ACT 1100Introduction to Accounting

Lecturer: Troy J. Wishart

Summer Course

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Accounting Cycle

Source Document

s

Record in Daybooks/Journals

Post to Ledgers

ExtractTrial

Balance

Prepare Financia

l Statemen

ts

Transactions in LedgersLecture Notes 2

Transactions in LedgersPosting•Before transactions are posted they are recorded in the Books of Original or Prime Entry/Journals

Transactions in LedgersPosting• 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

Transactions in LedgersPosting•There are three types of transactions that would occur in the Business:1.Transactions that affect Assets, Capital and Liabilities

2.Transactions that affect Expenses, Revenue, Assets, Liabilities, and sometimes Capital

Transactions in LedgersPosting3. 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

The Recording ProcessLecture Notes 2

The Recording ProcessDouble Entry•The principle used in recording transactions in the books of account is known as double-entry whereby each transaction must be entered twice; once as a debit and again as a credit.

The Recording Process

Receiver and Giver•Each transaction involves a 'receiver' and a 'giver'.

The Recording ProcessDebit and Credit•Debiting an account means recording an entry on the left hand side of that account.

•Crediting an account means recording an entry on the right hand side of that account.

The Recording ProcessBalancing Off the Accounts

•At the end of the recording process, each account must be closed off or balanced .

•Balancing an account means that the total on each side must be equal.

The Recording ProcessBalancing Off the Accounts

•After balancing each account, some accounts would have: Balances carried down

on the credit side; Balances carried down

on the debit side Or Balances with equal

totals.

The Recording ProcessBalancing Off the Accounts

•A balance carried down on the credit side would indicate:The total debits exceeds the total credits

There is a Debit Balance.

Balance brought down in the next period on the debit side.

The Recording ProcessBalancing Off the Accounts

•A balance carried down on the debit side would indicate: The total credits exceeds the total debits

There is a credit balance.

Balance brought down in the next period on the credit side.

The Recording ProcessBalancing Off the Accounts

•Those accounts that have balances remaining in the ledger would then be listed to form a Trial Balance at the close of the period.

Posting to LedgersLecture Notes 2

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

Posting to LedgersPosting–In order to do so, ask yourself the questions: Who is affected? What is happening? How its happening? Why is this happening?

Posting to LedgersPosting•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.

Posting to LedgersPosting – RULES•Debit all Expenses

Credit all Income•Debit the Receiver

Credit the Giver•Debit what Comes InCredit What Goes Out

The Account Format

Title of AccountDate DateDetail

sDetails

$ $

Debit Side

Credit Side

Posting to LedgersPosting - 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

Stock Adjustments PostingLecture Notes 2

Stock Adjustment PostingPurchases – Increase in Stock

•Goods purchase for resale are entered in the Purchases Account and 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).

Stock Adjustment PostingPurchases – 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.

Stock Adjustment PostingSales – 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.

Stock Adjustment PostingSales – Decrease in Stock•The corresponding entry if it is a cash sale goes to the debit side of the cash account.

•A credit sale will require a debit entry to the debtor’s account (credit customer).

Stock Adjustment PostingSales 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.

Stock Adjustment PostingPurchases 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.

Stock Adjustment PostingOther 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.

Stock Adjustment PostingOther 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.

Stock Adjustment PostingOther Considerations•This expenditure should include, in addition to purchase; such costs of conversion as are appropriate to the location and condition.

Closing an AccountLecture Notes 2

Closing and AccountHow 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.

The Account Format

Purchases AccountDate DateDetail

sDetails

$ $

Credit Purchases

Balance c/d

2,000

Cash Purchases

5,000

7,0007,000

7,000

7,000

Balance b/d

15/1/11

31/1/11

31/1/11

01/2/11

Closing and AccountAccounting 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

Trial BalanceLecture Notes 2

Trial BalanceDefinitionThe 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.

Trial BalanceErrors 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.

Trial BalanceErrors 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.

Trial BalanceErrors 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.

Trial BalanceErrors 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.

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.

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

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

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

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.