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Topic 4

Topic 4. Accounting Equation Procedures in Recording Accounting Cycle. Coverage. Peraturan simpan kira, rangka kerja kitaran perakaunan dan penyimpanan rekod - Bookkeeping procedures, accounting cycle and records keeping . Persamaan perakaunan – Accounting equation

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Topic 4

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  1. Topic 4 Accounting Equation Procedures in Recording Accounting Cycle

  2. Coverage • Peraturan simpan kira, rangka kerja kitaran perakaunan dan penyimpanan rekod - Bookkeeping procedures, accounting cycle and records keeping. • Persamaan perakaunan – Accounting equation • Peraturan perekodan mengikut jenis akaun – recording procedures based on accounts type • Langkah-langkah dalam kitaran perakaunan – steps in accounting cyle • Penyimpanan rekod perakaunan secara manual berbanding secara berkomputer - manual against computerised accounting record

  3. Accounting equationBookkeeping procedures, accounting cycle & records keeping.

  4. 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 non-current assets to different accounting periods. • Accounting transactions and events must be recorded and reported in the financial statements.

  5. = + ASSETS LIABILITIES EQUITY 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 balance.

  6. = + ASSETS LIABILITIES EQUITY

  7. Assets = Liabilities + Equity Cash = Capital (1) +$10 000 = +$10 000 Analysing Transactions (cont'd) • Invested RM10,000 cash to start the business.

  8. Assets = Liabilities + Equity Bank Cash = Loan + Capital Old balance 10 000 10 000 (2) +5 000 +5 000 New bal. RM15 000 = 5 000 + 10 000 RM15 000 Analysing Transactions (cont'd) • Borrows RM5,000 from CMB bank

  9. Assets = Liabilities + Equity Office Bank Cash + Equipment = Loan + Capital Old balance 15 000 5 000 10 000 (3) -5 000 +5 000 New bal. 10 000 + 5 000 = 5 000 + 10 000 $15 000 $15 000 Analysing Transactions (cont'd) • Purchases office equipment for RM5,000 cash

  10. Analysing Transactions (cont'd) • Receives $1200 cash in advance from customer Assets = Liabilities + Equity Cash Office = Bank Revenue Equipment Loan Received in Adv. + Capital Old bal. 10 000 5 000 5 00010 000 (4)+1 200 +$1 200 New bal. 11 200 + 5 000 = 5 000 + 1 200+ 10 000 $16 200 $16 200

  11. Analysing Transactions (cont'd) • Renders services for $10 000 cash Assets = Liabilities + Equity Revenue Office BankReceived Cash + Equipment = Loan + in Advance + Capital + Revenue O/b. $11 200 $5 000 $5 000 $1 200 $10 000 (5)+10 000 +$10 000 N/b $21 200 + $5 000 = $5 000 + $1 200 + $10 000 + $10 000 $26 200 $26 200 Service revenue

  12. Analysing Transactions (cont'd) • Pays $900 rent in cash Assets = Liabilities + Equity Revenue Office Bank Received Cash + Equipment = Loan + in Advance + Capital+ Revenue- Exp O/b$21 200 $5 000 $5 000 $1 200$10 000 $10 000 (6) -900 -900 N/b$20 300 + $5 000 = $5 000 + $1 200 + $10 000 + $10000 - 900 $25 300 $25 300 Rent expense

  13. Analysing Transactions (cont'd) • Pays $600 for insurance in cash Assets = Liabilities + Equity Revenue Prepaid Office Bank Received Cash + Insurance + Equipment = Loan + in Advance + Capital + Profit O/b $21 200 $5 000 = $5 000 $1 200 $10 000 $9 100 (7) -600 +$600 N/b$19 700 + $600 + $5 000 = $5 000 + $1 200 + $10 000 + $9 100 $25 300 $25 300

  14. Analysing Transactions (cont'd) • Purchases supplies on credit for $2500 Assets = Liabilities + Equity Revenue Prepaid Office Bank Accounts Received Cash + Supplies + Ins. + Equip. = Loan + Payable + in Advance + Capital + Profit O/b $19 700 $600 $5 000 = $5 000 $1 200$10 000 $9 100 (8) +$2 500 +$2 500 N/b $19 700 + $2 500+ $600+ $5 000 = $5 000 + $2 500 + $1 200 + $10 000 + $9 100 $27 800 $27 800

  15. Analysing Transactions (cont'd) 9. Take out $500 for personal use Assets = Liabilities + Equity Revenue Pre. Office Bank Accounts Received Cash + Supplies + Ins. + Equip = Loan + Payable + in Adv. + Cap.+ Profit – Draw. O/b $19 700 $2 500 $600 $5 000 = $5 000 $2 500 $1 200$10 000 $9100 (9)-500-500 N/b $19 200 + $2 500 + $600 + $5 000 = $5 000 + $2 500 + $1 200 + $10 000 + $9100-$500 $27 300 $27 300 Drawings

  16. Summary of Accounting Transactions • Each transaction is analysed in terms of effect on assets, liabilities and equity. • The two sides of the accounting equation must always be equal. (Assets = Liabilities + Owner’s Equity) • Cause of each change in equity must be indicated.

