Fundamentals of Financial Accounting PDF

10/11/2023 1 4 Recording Process and the Double-entry System 2 1  10/11/2023 Learning Outcomes After studying...

10/11/2023 1 4 Recording Process and the Double-entry System 2 1  10/11/2023 Learning Outcomes After studying this chapter, you should be able to: ❑ Record transactions in accounts using the double- entry system ❑ Record transactions in journals ❑ Post (transfer) the journal entries to the ledgers ❑ Balance off the ledgers ❑ Prepare Trial Balance ❑ Explain the limitation of Trial Balance Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2018 4–3 3 4.2 The Account ❑ An account is a basic summary tool of accounting. ❑ It is an individual accounting record of increases and decreases in specific asset, liability and owner’s equity items. ❑ Accounts are grouped in a record called the ledger. Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2018 4–4 4 2  10/11/2023 4.2 The Account (cont.) T-account and the Rules of Debits and Credits ❑ The simplest account format: the T-account. – It takes the form of the capital letter ‘T’. – The three parts of the T-account: – It helps you understand the double-entry system. Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2018 4–5 5 4.2 The Account (cont.) T-account and the Rules of Debits and Credits (cont.) ❑ Rules of debit and credit – Assets, expenses and drawings Increases are recorded on the left (debit) side Decreases are recorded on the right (credit) side – Liabilities, capital and revenues Increases are recorded on the right (credit) side Decreases are recorded on the left (debit) side Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2018 4–6 6 3  10/11/2023 4.2 The Account (cont.) Three-column Account ❑ A widely used format in a manual system that has three money columns—debit, credit and balance Note: A simple T-account form of accounts is ideal for illustration and analysis only. Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2018 4–7 7 4.2 The Account (cont.) Chart of Accounts ❑ Lists the accounts and the account numbers to indicate their location in the ledger. It uses a numbering system to identify the accounts. Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2018 4–8 8 4  10/11/2023 4.2 The Account (cont.) Chart of Accounts (cont.) Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2018 4–9 9 4.1 Analyzing and Recording Process Analyze each transaction and Record relevant transactions event from source documents and events in a journal Prepare and analyze Post journal information the trial balance to ledger accounts Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2018 4–10 10 5  10/11/2023 4.4 Important Books and Their Processes The Journal and Journalising Transactions are first recorded in a journal (the book of original entry) following these four steps: ❑ Identify the transaction from source documents. ❑ Specify the account affected by the transaction. ❑ Determine the increase/decrease by the transaction. ❑ Enter the transaction into the general journal – dates, account titles and explanation, references and two money columns Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2018 4–11 11 4.4 Important Books and Their Processes (cont.) The Ledger and Posting ❑ Every business has a general ledger. It contains all the assets, liabilities & owner’s equity accounts. ❑ Posting is the procedure of transferring journal entries to ledger accounts, using these steps: – In the ledger, enter the accounts debited/credited, the date, journal page, and debit/credit the amount shown in the journal. – In the reference column of the journal, write the account number to which amount was posted. Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2018 4–12 12 6  10/11/2023 4.4 Important Books and Their Processes (cont.) Balancing Off the Ledger—T-accounts ❑ The balance of a three-column form of account is determined after each transaction. ❑ The balance of an account using T-accounts has to be determined. – If total debit > total credit ➔ debit balance – If credit side > total debit ➔ credit balance – If total debit = total credit ➔ zero balance Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2018 4–13 13 4.4 Important Books and Their Processes (cont.) Balancing Off the Ledger—T-accounts (cont.) Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2018 4–14 14 7  10/11/2023 4.3 Double-entry Bookkeeping Accounting is based on the double-entry system. ❑ Every transaction affects two or more items to satisfy the basic accounting equation. ❑ Each time we record a business transaction, at least two accounts will be involved. ❑ Total debits must always be equal to the credits. Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2018 4–15 15 Steps to REMEMBER 1. Identify economic transaction/source documents. 2. Identify accounts involve. 3. Classify the identified accounts into types of the account (i.e. asset, liability, owner’s equity, revenue, expense). 4. Identify the effects (i.e. increase/decrease) of the accounts. 