Different Transactions Borrow and invest money. Purchase land, Buy and sell buildings, and goods or equipment. services. Exchange Transactions Pay wages to Pay taxes to the employees. government. Distribute earnings to owners.
Business DocumentsExamples: Sales invoice, purchase order, Bills and Receipts etc.Business documents are used to confirm that an arm’s-length transaction has 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 1 Analyze transactions. Analyze transactions.Step 2 Record the effects of the transactions Record the effects of the transactions Journal Entries. Journal Entries.Step 3 Classify and Summarize the effects of Classify and Summarize the effects of transactions. transactions. 1. 1. Posting Ledger entries.. Posting Ledger entries 2. 2. Preparing a trial balance. Preparing a trial balance. 4 Validation and Preparation of reports. Validation and Preparation of reports.Step 1. Adjusting entries. 1. Adjusting entries. 2. 2. Preparing financial statements. Preparing financial statements. 3. 3. Closing the books. Closing the books.
THE ACCOUNT An account is an individual, detailed accounting record of increases and decreases in a specific asset, liability, or stockholders’ equity item. A company will have separate accounts for such items as cash, salaries expense, accounts payable, and so on. Vehicle
THE ACCOUNTStockholders’ (Owners’) equity is the owners’ claims to the assets of a corporation A proprietorship uses a single account A partnership uses separate accounts for each owner’s capital balance and withdrawals A corporation uses separate capital accounts for each source of capital
CHART OF ACCOUNTSMost companies have a chart of accounts that Most companies have a chart of accounts thatlists the accounts and the account numbers lists the accounts and the account numberswhich identify their location in the ledger. which identify their location in the ledger.
RECORDING: JOURNALThis is the process of analyzing and recording the changesEntering the Debit (Dr) Change or Credit (Cr) change in the booksUse the “dual concept” Dr = CrThe primary book called “Journal”
RULE FOR RECORDING INCREASE IN ASSETS/INCREAS E IN EXPENSES DR CHANGE EQUALS INCREASE IN LIABILITY/INCREASE IN INCOME IS CR CHANGE
The Double-Entry System:Each transaction affects at least two accounts
RECORDING IN THE JOURNAL Accountants record transactions first in a journal: a chronological record of an entity’s transactions Steps of the journalizing process Identify the transaction from source documents, such as bank deposit slips, sale receipts, and check stubs Specify each account affected by the transaction and classify it by type (asset, liability, stockholders’ equity, revenue, or expense)
RECORDING TRANSACTIONS IN THE JOURNALDetermine whether each account is increased or decreased by the transactionDetermine whether to debit or credit the account to record its increase or decreaseEnter the transaction in the journal, including a brief explanation for the entry (Enter the debit side first and the credit side next Keep them Happy)
THE JOURNALTransactions are initially recorded in chronological order in a journal before being transferred to the accounts.Every company has a general journal which contains: 1 spaces for dates, 2 account titles and explanations, 3 references, and 4 two amount columns.
TECHNIQUE OF JOURNALIZINGThe date of the transaction is entered in this column.The date of the transaction is entered in this column.
TECHNIQUE OF JOURNALIZINGA brief explanation of the transaction is given.A brief explanation of the transaction is given.
TECHNIQUE OF JOURNALIZING
Date ACCT A/L/I/E UP/ DR AMT DN CR1/4 CASH A UP DR 100000 SHARE CAPITAL L UP CR 100000 (Being entry to record the amount of capital )2/4 BANK A UP DR 70000 CASH A DN CR 70000( Opened a bank account)
CLASSIFICATION GENERAL LEDGER
COPYING INFORMATION (POSTING) FROM THE JOURNAL TO THE LEDGER The ledger is a grouping of all accounts with their balances Data must be copied to the appropriate accounts in the ledger - a process called posting
The left side is called the debit side,and the right side is called the creditside Account Title Debit Credit Every business transaction involves both a debit and a credit
Similar to bank Pass Book Format Cash AccountDate Explanation ref Amt Amt Balanc Dr Cr e
LEDGER:Share Capital AccountDATE PARTICULAR JF DR./ CR.Mar 1 Opening Balance 1 150,000Mar 1 Recd Cash 100,000 Total 250,000 Balance 108,000
The type of account determines how increases and decreases are recorded in it: Stockholders’AccountingAccounting Assets = Liabilities + Equity Equation EquationRules of Rules ofDebit andDebit and Credit Debit Credit Debit Credit Debit Credit Credit + - - + - +
