Chapter 4ACCOUNTING RECORDS AND SYSTEMS
Account   An account is an individual accounting    record of increases and decreases    labeled as debits and credits. ...
Permanent Accounts   real accounts = balance sheet accounts.   Reported on balance sheet.   Carried forward into next p...
Temporary Accounts   Revenue and expense accounts.   Details of income statement and changes in    retained earnings (RE...
General Ledger   General ledger contains all accounts.   Some accounts may be in summary form.       E.g. accounts rece...
Accounting Cycle/Process1.   Identify the transactions.2.   Record the entries by making entries in the     appropriate jo...
Debit & Credit Two of the most familiar accounting  terms are “debits and credits.” In the  double-entry system, debits m...
Debit & Credit Recording $s on the left side of an  account is debiting the account Recording $s on the right side is  c...
Tabular Summary Vs. Account Form
Basic Form Of Account  The simplest form an account consists of1 the title of the account2 a left or debit side3 a right ...
Normal Balances-Assets & Liabilities                  Assets             Increase   Decrease             Debit      Credit...
Normal Balance- Owners Capital             Owner’s Capital        Decrease         Increase        Debit            Credit...
T Accounts for Revenue & Expenses    ANY EXPENSE       ANY REVENUE   NORMAL                    NORMAL   BALANCE           ...
Summarizing Rules of Debit & Credit                               Normal               Increase Decrease BalanceAssets    ...
Double Entry System total debits always equal the total credits accounting equation always stays in balanceAssets= Liabi...
Expanded Basic Equation & Debit CreditRules & Effect   Assets     = Liabilities +             Owner’s Equity              ...
To summarize..   Debit:    Increase in Assets              Decrease in Liabilities              All Expenses (losses)   ...
Example Mr. A started business with an initial capital of Rs.5,000.  Mr. A purchased goods worth Rs.10,000 from Mr. Y on ...
Sr No Assets               Liabilities    Owner’s          Income/    Expenses/     Total                                 ...
The JournalTransactions  are initially recorded (journalized) in chronologicalorder before they are transferred to the le...
Journalizing   Entering transaction data in the journal is    known as journalizing.   Separate journal entries are made...
Technique of JournalizingThe date of the transaction is entered into the date column.The debit account title is entered at...
Compound Journal Entry      When three or more accounts are required in one      journal entry, the entry is referred to a...
The Trial Balance   The trial balance is a list of accounts and their    balances at a given time.   The primary purpose...
A Trial Balance               PIONEER ADVERTISING AGENCY                        Trial Balance                      October...
Profit & Loss Account, Balance Sheet    Just as you have programming languages with    different syntax to write programme...
Accounting System   Consists of:       Journals.       Ledgers.       Rules for using them.   Manual, computerized, o...
Objectives of Accounting System   To process information efficiently (low cost).   To obtain reports quickly.   To ensu...
Internal Accounting Controls   Basic Principle: make it as difficult as is practical for    people to be dishonest or car...
Examples of Internal Controls    Separation of duties:        Record keeping.        Custody of assets.        Authori...
What a Computer BasedAccounting System Does   Mechanical steps are bookkeeping.   A computer based system performs some ...
Inputs   Data entry clerk using a keyboard.   Point of origin: Factory time records, inventory    counts, receiving reco...
Processing and Output Examples   Processing:       Only accept entries if debits equal credits.       Assigning seat nu...
Modules   Interconnected software programs. Examples:       Order entry. Processes sales orders, records shipments,     ...
Opportunities and Problems withComputer Systems   Efficiency over manual systems.   Off the shelf systems available for ...
Chapter 4
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Chapter 4

  1. 1. Chapter 4ACCOUNTING RECORDS AND SYSTEMS
  2. 2. Account An account is an individual accounting record of increases and decreases labeled as debits and credits. There are separate accounts for each classification type such as cash, salaries expense, accounts payable, etc.
  3. 3. Permanent Accounts real accounts = balance sheet accounts. Reported on balance sheet. Carried forward into next period:  In this sense, they are permanent.
  4. 4. Temporary Accounts Revenue and expense accounts. Details of income statement and changes in retained earnings (RE). Helps summarize operating activity. Avoids cluttering RE account. At end of accounting period, amounts are totaled, combined and transferred to RE.
