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- 1. School of Business and Law Edith Cowan University Financial Statements for Decision Making – Recording Transactions A study of the process of recording economic transactions to build financial statements to facilitate decision- making.
- 2. School of Business and Law Edith Cowan University Our learning road map
- 3. School of Business and Law Edith Cowan University Self Learning Focus • Chapter 2 – Financial Statements for decision making – Should be read for review purposes – Examinable • Chapter 3 – Learning Objective 1 – Nature, purpose and evidence for transactions – Learning Objective 5 – Trial Balance
- 4. School of Business and Law Edith Cowan University Lecture Focused Learning Objectives Our focus this week in the lecture is on Chapter 3 and developing an understanding of 1.Learning Objective 2 (A): The accounting cycle 2.Learning Objective 3: The rules of debit and credit in double-entry accounting 3.Learning Objective 4: The General Journal 4.Learning Objective 2 (B) The Ledgers 4
- 5. School of Business and Law Edith Cowan University THE ACCOUNTING CYCLE Learning Objective 1
- 6. School of Business and Law Edith Cowan University The Accounting Cycle
- 7. School of Business and Law Edith Cowan University THE RULES OF DEBIT AND CREDIT IN DOUBLE-ENTRY ACCOUNTING Learning Objective 2
- 8. School of Business and Law Edith Cowan University Historical Nature of Double-entry accounting Debits, credits, journal entries, ledgers, accounts, trial balances, balance sheets and income statements all date back to the Renaissance (~1494)… Accounting students can take pride in their heritage. Part of this heritage is a rich vocabulary, almost all of which dates back to this period and much of which is fascinating in its origin.” Hendriksen & Van Breda, 1993, p. 36.
- 9. School of Business and Law Edith Cowan University 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 • At least two accounts are affected by each transaction
- 10. School of Business and Law Edith Cowan University Debit and Credit Formatting Rules • Debits are recorded in the – Left hand column in a journal – Left hand side of a T- Account – Left hand column in the running balance format ledger • Credits are recorded in the – Right hand column in a journal – Right hand side of a T- Account – Right hand column in the running balance format ledger
- 11. School of Business and Law Edith Cowan University Debit & Credit Rules Summary
- 12. School of Business and Law Edith Cowan University THE GENERAL JOURNAL Learning Objective 3
- 13. School of Business and Law Edith Cowan University The Accounting Cycle
- 14. School of Business and Law Edith Cowan University The General Journal • The journal or general journal used for the initial recording of a transaction • Chronological (date) order of all transactions • Useful for locating and reducing errors as debits and credits shown together
- 15. School of Business and Law Edith Cowan University The General Journal: The Rules • Always two or more accounts are affected by each transaction • The entry must balance: Debits = Credits • Compound entries – Enter all debit entries first (Left column) – Then enter all credit entries (Right column) • Always in date order
- 16. School of Business and Law Edith Cowan University The General Journal Illustrated
- 17. School of Business and Law Edith Cowan University General Journal in Practice • Starting a business • Darren Jones has decided to setup a lawn mowing business (sole trader) called Darren’s Lawn and Gardening Services 1. On January 2, 2012 Darren invested $35,000 of his savings into the business
- 18. School of Business and Law Edith Cowan University General Journal Date Particulars Post Ref Debit Credit 2012 Jan 2 Cash at Bank 35,000 Jones, Darren – Capital 35,000 Investment in the business by Darren Jones
- 19. School of Business and Law Edith Cowan University General Journal in Practice • Purchase of assets • Darren’s Lawn and Gardening Services purchased assets for the business 2. A vehicle at a cost of $21,000 and equipment for a discounted price of $9,000 cash on January 3, 2012
- 20. School of Business and Law Edith Cowan University General Journal Date Particulars Post Ref Debit Credit 2012 Jan 2 Cash at Bank 35,000 Jones, Darren – Capital 35,000 Investment in the business by Darren Jones Jan 3 Vehicles 21,000 Equipment 9,000 Cash at Bank 30,000 Purchase of vehicle and equipment for cash
- 21. School of Business and Law Edith Cowan University General Journal in Practice • Purchase of supplies • Darren’s Lawn and Gardening Services purchased fuel supplies for the business on January 4, 2012 3. $2,500 of fuel and agreed to pay for the supplies later, i.e., a credit purchase
- 22. School of Business and Law Edith Cowan University General Journal Date Particulars Post Ref Debit Credit 2012 Jan 4 Fuel Supplies 2,500 Fuel Payable 2,500 Purchase of fuel supplies on credit
- 23. School of Business and Law Edith Cowan University General Journal in Practice • Provision of services • Darren’s Lawn and Gardening Services performed services for cash and credit 4. January 6 - Services for customers paid in cash - $2,200 5. January 8 - Services for the local council – invoiced $550 to be paid within 30 days
- 24. School of Business and Law Edith Cowan University General Journal Date Particulars Post Ref Debit Credit 2012 Jan 6 Cash at Bank 2,200 Lawn mowing services 2,200 Lawn mowing services provided for cash payment Jan 8 Accounts Receivable 550 Lawn mowing services 550 Provision of services on credit
- 25. School of Business and Law Edith Cowan University General Journal in Practice • Recording expenses • Darren’s Lawn and Gardening Services incurred the following expenses on January 30 6. Paid cash of $150 for wages to Sue an employee 7. A count of the fuel supplies on hand showed that $800 of fuel supplies had been used
- 26. School of Business and Law Edith Cowan University General Journal Date Particulars Post Ref Debit Credit 2012 Jan 30 Wages Expense 150 Cash at Bank 150 Wages payment Jan 30 Fuel Expense 800 Fuel Supplies 800 Recording consumption of fuel supplies
- 27. School of Business and Law Edith Cowan University General Journal in Practice • The following transactions occurred in Darren’s Lawn and Gardening Services on January 30 8. Collected the accounts receivable from transaction no. 5 9. Paid the amount due to Adam Fuel Ltd – refer to transaction no. 3 10.Darren withdrew $200 from the business for his own personal use.
