Account Managemant

1. Chapter 4
ACCOUNTING RECORDS AND SYSTEMS

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. Permanent Accounts
 real accounts = balance sheet accounts.
 Reported on balance sheet.
 Carried forward into next period:
 In this sense, they are permanent.

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. 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. Accounting Cycle/Process
1. Identify the transactions.
2. Record the entries by making entries in the
appropriate journal
3. Post journal entries to ledger account
4. Prepare trial balance to make sure that debit
equals credit
5. Pass necessary entries for closing of the books
6. Prepare adjusted trial balance
7. Prepare financial statements – Income statement,
Balance Sheet, Cash Flow Statement

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. 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. Tabular Summary Vs. Account Form

10. Basic Form Of Account
 The simplest form an account consists of
1 the title of the account
2 a left or debit side
3 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. Normal Balances-Assets & Liabilities
Assets
Increase Decrease
Debit Credit
Liabilities
Decrease Increase
Debit Credit

12. Normal Balance- Owners Capital
Owner’s Capital
Decrease Increase
Debit Credit
Normal
Balance

13. T Accounts for Revenue & Expenses
ANY EXPENSE ANY REVENUE
NORMAL NORMAL
BALANCE BALANCE

14. Summarizing Rules of Debit & Credit
Normal
Increase Decrease Balance
Assets DR CR DR
Liabilities CR DR CR
Owners’ equity CR DR CR
Revenues CR DR
CR
Expenses DR CR
DR

15. Double Entry System
 total debits always equal the total credits
 accounting equation always stays in balance
Assets= Liabilities + Equity

16. Expanded Basic Equation & Debit Credit
Rules & 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. To summarize..
 Debit: Increase in Assets
Decrease in Liabilities
All Expenses (losses)
 Credit: Decrease in Assets
Increase in liabilities
All Income (gains)

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. 5,000
2. Mr. A purchased goods worth Rs. 10,000 from Mr. Y on
credit
3. Mr. A sold goods worth Rs.8,000 for Rs. 10,000 to Mr. X
on credit
4. 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. 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
Capital
2 + 10,000 Inventory + 10, 000 0
A/cs Payable
3 + 10,000 A/cs + 10,000 -8,000 Cost 0
Receivable Sales of Goods
- 8,000 Inventory Sold
4 - 5,000 A/cs - 500 0
Receivable Discount
+ 4,500 Cash
5 - 4,000 Cash - 4,000 A/cs 0
Payable

20. The Journal
Transactions are initially recorded (journalized) in chronological
order 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 credit
amounts for each entry can be compared

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. Technique of Journalizing
The date of the transaction is entered into the date column.
The debit account title is entered at the extreme left margin of the
Account Titles and Explanation column. The credit account title is
indented 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. 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 8,000
1 To Accounts Payable 6,000
(Purchased truck for cash
with balance on account)
2
3

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. A Trial Balance
PIONEER ADVERTISING AGENCY
Trial Balance
October 31, 2005
Debit Credit
Cash $ 15,200
Advertising Supplies 2,500
Prepaid Insurance
The total 600
Office Equipment debits must 5,000
Notes Payable $ 5,000
Accounts Payable
equal the total 2,500
Unearned Fees credits. 1,200
C. R. Byrd, Capital 10,000
C. R. Byrd, Drawing 500
Fees Earned 10,000
Salaries Expense 4,000
Rent Expense 900
$ 28,700 $ 28,700

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.

28. Accounting System
 Consists of:
 Journals.
 Ledgers.
 Rules for using them.
 Manual, computerized, or anything between.
 In a computerized system:
 Bookkeeping steps are done electronically.

29. 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.

30. 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.

31. 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.

32. What a Computer Based
Accounting 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.

33. 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.

34. 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.

35. 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.

36. Opportunities and Problems with
Computer 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.