CHAPTER 3
Recording transactions
LEARNING OBJECTIVES
1.
2.
3.
4.
5.
Identify the nature of, purpose of and evidence for transactions
Describe the accounting cycle used to record, classify and summarise transactions,
including the of ledger accounts and the general ledger
Outline the rules of debit and credit used in double-entry accounting and how to
apply these rules in analysing transactions
Explain the purpose and format of the general journal, record transactions in the
general journal and transfer the information to the general ledger
Discuss the purpose of the trial balance and how to prepare one.
TYPES OF TRANSACTIONS
External Transactions
Involve an outside party
Exchange of economic resources and/or obligations
SALE OF INVENTORY
PURCHASE OF SUPPLIES
Internal Transactions
Transformation of economic resources
USE OF OFFICE SUPPLIES
Non-Transactional Events
Not usually recorded, but may be in the future
RECEIVING AN ORDER FROM A CUSTOMER
SOURCE DOCUMENTS
Prepared for every external transaction
Support entries in accounting records
Important element in control system
Common source documents include:
Tax invoice (specific requirements as per ATO)
Purchase order
Cash register tape
Credit card slip
THE ACCOUNTING CYCLE
Steps in the
Cycle &
1. Recognise
record
Start of transactions
new
period
2.Prepare
financial
statements
Accounting
Records
Source documents
Source documents
Financial
statements
THE LEDGER ACCOUNT
Where effect of transactions is recorded
Three Basic Parts
Title
Place for recording increases
Place for recording decreases
e Explanation
Account Title
Amt
Date
Debit (Dr) side
Explanation
Credit (Cr) side
THE LEDGER ACCOUNT
Cash at Bank
Date
Explanation
Amount
2013
2/1
20/1
Explanation
Amount
2013
Darren Jones, Capital
35 000
Lawn and Garden
Income
31/1
Date
Accounts Receivable
3/1
Vehicle
3/1
Lawn and Garden
2 200
550
Equipment
22/1
21 000
9 000
Employee Wages
Expense
31/1
Accounts Payable
31/1
Darren Jones, Drawings
Balance c/d
450
2 500
200
4 600
ACCOUNT FORMATS
T-Accounts
Convenient way to show individual accounts
Illustrate effects of transactions on an account
Still used in practice for quick calculations
Running Balance Accounts
Used in formal accounting systems
Standard presentation for computerised systems
Familiar to most - format used in Bank Statements
ACCOUNT FORMATS
ACCOUNT
Date
Cash at Bank
Explanation
Account No. 100
Debit
Credit
Balance
2013
Jan. 2
Darren Jones, Capital
Vehicle
Lawn and Garden Equipment
20
Lawn and Garden Income
22
Wages Expense
31
Accounts Receivable
31
Accounts Payable
35 000
35 000
21 000
14 000
9 000
5 000
2 200
7 200
450
550
6 750
7 300
2 500
4 800
ACCOUNTS COMMONLY USED
An account is established for each type of
Asset
Liability
Equity
Income
Expense
Number and exact individual accounts varies depending
on size and type of organisation
ACCOUNTS: BALANCE SHEET
Asset Accounts
Cash at bank
Accounts receivable
Other receivables and debtors
Prepaid expenses
Land
Buildings
Plant and equipment
ACCOUNTS: BALANCE SHEET
Liability Accounts
Accounts payable
Unearned income
Other current liabilities
Mortgage payable
ACCOUNTS: BALANCE SHEET
Equity Accounts
Four main types of transactions
INVESTMENT OF ASSETS BY THE OWNER
WITHDRAWAL OF ASSETS BY THE OWNER
INCOME EARNED
EXPENSES INCURRED
Two account types
CAPITAL
DRAWINGS OR WITHDRAWALS
ACCOUNTS: INCOME STATEMENT
Income
Revenues
INCOME THAT ARISES IN THE COURSE OF ORDINARY
ACTIVITIES OF AN ENTITY
USUALLY THROUGH THE PROVISION OF SERVICES OR
SALE OF GOODS
Gains
INCOMES THAT DOES NOT USUALLY ARISE IN THE COURSE
OF ORDINARY ACTIVITIES OF AN ENTITY
USUALLY OF A NON-RECURRING OR SPORADIC NATURE
ACCOUNTS: INCOME STATEMENT
Expenses
The cost of services and economic benefits
consumed or lost or liabilities incurred during
the period
Profit
When total income exceeds total expenses
Loss
When total expenses exceeds total income
