double entry principles, balancing off the accounts …
TRANSCRIPT
DOUBLE ENTRY PRINCIPLES,
BALANCING OFF THE ACCOUNTS AND THE TRIAL BALANCE
TOPIC 4
PART 1 – DOUBLE ENTRY
PRINCIPLES
What Are the Different Business
Transactions?
Invest money.
Buy and sell
goods or
services.
Borrow money.
Pay wages to
employees.
Purchase non-
current assets (e.g.
land, motor
vehicles, buildings,
and equipment.
Pay taxes to the
government.
Business
Transactions
Business (Source) Documents
Examples: Sales invoice, purchases order, check stub, etc.
Business documents are used:
to confirm that an arm’s-length transactionhas occurred.
to establish the amounts to be recorded.
to facilitate the analysis of business events.
These documents must be analyzed.
What is the Sequence of the Accounting Cycle?
Step 1Record the effects of the transactions.Step 2Summarize the effects of transactions.1. Posting journal entries.
2. Preparing a trial balance.
Step 3
Prepare reports.1. Adjusting entries.
2. Preparing financial statements.
3. Closing the books.
Step 4
Analyze transactions.
Step 1: Analyze Transactions
What accounts are
involved?
Did each account
increase or decrease?
By how much?
Transaction analysis framework
Transaction analysis:
breaks down complex
transactions into
manageable pieces.
provides a self-checking
mechanism.
What Is the Accounting
Equation?
Assets = Liabilities + Owners’ Equity
Resources Creditors’
claims
against
resources
= + Owners’
claims
against
resources
A = L + OE
Describe Effect of the Following
Transactions on a Company.
Borrow money
Invest in company
Pay off a creditor
Purchase
equipment by cash
Borrow funds to
settle a debt
What Is the Rule of Double-Entry
Accounting?
The debits must always equal the
credits.
Debits = Credits
Accounts provide an efficient method to categorize transactions.
A T-account is a simplified depiction of an account.
Using Accounts
Name of Account
Debit Credit
Debits and Credits
Debits are simply
entries on the left.
Credits are
simply
entries on
the right.
Remember:
DR CR DR CR DR CR
(+) (-) (-) (+) (-) (+)
Debits and Credits
Assets = Liabilities + Owners’ Equity
Asset accounts:
Debit is an increase.
Credit is a decrease.
Liabilities and owners’
equity accounts:
Debit is a decrease.
Credit is an increase.
Revenues
Increases in a company’s resources from the sale of goods or the performance of services.
Expenses
Decreases in a company’s resources incurred in the normal course of business (day-to-day operations) to generate revenues.
Expanding the Equation
Expanded Accounting Equation
Assets
DR CR
+ –
=Liabilities
DR CR
– +
+Owners’ Equity
DR CR
– +
Capital
DR CR
– +
Expenses
DR CR
+ –
Revenues
DR CR
– +
Step 2: Record Transactions
Record the results of the transactions in a journal.
Journalizing provides a chronological record of all business activities.
Journal --
book of
original entry
What is another name for the journal?
Step 2: Record Transactions
Record the results of the transactions in a
journal.
Journalizing provides a chronological record
of all business activities.
General Journal Entry Format:
Date Debit Entry . . . . . . . . . . . . . . . xx
Credit Entry . . . . . . . . . . . . xx
Explanation.
Journal Entries
What is the three-step process?
1 Identify which accounts are involved.
2 For each account, determine if it is
increased or decreased.
3 For each account, determine by
how much it will change.
On 1 January, supplies purchased for
RM25 on credit
Example 1: Journal Entry
Jan. 1 Purchases . . . . . . . . . . . . . . . . . . 25
Accounts Payable . . . . . . . . 25
(Purchased supplies on credit)
Example 2: Journal Entry
Feb. 1 Bank . . . . . . . . . . . . . . . . . . . . . 100
Revenue . . . . . . . . . . . . . . . . 100
(Received cash for services)
On 1 February, a check for RM100 is
received in payment for services
rendered.
Make the correct journal entry.
Example 3: Journal Entry
Mar. 1 Accounts Receivable. . . . . . . . 75
Sales …………... . . . . . . . . . . 75
Sold merchandise on account.
On 1 March, merchandise is sold to a
customer on credit for RM75. The cost
of the product was RM60.
Make the journal entries.
Mar. 1 Cost of Goods Sold . . . . . . . . . 60
Inventory. . . . . . . . . . . . . . . . 60
To record cost and reduce inventory.
Date Transaction Ref. Debits Credits
Jan. 1 Purchases 25
Accounts Payable 25
(Purchased supplies on account)
Feb. 1 Cash 100
Revenue 100
(Received cash for services)
Mar. 1 Accounts Receivable 75
Sales 75
(Sold merchandise on credit)
Journal 1
Step 3: Posting Journal Entries and Preparing a Trial Balance
Define the Following TermsPosting
transferring amounts from the journal to the ledger.
Ledger
a book of accounts where journal transactions are posted
and thereby summarized.
Posting reference
a cross-reference number between the general journal and
the accounts in the general ledger.
Chart of accounts
a systematic listing of all accounts used by a company.
Ledger
See Examples 4.1 to 4.20
PART 2 – BALANCING OFF THE
ACCOUNTS AND THE TRIAL
BALANCE
Determining Account Balances
Name of Account
Debit Credit
Accounts with
typical debit
balances are?
Accounts with
typical credit
balances are?
Expenses
Assets
Owners’ Equity
Revenues
Liabilities
An account’s
balance is usually
on the side that
increases the
account. It is
referred to as the
“Normal Balance.”
A listing of all
account balances;
provides a means to
assure that debits
equal credits.
Define The Trial Balance
From the data in the trial
balance, the Statement of
Financial Position and
Statement of Profit and
Loss can be prepared.
What is the Trial Balance
used for?
The Example CompanyTrial Balance
December 31, 2003
Debits Credits
Cash $ 21Accounts Receivable 15Inventory 12Land 200Accounts Payable $ 30Capital Stock 150Retained Earnings 24Sales Revenue 919Cost of Goods Sold 850Advertising Expense 10Miscellaneous Expenses 15 ______
Total $ 1,123 $ 1,123
Sample Trial Balance
The trial
balance shows
that debits
equal credits.
