REVIEW CHAPTER 1 - 2

• Basic Accounting Equation: Assets = Liabilities + Owner’s Equity

• Assets
▪ Anything of value owned by a business.
▪ Cash, Supplies, Prepaid Insurance
• Liability
▪ Anything owed by a business
▪ Accounts Payable (Tractor Supply Company)
• Owner’s Equity
▪ The rights the owner has to the things owned by the business.
▪ Capital—investment from the owner
▪ Drawing—paid to the owner for personal use
• Revenue
▪ Money received from the operation of the business
▪ Sales, Fees
• Expenses
▪ Money paid out from the operation of the business.
▪ Rent Expense, Utilities Expense
 Chapter 3
RECORDING TRANSACTIONS

©2015 John Wiley & Sons Australia Ltd

 LEARNING OBJECTIVES

1. Identify the nature of, purpose of and evidence for

transactions
2. Describe the accounting cycle used to record, classify and
summarise transactions, including the of ledger accounts
and the general ledger
3. Outline the rules of debit and credit used in double-entry
accounting and how to apply these rules in analysing
transactions
4. Explain the purpose and format of the general journal,
record transactions in the general journal and transfer the
information to the general ledger
5. Discuss the purpose of the trial balance and how to
prepare one.
Vocabulary
• An account
• Ledger account/ T-Account
• Debit/ Credit
• Double-entry
• Balance B/D; Balance C/D; Trial balance
• General Journal
• Journal entry
TYPES OF TRANSACTIONS

• External Transactions
➢Involve an outside party
➢Exchange of economic resources and/or obligations
✓Sale of inventory
✓Purchase of supplies
• Internal Transactions
➢Transformation of economic resources
✓Use of office supplies
• Non-Transactional Events
➢Not usually recorded, but may be in the future
✓Receiving an order from a customer
SOURCE DOCUMENTS

• Prepared for every external transaction

• Support entries in accounting records
• Important element in control system
• Common source documents include:
➢Tax invoice (specific requirements as per ATO)
➢Purchase order
➢Cash register tape
➢Credit card slip
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
 THE LEDGER ACCOUNT

• Where effect of transactions is recorded

• 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

 THE LEDGER ACCOUNT

Cash at Bank
Date Explanation Amount Date Explanation Amount
2013 2013
2/1 Darren Jones, Capital 35 000 3/1 Vehicle 21 000
20/1 Lawn and Garden 3/1 Lawn and Garden
Income 2 200 Equipment 9 000
31/1 Accounts Receivable 550 22/1 Employee Wages
Expense 450
31/1 Accounts Payable 2 500
31/1 Darren Jones, Drawings 200
Balance c/d 4 600
37 750 37 750
Balance b/d 4 600
An account - Example

11
 AN ACCOUNT

Tabular Summary Account Form

Cash
Cash
$15,000
- 7,000 Debit Credit
1,200 15,000 7,000
1,500 1,200 600
- 600 1,500 900
- 900 600 200
- 200 250
- 250 1,300
600
- 1,300 Balance 8,050
$8,050
ACCOUNT FORMATS

• An account:
✓ Is an individual accounting record;
✓ Used to record the increases & decreases in a
specific financial statement items.
• T-Accounts
➢Convenient way to show individual accounts
➢Illustrate effects of transactions on an account
➢Still used in practice for quick calculations
T-Accounts

14
 ACCOUNT FORMATS

ACCOUNT Cash at Bank Account No. 100

Date Explanation Debit Credit Balance
2018
Jan. 2 Darren Jones, Capital 35 000 35 000
3 Vehicle 21 000 14 000
3 Lawn and Garden Equipment 9 000 5 000
20 Lawn and Garden Income 2 200 7 200
22 Wages Expense 450 6 750
31 Accounts Receivable 550 7 300
31 Accounts Payable 2 500 4 800
31 Darren Jones, Drawings 200 4 600
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
ACCOUNTS: BALANCE SHEET

• Asset Accounts
➢Cash at bank
➢Accounts receivable
➢Other receivables and debtors
➢GST Outlays
➢Prepaid expenses
➢Land
➢Buildings
➢Plant and equipment
ACCOUNTS: BALANCE SHEET

• Liability Accounts
➢Accounts payable
➢Unearned income
➢Other current liabilities
➢GST collections
➢Mortgage payable
ACCOUNTS: BALANCE SHEET

• Equity Accounts
➢Four main types of transactions
✓Investment of assets by the owner
✓Withdrawal of assets by the owner
✓Income earned
✓Expenses incurred
➢Two account types
✓Capital
✓Drawings or withdrawals
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 nature
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
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
➢Can vary from simple two digit number to
complex alphanumeric system
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
DOUBLE-ENTRY ACCOUNTING

• Each transaction must be analysed to determine:

