ACCOUNTING Financial and Organisational Decision Making

ACCOUNTINGFinancial and Organisational Decision Making Chapter 4 The recording focus Slides written and designed by Tony Van Eekelen

Learning Objectives • In this chapter you will be introduced to : • the principles of the double entry system • the rules of debit and credit • the effect of transactions on the accounting equation and how to apply the rules of debit and credit, as appropriate, to such analyses • general ledger accounts in T-format and columnar format

Learning Objectives • The trial balance, and to why errors may exist in the accounting records even though the trial balance ‘balances’ • how to prepare a trial balance, a profit and loss statement and a balance sheet from information you have entered into the general ledger of an entity

Learning Objectives • basic computerised accounting • how to make entries in the general journal • how to make closing entries • interim reports

Designing a simple manual recording system • Three main requirements of a recording: • efficiency • minimum recording procedures • cumbersome systems increase costs and errors • control • provides checks against errors • accessibility • being able to access more information

Basic recording system Activity Recording and reports Input/actual events Source documents/transactions = Recording of events General Journal = Classifying and summarising General Ledger = Verification and summarising in preparation for final output Trial Balance = Output Financial Statements =

Components • Original evidence records • evidence of the event or transaction • source documents; invoice, cheque butt,.. • Journal entries • chronological listing of like transactions

Name of Account A/c no. Left hand or debit side (DR) Right hand or credit side (CR) Ledger Accounts • basic storage unit for business transactions • simplest form is the T account

Ledger Accounts • Separate account for each asset, liability, owners’ equity, revenue and expense category • Assist in summarising all information • Accounts are referenced by name or number

DR + Assets = Liabilities + Owners’ equity - CR + CR + CR The rules of double entry • To record transactions within accounts a coding system is needed. • This systems must reflect the effects on the accounting equation and keep in balance. • In general: DR - DR -

Supplies $200 Asset Increase Decrease Example • Purchased supplies $200 with cash. Cash $200

Motor Vehicle $20000 Liability Decrease Increase Example • Purchased motor vehicle for $20000 on loan. Loan $20000

Cash $3000 Owners’ equity Decrease Increase Example • Owner contributes $3000 cash. Capital $3000

Cash $5000 Revenue Decrease Increase Example • Provided services for cash, $5000 Services Revenue $5000

Electricity Expense $300 Expense Increase Decrease Example • Paid electricity account $300 with cash. Cash $300

Simplified recording system • Chart of accounts • list of balance sheet and profit and loss statements accounts to record the transactions Assets Liabilities Owners’ equity Capital Withdrawals Revenue Expenses Cash Loan Capital Drawings Fees Rent Equipment Accounts Payable Telephone Motor vehicle = +

Simplified recording system • Form of accounts • T format • continuous balance Form of account Account Name: NO: Date Particulars Debit Credit Balance

Trial Balance • After the transactions are record in the accounts, a list of the account balance can test whether the recording procedures have been followed. • This is done in a trial balance • List all the account balances and the total of debit balances should equal the total of the credit balances

Trial Balance Trial balance as at 3 June 1999 DR CR Cash at bank $3,200 Equipment $1,300 Motor vehicle $15,000 Accounts payable $9,500 Capital $10,000 $19,500 $19,500

Debit Credit Trial balance errors • Not equal • incorrect additions • incorrect recording of amount or wrong side • omitting debit or credit entry • incorrect amounts

Debit =Credit Trial balance errors • Equal • omission of transaction • debit and credit entries reversed • recording twice • transactions in wrong accounts • wrong amounts in both accounts

The system Chart of Accounts Transactions Journal Ledger Trial balance Financial Statements

Chart of accounts • The list of accounts to be maintained for the accounting entity. • Based upon the financial reports • All accounts are numbered and placed in order • eg • Assets 1000-1999 • Liabilities 2000-2999 • Owners’ equity 3000-3999 • Capital 3000-3099 • Withdrawals 3100-3199 • Revenue 3200-3299 • Expenses 3300-3399

Journal entries • Never enter directly into ledger accounts but into a journal. • Various types but common is general journal Journal entry format Date Acct No Particulars Debit Credit

Final reports and closing entries • At the end of the financial year, the ledger is “tidied up”. • All temporary accounts are closed off to summary accounts. • Revenue and expense accounts are closed to the profit and loss summary account. • The Profit and loss summary account is then closed to the capital account. • Also the drawings accounts is closed to the capital account.

Closing entries • Closing Revenue • Dr Revenue XX • Cr Profit and Loss Summary XX • Closing Expenses • Dr Profit and loss Summary XX • CR Expense (Rent) XX

Closing entries • Closing Profit and loss summary If Profit then • Dr Profit and loss summary XX • Cr Capital XX If Loss then • Dr Capital XX • Cr Profit and Loss summary XX

Closing entries • Withdrawals • Dr Capital XX • Cr Drawings XX

Financial reports Balance sheet as at 31 May 20X0 Assets Liabilities CurrentCurrent Cash at Bank 30,400 Acct. Payable 2,300 Acc. Receivable 10,000 40,400 Non Current Non- current loan Payable 6,000 Equipment 7,000 8,300 Owners’ equity Capital 30,000 Add Profit 9,700 less Drawings 600 39,100 $47,400 $47,400

Original evidence records Accounting records Financial Statements Source documents Journals Profit and Loss Statement Ledger Balance Sheet Trial Balance Statement of cash flows Closing Entries Summary

ACCOUNTING Financial and Organisational Decision Making