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UNIT-2 Acct - 103

UNIT-2 Acct - 103. College of Business Administration, Al-Kharj Salman Bin Abdulaziz University KINGDOM OF SAUDI ARABIA. Unit – II (Acct-103) Accounting System: Classifications of accounts, Double Entry system, Accounting Equations. AFTER THIS CHAPTER, YOU WOULD BE ABLE TO KNOW:.

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UNIT-2 Acct - 103

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  1. UNIT-2Acct - 103 College of Business Administration, Al-Kharj Salman Bin Abdulaziz University KINGDOM OF SAUDI ARABIA

  2. Unit – II (Acct-103) Accounting System: Classifications of accounts, Double Entry system, Accounting Equations.

  3. AFTER THIS CHAPTER, YOU WOULD BE ABLE TO KNOW: • Understand Classification of Accounts • Analyze the effect of business transactions on the basic double entry system . • State the basic accounting equation and explain the meaning of assets, liabilities, and owner’s equity.

  4. CLASSIFICATION OF ACCOUNTS Identify steps in classifications of account: An Account shows the effect of transactions on a given asset, liability, equity, revenue, or expense account. Therefore, it is necessary to classify the transactions in to their respective accounts. Accounts Real Account (Permanent) Nominal Accounts (Temporary)

  5. Accounts: A systematic arrangement that shows the effect of transactions and other event on a specific element, i.e., assets, liabilities and so The companies keep a separate account for each assets, liabilities, revenue, and expenses, and for capital (owners, equity). Real Account: Real accounts or permanent Accounts are assets, liability an d equity accounts; They appear on the balance sheet. Nominal Accounts: Nominal account or temporary accounts are revenue, expenses, and the dividend account; except for the dividends they appears on the income statement. Difference Real / Nominal Nominal; Companies periodically close nominal account. Real; While, Companies do not close real accounts.

  6. Double Entry system Meaning: Every business transaction causes at least two changes in the financial position of a business concern at the same time - hence, both the changes must be recorded in the books of accounts. Otherwise, the books of accounts will remain incomplete and the result ascertained therefore will be inaccurate. For Example; If we buy / purchase machinery for $1,000,000. Obviously, it is a business transaction. It has brought two changes - machinery increases by $1,000,000 and cash decreases by an equal amount. In accounting language these two changes are termed as "a debit change" and "a credit change“ Other words: each transaction was entered twice (hence "double-entry"), with one side of the transaction being called a DEBIT and the other a CREDIT.

  7. 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. • DEBITS must equal CREDITS.

  8. 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.

  9. 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

  10. 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

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

  12. 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

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

  14. Double-Entry System Exercise 3. Wages paid SR 3,200 to labor. Assets Liabilities Stockholders’ Equity + = -3,200 -3,200

  15. 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)

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

  17. Exercise • Questions. • 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

  18. BASIC ACCOUNTING EQUATION Owner’s Equity / Capital = Liabilities + Assets

  19. ASSETS FOR A BUILDING BLOCK • Assets are resources owned by a business. • They are used in carrying out such activities as production, consumption and exchange.

  20. LIABILITIES FOR A BUILDING BLOCK • Liabilities • are creditor claims against assets • are existing debts and obligations

  21. OWNER’S EQUITY FOR A BUILDING BLOCK • Owner’s Equity = total assets minus total liabilities. (A - L = O.E.) • Owner’s Equity represents the ownership claim to total assets. • Subdivisions of Owner’s Equity: 1 Capital or Investments by Owner (+) 2 Drawing (-) 3 Revenues (+) 4 Expenses (-)

  22. INVESTMENTS BY OWNERS FOR A BUILDING BLOCK • Investments • are the assets the owner puts in the business • increase owner’s equity

  23. DRAWINGS FOR A BUILDING BLOCK • Drawings • are withdrawals of cash or other assets by the owner for personal use • decrease owner’s equity

  24. REVENUES FOR A BUILDING BLOCK • Revenues • gross increases in owner’s equity from business activities entered into for the purpose of earning income • may result from sale of merchandise, services, rental of property, or lending money • usually result in an increase in an asset