GENERAL LEDGER
Collection of all the individual accounts
of an entity
Organised in the order they appear in
the balance sheet and income statement
Each account has a specific identification
number
Can vary from simple two digit number to complex
alphanumeric system
DOUBLE-ENTRY ACCOUNTING
Each transaction must be analysed to
determine:
What type of accounts are affected
ASSETS; LIABILITIES; EQUITY; INCOME; EXPENSE
By how much each item must be increased or
decreased
The accounting equation must always
remain in balance
DEBITS AND CREDITS
Often cause confusion, mainly due to previous exposure to the terms
(bank statements)
In accounting, instructions detailing where in the ledger the balance
needs to be recorded
Debit = on the left
Credit = on the right
No meaning beyond that instruction
DEBITS AND CREDITS
Rules
Assets are debit in nature
Debits = Credits
Accounting equation: A = L + Eq
Therefore, Liabilities and Equity must be credit in nature
Income increases Equity; credit increases Equity
Therefore Income must be credit in nature
Expenses decreases Equity; debit decreases Equity
Therefore Expenses must be debit in nature
DEBIT AND CREDIT RULES
Accounts: Balance Sheet
Assets
= Liabilities +
Debit to
Credit to Debit toCredit to Debit toCredit to
Equity
increase
decrease decrease
increase decrease
increase
Normal
balance
Normal
balance
Normal
balance
DEBIT AND CREDIT RULES
Accounts: Income Statement
Income (incl. revenues)
Expenses
Debit to Credit to
Debit to Credit to
decreaseincrease
increase decrease
Normal
balance
Normal
balance
DEBIT AND CREDIT RULES
All assets accounts = All liability accounts +
All equity accounts
CreditCr
to
Debit to
to Credit
DrCredit
Cr to Debit Dr
Cr to Debit toDr
increase decrease decreaseincrease decreaseincrease
Normal
Normal
Normal
balance
balance
balance
Expense
Income
accounts
accounts
to Credit to
Debit
Drto Credit to DebitDr
increase decrease decreaseincrease
Cr
Cr
Normal
Normal
balance
balance
NORMAL ACCOUNT BALANCES
Increases
Normal
Recorded On
Balance
Debit side
Debit
Credit side
Credit
Account
Assets
Liabilities
Equity
Investment in entity
Credit side
Credit
Drawings from entity Debit side
Debit
Income: Revenues Credit side
Credit
Expenses
Debit side
Debit
EXPANDED ACCOUNTING CYCLE
1. Recognise & record
transactions
2. Journalise transaction
Source documents
General journal
3. Post to ledger accounts
General ledger
4. Prepare trial balance of
GL
5. Prepare financial
statements
Trial balance
Financial
statements
GENERAL JOURNAL
Once analysed a transaction is recorded
first in the general journal
A journal has the following advantages:
Complete record of all transactions
Presented in chronological order
Useful for locating and reducing errors as debits and
credits shown together
RECORDING TRANSACTIONS
IN A JOURNAL
Two or more accounts are affected by each transaction
The debits must always equal the credits
The accounting equation remains in balance
General Journal
Date
Particulars
Post
Ref
Cash at Bank
100
Debit
Credit
2013
Jul 5
15 400
Marketing Services Revenue
402
14 000
GST Collections
250
1 400
(Marketing services rendered)
POSTING FROM JOURNAL
TO LEDGER
General journal records each transaction
General ledger records effect transactions on each
individual account
Think of journal as an instruction which accounts are
changing, which direction and by how much?
In a computerised system
Posting is automated
Therefore it is important that the initial entries are correct
Debits and credit automatically checked for equality
TRIAL BALANCE
Lists all ledger accounts and their balances
Debits in one column, credits in another
The totals of both columns must be equal
If this is the case, the ledger balances
Limitations of the trial balance
May balance but still contain errors
If it doesnt balance there is definitely an error but it
doesnt tell you what the error is
Thank you
END
