ACCG611 Notes

Introduction to Accounting
Economic Decisions

Many decisions can be considered economic and have a range of factors such as:
personal taste, social factors, environmental factors, religious/moral factors, government
policy

Nature of Accounting

Accounting is process of identifying, measuring, recording, and communicating economic

information to help make economic decisions
* Identify = observing economic events eg. Transactions (inputs of accounting
information)
* Measuring = takes place before effects of transaction can be recorded eg. Money
* Recording = history of economic activities of a particular activity
* Communicating = final part of economic process (reports/analysis)

Users of Accounting Information

External decision makers general purpose financial statement

* Creditors/investors
* Employers, unions, government agencies
Internal decision makers special purpose financial statement
* Managers, owners

Management vs Financial accounting

Management = provides information to management levels

* Managers etc use the reports (inside)
* Special financial statements
* On-demand reports
* Not required to be audited
Financial = reporting information to external users to make sound economic decisions
* People outside the entity use the reports (external)
* General purpose financial statements
* Subject to tax legislation
* Must be audited by external people

Public accounting vs Commercial accounting

Public = offer services to public for a fee, eg taxation, auditing, advisory, insolvency
* Auditing independent examination of a businesss financial statements
* Assurance services improve the quality of information such as risk management
* Taxation tax consequences, tax returns
* Advisory advice on clients accounting systems
* Insolvency when a company cannot pay its long-term debt, illiquid
Commercial = those in commerce and industry
* Cost accounting costs of producing goods and services
* Information systems designing manual and computerised accounting systems (ecommerce)
* Budgeting forecasts of future budgets
* Internal auditing internal audit of an entity
Not for profit
* Efficient use of resources, consistent with government provisions

Ethics

Importance of ethical behaviour of doing the right thing

Code of ethics establishes the fundamental principles of professional ethics

Types of Business Entities

Different Types

Sole trader = owned by one person, entitled to all profits, legally liable for all debts. Is an
entity separate from its owners and personal affairs are kept separate
Partnership = two or more people, share profits and losses. Not separate legal entities,
personally liable for all debts of the partnership. Separate from owners.
Company = separate legal entity, owners are shareholders. Shareholders have limited
liability and NOT liable for companys debts

Management Functions

Role of managers is help the business achieve satisfactory performance.

Management needs to be efficient and effective, to help maintain a satisfactory
relationship between an entitys resources and how well the entity its achieving its goals
Functions of Management:
* Planning goal setting
* Organising right people assigned to the right role
* Directing day to day managing
* Controlling management by exception, performance reports

Financial Statements

Users want information about financial performance of the entity

Users also want financial position of the entity
And they want information about the entitys cashflows
* Operating activities goods and services, collecting cash, purchasing goods etc,
collecting wages
* Investing activities acquisition and disposal of long term resources, such as
purchasing equipment, office buildings, selling long term assets
* Financing activities raising of funds, raising capital by issuing shares, borrowing
money

Balance Sheet

Represents the statement of financial position

Can be a T-shaped ledger or narrative style of statement
ASSETS = LIABILITIES +
Assets = resources controlled
by the entity, economic benefits expected to flow to the
EQUITY
entity
* Can be tangible (physical buildings, equipment) or intangible (legal claims,
patents)
Liabilities = debts owed by an entity to outside parties called creditors
* Includes amounts owed to suppliers purchased on credit (accounts payable)
Equity = owners claim (or residual interest) in the assets after deducting liabilities
* NET ASSETS = EQUITY
* Also known as capital

Income Statement

Represents financial performance

Also known as a Profit and Loss Statement

PROFIT = INCOME (REVENUE)

Income
EXPENSES
* Increase in wealth for the owners from inflows or enhancements of assets

* Usually from the sale of goods

* Also measured by the promise of customers to pay in future (accounts receivables)
Expenses
* Decreases in equity from outflows or depletions of assets or incurring liabilities
* Measured by the amount of assets used or liabilities incurred
Profit is an increase in equity as income results in an increase in equity and expenses are
a decrease in equity. Profit is the NET increase in equity.

