Accounting Equation Topic 4.pptx PDF

TOPIC 4 The Accounting Equation, Transaction Analysis and General Journal Topic 4 | Lesson Objectives: Accounting cycle process Transaction analysis and accounting equation Journal entries Double entry accounting system Accounting Cycle The Accounting Cycle 1 Identify tra...

TOPIC 4 The Accounting Equation, Transaction Analysis and General Journal Topic 4 | Lesson Objectives: Accounting cycle process Transaction analysis and accounting equation Journal entries Double entry accounting system Accounting Cycle The Accounting Cycle 1 Identify transactions 2 Record transactions in a journal 3 Posting to the ledger accounts 4 Unadjusted Trial Balance 5 Analyse and create a work sheet 6 Financial Statements 7 Closing the accounts  Transaction Analysis Accounting Transactions can be analysed using the accounting equation. Equity is affected by and therefore includes income & expenses Accounting equation must remain balanced. ASSETS = LIABILITIES + EQUITY Accounting equation | Let’s interpret… Let’s look at a few examples… 1. Sharon invested $100,000 into her Assets business = Liabilities + Equity Cash at Accounts Accounts Sharon, Bank Receivable Payable Capital Owner’s (1) 100,000 = + 100,000 investment $100,000 = $100,000  Accounting equation | Let’s interpret… Let’s look at a few examples… 2. Provided a service on account of Assets = $60,000 Liabilities + Equity Cash at Accounts Accounts Shreya, Bank Receivable Payable Capital (1) 100,000 = + 100,000 Owner’s investment (2) + 60,000 + 60,000 Service Revenue 100,000 60,000 = + 160,000 $160,000 = $160,000  Accounting equation | Let’s interpret… Let’s look at a few examples… 3. Incurred Advertising Expense of Assets = $20,000 Liabilities + Equity Cash at Accounts Accounts Shreya, Bank Receivable Payable Capital (1) 100,000 = + 100,000 Owner’s investment (2) + 60,000 + 60,000 Service Revenue 100,000 60,000 = + 160,000 (3) + 20,000 - 20,000 Advertising Expense 100,000 60,000 = 20,000 + 140,000 $160,000 = $160,000 Accounting equation | Let’s interpret… Let’s look at a few examples… 4. Sharon withdrew $40,000 from Assets =her business Liabilities + Equity Cash at Accounts Accounts Shreya, Bank Receivable Payable Capital (1) 100,000 = + 100,000 Owner’s investment (2) + 60,000 + 60,000 Service Revenue 100,000 60,000 = + 160,000 (3) + 20,000 - 20,000 Advertising Expense 100,000 60,000 = 20,000 + 140,000 (4) - 40,000 - 40,000 Owner’s drawing 60,000 60,000 = 20,000 + 100,000 $120,000 = $120,000 Recordin g Transacti ons Accounting transactions are recorded using journal entries. These journal entries have debit and credit entries. Journal entries are posted to i.e. recorded in T accounts or ledger accounts. Ledger accounts form the general ledger. Recordin g Transacti ons Accounting transactions are recorded using journal entries. These journal entries have debit and credit entries. Journal entries are posted to i.e. recorded in T accounts or ledger accounts. Ledger accounts form the general ledger. Journal entries A Journal Entry would include the following: Date of the transaction Name of the T account or the ledger account Debit entry – include in the first line Credit entry – included in the next line Each transaction should have at least one debit and one credit entry Double Entry Accounting System Let’s interpret the double entry accounting system. Increase in assets => debit entry Decrease in assets=> credit entry Increase in liabilities=> credit entry Decrease in liabilities=>debit entry Increase in equity=> credit entry Decrease in equity=> debit entry Summary | Ledger accounts balances and transaction impact Normal Impact of an Impact of a Account balance increase decrease Asset Debit Debit Credit Liability Credit Credit Debit Equity Credit Credit Debit Income Credit Credit Debit Expense Debit Debit Credit  Lecture Example Topic 3 Question 1 - Following transactions are recorded for Haiso Dollar Shop. Calculate the impact to the accounting equation. Assets = Liabilities + Equity Prepare journal entries. 1. Invested Capital in the firm $200,000 2. Purchased inventory on credit from Sally Ltd. for $20,000 3. Bought cash registers for cash $4,000 4. Sold goods on account for $6,000. 5. Part paid $1,000 of accounts payable for inventory previously bought on credit 6. Received $300 from accounts receivable for goods previously sold on credit 7. Paid salaries of $6,000 8. Received a bank loan of $50,000  Accounting equation | Let’s interpret… 1. Owner invested $200,000 into her Assets business = Liabilities + Equity Cash at Capital Bank Owner’s (1) 200,000 = + 200,000 investment  Accounting equation | Let’s interpret… 2. Purchased inventory on credit from Sally Ltd for $20,000 Assets = Liabilities + Equity Accounts Inventory payable Credit purchase of (2) 20,000 = 20,000 + inventory  Accounting equation | Let’s interpret… 3. Bought cash registers for cash $4,000 Assets = Liabilities + Equity Cash Cash registers Cash purchase of (3) 4,000 -4,000 = + cash registers  Accounting equation | Let’s interpret… 4. Sold goods on account for $6,000 Assets = Liabilities + Equity Accounts Sales revenue receivable (4) 6,000 = + 6,000  Accounting equation | Let’s interpret… 5. Part paid $2,000 for inventory previously purchased on credit Assets = Liabilities + Equity Cash at Accounts bank payable (5) -2,000 = -2,000 +  Accounting equation | Let’s interpret… 6. Received $300 from accounts receivable for goods previously Assets Accounts sold on = Liabilities + credit Equity Cash at receivable bank (6) +300 -300 = +  Accounting equation | Let’s interpret… 7. Paid salaries of $6,000 Assets = Liabilities + Equity Cash at Salaries expense bank -6,000 (7) -6,000 = +  Accounting equation | Let’s interpret… 8. Received a bank loan of $50,000 Assets = Liabilities + Equity Loan Cash at payable bank (8) +50,000 = +50,000 +  General Journal Journal Entries Date Accounts Debit Credit Cash $200,000 (1) Haiso, Capital $200,000 Invested cash into business Inventory $20,000 (2) Accounts payable $20,000 Purchased inventory on credit Cash registers $4,000 (3) Cash at bank $4,000 Cash purchase of cash registers Accounts receivable $6,000 (4) Sales revenue $6,000 Credit sale of inventory  General Journal Journal Entries Date Accounts Debit Credit Accounts payable $2,000 (5) Cash at bank $2,000 Cash payment on accounts payable Cash at bank $300 (6) Accounts receivable $300 Collection of accounts receivable Salaries expense $6,000 (7) Cash at bank $6,000 Received cash for service provided Cash at bank $50,000 (8) Loan payable $50,000 Receipt of bank loan  Next Week: General Ledger Journal Entries Date Accounts Debit Credit Accounts payable $2,000 (5) Cash at bank $2,000 Cash payment on accounts payable Cash at bank $300 (6) Accounts receivable $300 Collection of accounts receivable Salaries expense $6,000 (7) Cash at bank $6,000 Received cash for service provided Cash at bank $50,000 (8) Loan payable $50,000 Receipt of bank loan  Next Week: General Ledger  Posting to a ledger can be in the same way as that of journal entries.  Debts and Credits to each of the accounts still follow the same rules as those for journal entries  Posting to the ledger is a very simple process of just transferring the information from journal entries directly to the ledger entry.