  5. 5. General Ledger General ledger contains all accounts. Some accounts may be in summary form.  E.g. accounts receivable, inventory, fixed assets.  Detail or subsidiary ledgers kept for above.
  6. 6. Accounting Cycle/Process1. Identify the transactions.2. Record the entries by making entries in the appropriate journal3. Post journal entries to ledger account4. Prepare trial balance to make sure that debit equals credit5. Pass necessary entries for closing of the books6. Prepare adjusted trial balance7. Prepare financial statements – Income statement, Balance Sheet, Cash Flow Statement
  7. 7. Debit & Credit Two of the most familiar accounting terms are “debits and credits.” In the double-entry system, debits must always equal credits for the accounting equation. Debit (from the Latin word debere) means “left.” It is often abbreviated as “dr.” Credit (from the Latin word credere) means “right.” It is often abbreviated as “cr.”
  8. 8. Debit & Credit Recording $s on the left side of an account is debiting the account Recording $s on the right side is crediting the account For individual accounts: • If the total of debit amounts is bigger than credits, the account has a debit balance • If the total of credit amounts is bigger than debits, the account has a credit balance
  9. 9. Tabular Summary Vs. Account Form
  10. 10. Basic Form Of Account The simplest form an account consists of1 the title of the account2 a left or debit side3 a right or credit side The alignment of these parts resembles the letter T, therefore the name “T account” Title of Account Left or debit side Right or credit side Debit balance Credit balance
  11. 11. Normal Balances-Assets & Liabilities Assets Increase Decrease Debit Credit Liabilities Decrease Increase Debit Credit
  12. 12. Normal Balance- Owners Capital Owner’s Capital Decrease Increase Debit Credit Normal Balance
  13. 13. T Accounts for Revenue & Expenses ANY EXPENSE ANY REVENUE NORMAL NORMAL BALANCE BALANCE
  14. 14. Summarizing Rules of Debit & Credit Normal Increase Decrease BalanceAssets DR CR DRLiabilities CR DR CROwners’ equity CR DR CRRevenues CR DR CRExpenses DR CR DR
  15. 15. Double Entry System total debits always equal the total credits accounting equation always stays in balanceAssets= Liabilities + Equity
  16. 16. Expanded Basic Equation & Debit CreditRules & Effect Assets = Liabilities + Owner’s Equity Owner’s Owner’s Assets = Liabilities + - Capital Dividend s Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. + - - + - + + - + Revenues - Expenses Dr. Cr. Dr. Cr. - + + -
  17. 17. To summarize.. Debit: Increase in Assets Decrease in Liabilities All Expenses (losses) Credit: Decrease in Assets Increase in liabilities All Income (gains)
  18. 18. Example Mr. A started business with an initial capital of Rs.5,000. Mr. A purchased goods worth Rs.10,000 from Mr. Y on credit. He sold Rs.8,000 worth of goods at Rs.10,000 to Mr. X. Mr. X paid Rs.4,500 in settlement of Rs.5,000. Mr. A paid Rs. 4,000 to Mr. Y. The transactions involved in the above transaction in the books of A (in the books of A means that all transactions will be analyzed from A’s perspective) are as follows:1. Mr. A started business with a capital of Rs. 5,0002. Mr. A purchased goods worth Rs. 10,000 from Mr. Y on credit3. Mr. A sold goods worth Rs.8,000 for Rs. 10,000 to Mr. X on credit4. Mr. A received Rs.4,500 from X in settlement of Rs.5,000 (the difference of Rs.500 will be treated as Discount)5. Mr. A paid Rs. 4,000 to Mr. Y
  19. 19. Sr No Assets Liabilities Owner’s Income/ Expenses/ Total Equity (excl Gains/ Losses P/L for the Revenue period)1 + 10,000 Cash + 10,000 0 Capital2 + 10,000 Inventory + 10, 000 0 A/cs Payable3 + 10,000 A/cs + 10,000 -8,000 Cost 0 Receivable Sales of Goods - 8,000 Inventory Sold4 - 5,000 A/cs - 500 0 Receivable Discount + 4,500 Cash5 - 4,000 Cash - 4,000 A/cs 0 Payable
  20. 20. The JournalTransactions are initially recorded (journalized) in chronologicalorder before they are transferred to the ledger accounts.A journal makes several contributions to recording process: discloses in one place the complete effect of a transaction provides a chronological record of transactionshelps to prevent or locate errors as debit and creditamounts for each entry can be compared
  21. 21. Journalizing Entering transaction data in the journal is known as journalizing. Separate journal entries are made for each transaction. A complete entry consists of: 1 the date of the transaction, 2 the accounts and amounts to be debited and credited, 3 a brief explanation of transaction.