  25. EXPENSES FOR A BUILDING BLOCK Expenses • decreases in owner’s equity that result from operating the business • cost of assets consumed or services used in the process of earning revenue • examples: utility expense, rent expense, supplies expense, and tax expense

  26. INCREASES AND DECREASES IN OWNER’S EQUITY • INCREASES DECREASES Withdrawals by Owner Investments by Owner Owner’s Equity Revenues Expenses

  27. TRANSACTION ANALYSIS TRANSACTION 1 • Mr.Ray decides to open a computer programming service. • On September 1, he invests SR.15,000 cash in the business, which he names Soft touch. Soft touch

  28. TRANSACTION ANALYSISTRANSACTION 1 SOLUTION Assets = Liabilities + Owner’s Equity Cash R. Neal, Capital + 15,000 Investment + 15,000 SR.15,000 = SR.15,000 There is an increase in the asset Cash, SR.15,000, and an equal increase in the owner’s equity, R. Neal, Capital, SR.15,000.

  29. TRANSACTION ANALYSISTRANSACTION2 • Soft touch purchases computer equipment for SR.7,000 cash.

  30. TRANSACTION ANALYSISTRANSACTION 2 SOLUTION • Assets = Liabilities + Owner’s Equity • Cash + Equipment = + R. Neal, Capital • Old • SR.15,000 = SR.15,000 • (2) - 7,000 + 7,000______________________________ • New • SR. 8,000 + SR.7,000 = SR.15,000 Cash is decreased by SR.7,000 and the asset Equipment is increased by SR. 7,000.

  31. Acme Supply Company Softtouch TRANSACTION ANALYSISTRANSACTION3 • Softtouchpurchases supplies expected to last for several months for SR.1,600 from Acme Supply Company. • Acme agrees to allow Softtouchto pay this bill next month, in October. • This transaction is referred to as a purchase on account or a credit purchase.

  32. TRANSACTION ANALYSISTRANSACTION 3 SOLUTION • Assets = Liabilities + Owner’s Equity • Cash + Supplies + Equip. = Accts. Pay. + R. Neal, Capital • Old SR.8,000 + SR.7,000 = SR.15,000 • (3) _____ + SR.1,600 _______ +SR.1,600 ________ • New SR.8,000 + SR.1,600 + SR.7,000 = +SR. 1,600 + SR.15,000 • SR.16,600 SR.16,600 The asset Supplies is increased by SR.1,600, and the liability Accounts Payable is increased by the same amount.

  33. Softtouch TRANSACTION ANALYSISTRANSACTION4 • Softbytereceives SR.1,200 cash from customers for programming services it has provided. • This transaction represents theSofttouch’s principal revenue-producing activity.

  34. TRANSACTION ANALYSISTRANSACTION 4 SOLUTION • Assets = Liabilities + Owner’s Equity • Cash + Supplies + Equip. = Accts. Pay. + R. Neal, Capital • Old SR.8,000 + SR.1,600 + SR.7,000 = SR.1,600 + SR.15,000 • (4) + 1,200 _____ _____ _______________ + 1,200 • New SR.9,200 + SR.1,600 + SR.7,000 = SR.1,600 SR.16,200 • SR.17,800 SR.17,800 Cash is increased by SR.1,200 and Ray, Capital is increased by SR.1,200.

  35. TRANSACTION ANALYSISTRANSACTION 5 SOLUTION • Assets = Liabilities + Owner’s Equity • Cash + Supplies + Equip. = Accts. Pay. + R. Neal, Capital Old SR.9,200 + SR.1,600 +SR.7,000 = SR.1,600 + SR.16,200 • (5) ___Advertising Expense__ + 250 _- 250 • New SR.9,200 +SR.1,600 +SR.7,000 = SR.1,850 + SR.15,950 • SR.17,800 SR.17,800 Accounts Payable is increased by SR.250 and R. Neal, Capital is decreased by SR.250.

  36. Softtouch Bill TRANSACTION ANALYSISTRANSACTION6 • Softbyteprovides SR.3,500 of programming services for customers. • Cash of SR.1,500 is received from customers, and the balance of SR.2,000 is billed on account.

