ACC100 Introduction to Accounting

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Duane McGee
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1 ACC100 Introduction to Accounting

2 Week 4 Recording Transactions Chapter 3 - Recording Transactions Study Group Australia Pty Limited, SGA1286-F2/10/12 2

3 Learning Outcomes On completion of this week s study, you should be able to: explain how to analyse transactions explain how to record transactions as journal entries explain how to post journal entries to ledger accounts. 3

4 Introduction To Accounting This week we look at how accountants record transactions. TRANSACTIONS are the events that are identified as making up the economic activities of an entity. 4

5 TRANSACTIONS: Today s main concepts Accountants analyse information to decide which transactions should be recorded and how. Accountants record these transactions in the Journal. Accountants keep track of each affected account by posting transactions to Ledger Accounts. Accountants construct a Trial Balance - a summary of many transactions affecting many different accounts. 5

6 Types Of Transactions External Transactions Involve an outside party Exchange of economic resources Internal Transactions Transformation of economic resources (manufacturing) Non-Transactional Events Often provide information e.g. goods are ordered but no exchange has occurred 6

7 Source Documents Provide written evidence of transactions. Serve to control the entity s resources. Source documents include: tax invoices purchase orders cash register tapes credit card slips TASK 1: Decide if transaction should be recorded. 7

8 The Accounting Cycle Steps in the Cycle Accounting Records 1. Recognise & record transactions Source documents Start of new period 2. Prepare financial statements Financial statements 8

9 The Ledger Accounts Three Basic Parts Title Place for recording increases Place for recording decreases Account Title Date Explanation Amt Date Explanation Amt Debit (Dr) side Credit (Cr) side 9

10 The Ledger Accounts Cash at Bank Date Explanation Amt Date Explanation Amt /1 Darren Jones, Capital /1 Vehicle /1 Lawn and Garden 3/1 Lawn and Garden Income Equipment /1 Accounts Receivable /1 Employee Wages Expense /1 Accounts Payable /1 Darren Jones, Drawings 200 Balance c/d Balance b/d

11 Account Formats ACCOUNT Cash at Bank Account No. 100 Date Explanation Debit Credit Balance 2013 Jan. 2 Darren Jones, Capital Vehicle Lawn and Garden Equipment Lawn and Garden Income Wages Expense Accounts Receivable Accounts Payable Darren Jones, Drawings

12 Accounts Commonly Used An account is established for each type of: Asset Liability Equity Income Expense Number and exact individual accounts varies depending on size and type of organisation 12 12

13 Accounts: Balance Sheet Asset accounts Cash at bank Accounts receivable (sometimes called Debtors) Other receivables and debtors Prepaid expenses GST outlays Land Buildings Plant and equipment 13

14 Accounts: Balance Sheet Liability accounts Accounts payable (sometimes called Creditors) Unearned income Other current liabilities GST collections Mortgage payable 14

15 Accounts: Balance Sheet Equity accounts Four main types of transactions involving equity - Investment of assets by owner - Withdrawal of assets by owner - Income derived - Expenses incurred Types of accounts - Capital - Drawings or withdrawals 15

16 Accounts: Income Statement Income Revenues - Income that arises in the course of ordinary activities of an entity - Usually through the provision of services or sale of goods Gains - Incomes that does not usually arise in the course of ordinary activities of an entity - Usually of a non-recurring or sporadic nature 16

17 Accounts: Income Statement Expenses The cost of services and economic benefits consumed or lost or liabilities incurred during the period Profit When total income exceeds total expenses Loss When total expenses exceeds total income 17

18 General Ledger Collection of all the individual accounts of an entity. Organised in the order they appear in the balance sheet and income statement. Each account has a specific identification number. 18

19 Chart Of Accounts Complete listing of ledger account titles and identification numbers. Used as a reference point when analysing transactions. A good chart of accounts will reveal: The type of organisation The nature of its activities The sources of incomes and expenses 19

20 Double-entry Accounting Each transaction must be analysed to determine: What type of accounts are affected assets, liabilities, equity, income and expenses By how much each account must be increased or decreased At least two accounts are affected by each transaction. The accounting equation must always remain in balance. 20

21 Debit And Credit Rules Accounts: Balance Sheet Debit to increase Assets = Liabilities + Equity Credit to decrease Debit to decrease Credit to increase Debit to decrease Credit to increase Normal balance Normal balance Normal balance 21

22 Debit And Credit Rules Accounts: Income Statement Income (incl. revenues) Debit to decrease Credit to increase Expenses Debit to increase Credit to decrease Normal balance Normal balance 22

23 Debit And Credit Rules All assets accounts = All liability accounts + All equity accounts Dr Cr Dr Cr Dr Cr Debit to increase Credit to decrease Debit to decrease Credit to increase Debit to decrease Credit to increase Normal balance Normal balance Normal balance Expense accounts Dr Cr Income accounts Dr Cr Debit to increase Credit to decrease Debit to decrease Credit to increase Normal balance Normal balance 23

24 Normal Account Balances Increases Normal Account Recorded On Balance Assets Debit side Debit Liabilities Credit side Credit Equity Investment in entity Credit side Credit Drawings from entity Debit side Debit Income: Revenues Credit side Credit Expenses Debit side Debit 24

25 General Journal Once analysed transaction is recorded first in a book called a journal A journal has the following advantages: Complete record of all transactions Presented in chronological order Useful for locating and reducing errors as debits and credits shown together 25

26 Recording Transactions In A General Journal Two or more accounts are affected by each transaction The debits must always equal the credits The accounting equation remains in balance General Journal Date 2013 Particulars Post Ref Debit Credit Jul 5 Cash at Bank Marketing Services Revenue GST Collections (Marketing services rendered) 26

27 Trial Balance Lists all ledger accounts and their closing (ending) balances. Debits in one column, credits in another. The totals of both columns must be equal. If this is the case, the ledger balances. Limitations of the trial balance: May balance but still contain errors If it doesn t balance there is an error but it doesn t tell what the error is 27

28 Correcting Errors Error detected before posting. Cross out with single line and insert correct amount Error detected after posting. Must be corrected with another entry Never erase or whiteout! This gives the impression of concealment or fraud 28

29 Summary On completion of this week s study, you should be able to: explain how to analyse transactions explain how to record transactions as journal entries explain how to post journal entries to ledger accounts. 29

WEEK 7 to 12: FINANCIAL ACCOUNTING FOR BUSINESS Accounting Cycle ACCOUNTING CYCLE STEP 1: RECOGNISE & RECORD TRANSACTIONS

WEEK 7 to 12: FINANCIAL ACCOUNTING FOR BUSINESS Accounting Cycle ACCOUNTING CYCLE STEP 1: RECOGNISE & RECORD TRANSACTIONS EXTERNAL TRANSACTIONS INTERNAL TRANSACTIONS NON-TRANSACTIONAL EVENTS Involves an