journals and
ledgers. You can buy them at your local
stationery or office supply store.
 A journal is a book where you record each
business transaction shown on your supporting
documents. You may have to keep separate
journals for transactions that occur frequently.
 A ledger is a book that contains the totals from
all of your journals. It is organized into
different accounts.
LESSON 5&6:2:BUSINESS TRANSACTION
 JOURNAL RECORDING
 STEP 1.:Analysis of Transaction
 STEP 2. Journal Entry
 1. Owner invested $10,000 cash in the company.
 STEP 1:Analysis of Transaction
 Analysis of Transaction Steps
 Increase in Assets (Cash) by $10,000 Debit
 Increase in Owner's Equity by $10,000 Credit
 STEP 2. JOURNAL ENTRY
 Journal Entry
DR CR

 CASH 10000
 OWNER’S EQUITY 10000

 Description of Journal Entry

Owner invested $10,000 in the company.
Results of Journal Entry
Cash balance increases by $10,000. --> Increase in Assets
Owner's Equity balance increases by $10,000. --> Increase in Owner's Equity

LESSON 5&6:3:learning activity
 Practice the journal entries
 2. The company borrowed $20,000 from a

bank and received it by cheque.

3. The company purchased $12,000
equipment and paid in cash.
 4. purchased stock and paid $3,200 in cash
LESSON 5&6:4:DOUBLE ENTRY
RECORDING
 Double Entry Recording

1. All accounting transactions are recorded using "Double Entry" recording

system
 2. Double Entry Recording System
--> at least one "Debit" entry
--> at least one "Credit" entry
 3. An example of double entry recording
Transaction --> purchased merchandise and paid $3,200 in cash
(1) One entry on debit --> merchandise 3,200
(2) One entry on credit --> cash 3,200
 debit merchandise 3,200
 credit cash 3,200
 4. The sum of all debit entries = The sum of all credit entries
If the sums of debit and credit entries are not equal for any journal entry,
the journal entry is not correct
 5. Debit and credit sides of the accounting equation
Left side of the accounting equation = debit = assets
Right side of the accounting equation = credit = liabilities and equity
LESSON 5&6:4:DOUBLE ENTRY
RECORDING
 RULES OF DOUBLE ENTRY:
 1.ASSETS –INCREASE=DEBIT
 -DECREASE=CREDIT
 2. LIABILIITES –INCREASE=CREDIT
 -DECREASE=DEBIT
 3. CAPITAL/EQUITY-INCREASE=CREDIT
 -DECREASE=DEBIT
 4.EXPENSE -INCREASE=DEBIT
 -DECREASE=CREDIT
 5. REVENUES-INCREASE=CREDIT
 -DECREASE=DEBIT
 6. SALES –INCREASE=CREDIT
 DECREASE=DEBIT
 7. PURCHASE-INCREASE=DEBIT
 -DECREASE=CREDIT
LESSON 5&6:5:LEDGER ACCOUNT
 The journal provides a complete listing of the daily
transactions of a business.
 The book in which accounts are maintained is
called ledger. Generally, one account is opened on
each page of this book, but if transactions relating
to a particular account are numerous, it may
extend to more than one page.
 All transactions relating to that account are
recorded chronologically. From journal each
transaction is posted to at least two concerned
accounts - debit side of one account and credit
side of another account.
LESSON 5&6:5:LEDGER ACCOUNT
It appears that each account in the ledger has two similar sides
- left hand side is called debit side (briefly Dr.) and right hand
side (briefly Cr.) side. Now a days these two words are not
used, because it is obvious that the left hand side is debit side
and right hand side is credit side.

