Unit 3:

Recording Financial
Transactions
Fundamentals of Accounting
(ACC0001)
 Objectives
At the end of the unit, students should be able to:
1. apply the accounting equation
2. describe the accounting cycle This
week’s
3. explain various source documents used in accounting focus
4. apply the double-entry accounting system
5. record transactions using the general journal and the general
ledger
6. balance off various ledger accounts
7. prepare the unadjusted trial balance
The Accounting
Equation
The Accounting Equation
The Accounting Equation
Revisit the fundamental elements of
accounting
 The fundamental elements of accounting are:
 Assets
 Liabilities
 Equity

The elements are defined in the International Accounting Standards Board’s

(IASB) “Framework for the presentation of financial statements" as follows”:

 Assets: a resource controlled by the enterprise as a result of past events, from

which future economic benefits can be derived.

 Liabilities: a present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow of resources embodying
economic benefits. (IASB framework)

 Equity: is the residual interest in the assets of the enterprise after deducting all
its liabilities.
 ASSETS
Scenario # 1
Jason Riley decides to start a fresh fruits shop with a motor van valued at
$350,000, a shop valued at $1,000,000, and a loan in bank of $450,000.

The ASSETS for Jason Riley’s Fresh Fruits Shop assets at the start of
the business are as follows:

Motor van $350,000

Shop $1,000,000
Cash in bank $450,000
Total Assets $1,800,000

The calculated total assets of Jason’s Fresh Fruit Stop is $1,800,000 and is
made up of three different items.
 LIABILITIES
Scenario # 1

Jason Riley decides to start a fresh fruits shop with a motor van valued at
$350,000, a shop valued at $1,000,000, and a loan in bank of $450,000.

In the above case the only liability existing at the start of Jason Riley’s
business was the loan for $450,000.

Total Liabilities $450,000

 EQUITY
 Equity can also be defined as the investment of economic resources,
belonging to the investor in a business entity owned by the investor.

 Recall:

Total Assets $1,800,000

Total Liabilities $450,000

 Using the accounting equation what is equity?

Asset = Liabilities + Equity
$1,800,000 = $450,000 + Equity
$1,800,000 - $450,000 = Equity
$1,350,000 = Equity
 Scenario # 2
Joni Benton started a furniture business on July 5, 2023. At this date, he
invested
$180,000 cash, ASSET
inventory of lumber $200,000, and ASSET

a truck valued at $800,000. ASSET

Calculate the equity of Joni Benton on July 5, 2023.

 Using the accounting equation what is equity?

Asset = Liabilities + Equity
$1800,000 + $200,000 + $800,000 = $0 + Equity
$1,180,000 = Equity
Scenario # 3
Joni Benton started a furniture business on July 5, 2023. At this date, he
invested $180,000 cash, inventory of lumber $200,000, and a truck valued at
$800,000. During the period July 5 to July 31, 2023, the following transactions
took place:

• July 6 Bought office furniture by cash $40 000.

• July 15 Received a loan from BIBC Bank for $450,000, the cash is in the bank
• July 20 Bought machinery paying by cheque $200 000
• July 31 Bought more lumber by cash $ 10,000

Calculate the equity of Joni Benton on July 31, 2023.

 Note the Following
It is critical that you know from this early stage that equity is only increased if:
Income – Expenses =
a) the business makes a profit
b) more resources are is invested + Capital
And in reverse, equity is only decreased if the business:
Income – Expenses =
a) makes a loss
- Drawings
b) resources are taken from the business for private use (drawings)

The above information can be written in the form of two equations:

1. Opening equity + Net income – Drawings + additional investment = Closing equity

2. Opening equity - Net loss – Drawings+ additional investment = Closing equity

Or one extended version

1. Opening equity + net income – net loss +additional investment by owner –

drawings = Closing equity

Note

Drawings are defined as resources taken from the business for private use by the owner.
 Scenario # 3 (Continue)
Question Evaluation
How is equity affected?

a) If the business makes a profit or a loss

– Any profit or loss? NO

b) If more resources are invested by the

owner in the business
– Any resources invested by owner? NO

c) If resources are taken by the owner

from the business (drawings)
NO
– Any resources taken by owner?
CONCLUSION: Since there was no profit or loss, no additional
investment by owner, no drawings, …The capital remains at
The Accounting
Cycle
 The Accounting Cycle
• The accounting cycle is the
sequence in which data is
recorded and processed until it
becomes a part of the financial
statements at the end of
accounting period.
• It begins with the analysis and
journalizing of business
transactions and ends with the
preparation of a post-closing
trial balance.
 The Accounting Cycle
The following are the primary stages in the accounting cycle:
1. Transactions are analysed from source documents (a source document is primary
document used originally to analyse and record transactions in the journal e.g.,
invoices and vouchers)

2. Transactions are recorded in a journal

3. Transactions are posted to the ledger (from the journal).

4. The Trial balance is prepared, data needed to adjust accounts determined

5. Adjusting and closing entries are journalized and posted to the ledger

6. Adjusted trial balance

7. Prepare financial statements

8. Close accounts

9. Post- closing trial balance is prepared.

Source
Documents
Source Documents - Introduction
 Whenever a business transaction takes place, involving sales
or purchases, receiving or paying money, or owing or being
owed money, it is usual for the transaction to be recorded on
a document.

 These documents are the source of all the information

recorded by a business.