➢What type of accounts are affected
✓Assets; Liabilities; Equity; Income; Expense
➢By how much each item must be increased or
decreased
• In a double-entry system, equal debits and credits
are made in the accounts for each transaction.
• Thus, the total debits will always equal the total
credits and the accounting equation will always
stay in balance.
• The accounting equation must always remain in
balance
DEBITS AND CREDITS

• Often cause confusion, mainly due to previous

exposure to the terms (bank statements)
• In accounting, instructions detailing where in the
ledger the balance needs to be recorded
• Debit = “on the left”
• Credit = “on the right”
• No meaning beyond that instruction
DEBITS AND CREDITS RULES

• Assets are debit in nature

• Liabilities are credit in nature
• Accounting equation: A = L + Eq
➢Therefore, Liabilities and Equity must be credit in
nature
• Income increases Equity; credit increases Equity
➢Therefore Income must be credit in nature
• Expenses decreases Equity; debit decreases Equity
➢Therefore Expenses must be debit in nature
DEBIT AND CREDIT RULES

• Accounts: Balance Sheet

Assets = Liabilities + Equity

Debit to Credit to Debit to Credit to Debit to Credit to
increase decrease decrease increase decrease increase

Normal Normal Normal

balance balance balance
DEBIT AND CREDIT RULES

• Accounts: Income Statement

Income (incl. revenues) Expenses

Debit to Credit to Debit to Credit to
decrease increase increase decrease

Normal Normal
balance balance
DEBIT AND CREDIT – Ex

• Example 1: The owner makes an initial

investment of $15,000 to start the business. Cash
is debited and the owner’s Capital account is
credited.

Cash

29
DEBIT AND CREDIT – Ex

Example 2: Monthly rent of $7,000 is paid. Cash

is credited and Rent Expense is debited.

Cash
DEBIT AND CREDIT – Ex

Example: Cash is debited for $15,000 and credited for

$7,000, leaving a debit balance of $8,000.

Cash
DEBIT AND CREDIT RULES

SUMMARY OF DEBITS/CREDITS RULES

Debits doesn’t always mean decrease

Credit doesn’t always mean increase

The equation must be in balance after each transaction

For every Debit there must be a Credit.
Normal balance is on increase side
NORMAL ACCOUNT BALANCES
Double-entry system - Ex

QUESTION 1:

• Debits mean that:

a. increase both assets and liabilities.

b. decrease both assets and liabilities.

c. increase assets and decrease liabilities.

d. decrease assets and increase liabilities.

Double-entry system - Ex

QUESTION 2:

• Accounts that normally have debit balances are:

a. assets, expenses, and revenues.

b. assets, expenses, and equity.

c. assets, liabilities, and dividends.

d. assets, dividends, and expenses.

Double-entry system - Ex
QUESTION 3:

• Identify the type and the normal balance of each account.

Account Name Type of account Normal Balance
Cash
Supplies
Supplies Expense
Account Receivable
Common Stock
Service Revenue
Prepaid Rent
Accounts Payable
Unearned Revenue
EXPANDED ACCOUNTING CYCLE

1. Recognise & record transactions Source documents

2. Journalise transaction General journal

3. Post to ledger accounts General ledger

4. Prepare trial balance of GL Trial balance

5. Prepare financial statements Financial statements

GENERAL JOURNAL

• Once analysed a transaction is recorded first in the

general 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
 RECORDING TRANSACTIONS
IN A 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
Post
Date Particulars Ref Debit Credit
2013
Jul 5 Cash at Bank 100 15 400
Marketing Services Revenue 402 14 000
GST Collections 250 1 400
(Marketing services rendered)
RECORDING TRANSACTIONS

40
RECORDING TRANSACTIONS

41
RECORDING TRANSACTIONS

JOURNAL ENTRY
1. Date of transaction is disclosed;

2. The accounts to be debited is entered first at the left;

3. The accounts to be credited is then entered on the next

line, intended under the line above;

4. The indentation differentiates debits from credits &

decrease the possibility of switching debit and credit
amounts;

5. A brief explanation of transaction is given.

42
RECORDING TRANSACTIONS

43
RECORDING TRANSACTIONS

44
RECORDING TRANSACTIONS - EXAMPLE 1
JOURNAL ENTRY :
1.Cash contribution by owners:
On 1st Oct, owners invested $10,000 cash
2.Purchase assets:
Oct 2, company purchases a vehicle costing
$14,000, paid $8,000 cash
3.Credit purchase of an asset:
On Oct. 5, credit purchases $2,000 supplies.
4.Payment of a liability:
On Oct. 9, firm repays $1,200 of amount owed
supplier from Oct.5

