Unit-2 Accounting System

1. Unit-2Accounting System Prepared by Dr. Siraj Ahmad College of Business Administration, Al-Kharj AL-Kharj University Kingdom of Saudi Arabia

2. Learning Objectives • Explain double-entry rules. • Identify steps in the accounting cycle. • Record transactions in journals, post to ledger accounts, and prepare a trial balance.

3. Debits and Credits • An Account shows the effect of transactions on a given asset, liability, equity, revenue, or expense account. • Double-entry accounting system (two-sided effect). • Recording done by debiting at least one account and crediting another. • DEBITSmust equalCREDITS.

4. Debits and Credits • An arrangement that shows the effect of transactions on an account. • Debit = “Left” • Credit = “Right” Account An Account can be illustrated in a T-Account form.

5. Debits and Credits If Debit entries are greater than Credit entries, the account will have a debit balance. Account Name Credit / Cr. Debit / Dr. SR.10,000 SR.3,000 8,000 Balance SR.15,000

6. Debits and Credits If Credit entries are greater than Debit entries, the account will have a credit balance. SR.10,000 SR.3,000 8,000 Balance SR.1,000

7. Debits and Credits Summary Normal Balance Debit Normal Balance Credit

8. Debits and Credits Summary Balance Sheet Income Statement - + Asset Liability Equity Revenue Expense = = Debit Credit

9. Basic Accounting Equation Relationship among the assets, liabilities and stockholders’ equity of a business: The equation must be in balance after every transaction. For every Debit there must be a Credit.

10. Double-Entry System Exercise 1. Invested SR 32,000 cash and equipment valued at SR 14,000 in the business. Assets Liabilities Stockholders’ Equity + = + 32,000 + 46,000 + 14,000

11. Double-Entry System Exercise 2. Paid office rent of SR 600 for the month. Assets Liabilities Stockholders’ Equity + = - 600 - 600 (expense)

12. Double-Entry System Exercise 3. Received SR 3,200 advance on a management consulting engagement. Assets Liabilities Stockholders’ Equity + = + 3,200 + 3,200

13. Double-Entry System Exercise 4. Received cash of SR 2,300 for services completed for Shuler Co. Assets Liabilities Stockholders’ Equity + = + 2,300 + 2,300 (revenue)

14. Double-Entry System Exercise 5. Purchased a computer for SR 6,100. Assets Liabilities Stockholders’ Equity + = + 6,100 - 6,100

15. Double-Entry System Exercise 6. Paid off liabilities of SR 7,000. Assets Liabilities Stockholders’ Equity + = - 7,000 - 7,000

16. Double-Entry System Exercise 7. Declared a cash dividend of SR 10,000. Assets Liabilities Stockholders’ Equity + = + 10,000 - 10,000 Note that the accounting equation equality is maintained after recording each transaction.

17. Practical Problems Performing services on account will have the following effects on the components of the basic accounting equation: increase assets and decrease owner’s equity. increase assets and increase owner’s equity. increase assets and increase liabilities. increase liabilities and increase owner’s equity. Which of the following statements about an account is true? In its simplest form, an account consists of two parts. An account is an individual accounting record of increases and decreases in specific asset, liability, and owner’s equity items. There are separate accounts for specific assets and liabilities but only one account for owner’s equity items. The left side of an account is the credit or decrease side.

18. 3. Debits: • a. increase both assets and liabilities. • b. decrease both assets and liabilities. • c. increase assets and decrease liabilities. • decrease assets and increase liabilities. • 4. A revenue account: • a. is increased by debits. • b. is decreased by credits. • c. has a normal balance of a debit. • d. is increased by credits. • 5. Accounts that normally have debit balances are: • a. assets, expenses, and revenues. • b. assets, expenses, and owner’s capital. • c. assets, liabilities, and owner’s drawings. • assets, owner’s drawings, and expenses.

19. Q-6. • Classify the following items as investment by owner (I), owner’s drawings (D), revenues (R), or expenses (E). Then indicate whether each item increases or decreases owner’s equity: • (1) Rent Expense, (2) Service Revenue, • Drawings, (4) Salaries Expense. • Solution • 1. Rent Expense is an expense (E); it decreases owner’s equity. • 2. Service Revenue is revenue (R); it increases owner’s equity. • 3. Drawings is owner’s drawings (D); it decreases owner’s equity. • 4. Salaries Expense is an expense (E); it decreases owner’s equity. • Answers: 1-a 2-b 3- c 4- d 5-d

20. Q-7. Investment By Owner. Mr.Fahad decides to open a computer programming service which he names Soft byte. On September 1, 2008, he invests SR.15,000 cash in the business.. The effect of this transaction on the basic equation is: Solution: AssetsLiabilitiesOwner’s Equity  Cash Fahad Capital SR.15,000 SR.15,000 Investment

21. Q-8. Purchase of Equipment for Cash. Soft byte purchases computer equipment for SR.7,000 cash. What is specific effect of this transaction and the cumulative effect of the first two transactions are: Solution: Assets LiabilitiesOwner’s Equity Cash Equipment Fahad Capital Old Balance SR.1500 SR.15000 SR.7000 SR.7000 New Balance SR.8000 SR.7000 SR.15000 ..................................... SR.15000

22. Q.9. Purchase of Supplies on Credit: Soft byte purchases for SR.1,600 from Acme Supply Company computer paper and other supplies expected to last several months. Acme agrees to allow Soft byte to pay this bill in October. What will be effect on accounting equation? Solution: Assets Liabilities Owner’s Equity Cash Supplies Equipment Account Payable Fahad Capital Old bal. 8000 -- 7000 ---- 15000 1600 1600 New Bal. SR.8000 SR.1600 SR.7000 SR.1600 SR.15000 SR.16600 SR.16600

23. Q.10. Services Provided for Cash. Soft byte receives SR.1,200 cash from customers for programming services it has provided. What will be new balances in the equation ? Solution: Assets Liabilities Owner’s Equity   Cash Supplies Equipment Account Payable Fahad Capital Old bal. 8000 1600 7000 1600 15000 1200 1200 reven New Bal. SR.9200 SR.1600 SR.7000 SR.1600 SR.16200 SR.17800 SR.17800

24. HOME ASSIGNMENT • What do you mean by double entry system? • State the accounting equation, and define assets, liabilities, and owner’s equity.