Acc week 3

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Acc week 3

  1. 1. Recording Business Transactions – Double Entry Recording and Account Week 3
  2. 2. In Your Textbook... <ul><li>Roshayani Arshad, et al. (2007), Financial Accounting An Introduction , 2 nd Edition, Malaysia, McGraw Hill. </li></ul><ul><li>Chapter 3: Accounting Equation and Double Entry System (pp.27 – 38) </li></ul>
  3. 3. An Account <ul><li>A part of the accounting system used to classify and summarise the increases, decreases and balances of each asset, liability and owner’s equity. </li></ul><ul><li>There is an account for each item where it records or keeps account of every changes to a particular item. </li></ul>
  4. 4. Major Account Classifications Assets are resources owned by the business. Liabilities are debts owed to outsiders (creditors). Cash Supplies Building Accounts receivable Accounts payable Notes payable Wages payable
  5. 5. Major Account Classifications Liabilities are debts owed to outsiders (creditors). Cash Supplies Building Accounts receivable Accounts payable Notes payable Wages payable Assets are resources owned by the business. Liabilities are often identified on the balance sheet by titles that include payable .
  6. 6. Owner’s equity is the owner’s right to the assets of the business. Revenues are increases in owner’s equity as a result of selling services or products. Chris, Capital Chris, Drawing Fees Earned Fares Earned Commission Revenue Expenses are the using up of assets or consuming of services to generate revenue. Rent Expense Salary Expense Utilities Expense Major Account Classifications
  7. 7. To assist you in learning, an account can be drawn to resemble the letter T.
  8. 8. The T-Account The T-account has a title. Cash
  9. 9. The T-Account The left side of the account is the debit side. Cash Left side debit
  10. 10. The T-Account The right side of the account is the credit side. Cash Left side debit Right side credit
  11. 11. The T-Account Dr Title of Account Cr Date Particulars Folio Amount $ Date Particulars Folio Amount $
  12. 12. The T-Account Cash John 3,750 Interest 4,300 Capital 2,900 Utilities 850 Supplies 1,400 Drawings 700 Creditors 2,900 Typical entries
  13. 13. Balancing a T-Account
  14. 14. Cash 3,750 4,300 2,900 850 1,400 700 2,900 First, foot the debit side. 10,950
  15. 15. 850 1,400 700 2,900 Cash 3,750 4,300 2,900 Next, foot the credit side. 10,950 5,850
  16. 16. 850 1,400 700 2,900 Cash 3,750 4,300 2,900 Subtract total credits from total debits to obtain the account balance. 5,100 10,950 5,850
  17. 17. Balancing The T-Account Cash John 3,750 Interest 4,300 Capital 2,900 10,950 Balance b/d 5,100 Utilities 850 Supplies 1,400 Drawings 700 Creditors 2,900 Balance c/d 5,100 10,950 Enter the balance amount as c/d at the end of period and b/d for the next period.
  18. 18. Columnar Format <ul><li>Has an advantage over the T format in that with every entry in the account, a new balance is created. </li></ul>Title of Account Date Particulars Folio Debit $ Credit $ Balance $
  19. 19. CASH Date Particulars Folio Debit $ Credit $ Balance $ 2/2 4/2 Revenue Interest income 100 50 100 150
  20. 20. Asset Accounts <ul><li>Opening balances as entries on the left-hand side (debit entries). </li></ul><ul><li>An increase is recorded on the debit side while decrease on the credit side. </li></ul>Asset accounts will typically have debit balances. Dr Asset Account Cr Balance b/d Increase (+) Decrease (-)
  21. 21. Liability Accounts <ul><li>Opening balances as entries on the right-hand side (credit entries). </li></ul><ul><li>Increase is recorded on the credit side while decrease on the debit side. </li></ul>Liability accounts will typically have credit balances. Dr Liability Account Cr Balance b/d Decrease (-) Increase (+)
  22. 22. Owner’s Equity Account <ul><li>Similar to liability accounts. </li></ul><ul><li>Increase is recorded on the credit side while decrease on the debit side. </li></ul>OE accounts will typically have credit balances. Dr Owner’s Equity Account Cr Balance b/d Decrease (-) Increase (+)
  23. 23. Debits Credits Asset accounts………. Increase (+) Decrease (-) Liability accounts…… Decrease (-) Increase (+) Owner’s equity (capital) accounts…. Decrease (-) Increase (+) Rules of Debit / Credit Balance Sheet Accounts
  24. 24. Credit for increases (+) Credit for increases (+) Credit for decreases (-) Debit for increases (+) Debit for decreases (-) Debit for decreases (-) Balance Sheet Accounts ASSETS Asset Accounts LIABILITIES Liability Accounts Owner’s Equity Accounts OWNER’S EQUITY
  25. 25. Transactions and Accounts
  26. 26. (A) On November 1, Chris brings in cash RM25,000 to start a business in the name of NetSolutions. Effects of this entry in the account Cash Nov 1 Capital 25,000 Nov 1 Cash 25,000 Chris, Capital
  27. 27. Effects of this entry in the account Cash Nov 1 25,000 Nov 5 Land 20,000 Land Nov 5 Cash 20,000 (B) On November 5, NetSolutions bought land for RM20,000, paying cash.