  17. Title of Account Left or debit side Right or credit side Debit balance Credit balance Debit Credit The Account An account is an individual accounting record of increases and decreases in a specific asset, liability or equity item.

  18. Assets Increase Decrease debit credit Normal balance Liabilities Decrease Increase debit credit Normal balance 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

  19. Capital Decrease Increase debit credit Normal balance Debit and Credit Procedures (cont'd) 2. Dr/Cr procedures for Owner’s Equity: • Capital

  20. Drawings Increase Decrease debit credit Normal balance Expenses Increase Decrease debit credit Normal balance Revenues Decrease Increase debit credit Normal balance Debit and Credit Procedures (cont'd) b. Drawings 3. Dr/Cr procedures for Revenue & Expenses:

  21. Equity Expansion of the Basic Accounting Equation

  22. Steps in the Recording Process • Enter transaction information in a journal. • Transfer journal information to appropriate accounts in the ledger. (Note: analysis of transaction is based on the source documents. Source documents are the evidences from the transactions)

  23. 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.

  24. GENERAL JOURNAL Post Date Account titles and explanations ref. Debit Credit 2008 Oct 1 Cash 100 10 000 Capital 300 10000 (Invested cash to the business) 1 Cash 100 5 000 Bank Loan 230 5 000 (Borrowed money from a bank) 2 Office Equipment 130 5 000 Cash 100 5 000 (Purchased office equipment for cash) The General Journal Wong Enterprise: 1st three transactions

  25. Individualassetaccounts Individualliabilityaccounts Individualequityaccounts Equipment Interest Payable Salaries Expense Land Salaries Payable Service Revenue Supplies Accounts Payable Share Capital Cash Bank Loan Retained Profits The General Ledger • Contains all asset, liability and equity accounts

  26. Posting • Posting is the procedure of transferring journal entries to ledger accounts. • Steps in the process: • Enter date in account to be debited • Enter name of ledger account to be credited • Enter amount to be debited • Tick account no. in general journal to show entry is posted • Repeat steps 1–4 for the credit side

  27. Transaction 1 October, Wong Pty Ltd issued shares for $10 000 cash Basic analysis The asset Cash is increased $10 000; equity (specifically Share Capital) is increased by $10 000 Assets = Liabilities + Equity Share Cash = Capital (1) +$10 000 +$10 000 Issued shares Equation analysis The Recording Process Illustrated • Shares issued for cash

  28. The Recording Process Illustrated (cont'd)

  29. Transaction 1 October, borrowed $5000 from the ANZ bank Basic analysis The asset Cash is increased $5000; the liability Bank Loan is increased by $5000 Assets = Liabilities + Equity Bank Cash = Loan (2) +$5000 +$5000 Equation analysis The Recording Process Illustrated (cont'd) • Loan of $5000 from ANZ bank

  30. The Recording Process Illustrated (cont'd)

  31. Transaction 2 October, paid $5000 cash to purchase office equipment Basic analysis The asset Office Equipment is increased $5000; the asset Cash is decreased $5000 Assets = Liabilities + Equity Office Cash + Equipment (3) -$5000 +$5000 Equation analysis The Recording Process Illustrated (cont'd) • Office equipment purchased for cash

  32. The Recording Process Illustrated(cont'd)

  33. Balance the Accounts Example: Cash ledger Cash No. 100 Oct. 1 Capital 10 000 Oct. 2 Office Equip 5 000 1 Bank Loan 5 000 3 Rent Exp 900 2 Revenue Received 4 Prepaid Ins 600 in Advance 1 200 20 Drawings 500 3 Service Rev. 10 000 26 Salaries Exp 4 000 31 Closing bal 15 200 26 200 26 200 Nov. 1 Opening bal. 15 200

  34. The Trial Balance • The trial balance is a list of all the accounts and their balances 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 balance • List account numbers, titles and balances • Total debit and credit columns • Verify equality of debit and credit columns

  35. Trial Balance : Example WONG Enterprise Trial Balance as at 31 October 2008 No.Account titleDebitCredit • Cash $15 200 • Advertising Supplies 2 500 • Prepaid Insurance 600 • Office Equipment 5 000 • Accounts Payable $ 2 500 • Revenue Received in Adv. 1 200 • Bank Loan 5 000 • Capital 10 000 • Drawings 500 • Service Revenue 10 000 500 Salaries Expense 4 000 • Rent Expense 900 $28 700 $ 28 700

  36. Limitations of a Trial Balance Errors not detected in a trial balance: • 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

  37. 1 Analyse transactions 9 Prepare a post closing trial balance 2 Journalise the transactions 8 Journalise and post closing entries 3 Post to ledger accounts 7 Prepare financial statements 4 Prepare a Trial Balance 6 Prepare an adjusted Trial Balance 5 Journalise and post adjusting entries: prepayments / accruals The Accounting Cycle

  38. Describe how technology has affected the first three steps of the accounting cycle.

  39. List Advantages of Computers • Large amounts of information can be quickly processed without mathematical errors. • More documents can be produced than humanly possible in the same amount of time. • Common tasks can be automated for increased efficiency.

  40. List Disadvantages of Computers • Computer hardware and software require human judgment and input. • GIGO (garbage in, garbage out). • Once an error is identified, fixing the problem may require many adjustments.

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