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Bookkeeping Rule, Accounting Cycle Framework and Record Keeping

Bookkeeping Rule, Accounting Cycle Framework and Record Keeping. Accounting Equation Record Keeping according to Account Classification Steps in Accounting Cycle. Accounting Equation. Assets = Liabilities + Owner’s Equity Assets = Resources owned by the business

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Bookkeeping Rule, Accounting Cycle Framework and Record Keeping

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  1. Bookkeeping Rule, Accounting Cycle Framework and Record Keeping Accounting Equation Record Keeping according to Account Classification Steps in Accounting Cycle

  2. Accounting Equation • Assets = Liabilities + Owner’s Equity • Assets = Resources owned by the business • Liabilities = Creditors’ claims against resources • Owner’s equity = Owners’ claims against resources

  3. Accounting Equation (cont..) • Assets = Liabilities + Owner’s Equity • Assets = Liabilities + {Capital + (R – E) • R = Revenues • E = Expenses

  4. Assets • Assets are the economic resources owned by or under the control of an entity whether already paid for or yet to be paid for. • Provide future benefits to owners • Assets are used to help operate the activities of an entity. • Assets can be divided into two groups, currentassetsand non-current assets

  5. Liabilities • amounts owing or obligations made to parties outside the entity. • Liabilities can be regarded as the right of external parties to the resources or assets of the business. • Liabilities can be divided into two: current and long-term and deferred liabilities.

  6. Owner’s Equity • the rights or claims that the owner (or owners) has over the assets of the business or entity. • Owner's equity also represents the total investments of the owner in his business

  7. Revenues • Cash received or receivable from transactions that have taken place • Revenue from sales of goods/services to its customers will result in an increase in the value of assets. • Revenue can encompass those generated from the normal primary business activities or from other secondary activities

  8. Expenses • Expenses are costs of services or goods used up in the process of generating sales or in supporting the activities of the business. • Expense transaction results in cash paid or payable. • Examples of expenses are rental expense, interest expense, electricity, water and salaries.

  9. Duality Concept • Accounting regards every transaction as having two aspects • For example: if a business buys machinery for cash, the asset (machinery ) is increased and the asset (cash ) is decreased • Double entry bookkeping reflects the concept of duality

  10. DOUBLE ENTRY RULE

  11. Transaction Analysis • A process of identifying the specific effects of transactions and events on the accounting equation

  12. What is a transaction? • Any event that both affects the financial position of the business entity and can be reliably be measured and recorded

  13. Steps in analyzing a transaction • Identify the account and the account type (classification) • Determine the effect of the transaction on the balance of account(s) identified • Record the transaction on the debit or credit side of the relevant account

  14. Analyse accounting data Identify relevant transaction SJ Prepare journal entries GJ GL Post to the ledgers SL Prepare adjusting entries Balance the account Correct errors (if any) Prepare trial balance Prepare financial statements Prepare closing entries and post to the ledger Prepare trial balance after closing entries (if required) Prepare reversing entries

  15. Source Documents • A form which provides details of a transaction and the evidence that the transaction has occurred • Provide evidence for doth internal and external auditors • Used as the basis for entries in the accounting records • Examples: invoice, receipts, debit note, credit note

  16. Journal • Books of original entry which collates and summarises information from source documents • Records business transactions in chronological order • Types: • General journal • Special journals

  17. General Journal • Records • Adjusting entries • Closing entries • Reversing entries • Other transactions that cannot be recorded in special journals

  18. Special Journals • Sales Journal • Records credit sales of goods • Purchases Journal • Records credit purchases of goods • Cash receipts journal • Records all cash received from any source • Cash payments Journal • Records all cash payments from the business • Sales return Journal • Records the returns of goods by the customers • Purchases return Journal • Records the returns of goods to the suppliers

  19. Journal • Functions: • Classifies or list like item together e.g all purchase of goods on credit • Acts as an aid for posting to the ledger by analysing the transaction into its debits and credits elements • Provides a record of transactions in date order • Enables easy reference forward to the ledger and back to source documents • Cuts down unnecessary details in the ledger

  20. General Journal

  21. Purchases Journal

  22. Cash Receipts Journal Cash Payments Journal

  23. Ledger • Book ( file) of all the accounts • An account is a record where all changes (increase or decrease ) to a particular item are shown • Types of ledgers • General (norminal) Ledger • Sales (Debtors) Ledger • For customers’ personal accounts • Purchases( Credit) Ledger • For suppliers’ personal account

  24. Dr Cash at Bank Cr T account Format

  25. Adjusting Entries • Step taken before preparation of trial balance under accrual basis of accounting • Adjustment of accounts not needed under cash basis of accounting • Adjusting entries assign revenues to the period in which they are earned and expenses to the period in which they are incurred • Needed to (a) measure properly the period’s profit and (b) to bring related asset and liability accounts to correct balances for the financial statements • Entries recorded in general journal and then posted to general ledger

  26. Adjusting entries (cont..) • Needed for the following items: • Prepaid expenses ( belanja bayar dulu) • Accrued expenses (belanja terakru) • Unearned revenues (Hasil terima dahulu) • Accrued revenues (Hasil belum terima) • Provision for depreciation( Peruntukan susut nilai) • Provision for doubtful debts (Peruntukan hutang ragu)

  27. Balancing of Accounts • Need to determine the balance of all the accounts before trial balance • Compare total debits and total credits • Accounts with debit balances • Assets • expenses • Accounts with credit balances • Liabilities • Owner’s equity • Revenues

  28. Debtors Control Account

  29. Trial Balance • A list of all accounts with their balances at a particular date • Provides a check on the accuracy by showing whether total debits equal total credits • Merely a step in the preparation of financial statement • Errors revealed by TB • Errors not revealed by TB

  30. AIR & SEA TRAVEL SDN BHD Trial Balance 30 April 2005

  31. Errors not revealed by TB • Complete omission of a transaction • Debiting or crediting a wrong account • Debiting or crediting the wrong type of account • Compensating error (unconnected errors which will cancel each other out) • Entering the wrong amount in the journal • Reversal of entries

  32. Closing Entries • Final step in the accounting cycle for a specific accounting period • To close the temporary accounts (Revenues and Expenses) • Transfer the balances of the Revenue and Expense balances to Trading and Profit and Loss account

  33. Reversing Entries • Made on the first of the new accounting period (first step in the accounting cycle) • Purposes: • To ensure that the correct amounts for the revenue and expenses are taken into account in the period to which they actually refer • To cancel the temporary asset and liability accounts created on balance day (prepayments and accruals)

  34. Manual versus ComputerisedAccounting System • Manual accounting system • Each step in the accounting cycle is performed manually • Accounting transaction entered manually in journal and ledger

  35. Manual versus ComputerisedAccounting System • Computerised accounting system • Examples of industrial accounting software UBS, MYOB • Advantages: • Ability to process numerous transactions quickly • error reduction • Fast response time • Flexible and fast report production

  36. Manual versus ComputerisedAccounting System • Disadvantages / issues: • Incompatibility of hardware and software • Employees lacking the skill could cause problems in the system or unable to make full use of the system ‘s capability • Computer viruses and computer hackers • Need good backup mechanisms to ensure data are not lost during power failures/system crashes

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