  28. 28. (C) On November 10, NetSolutions purchased supplies on account for RM1,350. Effects of this entry in the account Supplies Nov 10 Acc. Payable 1,350 Accounts Payable Nov 10 Supplies 1,350
  29. 29. Cash Nov. 1 25,000 Nov. 5 25,000 18 7,500 30 3,650 Effects of this entry in the account Accounts Payable Nov. 10 1,350 Nov 30 Cash 950 30 Acc. Payable 950 (F) On November 30, NetSolutions paid creditors on account, RM950.
  30. 30. In every entry the sum of the debits always equal the sum of the credits.
  31. 31. Double-Entry Accounting “ Double-entry accounting is based on a simple concept: each party in a business transaction will receive something and give something in return. In bookkeeping terms, what is received is recorded on one side and what is given is on the other side. The T account is a representation of a scale of balance.” Luca Pacioli Developer of Double-Entry Accounting Scale of Balance Receive Give T account Receive Give
  32. 32. Take A Break!
  33. 33. Lecture Exercise 1 Record the following transactions in the T account. <ul><li>Jan 1 Began business by investing RM50,000 cash. </li></ul><ul><li>3 Purchased RM2,300 for office supplies on credit . </li></ul><ul><li>10 Owner brought in office equipment for business use which values RM5,000. </li></ul><ul><li>11 Paid RM1,500 for the supplies purchased on 3 January. </li></ul><ul><li>20 Paid RM3,000 to purchase new office furniture. </li></ul><ul><li>29 The remaining balance for supplies purchased on 3 January was paid. </li></ul><ul><li>30 The bank has approved a loan to the business for RM100,000. </li></ul>
  34. 34. CASH CAPITAL BACK Capital Jan 1 50,000 Cash Jan 1 50,000
  35. 35. OFFICE SUPPLIES ACCOUNT PAYABLE BACK A/C Payable Jan 3 2,300 Office Supplies Jan 3 2,300
  36. 36. OFFICE EQUIPMENT CAPITAL BACK Capital Jan 10 5,000 Office Equipment Jan 10 5,000 Cash Jan 1 50,000
  37. 37. ACCOUNTS PAYABLE CASH BACK Cash Jan 11 1,500 A/C Payable Jan 11 1,500 Office Supplies Jan 3 2,300 Capital Jan 1 50,000
  38. 38. OFFICE FURNITURE CASH BACK Cash Jan 20 3,000 A/C Payable Jan 11 1,500 Capital Jan 1 50,000 Office Furniture Jan 20 3,000
  39. 39. ACCOUNTS PAYABLE CASH BACK Cash Jan 11 1,500 Office Supplies Jan 3 2,300 A/C Payable Jan 11 1,500 Capital Jan 1 50,000 Office Furniture Jan 20 3,000 Cash Jan 29 800 A/C Payable Jan 29 800
  40. 40. BANK BANK LOAN Bank Loan Jan 30 100,000 Bank Jan 30 100,000
  41. 41. CASH A/C Payable Jan 11 1,500 Capital Jan 1 50,000 Office Furniture Jan 20 3,000 A/C Payable Jan 29 800 Balance c/d Jan 31 44,700 Balance b/d Feb 1 44,700 50,000 50,000
  42. 42. Office Equipment Jan 10 5,000 CAPITAL Cash Jan 1 50,000 55,000 55,000 Balance c/d Jan 31 55,000 Balance b/d Feb 1 55,000
  43. 43. OFFICE SUPPLIES ACCOUNTS PAYABLE A/C Payable Jan 3 2,300 2,300 2,300 Balance c/d Jan 31 2,300 Balance b/d Feb 1 2,300 Cash Jan 11 1,500 Office Supplies Jan 3 2,300 Cash Jan 29 800 2,300 2,300
  44. 44. OFFICE EQUIPMENT OFFICE FURNITURE 3,000 Capital Jan 10 5,000 5,000 5,000 Balance c/d Jan 31 5,000 Balance b/d Feb 1 5,000 Cash Jan 20 3,000 3,000 Balance c/d Jan 31 3,000 Balance b/d Feb 1 3,000
  45. 45. BANK BANK LOAN Bank Loan Jan 30 100,000 Bank Jan 30 100,000 100,000 Balance b/d Feb 1 100,000 100,000 Balance b/d Feb 1 100,000 100,000 100,000 Balance c/d Jan 31 100,000 Balance c/d Jan 31 100,000
  46. 46. Revenue Accounts <ul><li>Revenue items generate profit that belongs to the owner and which will increase the owner’s equity. </li></ul><ul><li>Increases are recorded as credits and decreases as debits. </li></ul>Dr Revenue Account Cr Decrease (-) Increase (+)