  22. 22. Technique of JournalizingThe date of the transaction is entered into the date column.The debit account title is entered at the extreme left margin of theAccount Titles and Explanation column. The credit account title isindented on the next line. GENERAL JOURNAL J1 Date Account Titles and Explanation Lf. Debit Credit 2005 Sept. 1 Cash a/c dr. 15,000 To R. Neal, Capital 15,000 (Invested cash in business) 1 Computer Equipment a/c dr. 7,000 To Cash a/c 7,000 (Purchased equipment for cash)
  23. 23. Compound Journal Entry When three or more accounts are required in one journal entry, the entry is referred to as a compound entry. GENERAL JOURNAL J1 Date Account Titles and Explanation Lf. Debit Credit 2005 July 1 Delivery Equipment a/c dr 14,000 To Cash 8,0001 To Accounts Payable 6,000 (Purchased truck for cash with balance on account)23
  24. 24. The Trial Balance The trial balance is a list of accounts and their balances at a given time. The primary purpose of a trial balance is to prove debits = credits after posting. If debits and credits do not agree, the trial balance can be used to uncover errors in journalizing and posting.
  25. 25. A Trial Balance PIONEER ADVERTISING AGENCY Trial Balance October 31, 2005 Debit CreditCash $ 15,200Advertising Supplies 2,500Prepaid Insurance The total 600Office Equipment debits must 5,000Notes Payable $ 5,000Accounts Payable equal the total 2,500Unearned Fees credits. 1,200C. R. Byrd, Capital 10,000C. R. Byrd, Drawing 500Fees Earned 10,000Salaries Expense 4,000Rent Expense 900 $ 28,700 $ 28,700
  26. 26. Profit & Loss Account, Balance Sheet Just as you have programming languages with different syntax to write programme, accounting language is used to find out two things: What is the profit/loss I made during the period? What are the assets I own and liabilities I owe as on a particular date? The first question is answered by preparing a Profit & Loss Account and the second question is answered through a Balance Sheet. All other statements etc. that you make are aimed at facilitating the process of preparing these two statements.
  27. 27. Accounting System Consists of:  Journals.  Ledgers.  Rules for using them. Manual, computerized, or anything between. In a computerized system:  Bookkeeping steps are done electronically.
  28. 28. Objectives of Accounting System To process information efficiently (low cost). To obtain reports quickly. To ensure a high degree of accuracy. To minimize possibility of theft or fraud.
  29. 29. Internal Accounting Controls Basic Principle: make it as difficult as is practical for people to be dishonest or careless. Activities that reduce possibility of theft, or intentional or unintentional mistakes.
  30. 30. Examples of Internal Controls  Separation of duties:  Record keeping.  Custody of assets.  Authorization of transactions.  Reconciliations.  Bank accounts.  Detail ledgers to control accounts in general ledger.
  31. 31. What a Computer BasedAccounting System Does Mechanical steps are bookkeeping. A computer based system performs some or all bookkeeping steps:  Records and stores data.  Performs arithmetic operations on data.  Sorts and summarizes data.  Prepares reports.
  32. 32. Inputs Data entry clerk using a keyboard. Point of origin: Factory time records, inventory counts, receiving records. Scanning device reading bar codes. Purchase orders from customer transmitted electronically.
  33. 33. Processing and Output Examples Processing:  Only accept entries if debits equal credits.  Assigning seat numbers for airline, or concert. Outputs  Reports including tables and graphs.  Routine or customized.
  34. 34. Modules Interconnected software programs. Examples:  Order entry. Processes sales orders, records shipments, and related accounts receivable.  Purchasing: Issues purchase orders.  Personnel and Payroll: Keeps employee records and issues paychecks.
  35. 35. Opportunities and Problems withComputer Systems Efficiency over manual systems. Off the shelf systems available for small companies. Modifying to unique complexities of a company may be costly. Paper trail replaced by electronic records. Technological advances making systems obsolete. Challenge of educating users.

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