45
RECORDING TRANSACTIONS - EXAMPLE 1
JOURNAL ENTRY (cont.):
5.Pay bills:
Oct. 15, company paid $800 electricity bill
6.Pay salary:
Oct. 20, company paid salary for employees $4,500
through bank account.
7. Purchased merchandise :
On Oct. 20, purchased merchandise having a cost of
$1,000 with terms of net 30 days.
8. Purchase Return:
On Oct. 21, company discovered that some of the
merchandise received was of a lower. The company
decide to return the merchandise. Assuming this
merchandise had a cost of $200.
 RECORDING TRANSACTIONS - EXAMPLE 2
JOURNAL ENTRY QUESTIONS

On first January, 2019 A started business with capital of $20,000

and his transactions of the month were as follows:

Jan.2 Purchased building for cash $8,000

Jan.8 Purchased goods from C $1,000
Jan.15 Sold goods for cash $500
Jan.20 Goods returned to C $100
Jan.22 Sold goods to R $400
Jan.25 Customer R returned goods $25
Jan.31 Salaries paid for the month $200
Jan.31 Rent paid for the month $150
RECORDING TRANSACTIONS - EXAMPLE 3
• Company A was incorporated on January 1, 2017 with an
initial capital of 5,000 shares of common stock having
$20 par value. During the first month of its operations, the
company engaged in following transactions:
Jan 2 An amount of $36,000 was paid as advance rent for three
months.
Jan 3 Paid $60,000 cash on the purchase of equipment costing
$80,000. The remaining amount was recognized as a one
year note payable with interest rate of 9%.
Jan 4 Purchased office supplies costing $17,600 on account.
Jan 13 Provided services to its customers and received $28,500 in
cash.
Jan 13 Paid the accounts payable on the office supplies purchased
on January 4.
RECORDING TRANSACTIONS - EXAMPLE 3
Jan 14 Paid wages to its employees for first two weeks of January,
aggregating $19,100.
Jan 18 Provided $54,100 worth of services to its customers. They paid
$32,900 and promised to pay the remaining amount.
Jan 23 Received $15,300 from customers for the services provided on
January 18.
Jan 25 Received $4,000 as an advance payment from customers.
Jan 26 Purchased office supplies costing $5,200 on account.
Jan 28 Paid wages to its employees for the third and fourth week of
January: $19,100.
Jan 31 Paid $5,000 as dividends.
Jan 31 Received electricity bill of $2,470.
Jan 31 Received telephone bill of $1,494.
Jan 31 Miscellaneous expenses paid during the month totaled $3,470
POSTING FROM JOURNAL TO LEDGER

• General journal records each transaction

• General ledger records effect transactions on each
individual account
• Think of journal as an instruction – which accounts are
changing, which direction and by how much?
• In a computerised system
➢Posting is automated
➢Therefore it is important that the initial entries are
correct
➢Debits and credit automatically checked for equality
 3 - 49

POSTING FROM JOURNAL TO LEDGER

• Throughout the period, the same account may
be debited and/or credited thousands of
times via different journal entries;
• A ledger account keeps in one place all info
about changes in one type of account balances;
 3 - 51
THE LEDGER

• All companies has a general ledger

• General Ledger: contains the entire group
of ledgers maintained by a company.
POSTING
• In order for the ledger accounts to be
reflect a journal entry that journal entry
must be posted to the ledger;
• Posting: process of transferring amounts
from the journal to the ledger accounts.
Debit Credit
Cash $10,000
Sales Revenue $10,000

Cash Sales Revenue

$10,000 $10,000
 3- 54
POSTING
 3- 55
POSTING
Question

Posting:
a. normally occurs before journalizing.
b. transfers ledger transaction data to the
journal.
c. is an optional step in the recording
process.
d. transfers journal entries to ledger
accounts.
TRIAL BALANCE

• Lists all ledger accounts and their 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 definitely an error but it
doesn’t tell you what the error is
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
• Errors should not be erased or ‘whited out’
➢This may give the impression of concealment or fraud
APPENDIX: INTRODUCTION TO GST IN AUSTRALIA

• GST rate is 10%

• All supplies of goods and services are subject to
GST unless they are non-taxable
• Two types of non-taxable supplies
➢GST-free supplies
✓fresh food; education courses; wages etc.
➢Input taxed supplies
✓financial services etc.
GST IN BUSINESS

• GST Registration
➢Turnover < $75 000 – optional
➢Turnover > $75 000 – required
• Cash or accrual basis of recording GST
➢Cash basis
✓GST recorded on receipt/payment of cash
➢Accrual basis
✓GST recorded on recept/issue of invoice, unless
cash flow occurs first
➢Gross Revenue < $2 000 000 – cash or accrual
➢Gross Revenue > $2 000 000 – accrual only
GST IN PRACTICE
ACCOUNTING FOR GST

• Business Activity Statement (BAS) must be completed for

each tax period
• GST registered business uses two accounts
➢GST Collections for GST amounts received
➢GST Outlays for GST amounts paid
• GST collections must be remitted to the government
hence are a liability
• GST outlays can be claimed back and are therefore an
asset