  47. 47. Expenses Accounts <ul><li>Expenses include all items incurred in the process of generating revenue. </li></ul><ul><li>Such as: rent, transport, insurance, advertising and wages. </li></ul><ul><li>Increase in expense recorded as debit entries. A reduction in expenses is recorded as credits. </li></ul>Dr Expenses Account Cr Increase (+) Decrease (-)
  48. 48. Credit for increases (+) Credit for decreases (-) Debit for increases (+) Debit for decreases (-) Expense Accounts Revenue Accounts Rules of Debit / Credit Income Statement Accounts
  49. 49. Debits Credits Revenue accounts…… Decrease (-) Increase (+) Expense accounts…… Increase (+) Decrease (-) Income Statement Accounts
  50. 50. Effects of this entry in the account. Cash Nov. 1 25,000 Nov. 5 25,000 Fees Earned Nov 18 Cash 7,500 18 Fees 7,500 (D) On November 18, NetSolutions received fees of RM7,500 from customers for services provided .
  51. 51. Effects of this entry in the account. Cash Nov. 1 25,000 Nov. 5 25,000 Wages Expense Nov 30 Cash 2,125 18 7,500 Rent Expense Nov 30 Cash 800 Utilities Expense Nov 30 Cash 450 Miscellaneous Expense Nov 30 Cash 275 30 3,650 (E) Throughout the month, NetSolutions incurred the following expenses: wages, RM2,125; rent, RM800; utilities, RM450; and miscellaneous, RM275 .
  52. 52. Returns Inwards Account / Sales Returns Account <ul><li>A customer may return goods sold to him because they are defective, damaged, unsatisfactory, of the wrong brand or specification. </li></ul><ul><li>Effect: reduce in the amount of revenue earned by the business. </li></ul><ul><li>For better control and a clearer record of sales, a separate Return Inwards Account is opened and debited. </li></ul>
  53. 53. <ul><li>Example: </li></ul><ul><li>12 Jul 2005 Sold goods on credit to Chen for $4,000. </li></ul><ul><li>20 Jul 2005 Chen returns defective goods worth $500. </li></ul>Dr Chen (Debtor) Cr Jul 12 Sales 4,000 Jul 20 Return Inwards 500 Dr Sales Account Cr Jul 12 Chen 4,000 Dr Return Inwards Account Cr Jul 20 Chen 500
  54. 54. Returns Outwards Account / Purchases Returns Account <ul><li>A trader may return goods to his supplier for similar reasons as returns inwards. </li></ul><ul><li>Any purchases that are returned are treated as decrease in expenses and are credited to a Returns Outwards Account or Purchases Returns Account. </li></ul>
  55. 55. <ul><li>Example: 19 Nov Trader returned goods previously bought on credit worth RM250 to Li Brothers, his supplier, because they were of the wrong brand. </li></ul>Dr Li Brothers (Creditor) Cr Nov 19 Returns Outwards 250 Dr Returns Outwards Account Cr Nov 19 Li Brothers 250
  56. 56. <ul><li>Feb 1 Paris started her salon business with self cash capital of RM25,000 and furniture cost RM20,000. </li></ul><ul><li>1 Bought some beauty supplies from Kent Bhd at cost RM3,000 on account . </li></ul><ul><li>1 Paid one month rental of RM1,000 for the shop. </li></ul><ul><li>2 Paid for advertising cost amounting to RM1,200 . </li></ul><ul><li>15 The salon started to serve many customers and generate revenues amounting RM3,100 cash and RM5,000 on credit. </li></ul><ul><li>24 Billed the Royal Dance Club for services rendered by the salon for RM2,200. No payment received yet . </li></ul><ul><li>26 A credit note was sent for over-charging a customer on account amounting RM500. </li></ul><ul><li>28 Paid salaries for the month, RM10,000. </li></ul><ul><li>28 Paid Kent Bhd the full amount owed. </li></ul>Lecture Exercise 2 Record the following transactions in the T account.