  37. TRANSACTION ANALYSISTRANSACTION 6 SOLUTION • Assets = Liabilities + Owner’s Equity • Cash + Accts. Rec. + Supplies + Equip. = Accts. Pay. + R. Neal, Capital • Old • SR.9,200 +SR.1,600 +SR.7,000 = SR.1,850 + SR.15,950 • (6) • + 1,500 + 2,000 + 3,500 • New • SR.10,700 + SR.2,000 + SR.1,600 + SR.7,000 = SR.1,850 + SR.19,450 • SR.21,300 SR.21,300 Cash is increased by SR.1,500; Accounts Receivable is increased by SR.2,000, and R. Neal, Capital is increased by SR.3,500.

  38. SR.600 SR.900 Softtouch SR.200 TRANSACTION ANALYSISTRANSACTION7 • Expenses paid in cash for September are store rent, SR.600; employees’ salaries, SR.900; and utilities, SR.200.

  39. TRANSACTION ANALYSISTRANSACTION 7 SOLUTION • Assets = Liabilities + Owner’s Equity • Cash + Accts. Rec. + Supplies + Equip. = Accts. Pay. + R. Neal, Capital • Old • SR.10,700 + SR.2,000 + SR.1,600 + SR.7,000 = SR.1,850 + SR.19,450 • (7) • - 1,700 Rent Expense - 600 • Salaries Expense - 900 • Utilities Expense - 200 • New • SR. 9,000 + SR.2,000 + SR.1,600 +SR.7,000 = SR.1,850 + SR.17,750 • SR.19,600 SR.19,600 Cash is decreased by SR.1,700and R. Neal, Capital is decreased by the same amount.

  40. Softtouch Daily News TRANSACTION ANALYSISTRANSACTION8 • Softtouchpays its SR.250Daily News advertising bill in cash.

  41. TRANSACTION ANALYSISTRANSACTION 8 SOLUTION • Assets = Liabilities + Owner’s Equity • Cash + Accts. Rec. + Supplies + Equip. = Accts. Pay. + R. Neal, Capital • Old • SR.9,000 + SR.2,000 +SR.1,600 + SR.7,000 = SR.1,850 + SR.17,750 • (8)- 250 - 250 . • New • SR.8,750 +SR.2,000 + SR.1,600 +SR. 7,000 = SR.1,600 + SR.17,750 • SR.19,350 SR.19,350 Both Cash and Accounts Payable are decreased by SR.250. Since the expense was previously recorded, it is not recorded now.

  42. Softtouch TRANSACTION ANALYSIS TRANSACTION9 • The sum of SR.600 in cash is received from customers who have previously been billed for services (in Transaction 6).

  43. TRANSACTION ANALYSISTRANSACTION 9 SOLUTION • Assets = Liabilities + Owner’s Equity • Cash + Accts. Rec. + Supplies + Equip. = Accts. Pay. + R. Neal, Capital • Old • SR.8,750 + SR.2,000 + SR.1,600 + SR.7,000 = SR.1,600 + SR.17,750 • (9) + 600 - 600 . • New • SR.9,350 + SR.1,400 + SR.1,600 + SR.7,000 = SR.1,600 + SR.17,750 • SR.19,350 SR.19,350 Cash is increased by SR.600 and Accounts Receivable is decreased by the same amount. R. Neal, Capital is not increased because the revenue was already recorded.

  44. SR.1,300 Softbyte TRANSACTION ANALYSISTRANSACTION10 • Ray Neal withdraws SR.1,300 in cash from the business for his personal use.

  45. TRANSACTION ANALYSISTRANSACTION 10 SOLUTION • Assets = Liabilities + Owner’s Equity • Cash + Accts. Rec. + Supplies + Equip = Accts. Pay. + R. Neal, Capital • Old • SR.9,350 + SR.1,400 + SR.1,600 + SR.7,000 = SR.1,600 + SR.17,750 • (10) • - 1,300 Drawing - 1,300 • New • SR.8,050 + SR.1,400 + SR.1,600 + SR.7,000 = SR.1,600 + SR.16,450 • SR.18,050 SR.18,050 Cash is decreased by SR.1,300 and R. Neal, Capital is decreased by the same amount. This is not an expense, but rather a withdrawal of owner’s equity.

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