ACT 1100 Introduction to Accounting

1. ACT 1100Introduction to Accounting Summer Course Lecturer: Troy J. Wishart

2. Our Confession ACT 110 Is EASY POP! Because Summer course too Expensive

3. Accounting Cycle Source Documents Prepare Financial Statements Record in Daybooks/Journals Extract Trial Balance Post to Ledgers

4. Lecture Notes 2 Posting to Ledgers

5. Posting to Ledgers Posting • Before transactions are posted they are recorded in the Books of Original or Prime Entry/Journals

6. Posting to Ledgers Posting • The Books of Prime Entry are then used to Post to the Various accounts in the three ledgers: • General Ledgers – Records general transactions • Purchase Ledgers – Records Credit Purchases • Sales Ledgers – Records Credit Sales

7. Posting to Ledgers Posting • There are three types of transactions that would occur in the Business: • Transactions that affect Assets, Capital and Liabilities • Transactions that affect Expenses, Revenue, Assets, Liabilities, and sometimes Capital

8. Posting to Ledgers Posting • Transactions that affect the stock,assets, Liabilities and sometimes Capital • Each transactions should be entered the Accounts in the Ledgers using the Double Entry Principle

9. Posting to Ledgers Posting • How to identify the double entry effect of a transaction? • Identify the accounts affected the transaction

10. Posting to Ledgers Posting • In order to do so, ask yourself the questions: • Who is affected? • What is happening? • How its happening? • Why is this happening?

11. Posting to Ledgers Posting • After identifying accounts: • Post to the accounts within the Ledgers while • Ensuring that each debit entry is matched by equal corresponding credit or vice-versa.

12. Posting to Ledgers Posting – RULES • Debit allExpenses • Creditall Income • Debitthe Receiver • Credit the Giver • Debitwhat Comes In • CreditWhat Goes Out

13. The Account Format Title of Account $ $ Date Details Date Details Debit Side Credit Side

14. Posting to Ledgers Posting - Example • Purchase Motor Vehicle for cash $2m and paid a deposit of $500,000. • Purchase goods by credit $20,000 • Sold goods for cash $30,000 • Sold Goods on credit $26,000 • Purchase goods for cash $50,000 • Paid rent $50,000 • Paid wages $250,000

15. Lecture Notes 2 Stock Adjustments Posting

16. Stock Adjustment Posting Purchases – Increase in Stock • Goods purchase for resale are entered in the PurchasesAccountand not stock account. • They are entered on the debit side of the account, whether or not the transaction is for cash or credit. • The corresponding entries are made either to the cash or creditor’s account (creditor).

17. Stock Adjustment Posting Purchases – Increase in Stock • Why are goods bought not entered in stock account • If goods purchased for resale were entered in the stock account at cost, when they are sold they would have to be entered in the stock account at cost, requiring calculations for each transaction of sale.

18. Stock Adjustment Posting Sales – Decrease in Stock • Goods sold for cash or credit are entered in Sales Account. • Both cash and credit sales of trading goods are entered on the credit side of the sales account.

19. Stock Adjustment Posting Sales – Decrease in Stock • The corresponding entry if it is a cash salegoes to the debit side of the cash account. • A credit sale will require a debit entry to the debtor’s account (credit customer).

20. Stock Adjustment Posting Sales Returns – Return of Stock by Customer • Return of sales, are entered in a separate account known as the sales return or returns inward account. • The corresponding account if the sales transaction was on credit would be a credit to the debtor’s account.

21. Stock Adjustment Posting Purchases Returns – Return of Stock to supplier • Return of purchases, are entered in the purchases return account or returns outward account. • The corresponding account if the purchase was on credit would be a debit to the creditor’s account.

22. Stock Adjustment Posting Other Considerations • Purchases and Sales Return accounts are used so as not to offset the transactions in one account and thus reduce our ability to analyze.

23. Stock Adjustment Posting Other Considerations • Cost is defined in relation to the different categories of stock as being that expenditure which has been incurred in the normal course of business in bringing the product or service to its present location and condition.

24. Stock Adjustment Posting Other Considerations • This expenditureshould include, in addition to purchase; such costs of conversion as are appropriate to the location and condition.

25. Lecture Notes 2 Closing an Account

26. Closing and Account How to Close off the Accounts • Add both sides • Place the greater of the two sides on both sides • Record the difference on the smaller side. • Balance (bal.) carried down (c/d) is placed next the balancing figure and balance brought down (b/d) at the bottom figure under the total of the greater side.

27. The Account Format Purchases Account $ $ Date Details Date Details 15/1/11 Cash Purchases 2,000 31/1/11 Credit Purchases 5,000 31/1/11 Balance c/d 7,000 7,000 7,000 01/2/11 Balance b/d 7,000

28. Closing and Account Accounting Steps • Double entry bookkeeping for each transaction or event. • Closing of the accounts and bring down the balances. • Prepare a trial balance indicating Balance Sheet items and Profit and Loss items. • Prepare a Trading and Profit and Loss Account. • Prepare Balance Sheet Statement

29. Lecture Notes 2 Trial Balance

30. Trial Balance Definition The Trial Balance is a summary of the balances in a double entry system, and is used to check the arithmetic accuracy, and prepare the financial statements.

31. Trial Balance Errors that are not revealed in the Trial Balance:- • Errors of Omission – there is neither a debit nor a credit in relation to the transaction. • Errors of Principle – the amount is correctly recorded but placed in the wrong class of account.

32. Trial Balance Errors that are not revealed in the Trial Balance:- • Errors of Commission - where an amount is correctly recorded but entered in the wrong personal account. • Errors of Original Entry - where the transaction is recorded with the wrong amount.

33. Trial Balance Errors that are not revealed in the Trial Balance:- • Errors of Compensation – here the error on one side is compensated by an error/s of similar amount on the other side. • Complete Reversal of Entry – Incorrect posting of the debit and credit of a transaction, that is the debit of the transaction is credited and the credit is debited.

34. Trial Balance Errors that are revealed in the Trial Balance:- • Errors in extraction of the Trial Balance. • Omission of an account balance. • Errors in computation of the balances of the accounts. • Non-correspondence of debit and credit.

35. Trial Balance • Other Considerations:- • In the Trial Balance, the stock usually is of the previous year or the Opening Stock. • The value of the stock at the end of the year or at the Trial Balance date is usually given as a note.

36. Trial Balance • Other Considerations:- • Items or accounts that will always appear on the debit side of the Trial Balance:-  • All assets • Debtors • Cash at Bank • Cash in Hand

37. Trial Balance • Other Considerations:- • These accounts are also referred to as debit balances, as the debit side is greater than the credit side.

38. Trial Balance • Other Considerations:- • Those that will appear on the credit side:- • All liabilities • Creditors • Capital • Bank Overdraft

39. Trial Balance • Other Considerations:- • These accounts are referred to as credit balances, as the credit side is greater than the debit side. •  Those accounts with the debit side being equal to the credit side are referred to as zero balances. • Such accounts are not placed in the trial balance.