  57. 57. CASH Revenue Feb 15 3,100 Capital Feb 1 25,000 Shop rental expenses Feb 1 1,000 Advertising expenses Feb 2 1,200 Salary expenses Feb 28 10,000 A/C Payable Feb 28 3,000 28,100 28,100 Balance c/d Feb 28 12,900 Balance b/d Mar 1 12,900
  58. 58. FURNITURE CAPITAL 20,000 Capital Feb 1 20,000 20,000 Balance c/d Feb 28 20,000 Cash Feb 1 25,000 Furniture Feb 1 20,000 45,000 45,000 Balance c/d Feb 28 45,000 Balance b/d Mar 1 20,000 Balance b/d Mar 1 45,000
  59. 59. BEAUTY SUPPLIES ACCOUNT PAYABLE -- KENT A/C Payable Feb 1 3,000 Beauty Supplies Feb 1 3,000 Cash Feb 28 3,000 3,000 3,000 3,000 3,000 Balance c/d Feb 28 3,000 Balance b/d Mar 1 3,000
  60. 60. SHOP RENTAL EXPENSES ADVERTISING EXPENSES Balance c/d Feb 28 1,000 Balance b/d Mar 1 1,000 Cash Feb 1 1,000 Cash Feb 2 1,200 1,000 1,000 1,200 1,200 Balance c/d Feb 28 1,200 Balance b/d Mar 1 1,200
  61. 61. ACCOUNT RECEIVABLE 10,300 10,300 Balance c/d Feb 28 10,300 Revenue Feb 15 5,000 Return Inwards Feb 26 500 Revenue Feb 24 2,200 7,200 7,200 Balance c/d Feb 28 6,700 Balance b/d Mar 1 6,700 Balance b/d Mar 1 10,300 A/C Receivable Feb 24 2,200 Feb 15 A/C Receivable 5,000 Cash Feb 1 3,100 REVENUE
  62. 62. RETURN INWARDS SALARY EXPENSES Account Receivable Feb 26 500 Cash Feb 28 10,000 500 500 10,000 10,000 Balance c/d Feb 28 10,000 Balance c/d Feb 28 500 Balance b/d Mar 1 500 Balance b/d Mar 1 10,000
  63. 63. Withdrawals by the Owner
  64. 64. 30 950 30 Drawings 2,000 Cash Nov. 1 25,000 Nov. 5 25,000 18 7,500 30 3,650 Effects of this entry in the Ledger Chris, Drawing Nov. 10 1,350 Nov 30 Cash 2,000 (G) On November 30, Chris withdrew RM2,000 in cash from NetSolutions for personal use.