THE NORMAL BALANCE OF AN ACCOUNTAn account’s normal balance is the side of the account - debit or credit - where increases are recorded Assets are called debit-balance accounts Liabilities and stockholders’ equity are called credit- balance accounts
What are the normal balancesShare CapitalSalesGeneral ReserveCash and Bank BalanceSalariesSundry DebtorsBalance in Profit and Loss Account.31.3.20X4Bad Debt ExpensesInterest IncomeInventory as on 1.4.20X4Depreciation ExpensesInterest ExpensesIncome Tax Expenses
Bills ReceivableProvision for Doubtful DebtsAccumulated Depreciation – Equipment Advanceto SuppliersLandEquipment at costTerm Loan from Can BankInsurance ExpensesInvestment in Shares of ABC Ltd.General ExpensesSelling ExpensesLoan from ICC BankPurchasesInterim DividendSundry CreditorsProvision for Income taxPrepaid Insurance
DepreciationDepreciation is the allocation of cost (Depreciable value) over the useful life of the assetIt is a process of allocation not valuationDepreciable value = Cost – salvage valueUseful Life of an Asset is not the same as physical life. It depends on many factors like obsolescence, wear and tear etc
Depreciation Some Terms: Original cost (OC) of the asset Expected Useful life of the asset (This is not the physical life) Residual Value (RV) at the end of the useful life Depreciable Value of the asset (OC-RV)
Depreciation Depreciation is treated as Expenses and is charged to the profit and loss account Accumulated Depreciation is the sum of depreciation charged to the profit and loss account till the end of the current financial year
DepreciationMethods of Charging Depreciation Straight Line Method Reducing Balance MethodWhich ever method you use the total depreciation to be charged over the useful life will be the same
DepreciationSelection of the methodConceptually the method chosen should result in the accurate allocationOther factors that affect include simplicity, savings in record keeping cost, tax laws and legal requirements.
THE TRIAL BALANCE A trial balance is a list of accounts and their balances at a given time. The primary purpose of a trial balance is to prove the mathematical equality of DR and CR after posting. A trial balance also uncovers errors in journalizing and posting. The steps for preparing a trial balance are: 1 List the account titles and their balances. 2 Total the columns. 3 Prove the equality of the two columns.
TRIAL BALANCEThe TRIAL BALANCE MUSTALWAYS BALANCETotal DRs = Total CRs.
Trial Balance as on 31.3.xxLF. ACCOUNTS DR. CR. 1 CASH 29,750 2 SHARE CAPITAL 108,000 RETAINED EARNINGS 2,000 3 BANK ACCOUNT 20000 4 RENT DEPOSIT 10,000 ACCOUNT 5 FURNITURE 30,000 6 LOAN 10,000 7 STOCK OF GOODS 15,250 8 SUNDRY CREDITORS 36,000 PURCHASE 9 INVESTMENT 10,000
ERRORS IN TRIAL BALANCEErrors are located firstErrors are corrected by passing journal entries or rectification entries.
If total debits and total credits on the trial balance are not equal, then accounting errors existOutdated(In manual accounts the trial balance difference is put in a suspense account and later entries are passed to rectify the same)
LIMITATIONS OF A TRIAL BALANCE A trial balance does not prove that all transactions have been recorded or that the ledger is correct. Numerous errors may exist even though the trial balance columns agree. The trial balance may balance even when: 1 a transaction is not journalized, 2 a correct journal entry is not posted, 3 a journal entry is posted twice, 4 incorrect accounts are used in journalizing or posting, 5 offsetting errors are made in recording the amount of the transaction.
REVIEW Process Remember the “ Accounting Period” concept Do items shown as income represent the earnings for the period Have all income transactions relating to the period brought into account Are all expenses items taken into account and truly reflect the “expense” for the period
REVIEW Process Remember Unearned Revenue Accrued Revenue ( earned but not received ) Accrued Expenses (expenses incurred but not paid yet) Prepaid Expenses (Paid in advance like insurance etc) Accrual basis of Accounting Vs. Cash Basis of Accounting Cash Basis of accounting there are no accrual of expenses or income. Income/ Exp are only on cash.
RECAP REALIZATION PRINCIPLE MATCHING PRINCIPLE ACCRUAL PRINCIPLE REVENUE FOR CURRENT PERIOD = ?? EXPENSES FOR CURRENT PERIOD = ?? Deferral and Accrual
SPECIAL ENTRIESDEPRECIATION ACCUMULATED DEPRECIATION (called a contra account)INCOME TAX EXPENSES INCOME TAX PAYABLE
USING A WORK SHEETACCO ADJUSTEDUNT TRIAL TRIAL BALANCE ADJUSTMENTS BALANCECAPITALSalary 100 5 105Sal 5 5payabl
Adjustment EntriesThey affect more than one accounting periodBoth balance sheet and income statement are affected by it
PREPARATION OF FINANCIAL STATEMENTSFrom the Final Trial balance the financial statements are preparedProfit and Loss AccountBalance SheetCash Flow statement