 Thus, business transactions are recorded on source

documents.
Types of Source Documents
 Quotation
o A document sent to a customer by a company stating the fixed price that
would be charged to produce or deliver goods or services.

 Purchase Order
o A document of the company that details goods or services that the
company wishes to purchase from another company.
o Two copies of a purchase order are often made, one is sent to the
company from which the goods or services will be purchased, and the
other is kept internally so the company can keep track of its orders.
o Purchase orders are often sequentially numbered.
Types of Source Documents
 Sales order
o A document of the company that details an order placed by a customer
for goods or services.
o The customer may have sent a purchase order to the company from
which the company will then generate a sales order.
o Sales orders are usually sequentially numbered so that the company
can keep track of orders placed by customers.
o When you want to document sales that you can't (or won't) fulfill
immediately, but you plan to do so in the future, and you cannot create
a more permanent document (such as an invoice) just yet.
 Types of Source Documents
 Goods received note (GRN)
o A document of the company that lists the goods that a business has received
from a supplier.
o A goods received note is usually prepared by the business's own warehouse
or goods receiving area.

 Goods despatched note.

o A document of the company that lists the goods that the company has sent
out to a customer.
o The company will keep a record of goods despatched notes in case of any
queries by customers about the goods sent.
o The customer will compare the goods despatched note to what they receive
to make sure all the items listed have been delivered and are the right
specification.
Types of Source Documents
 Invoice
o An invoice relates to a sales order or a purchase order.

o When a business sells goods or services on credit to a customer, it

sends out an invoice. The details on the invoice should match the
details on the sales order. The invoice is a request for the customer
to pay what they owe.

o When a business buys goods or services on credit it receives an

invoice from the supplier. The details on the invoice should match
the details on the purchase order.
Types of Source Documents
 Credit note
o A document sent by a supplier to a customer in respect of goods
returned or overpayments made by the customer. It is a 'negative'
invoice.
o It can be regarded as a negative invoice

 Debit note
o A document sent by a customer to a supplier in respect of goods
returned or an overpayment made.
o It is a formal request for the supplier to issue a credit note.
Types of Source Documents
 Statement
o A document sent out by a supplier to a customer listing the
transactions on the customer's account, including all invoices and
credit notes issued and all payments received from the customer.

o The statement is useful, as it allows the customer to reconcile the

amount that they believe they owe the supplier to the amount the
supplier believes they are owed.

o Any differences can then be queried.

Types of Source Documents
 Remittance advice

o A document sent to a supplier with a payment, detailing which invoices

are being paid and which credit notes offset.

o A remittance advice allows the supplier to update the customer's

records to show which invoices have been paid and which are still
outstanding.

o It also confirms the amount being paid, so that any discrepancies can
be easily identified and investigated.
Types of Source Documents
• Receipt

o A document confirming confirmation that a payment has been

received.

o This is usually in respect of cash sales, e.g., a receipt from a cash

register.
Double-entry
Accounting
System
 Double Entry Accounting
 Double-entry accounting describes how business transactions are
recorded:
 “Every transaction produces a debit in one account and a
credit in the other i.e., for every debit there is a
corresponding credit”
 Together, they represent money flowing into and out of your business.
 Debits are recorded on the left side of the general ledger and credits
are recorded on the right.
 Double entry accounting
Debits increase Drawings/Dividends, Expenses and Assets
(“DEA”), whereas Credits increase Liabilities, Equity and Revenue
(“LER”)
Here’s a breakdown of the debit & credit effect: [“DEALER”]
Account type Debit Credit
Dividend/Drawings
Expense
Asset
Liability
Equity
Revenue
The Accounting Equation – Revisited
Let’s find the “DEALER” - DEA
Profit/
Loss
Retained

- Drawing
s
The Accounting Equation – Revisited
Let’s find the “DEALER” - LER
Profit/
Loss
Retained

- Drawing
s
Double-entry simplified rule
• In most instances we can consider the following rule to help
us understand the double-entry system:

– Debit the “RECEIVING” account

– Credit the “GIVING” account

 Double-entry Cash Transactions
Examples:
Debit Cash
1. A cash sale (i.e. a receipt) of $250 Credit Sales or
Revenue

2. Payment of an electricity bill totaling $150 Debit Electricity expense

Credit Cash

3. Buying some goods for cash at $100Debit Purchases

Credit Cash

4. Buying some shelves for cash at $200 Debit Shelves (asset)

Credit Cash
 Double-entry Credit Transactions
• Trade Accounts Payable (Creditors)
o A payable is a person or organisation to whom a business owes money.
o Obligations that arise from the purchase of materials,
components, or goods for resale are called trade accounts
payable, sometimes abbreviated to 'accounts payable’
o A trade account payable is a liability of a business.

 Trade Accounts Receivables (Debtors)

o Just as a business might buy goods on credit, so too might it sell goods to
customers on credit.
o A customer who buys goods without paying cash for them
straightaway is a receivable, sometimes abbreviated “accounts
receivable”
o A trade account receivable is an asset of a business
 Double-entry Credit Transactions
Examples:
1. The business sells goods on credit to a customer Mr A for $2,000

Debit Accounts Receivable

Credit Sales or Revenue

2. The business buys goods on credit from a supplier B Inc for $100
Debit Purchases
Credit Accounts
Payables
 Summary
 Outline the accounting equation

 Describe the accounting cycle

 Explain various source documents

used in accounting

 Discuss the double-entry accounting

system
End of presentation