  65. 65. Increase (Normal Balances) Decreases Balance sheet accounts: Asset Debit Credit Liability Credit Debit Owner’s Equity: Capital Credit Debit Drawing Debit Credit Income statement accounts: Revenue Credit Debit Expense Debit Credit Normal Balances of Accounts
  66. 66. Flow of Business Transactions 1 Transaction authorized 2 Transaction takes place 3 Document prepared 4 Entry recorded in journal 5 Entry posted to ledger
  67. 67. Lecture Exercise 3 The account balances as at the end of April 06 for Sean Enterprise are as follows: Accounts RM Cash 48,500 Accounts Receivable 76,700 Stock 750 Accounts Payable 26,000 Sean, Capital 113,050 Sean, Drawing 19,500
  68. 68. CASH CASH ACCOUNTS RECEIVABLE STOCK Balance b/d May 1 48,500 Balance b/d May 1 76,700 Balance b/d May 1 750
  69. 69. ACCOUNTS PAYABLE SEAN, CAPITAL SEAN, DRAWING Balance b/d May 1 26,000 Balance b/d May 1 113,050 Balance b/d May 1 19,500
  70. 70. <ul><li>May 1 Purchase goods on account RM1,700. </li></ul><ul><li>3 Received cash from clients on account, RM67,900. </li></ul><ul><li>5 Paid insurance premiums for May, RM350. </li></ul><ul><li> 11 Returned a portion of the goods purchased on 1 May. The cost was RM500. </li></ul><ul><li>15 Paid advertising expense, RM3,800. </li></ul><ul><li>17 Paid creditors, RM14,800. </li></ul><ul><li>21 Paid monthly office rent, RM4,500 </li></ul><ul><li>23 Recorded sales made during the month RM91,900. </li></ul><ul><li>27 Withdrew cash for personal use, RM4,500. </li></ul><ul><li>31 Paid salaries and commissions for the month, RM61,200 . </li></ul>Lecture Exercise 3 Record the opening balances and the following transactions in the T account of Sean Enterprise.
  71. 71. STOCK ACCOUNTS PAYABLE Back Balance b/d May 1 750 Balance b/d May 1 26,000 A/C Payable May 1 1,700 Stock May 1 1,700
  72. 72. CASH ACCOUNTS RECEIVABLE Back Balance b/d May 1 48,500 Balance b/d May 1 76,700 A/C Receivable May 3 67,900 Cash May 3 67,900
  73. 73. INSURANCE EXPENSES CASH Back Cash May 5 350 Balance b/d May 1 48,500 A/C Receivable May 3 67,900 Insurance expenses May 5 350
  74. 74. ACCOUNTS PAYABLE RETURN OUTWARDS Back Balance b/d May 1 26,000 Stock May 1 1,700 A/C Payable May 11 500 Return Outwards May 11 500
  75. 75. ADVERTISING EXPENSES CASH Back Cash May 15 3,800 Balance b/d May 1 48,500 A/C Receivable May 3 67,900 Insurance expenses May 5 350 Advertising expenses May 15 3,800
  76. 76. CASH ACCOUNTS PAYABLE Back Balance b/d May 1 48,500 A/C Receivable May 3 67,900 Insurance expenses May 5 350 Advertising expenses May 15 3,800 Balance b/d May 1 26,000 Stock May 1 1,700 Return Outwards May 11 500 A/C Payable May 17 14,800 Cash May 17 14,800
  77. 77. CASH OFFICE RENT EXPENSES Back Balance b/d May 1 48,500 A/C Receivable May 3 67,900 Insurance expenses May 5 350 Advertising expenses May 15 3,800 A/C Payable May 17 14,800 Cash May 21 4,500 Rent expenses May 21 4,500
  78. 78. ACCOUNTS RECEIVABLE SALES Back Balance b/d May 1 76,700 Cash May 3 67,900 A/C Receivable May 23 91,900 Sales May 23 91,900
  79. 79. SEAN, DRAWING CASH Back Balance b/d May 1 19,500 Balance b/d May 1 48,500 A/C Receivable May 3 67,900 Insurance expenses May 5 350 Advertising expenses May 15 3,800 A/C Payable May 17 14,800 Rent expenses May 21 4,500 Drawing May 27 4,500 Cash May 27 4,500
  80. 80. SALARIES AND COMMISSION EXPENSES CASH Back Cash May 31 61,200 Balance b/d May 1 48,500 A/C Receivable May 3 67,900 Insurance expenses May 5 350 Advertising expenses May 15 3,800 A/C Payable May 17 14,800 Rent expenses May 21 4,500 Drawing May 27 4,500 Salaries & Commissions May 31 61,200

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