5. Identify the debit or credit on the identified accounts. 6. Record journal entry. 7. Transfer to ledger account. 8. Prepare Trial Balance. Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2018 3–16 16 8  10/11/2023 3.2 Components in FR Effects of Transaction Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2018 3–17 17 4.3 Double-entry Bookkeeping (cont.) The entry of a few transactions can now be illustrated: ❑ Hassan starts a business by investing RM55,000 in cash on 1 August 20x6. Journal entry: Aug 1 Dr. Cash RM55,000 Cr. Capital RM55,000 (Investment in cash) Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2018 4–18 18 9  10/11/2023 4.3 Double-entry Bookkeeping (cont.) These are then entered into ledger accounts: Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2018 4–19 19 4.3 Double-entry Bookkeeping (cont.) ❑ A motor van is bought for RM30,000 cash on 2 August 20x6 Journal entry: Aug 2 Dr. Motor Van RM30,000 Cr. Cash RM30,000 (Purchase motor van by cash) Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2018 4–20 20 10  10/11/2023 4.3 Double-entry Bookkeeping (cont.) Ledger accounts: Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2018 4–21 21 4.3 Double-entry Bookkeeping (cont.) ❑ Fixtures are bought on credit from Eco Sdn. Bhd. for RM2,000 on 3 August 20x6 Journal entry: Aug 3 Dr. Fixtures RM2,000 Cr. Other Payable – Eco Sdn Bhd RM2,000 (Purchase fixtures on credit) Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2018 4–22 22 11  10/11/2023 4.3 Double-entry Bookkeeping (cont.) Ledger accounts: Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2018 4–23 23 4.3 Double-entry Bookkeeping (cont.) ❑ The amount owing in cash to Eco Sdn. Bhd. is paid on 17 August 20x6 Journal entry: Aug 17 Dr. Other Payable – Eco Sdn Bhd RM2,000 Cr. Cash RM2,000 (Paid amount owing to Eco Sdn Bhd) Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2018 4–24 24 12  10/11/2023 4.3 Double-entry Bookkeeping (cont.) Ledger accounts: Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2018 4–25 25 4.4 Important Books and Their Processes (cont.) ❑ Based on two transactions of the worked example earlier: ❑ When three or more accounts are required in one journal entry, the entry is referred to as a compound entry. Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2018 4–26 26 13  10/11/2023 27 4.5 Preparing the Trial Balance A trial balance is a list of all accounts and their balances at a given time. ❑ It is to verify that total debits equals total credits. ❑ It is usually prepared at the end of the accounting period. ❑ Uncovers errors in journalising and posting Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2018 4–28 28 14  10/11/2023 Preparing a Trial Balance Preparing a trail balance involves three steps: 1.List each account title and its amount (from ledger) in the trial balance. If an account has a zero balance, list it with a zero in the normal balance column (or omit it entirely). 2.Compute the total of debit balances and the total of credit balances. 3.Verify (prove) total debit balances equal total credit balances. Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2018 4–29 29 After processing its remaining transactions for December, FastForward’s Trial Balance is prepared. FastForward Trial Balance The trial balance December 31, 2011 lists all account Debits Credits balances in the Cash $ 4,350 Accounts receivable - general ledger. If Supplies 9,720 the books are in Prepaid Insurance 2,400 Equipment 26,000 balance, the total Accounts payable $ 6,200 debits will equal the Unearned consulting revenue 3,000 C. Taylor, Capital 30,000 total credits. Owner's Withdrawals 200 Consulting revenue 5,800 Rental revenue 300 Salaries expense 1,400 Rent expense 1,000 Utilities expense 230 Total $ 45,300 $ 45,300 30 15  10/11/2023 4.5 Preparing the Trial Balance (cont.) Limitations of a Trial Balance ❑ Even though its purpose is to prove the accuracy of the double-entry system, a trial balance does not prove that all transactions have been recorded correctly. ❑ Two categories of the errors: – Errors not Affecting the Trial Balance – it will still balance despite the recorded errors. – Errors Affecting the Trial Balance – errors will lead to a disagreement in the total debits/credits. Fundamentals of Financial Accounting (SECOND EDITION) All Rights Reserved © Oxford Fajar Sdn. Bhd. (008974-T), 2018 4–31 31 Reference Ahmad, A., Saat, N. A. M., Mahmud, R., Aripin, R. M., Ngalim, S. M., Talib, M. A. & Abdullah, A. A. (2015) Financial Accounting and Reporting 1. Selangor, Malaysia: Oxford University Press. Haniff, M. N., Nawawi, A., Samad, R. A., Mohamed, Fundamentals I. of S. (2018) Financial - THE END - Accounting. 2nd Edition, Oxford. Stice, J. D. & Stice, E. K. (2014), Intermediate Accounting, 19th Edition, South-Western Thomas, A. & Ward, A. M. (2012) Introduction to Financial Accounting, 7th Edition, McGraw- Hill. Wild, J.J. & Kwok, W. (2011). Financial Accounting, Information for Decisions, Mc Graw Hill. 32 16