Statement of Changes in Equity Statement

Connecting link between balance sheet and income statement and explains changes in
equity during the period

Accounting Assumptions
Accounting entity assumption

Transactions of an entity are to be recorded, classified, and summarised

Accountant must be able to clearly see the boundaries of the entity
Assumed each entity controls its assets and incurs its liabilities = these records are to be
kept completely separate from owner
* Personal assets, debts are not included

Accrual basis

All transactions and events are recognised in accounting when they occur, not when cash
is received or paid
Statements report when cash transactions occur, and obligations to pay cash in the
future

Going concern

That an existing entity will continue to operate into the future and not be wound up in the
near future
Liquidation values of an entitys assets are not generally recorded

Period assumption

Report their results in the form of either profit or operating surplus

Division of the life of the entity into equal time intervals
Recognising income for a period, and deducting expenses that occur in that same period

Fundamental Qualitative Characteristics

Relevance and faithful representation for decision makers

* Relevance = information can influence decisions by helping predict future events,
evaluate past decisions, provide feedback to help timeliness of information
* Faithful representation = information is complete, without bias or error, neutral
and reliable
* Economic substance = part of faithful representation; accountant examines
transactions and events in order to report on their economic reality as opposed to
legal form

Enhancing Qualitative Characteristics

Comparability = quality of information, enhances usefulness of financial reporting

Consistency = use of same accounting policies and procedures, consistency of policies
helps achieve the goal of comparability
Verifiability = independent observers being able to reach consensus
Timeliness = access to timely information
Understandability = quality of information which can be comprehendible, and relevant
information should not be excluded even if it is deemed too complex

Materiality

Users are not overwhelmed with information with so much detail that they cannot clearly
understand the message
Users receive information of significant information

Benefits and Costs

Benefits of financial reporting should justify the costs of providing and using it

Transactions

External transactions = with outside parties such as to purchase equipment, borrowing

money, purchasing supplies
Internal transactions = transactions that affect internal relationships between entitys
assets, liabilities and equity. Such as use of office supplies by employees, destruction of
an office building
Non-transaction events = some events are not recorded if there has not been an
exchange of goods and services. Such as receiving an order from a customer, hiring an
employee, signing a contract

Source documents

Provides written evidence of a transaction and an important part of the accounting cycle
For each external transaction, there should be at least one source document
* Examples: tax invoice, purchase order, credit card slip, cheque,

Accounting Cycle & Accounts

The life of an entity is divided into time periods of equal length called accounting periods
to compare current period with the next or previous
The basic two-step accounting cycle is: (will be expanded as we go on)
Steps in the Cycle
1. Recognise/record
transactions

2. Prepare f. statements

Accounting Records
Source documents

Financial statements

Ledger Account

An account provides a record of the increases and decreases in each item that appears in
the financial statements
An entity will have an account for each type of asset, liability, equity, income and
expense item
ALL OF THESE ACCOUNTS are collectively called a GENERAL LEDGER
A chart of accounts is a listing of the complete ledger account titles and their related
numbers (much like a contents)
Each account as a title, place for increases, place for decreases and account balance
* Left hand side is the debit side
* Right hand side is the credit side
* Balance carried down (c/d) is entered on the credit side
* Balance brought down (b/d) is under the total of debits side

Common Accounts

Balance Sheet Accounts

Asset Accounts
*Cash at Bank (record

Liability Accounts
*Accounts Payable

Equity Accounts
*Capital

deposits and
withdrawals)
*Accounts Receivable
(amounts owed)
*Other Receivables (GST
GST paid to suppliers
that is refundable from
ATO)
*Prepaid Expenses (paid
in advance, not yet
used)
*Land
*Buildings
*Plant and Equipment
(items used long-term)

(amounts obliged to pay to

externals)
*Unearned Income (cash
received, yet goods not
delivered)
*Other current liabilities
(entity may owe money to
employees, ATO)
*GST Payable (received
from customers which
must be passed (paid) onto
ATO
*Mortgage Payable

*Drawings or withdrawals
(results in reduction of
equity)
*Income accounts
*Expense accounts

Income and Expense accounts are sub-classifications under Equity accounts

Income Accounts
* Revenue accounts = revenue is income that arises in the course of entitys
ordinary activities
Examples: performance of services, sale of merchandise,
Normally a cash or receivable
* Gains accounts = income that does not usually arise from course of ordinary
activities of an entity
Example: sale of assets such as buildings
Expense Accounts
* Services consumed or lost or liabilities incurred are expenses
* Recorded by decreasing an asset account and increasing the correlating expense
account
* Examples: wages expense, fuel expense, telephone expense

Debit and Credit Rules**

Double-entry accounting

Each transaction affects at least two financial statements and the accounting equation is
always in balance, where one account represents an increase, and another a decrease.
We also need to find out which account is a debit, and which is a credit
This is called double entry accounting

