ACC/ACF1100

Introduction to Financial Accounting

Lecture 2:
The recording process (Part 1): Double-entry accounting, general
journal, and ledgers

Dr Chris Adrian - Department of Accounting

Reference:
Required readings: Financial Accounting - Reporting, Analysis and Decision Making (7th
Edition)
Chapter 2: sections 2.1-2.7
Chapter 3: sections 3.1-3.2
 Week 2
1. Cash vs accrual accounting
2. Accounting period concept
3. The accounting cycle
4. Double-entry accounting
5. Journalising transactions (general journals)
6. Posting general journal transactions to general ledgers
7. Case study ‘Donny’s hairdressing business’

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Cash Accounting vs. Accrual Accounting

3
 Cash and Accrual Accounting
• Entities need to record transactions and events that occur
during a period to enable them to prepare financial statements.

• There are two methods of accounting that underlie the

recording process:

• Cash accounting
• Accrual accounting

• Key difference: WHEN to recognise revenue and expense

4
 Cash versus Accrual Accounting
Cash Accounting

• Records revenues and expenses at the time the cash is received or

paid
• The cash flow may be in a different period to when the original
transaction occurred:
• For example, Chris sells a laptop to a customer in June for
$1,000, but the cash was received in July.
• When is revenue recognised under cash accounting?
JULY

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 Cash versus Accrual Accounting
Accrual Accounting
• Records revenues and expenses when transaction occurs
• Records income when it has been earned (regardless of whether the
cash has been received).
• Records expenses when they have been incurred (regardless of
whether the cash has been paid).

• For example, Chris sells a laptop to a customer in June for $1,000,

but the cash was received in July.
• When is revenue recognised under accrual accounting?

JUNE

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Accounting period concept

7
 Accounting period concept
• Life of a business can be divided into artificial periods, e.g.,
financial year 2021-2022 (started on 1 July 2021 and ended on
30 June 2022)

• Entities report at least annually

• Provide timely information to users

• Allows comparison with relevant/equivalent periods

8
The accounting cycle

9
 The Accounting Cycle
Inputs 1 SOURCE DOCUMENTS
During the
2 JOURNALS accounting
period
3 LEDGERS

Processing 4 TRIAL BALANCE

5 ADJUSTING JOURNAL ENTRIES

End of
6 CLOSING JOURNAL ENTRIES accounting
period
7 POST-CLOSING TRIAL BALANCE

Output 8 FINANCIAL STATEMENTS

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 Step 1: Source Documents
Evidence that a transaction has occurred
Necessary as a starting point for recording transactions
Examples include:
• Invoices
• Cheques
• Bank statements
• Receipts
• Cash register records

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 Step 2: Journal Entries
• Based on the relevant source documents, transactions
are recorded by preparing journal entries

• We are going to use Transaction Analysis to help us

understand how to prepare journal entries

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 Transactions
• Exchanges between two or more parties
• May affect the business along with customers, suppliers, banks,
other parties
• May affect the business owner
• Where the transaction relates to the owner but not the
business, it is a personal transaction – NOT RECORDED
• Where the transaction relates to the owner and the business, or
the business and an external party, it is a business transaction
• ONLY business transactions should be recorded in the
accounting system of the business under the ‘entity’ concept

13
 The Accounting Equation

• The basic version of the accounting equation is:

Assets = Liabilities + Owner’s Equity

• This equation expresses the relationship between the assets of

the entity and how the assets are financed.

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 Balancing the Accounting Equation
Assets = Liabilities + Owner’s Equity

• This equation must always stay balanced.

• In order for this to occur, there needs to be a minimum of TWO

effects.

• When transactions are recorded in the accounting system, the

accounting equation maintains its balance at all times.

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 Transaction Analysis

3 questions to ask:
1. Which accounts are affected?

2. What happens to these accounts? i.e. increase

or decrease?

3. After answering the first 2 questions, does the

accounting equation remain balance?
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 Transaction Analysis

• An owner provides $50,000 in cash funds to start the business

Assets = Liabilities + Owner’s Equity

Cash Capital
$50,000 $50,000

• Thus increasing both assets and owners equity.

• Notice that both sides of the accounting equation increase, and
it remains balanced.
Clue – Identify the 2 things that change

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 Transaction Analysis
• The company purchases a $19,000 motor vehicle and funds it
by borrowing using a bank loan

Assets = Liabilities + Owner’s Equity

Motor Vehicle Bank Loan
$19,000 $19,000

• This increases both assets (the vehicle) and liabilities (the

bank loan).