- 28. School of Business and Law Edith Cowan University General Journal Date Particulars Post Ref Debit Credit 2012 Jan 30 Cash at Bank 550 Accounts Receivable 550 Accounts receivable received Jan 30 Fuel Payable 2,500 Cash at Bank 2,500 Payment of accounts payable
- 29. School of Business and Law Edith Cowan University General Journal Date Particulars Post Ref Debit Credit 2012 Jan 30 Darren Jones - Drawings 200 Cash at Bank 200 Withdrawal by Darren Jones
- 30. School of Business and Law Edith Cowan University THE LEDGERS Learning Objective 4
- 31. School of Business and Law Edith Cowan University Posting from the Journals to the Ledgers • Normally a monthly process • General Ledger contains a summary of the transactions for each account • General ledger contains the balances of each account
- 32. School of Business and Law Edith Cowan University The Accounting Cycle
- 33. School of Business and Law Edith Cowan University The Ledger Accounts • An account provides a record of increases and decreases in each item that appears in the financial statements • A collective of accounts is known as the ledgers • Each account has three basic parts: – A title and account number – A place to record increases – A place to record decreases
- 34. School of Business and Law Edith Cowan University The Ledger Accounts • Two common formats – The T-Account • An accountants tool – The Running Balance Format • Used formally in accounting records both manually and computerised
- 35. School of Business and Law Edith Cowan University The Ledger Accounts • Ledger accounts reflect the standard practice of – Debits in the left column (left side of the T) – Credits in the right column (right side of the T) • Key details recorded are: – Date – Explanation (the other account affected by the transaction) – Amount – Account balance (calculated)
- 36. School of Business and Law Edith Cowan University Ledger Account Formats • Running Balance Accounts – Used in formal accounting systems – Standard presentation for computerised systems – Familiar to most - format used in Bank Statements
- 37. School of Business and Law Edith Cowan University The Running Balance Format
- 38. School of Business and Law Edith Cowan University T-Accounts • T-Accounts – Came about because negative numbers not part of math's until the 17th century, some two centuries after founding of double-entry accounting – Convenient way to show individual accounts – Illustrate effects of transactions on an account – Still used in practice for quick calculations • Shaped in the form of a capital T – Left side of the T is the debit side – Right side of the T is the credit side
- 39. School of Business and Law Edith Cowan University The Structure of a T-Account Account Name and Number Date Explanation Amount Date Explanation Amount Debit Side (Dr) Credit Side (Cr)
- 40. School of Business and Law Edith Cowan University T- Accounts
- 41. School of Business and Law Edith Cowan University T-Accounts • Based on the accounting equation • Assets = Liabilities + Owners’ Equity • Debits = Credits • Referring back to Darren Jones decision to to setup a lawn mowing and his initial investment of $35,000. The Cash at Bank T- Account would have reflected the transaction thus …
- 42. School of Business and Law Edith Cowan University Illustration of a T- Account Cash at Bank (Asset) 2012 Jan 2 Darren Jones, Capital 35,000
- 43. School of Business and Law Edith Cowan University Illustration of a T- Account • Please record the remaining Darren Jones transactions in the T- Accounts
- 44. School of Business and Law Edith Cowan University Illustration of a T- Account Cash at Bank (Asset) 2012 Jan 2 Darren Jones, Capital 35,000 Jan 3 Vehicles 21,000 Jan 6 Lawn Mowing Services 2,200 Equipment 9,000 Jan 30 Accounts Receivable 550 Jan 30 Wages Expense 150 Jan 30 Fuel Payable 2,500 Jan 30 Drawings 200
- 45. School of Business and Law Edith Cowan University Illustration of a T- Account Vehicle Account (Asset) 2012 Jan 3 Cash at Bank 21,000
