2/10/2009. The accounting ACCOUNTING TRANSACTIONS AND EVENTS. Analysing transactions. Chapter 2

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1 Chapter 2 The accounting information system PowerPoint presentation by Anne Abraham University of Wollongong 2009 John Wiley & Sons Australia, Ltd ACCOUNTING TRANSACTIONS AND EVENTS Transactions are external exchanges of something of value between two or more entities Events include price increases in assets during an accounting period or the allocation of the cost of the long-lived assets of an entity to different accounting periods Accounting transactions and events must be recorded because they have an effect on assets, liabilities and equity 2 Analysing transactions Transaction analysis is the process of identifying the specific effects of transactions and events on the accounting equation The accounting equation must ALWAYS ASSETS = LIABILITIES + EQUITY 3 1

2 Expansion of the Basic Equation 4 1. Issues shares for $ cash Share Cash = Capital (1) +$ = +$ Issued shares 5 2. Borrows $5000 from ANZ bank Bank Share Cash = Loan + Capital Old $ $ (2) $5 000 New $ = $ $ $

3 3. Purchases office equipment for $5000 cash Office Bank Share Cash + Equipment = Loan + Capital Old $ $5 000 $ (3) $5 000 New $ $5 000 = $ $ $ $ Receives $1200 cash in advance from customer Revenue Office Bank Received Share Cash + Equipment = Loan + in Advance + Capital Old $ $5 000 $5 000 $ (4) $1 200 New $ $5 000 = $ $ $ $ $ Renders services for $ cash Revenue Office Bank Received Share Retained Cash + Equipment = Loan + in Advance + Capital + Profits Old $ $5 000 $5 000 $1 200 $ (5) $ New $ $5 000 = $ $ $ $ $ $ Service revenue 9 3

4 6. Pays $900 rent in cash Revenue Office Bank Received Share Retained Cash + Equipment = Loan + in Advance + Capital + Profits Old $ $5 000 $5 000 $1 200 $ $ (6) New $ $5 000 = $ $ $ $9 100 $ $ Rent expense Pays $600 for insurance in cash Revenue Prepaid Office Bank Received Share Retained Cash + Insurance + Equipment = Loan + in Advance + Capital + Profits Old $ $5 000 $5 000 $1 200 $ $9 100 (7) $600 New $ $600 + $5 000 = $ $ $ $9 100 $ $ Purchases supplies on credit for $2500 Revenue Prepaid Office Bank Accounts Received Share Retained Cash + Supplies +I Insurance +Equipment = Loan + Payable +in Advance +Capital +Profits Old $ $600 $5 000 $5 000 $1 200 $ $9 100 (8) +$ $2 500 New $ $ $600 + $5 000 = $ $ $ $ $9 100 $ $

5 Summary of accounting transactions Each transaction is analysed in terms of effect of its effect on assets, liabilities and equity The two sides of the accounting equation must always be equal Assets must equal liabilities plus equity The cause of each change in equity must be indicated 13 THE ACCOUNT An account is an individual accounting record of increases and decreases in a specific asset, liability or equity item Debit Title of Account Left or debit side Right or credit side Credit Debit Credit 14 Debits and credits Debit Refers to the left side Commonly abbreviated as Dr Credit Refers to the right side Commonly abbreviated as Cr 15 5

6 Debit and credit procedures Double entry system: each transaction affects at least two accounts total debits must equal total credits 1. Dr/Cr procedures for assets & liabilities Assets Increase Decrease Liabilities Decrease Increase 16 Debit and credit procedures continued 2. Dr/Cr procedures for Equity: a. Share Capital b. Retained Profits Share Capital Decrease Increase Retained Profits Decrease Increase 17 Debit and credit procedures continued c. Dividends Dividends Increase Decrease 3. Dr/Cr procedures for Revenue & Expenses: Expenses Increase Decrease Revenues Decrease Increase 18 6

7 Equity relationships Statement of Financial Position Equity Share Capital (investments by shareholders) Retained Earnings (profit retained in business) Beginning in Retained Earnings Profit (or minus loss) + Income Statement (revenues minus expenses) Dividends Calculation of Retained Earnings 19 STEPS IN THE RECORDING PROCESS 1. Analyse each transaction in terms of its effects on the accounts 2. Enter transaction information in a journal 3. Transfer journal information to appropriate accounts in the ledger 20 The journal A journal is a chronological record of all transactions The complete effect of a transaction is disclosed in one place This helps prevent errors as debit and credit amounts are easily compared 21 7

8 Journalising 22 The journal continued Wong Pty Ltd: 1 st three transactions GENERAL JOURNAL Post Date Account titles and explanations ref. Debit Credit 2010 Oct 1 Cash Share Capital (Issued shares for cash) 1 Cash Bank Loan (Borrowed money from a bank) 2 Office Equipment Cash (Purchased office equipment for cash) 23 The general ledger Contains all asset, liability and equity accounts Individual asset accounts Individual liability accounts Individual equity accounts Equipment Interest Payable Salaries Expense Land Salaries Payable Service Revenue Supplies Accounts Payable Share Capital Cash Bank Loan Retained Profits 24 8

9 Posting Posting is the procedure of transferring journal entries to ledger accounts Steps in the process: 1.Enter date in account to be debited 2.Enter name of ledger account to be credited 3.Enter amount to be debited 4.Tick account no. in general journal to show entry is posted 5.Repeat steps 1-4 for the credit side 25 The recording process illustrated Internet connection required 26 Balancing the accounts Example: Cash ledger Cash No. 100 Oct. 1 Share Capital Oct. 2 Office Equipment Bank Loan Rent Expense Revenue Received 4 Prepaid Insurance 600 in Advance Dividends Service Revenue Salaries Expense Closing Nov. 1 Opening

10 THE TRIAL BALANCE A trial is a list of all the accounts and their s at a given time listed in order as they appear in general ledger It proves the mathematical equality of debits and credits after posting Steps to prepare a trial 1.List account numbers, titles and s 2.Total debit and credit columns 3.Verify equality of debit and credit columns 28 THE TRIAL BALANCE continued WONG PTY LTD Trial Balance as at 31 October 2010 No. Account title Debit Credit 100 Cash $ Advertising Supplies Prepaid Advertising Office Equipment Accounts Payable $ Revenue Received in Advance Bank Loan Share Capital Dividends Service Revenue Salaries Expense Rent Expense 900 $ $ Limitations of a trial Errors not detected in a trial : A transaction is not journalised A correct journal entry is not posted A journal entry is posted twice Incorrect accounts used in journalising or posting Offsetting errors made in recording the amount of a transaction 30 10

11 DECISION TOOLKIT Western Farmers Cooperative Ltd Work through on your own and check your results with the suggested solution provided 31 DEMONSTRATION PROBLEM Niky s Dry Cleaning Pty Ltd Work through on your own and check your results with the suggested solution provided