DR CR
Date Particula J.R Amount Date Particula J.R Amount
rs rs
LESSON 5&6:6:BALANCING AN
ACCOUNT
 The difference between the two sides of an account is its balance. The balance is
written on the lesser side to make the two sides equal. The process of equalizing
the two sides of an account is known as balancing.
 The rules for balancing an account are stated as below:
 Add up the amount columns of both the sides of an account and write the totals in
a separate slip of paper.
 Find out the difference of the two totals.
 Write down the difference on the lesser side of the account.
 Now total up both the sides and write the totals and draw double lines under them.
 Again write the difference on the opposite side below the double line.
 If the debit side of an account is heavier, its balance is known as debit balance. and
if the credit side of an account is heavier its balance is know as credit balance. If
the two sides are equal, that account will show zero balance. The rules for
determining the balance is as follows:
 Total debit = More than total credit = Debit balance Total credit = More than total
debit = Credit balance Total debit = Total credit = Nil balance It may be noted that
at the time of balancing an account debit balance is placed on the credit side and
credit balance on debit site. This balance is known as closing balance. What is
closing balance in this year, is the opening balance of the next year.
LESSON 5&6:7:LEARNING ACTIVITY
 Example:1
 Enter the following transactions in journal post them into ledger and extract
a trial balance:
 2015 Jan. 1 Mr. Javed started business with cash $100,000
 Jan 2 He purchased furniture for $20,000
 Jan 3 He purchased goods for $60,000
 Jan 5 He sold goods for cash $80,000
 Jan 6 He paid salaries $10,000
 Example:2
 Enter the following transactions in journal and post them into the ledger
and also prepare a trial balance.
 2015 Jan. 1 Mr. X started business with cash $80,000 and furniture
$20,000.
 Jan. 2 Purchased goods on credit worth $30,000 from Y. Jan. 3 Sold goods
for cash $16,000.
 Jan. 4 Sold goods on credit to S for $10,000
 Jan. 8 Cash received from S $9,800 in full settlement of his account.
LESSON3:8:TRIAL BALANCE
 Trial balance may be defined as an informal accounting
schedule or statement that lists the ledger account balances at
a point in time compares the total of debit balance with the
total of credit balance.
 The fundamental principle of double entry system is that at any
stage, the total of debits must be equal to the total of credits.
 If entries are recorded and posted correctly, the ledger will
reflect equal debits and credits, and the total credit balance will
then be equal to the total debit balances.
 Purposes of Trial Balance:
 The trial balance serves two main purposes. These are as under:
 To check the equality of debits and credits - an arithmetical or
mathematical test of accuracy.
 To provide information for use in preparing final accounts.
LESSON3:8:TRIAL BALANCE
 Every business concern prepares final accounts at the end of the year to ascertain
the result of the activities of the whole year. To ensure correct result, the concern
must be free from doubt that the books of accounts have been correctly recorded
throughout the year.
 Trial balance is prepared to test the arithmetical accuracy of the books of accounts.
As we know that under double entry system for each and every transaction one
account is debited and other account is credited with an equal amount. If all the
transactions are correctly recorded strictly according to this rule, the total amount
of debit side of all the ledger accounts must be equal to that of credit side of all
the ledger accounts. This verification is done through trial balance.
 If the trial balance agrees we may reasonably assume that the books are correct.
On the other hand, if it does not agree, it indicates that the books are not correct -
there are mistakes somewhere. The mistakes are to be detected and corrected
otherwise correct result cannot be ascertained. There are however, a few types of
errors which the trial balance cannot detect. In other words, the trial balance will
agree in spite of the existence of those errors.
 The trial balance is not an absolute or solid proof of the accuracy of books of
accounts. Thus if trial balance agrees, there may be errors or may not be errors.
But if it does not agree, certainly there are errors.
LESSON3:9:THE FORMAT OF A TRIAL BALANCE

The name of the business

Trial balance
As at July 31st 2004
Items Dr CR
furniture XXXX
Cash XXXX
creditors XXXX
Bank loan XXXXX
Totals XXXXX XXXXXX
LESSON 5&6:10:STEPS OF PREPARING
A TRIAL BALANCE
 The various steps involved in the preparation of Trial Balance under this
method are given below:
 Find out the balance of each account in the ledger.
 Write up the name of account in the first column.
 Record the debit balance of each account in debit column and credit
balance in credit column.
 Add up the debit and credit column and record the totals.
 Check the equality of debits and credits
 Example:
 Enter the following transactions in journal and post them into the ledger
and also prepare a trial balance.
 2005 Jan. 1 Mr. X started business with cash $80,000 and furniture
$20,000.
 Jan. 2 Purchased goods on credit worth $30,000 from Y.
 Jan. 3 Sold goods for cash $16,000.
 Jan. 4 Sold goods on credit to S for $10,000
 Jan. 8 Cash received from S $9,800 in full settlement of his account.
LESSON 5&6:11:SELFTEST
QUESTIONS
 COMPLETE THE FOLLOWING ACTIVITY
 Example:
 Enter the following transactions in journal and post
them into the ledger and also prepare a trial balance.
 2015 Jan. 1 Mr. X started business with cash $80,000
and furniture $20,000.
 Jan. 2 Purchased goods on credit worth $30,000 from
Y.
 Jan. 3 Sold goods for cash $16,000.
 Jan. 4 Sold goods on credit to S for $10,000
 Jan. 8 Cash received from S $9,800 in full settlement
of his account.