• Again, both sides of the accounting equation increase, and

remains balanced.
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 Transaction Analysis
• Some transactions cause decreases in the elements, such as a
$3,500 part repayment of the loan principal (liability) with cash
(asset).
Assets = Liabilities + Owner’s
Equity
Cash Bank Loan
$3,500 $3,500

• Despite a reduction in both elements, the equation once again

remains in balance.

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 Transaction Analysis
• Changes do not always take place on both sides of the
equation.
• If cash was used to purchase a computer, one asset would
increase while the other decreases.
Assets = Liabilities + Owner’s Equity
Computer
$1,200

Cash
$1,200

• The overall balances of the equation remain the same. It is only

the type of assets that have changed.
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 Extended Accounting Equation
Assets = Liabilities + Owner’s Equity

• Revenue (Income) is shown as a positive addition to owner’s

equity, since revenue contributes to profit.

• Assets = Liabilities + Owner’s Equity + Income

• Expenses are shown as a subtraction from owner’s equity,

since expenses reduce profit.

• Assets = Liabilities + Owner’s Equity + Income – Expenses

• We can now consider how transactions involving these two

elements can be analysed.
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 Transaction Analysis

• The recording of a $220 cash sale would:

• Increase assets (cash) and increase revenue (sales).

Assets = Liabilities + Owner’s + Income - Expenses
Equity
Cash Sales
$220 $220

Here, both sides of the equation increase due to a rise in assets

and owner’s equity.

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 Transaction Analysis
• If staff worked for an entity, but had not yet been paid, there
would be both an increase and decrease on the right hand
side of the equation.
Assets = Liabilities + Owner’s + Income - Expenses
Equity
Wages Wages
Payable Expense
$990 $990

• Despite owner’s equity decreasing due to an expense,

liabilities increase causing no overall change in the balance of
the equation.

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 Double-entry accounting
Assets = Liabilities + Owner’s Equity
Debit (Dr) = Credit (Cr)
Therefore, Assets are debit in nature
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
1876
Therefore, Expenses must be debit in nature

Important: The accounting equation must always remain in balance

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 Double-entry accounting
Asset Liability

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

Normal balance Normal balance

Equity
Income
Debit to decrease Credit to increase Debit to decrease Credit to increase
Normal balance Normal balance

Expense

Debit to increase Credit to decrease

Normal balance

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 Journalising
Journalising is the process of entering transaction data into
the journal.

Separate journal entries are made for each transaction.

A complete journal entry consists of:

• The date of the transaction.
• The accounts and amounts to be debited and credited.
• A brief explanation of the transaction (or narration).

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What Does the General Journal Look
Like?
At least
Date Account Debit Credit two
accounts
change

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 General Journal Entries - Example
2017
June 1: Owner provided $50,000 in cash funds to start the
business.

June 2: Business purchased a $19,000 motor vehicle through a

bank loan.

June 25: Paid $3,500 of the loan principal amount.

REMEMBER:
Assets = Liabilities + Owner’s Equity + Income – Expenses
Assets + Expenses = Liabilities + Owner’s Equity + Income
Increase DR Increase CR
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 General Journal
Date Account Debit Credit

2016 Cash at bank (A) 50,000

June 1 Capital (OE) 50,000
Credit
indented! Capital Contribution by owner

June 2 Motor Vehicle (A) 19,000

Bank Loan (L) 19,000
Purchased MV using bank loan

June 25 Bank Loan (L) 3,500

Cash at bank (A) 3,500
Repaid part of bank loan

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 Step 3 : The ‘Ledger Account’

A Ledger Account records increases and decreases in asset,

liability, owner’s equity, income and expense accounts.

There are separate ledger accounts for every single “item” we

record in transactions such as cash at bank, salaries expense,
accounts payable and capital.

For example, a ‘cash at bank’ account would record all cash

movements. Therefore it would show both increases and decreases
representing cash received and paid.

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 What Does a Ledger Account Look Like?
Cash

Debit side Credit side

Recording amounts on the left side of an account is known as

‘debiting’ the account.

Recording amounts on the right side of an account is known as

‘crediting’ the account.

If the total of debit amounts is bigger than credits, the account has
a debit (Dr) balance.

If the total of credit amounts is bigger than debits, the account has
a credit (Cr) balance. 31
 Posting
Posting is the procedure of transferring journal entries to the
Ledger accounts.