Debits and Credits

Debit means left hand side

Credit means right hand side
Total debits must equal total credits
Whether one increases or decreases depends upon if the account is an asset, liability, or
equity
* An increase in an asset account is a debit, a decrease is a credit
* An increase in a liability or equity account is a credit, and decrease is a debit
* An increase in income, increases equity, therefore, income is a credit
* A decrease in income (expense), decreases equity, therefore expenses increase as
a debit
DEBIT (Dr) INCREASE
CREDIT (Cr) INCREASE
Assets
Liabilities
Expenses
Equity Investments
Drawings
Income
The normal account balance will be on the side where there are increases (as per table
above)

General Journal & Ledger

A transaction is recorded first in a book called a journal

Provides one place for a complete record of all transactions as they occur in chronological
order
Detailed record of full effect of a particular transaction

Recording transactions in a journal

Recording transactions in a journal is called entering or journalising and each transaction

is a separate journal entry that records the receipt of cash
Many journal entries will involve only two accounts
* Two or more accounts are affected by each transaction
* Sum of debit must equal sum of credit (balance)

Posting from Journal to Ledger

Transferring amounts entered in the journal to the proper ledger account is called posting
Classify the effects of all transactions on each individual asset, liability, equity, income,
expense acc
The Post Ref column of the ledger will contain the page number of the journal from which
the entry is being posted
* enter in the journal, the account number to indicate it has been posted

Trial Balance

The equality of debits and credits posted to the ledger accounts is verified by preparing a
trial balance list of all the accounts in the order in which they appear in the general
ledger with their current balances
Dollar signs are not used in the journal or ledger
Is an unadjusted trial balance, as no adjustments have been made
Limits of the trial balance
* Balance does not guarantee that errors have not been made eg. a correct
amount could have been posted to the wrong account, journal entry could have
been omitted
* It is only a check of equal debits and credits
* A trial balance that does NOT balance is a clear indication of one or more errors in
the accounts
Correcting errors
* Once an error is located, it must be corrected
* Errors should not be erased because they may give the impression that something
is being concealed instead the wrong amount is crossed out then a new line
written

Measuring Profit

Income and expenses can be recognised under the cash or accrual basis; most business
systems will use accrual (PROFIT = INCOME EXPENSES)

Cash basis

Income and revenue is recorded in the period in which cash is received

Expenses are recorded in the period when cash is paid
Profit represents the excess of cash inflows from income over cash outflows for expenses
Does not recognise income from credit sales
Used by businesses who conduct all their activities on credit not satisfactory for most
businesses that conduct a significant portion of sales on credit

Accrual basis

Income and revenue is recognised in the period in which the expected inflow of economic
benefits can be measured in a faithful and verifiable manner
* The period in which the business sells goods or performs services under a contract
The going concern principle is the underlying basis for accrual accounting
Determined by subtracting expenses incurred during the accounting period from income
earned in that same accounting period
Income
* Represents inflows or enhancements of assets, decreases in liabilities which results
in an increase in equity
* Revenue is a major part of income
* Revenue is recognised as the fair value of assets received the asset is usually
cash or the right to receive cash in the future (accounts receivable)
* Revenue = sum of cash + accounts receivable + fair value of other assets
received
* Examples of Revenue account titles include: Sales Revenue (sale of merchandise),
Services Revenue (when a service has been performed for a fee)
Expenses
* The portion of a cost that is expected to provide economic benefits in a future
period is an unexpired cost and reported as an asset on the balance sheet
* Cost of assets that have been consumed in the period are reported in the income
statement as expenses (expired costs)
* Expenses are the cost of services and assets consumed in the current period
* Expenses are recognised in the period in which the consumption of costs can be
measured in a faithful, verifiable manner rather than the period which cash is paid
* Example: salaries earned are a current expense, as they can be measured even if
the payment doesnt go through until the next period
* Expenses incurred and its cash payment dont always occur in the same
accounting period
* Not all cash payments are expenses eg. repayment of a loan

Nominal vs Real accounts

Separate accounts are maintained for each income and expense item
Income and expense accounts are reduced to a zero balance at the end of a period and
are closed are thus are nominal (temporary) accounts
Accounts in the balance sheet do not close and are real (permanent) accounts