- 46. School of Business and Law Edith Cowan University Illustration of a T- Account Equipment Account (Asset) 2012 Jan 3 Cash at Bank 9,000
- 47. School of Business and Law Edith Cowan University Illustration of a T- Account Fuel Supplies (Asset Account) 2012 Jan 3 Fuel Payable 2,500 Jan 30 Fuel Expense 800
- 48. School of Business and Law Edith Cowan University Illustration of a T- Account Fuel Payable (Liability) 2012 2012 Jan 30 Cash at Bank 2,500 Jan 3 Fuel Supplies 2,500
- 49. School of Business and Law Edith Cowan University Illustration of a T- Account Lawn Mowing Services (Revenue) 2012 Jan 8 Cash at Bank 2,200 Accounts Receivable 550
- 50. School of Business and Law Edith Cowan University Illustration of a T- Account Accounts Receivable (Asset) 2012 2012 Jan 8 Lawn Mowing Services 550 Jan 30 Cash at Bank 550
- 51. School of Business and Law Edith Cowan University Illustration of a T- Account Wages Expense 2012 Jan 30 Cash at Bank 150
- 52. School of Business and Law Edith Cowan University Illustration of a T- Account Fuel Expense 2012 Jan 30 Fuel Supplies 800
- 53. School of Business and Law Edith Cowan University Illustration of a T- Account Drawings (Owners’ Equity) 2012 Jan 30 Cash at Bank 200
- 54. School of Business and Law Edith Cowan University Process of Balancing a T- Account • Balancing only required if more than one entry in the month • We need to determine the balance carried down (Balance c/d)
- 55. School of Business and Law Edith Cowan University Process of Balancing a T- Account Cash at Bank (Asset) 2012 Jan 2 Darren Jones, Capital 35,000 Jan 3 Vehicles 21,000 Jan 6 Lawn Mowing Services 2,200 Equipment 9,000 Jan 30 Accounts Receivable 550 Jan 30 Wages Expense 150 Jan 30 Fuel Payable 2,500 Jan 30 Drawings 200 37,750 32,850
- 56. School of Business and Law Edith Cowan University Process of Balancing a T- Account Cash at Bank (Asset) 2012 Jan 2 Darren Jones, Capital 35,000 Jan 3 Vehicles 21,000 Jan 6 Lawn Mowing Services 2,200 Equipment 9,000 Jan 30 Accounts Receivable 550 Jan 30 Wages Expense 150 Jan 30 Fuel Payable 2,500 Jan 30 Drawings 200 Jan 30 Balance c/d 4,900 37,750 37,750 Feb 1 Balance b/d 4,900
- 57. School of Business and Law Edith Cowan University Illustration of a T- Account Fuel Supplies (Asset Account) 2012 Jan 3 Fuel Payable 2,500 Jan 30 Fuel Expense 800 Jan 30 Balance c/d 1,700 2,500 2,500 Feb 1 Balance b/d 1,700
- 58. School of Business and Law Edith Cowan University Illustration of a T- Account Lawn Mowing Services (Revenue) 2012 2012 Jan 30 Balance c/d 2,750 Jan 8 Cash at Bank 2,200 Accounts Receivable 550 2,750 2,750 Feb 1 Balance b/d 2,750
- 59. School of Business and Law Edith Cowan University INTRODUCTION TO GST Learning Objective 4
- 60. School of Business and Law Edith Cowan University Goods and Services Tax (GST) • GST is a Good and Services Tax imposed on the sale of goods and services. • It is NOT recorded or added to payments of accounts. • GST is accounted for at the time of sale
- 61. School of Business and Law Edith Cowan University Goods and Services Tax (GST) • When a sale is recorded in the Sales Journal or General Journal – The seller records the applicable amount of GST in their GST Payable account • When the purchaser (buyer) records a purchase of inventory, supplies or services etc – The purchaser (buyer) records the amount of GST in their GST Receivable account
- 62. School of Business and Law Edith Cowan University Goods and Services Tax (GST) • To determine the amount of GST we need to know if it is GST Plus or GST Inclusive • GST Plus – Add 10% to the price of the goods or services – Price x 1.10 • GST Inclusive… – Divide the price by 11 to determine amount of GST – Divide the price by 1.10 to determine price excluding GST
- 63. School of Business and Law Edith Cowan University Further Reading • Please review the appendix to Chapter 3 of the text book.
- 64. School of Business and Law Edith Cowan University THE END