When posting to an account, it is important to record the

corresponding account in the reference or details column.

Steps in Posting
• Step 1 Go to appropriate ledger account
• Step 2 Enter Date
• Step 3 Enter Amount (ensure it is on correct debit or credit side)
• Step 4 Enter Other Account Name (Cross-reference)
• Step 5 Repeat steps 1 - 4 for other accounts in the journal entry
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 General Journal
Date Account Debit Credit

2016 Cash at bank (A) 50,000

June 1 Capital (OE) 50,000
Capital Contribution by owner

June 2 Motor Vehicle (A) 19,000

Bank Loan (L) 19,000
Purchased MV using bank loan

June 25 Bank Loan (L) 3,500

Cash at bank (A) 3,500
Repaid part of bank loan

33
Posting to Ledgers - T-Account Format

Cash at Bank

1/6/16 Capital 50,000

Capital

1/6/16 Cash at Bank 50,000

34
Posting to Ledgers - T-Account Format

Motor Vehicle

2/6/16 Bank Loan 19,000

Bank Loan

2/6/16 Motor Vehicle 19,000

35
Posting to Ledgers - T-Account Format

Cash at Bank

1/6/16 Capital 50,000 25/6/16 Bank Loan 3,500

Bank Loan

25/6/16 Cash at Bank 3,500 2/6/16 Motor Vehicle 19,000

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Lecture Example – Donny’s
hairdressing business

37
Donny’s hairdressing business – July transactions

1/7 Donny contributed $20,000 cash to start a hairdressing business

1/7 Donny purchased a hairdressing equipment for $10,000 cash.
1/7 Donny took a five-year bank loan of $40,000 from Bank XYZ.
5/7 Donny provided hairdressing services to his customers for a total of $1,000 cash.
10/7 Donny purchased $6,500 worth of hairdressing supplies on credit.
15/7 Donny received a telephone bill of $250.
21/7 Donny invoiced his clients for a total of $5,000 for the hairdressing services performed.
23/7 Donny paid his telephone bill.
31/7 Donny paid his staff their monthly salary of $1,500..

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Donny’s hairdressing – General Journal
Date Particulars Debit Credit
1 July

1 July

5758
1 July

5243
5 July
1876

10 July

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Donny’s hairdressing – General Journal
Date Particulars Debit Credit
15 July

21 July

5758
23 July

5243
31 July
1876

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Donny’s hairdressing – General Journal
Date Particulars Debit Credit
1 July Cash 20,000
Capital 20,000

1 July Equipment 10,000

Cash 10,000
5758
1 July Cash 40,000
Bank loan 40,000

5243
5 July Cash 1,000
Service revenue 1876 1,000

10 July Hairdressing supplies 6,500

Accounts payable 6,500

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Donny’s hairdressing – General Journal
Date Particulars Debit Credit
15 July Telephone expense 250
Telephone payable 250

21 July Accounts receivable 5,000

Service revenue 5,000
5758
23 July Telephone payable 250
Cash 250

5243
31 July Wages expense 1,500
Cash 1876 1,500

42
Donny’s hairdressing – General Ledgers
Cash Equipment

Capital Bank loan

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Donny’s hairdressing – General Ledgers
Service revenue

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Donny’s hairdressing – General Ledgers
Hairdressing Supplies Accounts Payable

Accounts Receivable Telephone payable

Telephone expense Wages expense

45
 Donny’s hairdressing – General Ledgers
Cash Equipment
1/7 Capital 20,000 1/7 Equipment 10,000 1/7 Cash 10,000
1/7 Bank loan 40,000 23/7 Telephone payable 250

5/7 Service revenue 1,000 31/7 Wages expense 1,500

31/7 Closing balance 49,250

61,000 61,000
1/8 Opening balance 49,250

Capital Bank loan

1/7 Cash 20,000 1/7 Cash 40,000

46
Donny’s hairdressing – General Ledgers
Service revenue
5/7 Cash 1,000
21/7 Accounts receivable 5,000
31/7 Closing balance 6,000
6,000 6,000
1/8 Opening balance 6,000

47
Donny’s hairdressing – General Ledgers
Hairdressing Supplies Accounts Payable
10/7 Accounts payable 10/7 Hairdressing 6,500
6,500

Accounts Receivable Telephone payable

21/7 Service revenue 31/7 Cash 250 15/7 Telephone expense
5,000 250

Telephone expense Wages expense

15/7 Telephone payable 250 31/7 Cash 1,500

48