Adjusting Entries Deferrals and Accruals

Some transactions affect the entity for two or more accounting periods, so some
accounts need to be adjusted on the last day of the accounting period to provide the
correct recognition of income and expenses to properly assess the entitys performance
Adjusting entries help to achieve accurate reporting of assets and liabilities
Adjusting entries are entered in the journal and posted to the accounts
Formal adjusting entries usually only happen at the end of the year, and entered on a
worksheet

Classifying Adjusting Entries

Classified into two major categories: deferrals and accruals

* Deferrals: expenses paid in advance, revenues received in advance which need to
be allocated over future accounting periods = recognition is deferred until next
period
* Accruals: recognition of expenses incurred but not yet paid, recognition of revenue
earned but cash not received

DEFERRALS
Expenses
Prepaid expenses =

Debit

ACCRUALS
Expenses
Accrued expenses =

Debit to

expenses paid for before

they are consumed,
including depreciation
eg: rent in advance,
insurance premiums paid for
life of the entity
Revenue
Unearned revenues =
revenues
collected/received in
advance but not yet
earned
eg: magazine subscription
fees received in advance,
rent received in advance
*

to
expens
e
Credit
to
asset
Credit
to
revenu
e
Debit
to
liability

expenses incurred, not yet

paid
eg: wages earned but not
paid, interest to be paid on a
loan

Revenue
Accrued Revenues =
revenue earned but not
yet received in cash
eg: sales commission earned
not received, interest
accumulated on receivable
*

expense
Credit
to
liability

Credit
to
revenue
Debit to
asset

Adjusting entries affect both the size of profit and financial position
Two rules for adjusting entries:
* One side of the entry affects an account from income statement (expense or
revenue account), and the other entry affects an account in the balance sheet
(asset or liability).
For example: Salaries Expense (income statement, expense) to Salaries Payable
(balance sheet, liability)
* Cash account is never adjusted

Deferrals Expenses

Prepaid Expenses
* paying for an item in advance of their use
* Payment of cash does not necessarily result in recognition of an expense
* At the end of an accounting period, portion of costs of goods consumed or services
received are transferred to an expense account (balance sheet)
* The unexpired portion is an asset, and their cost is transferred to an expense
account
* Expense account is debited, and transferred to an asset account (credited) as
some cost has been consumed.
* Eg: credit Prepaid Insurance, and debit Insurance Expense; credit Office Supplies
and debit Office Supplies Expense
* The adjusting entry is made to remove the cost of something consumed (eg
supplies) from the asset account and to recognise the costs consumed as an
expense
If Office Supplies had a balance of $1500, and $50 was consumed in June, at
the end of June we would need to deduct $50 from the Office Supplies asset
account, and record it as $50 in the Office Supplies Expense account.
Office Supplies
(Dr) 60
Office Supplies Expense (Cr)
60
Depreciation of Equipment and Buildings
* The cost of each asset minus its expected sales value at the end of its estimated
useful life is allocated as an expense
* Useful life is the amount of time over which the asset is expected to be consumed
(estimate)
* Portion assigned over to an expense is depreciation (estimate only and no GST)
* Expense account is debited, and the asset credited.
* Reported as an expense in the income statement
* For adjusting entry, a separate account Accumulated Depreciation is credited
rather than directly crediting its appropriate asset account = contra account
(offset to or deduction from relate acc)

Eg: Accumulated Depreciation is credit, and Depreciation Expense (Building) is

debit

Deferrals Revenue

Unearned or precollected Revenue

* Entity may receive cash in advance for services to be performed in the future such
as magazine subscription, advertising fees, or rent received in advance
* A liability is reported until the service is performed to reflect the obligation of
entity to carry out the service
* Recognition of income (revenue) has been deferred
* The Revenue (income) account is credited, liability account (unearned revenue
account) is debited
* Eg: Unearned Appraisal Fees is a debit, Appraisal Fees Revenue is a credit;
Unearned Subscriptions Revenue (liability account) is debit, Subscriptions Revenue
is a credit

Accruals Expenses

Accrued or unrecorded expenses

* Some expenses that have been consumed but not yet recorded because payment
has not been made
* An adjusting entry is needed to recognise the period it was incurred, rather than
when it was paid
* A credit is made to the liability account, and a debit to the expense account
* Salaries or wages may have accrued, but not yet paid, an adjusting entry is
needed to correctly determine the expenses consumed within an accounting
period that carries over into another
* Eg: Salaries Payable is credited, and Salaries Expense is debited; Interest Payable
is credited, and Interest Expense is debited; Electricity Expense is debited, and
Electricity Payable is credited

Accruals Revenue

Accrued or unrecorded revenue

* Adjusting entry is needed to recognise when a service is performed but not yet
paid
* An account receivable is created to have a record of the amounts owed to the
entity
* The income (revenue) account is credited, and the asset account is debited
* Eg: Accounts Receivable (asset account) is debited, Marketing Services Revenue is
credited
Quick Guide
Adjustment Type
Prepaid expense
(deferral)

Accounts
Assets
Expenses

Unearned revenue
(deferral)

Liabilities
Revenue

Accrued expense

Expenses
Liabilities

Accrued revenue

Assets
Revenue

Adjusting Entry
Expense account
Dr
Asset account
Cr
Liability account
Dr
Revenue account
Cr
Expense account
Dr
Liability account
Cr
Asset account
Dr
Revenue account

Cr
Adjusted Trial Balance

After the adjusting entries are prepared, an adjusted trial balance can be prepared
Seeks to verify the equality of debits and credits in the accounts after adjusting entries
It can then be used to prepare end of year financial statements
WORKING CAPITAL = CURRENT ASSETS
CURRENT LIABILITIES

Current Assets and Non-Current Assets

Current assets are cash and those held primarily for the purpose of sale or trading
* They are reasonably expected to be converted into cash, sold or consumed within
the next operating cycle of the business
* Must be realised within 12 months (short term) most operating cycles are one
year
* Current assets can be listed in terms of their liquidity (how easily something is
changed to cash)
Cash at bank, Marketable Securities, Accounts Receivable, Inventory,
Prepayments
Non-current assets are long term assets
* Investments = shares, debentures or other long term financial assets eg.
retirement fund
* Property, plant and equipment (PPE) = tangible, physical items used in the normal
activities of the entity. Fixed assets, not held for resale. Land does not depreciate,
as it has an unlimited life
* Intangible assets = non-physical such as patents, copyrights, franchises, brand
names
* Other assets = things that dont fit into the categories above, eg: development
expenditure

Current Liabilities and Non-Current Liabilities

Current liabilities are obligations of the entity that are expected to be settled within 12
months
* Most require payment in the short term, such as accounts payable, interest
payable
* No agreed way to present this information on a balance sheet
Non-current Liabilities
* Obligations of the entity that do not require payment within 12 months, long term
* Any liability that is not classified as current, will be reported here

Worksheet

The recording of adjusting entries does not happen until the end of year, and is entered
into a worksheet only
The worksheet
* Assembles all the information in one place to make the adjustments
* Helps in the preparation of financial statements
* Contains the information needed to close off accounts
* It does NOT replace financial statements
The worksheet contains the unadjusted trial balance, any adjustments, the adjusted trial
balance and then the income statement and balance sheet (all on one page)
The amounts entered on each line are combined this is crossadding adding and
subtracting horizontally across the page
Accounts that are unaffected by adjustments (such as Cash at Bank) their balance is
extended directly to the adjusted trial balance column

An account with debit in unadjusted trial balance, will have an increase in debit in the
adjusted trial balance
Accounts are sorted on the basis of their financial statement classification
* Asset, liability and equity accounts are extended to the balance sheet
* Income and expense accounts are extended to the income statement
The Income Statement and Balance Sheet columns are totalled.
Profit is calculated by deducting the two debit and credit columns in the income
statement
If the debit and credit columns in the balance sheet are not equal, an error has been
made in carrying over some amounts
The completed worksheet helps to create the end of year financial statements
Adjusting entries are made on the worksheet but not entered into accounting records
except until the end of the year when the accounts are closed

Expanded Accounting Cycle

Steps in the Cycle
1. Recognise/record
transactions

2. Journalise transactions

3. Post to ledger accounts

4. Prepare unadjusted trial

balance

5.Determine adjusting entries

6. Post adjust en to journal

7. Prepare adjusted trial b

8. Post closing entries

10. Prepare closing trial

balance

12. Journalise reversing

entries

13. Post reversing entries

Accounting Records
Source documents

General Journal

General Ledger

Trial balance (unadjusted)

General journal

General ledger (adjusted)

Trial balance (adjusted)

General journal

General ledger (closed acc)

Trial balance (post closing)

Financial Statements

General journal

General ledger

Closing Accounts

To help prepare information for the next accounting period, temporary accounts need to
reduced to a zero balance or closed by transferring their balances to another account in
order to calculate profit
Journal entries made to close the temporary accounts are called closing entries
This means each income and expense account will have a zero balance at the start of the
next accounting period
A new temporary account called the Profit and Loss Summary Account is created to
calculate profit and is the ONLY time the account is used
* Balance of each income and expense account is transferred to Profit and Loss
Summary
Debit balance of Expense account is transferred to Debit side of Profit and
Loss

Credit balance of Income account is transferred to Credit side of Profit and

Loss
Balance in Profit and Summary is transferred to Capital account
Credit side of Profit and Loss is transferred to Credit side of the Capital
account
Drawings account is transferred to the Capital account
The debit balance of drawings is transferred to debit side of capital

*
*

EXPENSE ACCOUNT (Debit)

DEBIT side Profit and Loss
INCOME ACCOUNT (Credit)
CREDIT side Profit and Loss
PROFIT AND LOSS SUMMARY
CREDIT side Capital
(Credit)
Account
DRAWINGS (Debit)
DEBIT side Capital Account
The closing of all accounts is done by making compound journal entries, and then posting
to the relevant account.
Closing entries are not shown on the worksheet
Adjusting entries are separated from closing entries by the heading, closing entries

Closing Income (Revenue) Accounts

Income account usually has a credit balance

To close the account, it must be debited with the equal amount to another account (the
Profit and Loss Summary account), an offsetting account
The sum of the credit balance is transferred to the credit side of Profit and Loss Summary
account

Closing Expense Accounts

Expense accounts usually have a debit balance

To close the account, it must be credited with the equal amount to the Profit and Loss
Transfers the sum of debits to the Profit and Loss Summary

Closing Profit and Loss Summary Account

If income exceeds expenses, there will be a profit and the account will have a credit
balance
If there is a loss, the account will have a debit balance
The balance is transferred to the Capital account by making a debit to the Profit and Loss
Summary

Closing Drawings Account

Debit balance in the drawings account reflects decrease in owners interest due to a
withdrawal of cash
The balance is transferred DIRECTLY to the Capital account by making a credit to the
Drawings account

Post-Closing Trial Balance

This helps to verify the equality of debits and credits in the general ledger, and confirm
the general ledger is in balance:
Only permanent accounts have balances at this point, which are used to prepare the end
of year post-closing trial balance, balance sheet and the figures used for the next
accounting period

Reversing entries for accruals

This is an alternative approach in the treatment of accrual entries for subsequent periods
Occurs after closing entries have been posted to the ledger

Reversing entries are dated at the first day of the next accounting period and reverse the
effects of certain adjusting entries made on the last day of the accounting period
Helps to simplify the recording of regular transactions for the next period
The reversing entry is the OPPOSITE of an adjusting entry
Useful for reversing adjusting entries for accruals, such as accrued income (revenue).

Reversing Deferrals

Adjusting entries are made for prepaid expenses and unearned or precollected revenue
The need for reversing entries to reverse the effects of any adjusting entries depend on
whether the initial recording of a transaction occurs in a permanent account (an asset or
liability account)
There is no need for reversing entries in relation to adjustments for supplies or
depreciation expenses no need to reverse entries with adjusting entries which are
gradually reducing in liability over time

Accounting procedures for partnerships and companies

Accounting and reporting for partnerships and companies are similar in most areas to
sole traders
Financial statements are essentially the same, except for the equity accounts
An important difference between all three types of business organisations is the way
income tax is determined
* Sole traders and partnerships are non-tax paying entities = their share of business
profit must be declared in their own personal tax return
* Companies are subject to company tax paid to the ATO and must show the amount
of income tax expense incurred

Accounting for a partnership

Separate Capital and Drawings accounts are maintained for each partner, as a minimum
Any investment made by a partner is credited to their individual own Capital account,
and a withdrawal is debited from their own Drawings account
Salary is regarded as a drawings
Profit is allocated to each Capital account

Accounting for companies

The equity section of the balance sheet is separated into two sections
* Share capital = amount of assets invested by the shareholders. This is recorded as
a credit
* Retained earnings (accumulated losses) = reflect the profits (losses) earned by
company and retained in the business.
Cash distributions called dividends may be made to shareholders of the company
* Before a dividend is paid, it must be declared
* Dividends are considered a distribution or withdrawal of profits by owners and are
not a cost incurred for the purpose of producing income
* A dividend declared is debited directly to Retained Earnings
* No closing entry is needed (unlike Drawings acc for sole trader/partnership)
* Retained Earnings
Dr 5000
Dividends Payable Cr
5000