Chapter 2 The Recording Process PDF

Chapter 2 The recording process PowerPoint presentation by Dr Anne Abraham University of Western Sydney ©2009 John Wiley & Sons Australia, Ltd 1 LO1 THE ACCOUNT An account is an individual accounting record...

Chapter 2 The recording process PowerPoint presentation by Dr Anne Abraham University of Western Sydney ©2009 John Wiley & Sons Australia, Ltd 1 LO1 THE ACCOUNT An account is an individual accounting record of increases and decreases in a specific asset, liability, or owner’s equity item There are separate accounts for the items we used in transactions such as cash, salaries expense and accounts payable PowerPoint presentation by Dr Anne 2 Abraham, University of Western Sydney  THE ACCOUNT continued The simplest form an account consists of – the title of the account – a left or debit side – a right or credit side It resembles the letter “T” as is known as a T account Title of Account Debit Credit Left or debit side Right or credit side Debit balance Credit balance PowerPoint presentation by Dr Anne 3 Abraham, University of Western Sydney LO1 Question 1 An account consists of A. a title, a debit balance, and a credit balance B. a title, a left side, and a debit balance C. a title, a debit side, and a credit side D. a title, a right side, and a debit balance PowerPoint presentation by Dr Anne 4 Abraham, University of Western Sydney LO2 Debits and credits Recording $ on the left side of an account is debiting the account Recording $ on the right side is crediting the account If the total of debit amounts is bigger than credits, the account has a debit (Dr) balance If the total of credit amounts is bigger than debits, the account has a credit (Cr) balance PowerPoint presentation by Dr Anne 5 Abraham, University of Western Sydney  Debit and credit procedure Double-entry system: Each transaction affects at least two accounts to keep the basic accounting equation in balance OWNER’S ASSETS = LIABILITIES + EQUITY Total debits must equal total credits Every account has a designated normal balance which is either a debit or a credit PowerPoint presentation by Dr Anne 6 Abraham, University of Western Sydney Debit and credit procedure continued 1. Assets and liabilities Debits Credits Increase assets Decrease assets Decrease liabilities Increase liabilities Assets Liabilities Debit Credit Debit Credit Increase Decrease Decrease Increase Normal Normal balance balance PowerPoint presentation by Dr Anne 7 Abraham, University of Western Sydney Debit and credit procedure continued 2. Owner’s equity: a. Owner’s capital Debits Credits Decrease Owner’s Capital Increase Owner’s Capital Owner’s Capital Debit Credit Decrease Increase Normal balance PowerPoint presentation by Dr Anne 8 Abraham, University of Western Sydney Debit and credit procedure continued 2. Owner’s equity: b. Owner’s drawings Debits Credits Increase Owner’s Capital Decrease Owner’s Capital Owner’s Drawing’s Debit Credit Increase Decrease Normal balance PowerPoint presentation by Dr Anne 9 Abraham, University of Western Sydney Debit and credit procedure continued 2. Owner’s equity: c. Revenue and expenses Debits Credits Decrease income Increase income Increase expenses Decrease expenses Income Expenses Debit Credit Debit Credit Decrease Increase Increase Decrease Normal Normal balance balance PowerPoint presentation by Dr Anne 10 Abraham, University of Western Sydney Expansion of the basic equation PowerPoint presentation by Dr Anne 11 Abraham, University of Western Sydney LO2 Question 2 A credit to a liability account A. indicates an increase in the amount owed to creditors B. indicates a decrease in the amount owed to creditors C. is an error D. must be accompanied by a debit to an asset account PowerPoint presentation by Dr Anne 12 Abraham, University of Western Sydney  STEPS IN THE RECORDING LO3 PROCESS 1. Identify the transaction from source documents 2. Analyse each transaction for its effect on the accounts 3. Enter the transaction information in a journal 4. Transfer the journal information to the appropriate account in the ledger PowerPoint presentation by Dr Anne 13 Abraham, University of Western Sydney  Question 3 LO3 The usual sequence of steps in the transaction recording process is: A. journal  analyse  ledger B. analyse  journal  ledger C. journal  ledger  analyse D. ledger  journal  analyse PowerPoint presentation by Dr Anne 14 Abraham, University of Western Sydney  The journal LO4 Transactions are initially recorded in chronological order before they are transferred to the ledger accounts Every business has a general journal (but may also have other types of journals) A general journal contains – Spaces for dates – Account titles and explanations – References – Two amount columns PowerPoint presentation by Dr Anne 15 Abraham, University of Western Sydney  The journal continued The journal contributes to the recording process by – Disclosing all effects of transaction in one place – Providing a chronological record of transactions with cross-references – Helping to prevent or locate errors by providing ready comparison of debits and credits PowerPoint presentation by Dr Anne 16 Abraham, University of Western Sydney  The journal continued Journalising is the process of entering transaction data into the journal Separate journal entries are made for each transaction A complete journal entry consists of – The date of the transaction – The accounts and amounts to be debited and credited – A brief explanation of the transaction (or narration) PowerPoint presentation by Dr Anne Abraham, University of Western Sydney 17  The journal continued A simple journal entry involves only two accounts, one debit and one credit (as shown in previous example) A compound journal entry involves three or more accounts, with total debit and credit amounts still being equal GENERAL JOURNAL J1 Date Account titles and explanations Ref. Debit Credit 2010 Jul 1 Delivery Equipment 14 000 Cash 8 000 Accounts payable 6 000 (Purchased truck for cash with balance on PowerPoint presentation by Dr Anne account) Abraham, University of Western Sydney 18  Question 4 LO4 A complete journal entry does not show A. the date of the transaction B. the new balance in the accounts affected by the transaction C. a brief explanation of the transaction D. the accounts and amounts to be debited and credited PowerPoint presentation by Dr Anne 19 Abraham, University of Western Sydney  The ledger LO5 The ledger is the entire group of accounts maintained by a business A general ledger contains all the assets, liabilities and owner’s equity accounts Individual Individual Individual assets liabilities owner’s equity Equipment Interest Payable Salaries Expense Land Salaries Payable Service Revenue Supplies Accounts Payable J. Long, Drawings Cash Notes Payable J. Long, Capital PowerPoint presentation by Dr Anne 20 Abraham, University of Western Sydney  The ledger continued Standard form of account – A simple T-account form is often useful for illustration purposes and to understand transactions quickly – In practice, account forms in ledgers are more structured – A three-column form of account has three money columns – debit, credit and a running balance PowerPoint presentation by Dr Anne 21 Abraham, University of Western Sydney  Question 5 LO5 The purpose of the ledger is to A. record chronologically the day’s transactions B. keep a record of documentation to support each transaction C. keep in one place all information about changes in specific account balances D. make sure that all assets and liability accounts have normal balances at all times PowerPoint presentation by Dr Anne 22 Abraham, University of Western Sydney  The ledger continued LO6 Posting is the procedure of transferring journal entries to the ledger accounts Posting involves a number of steps: 1.Post to DR account – date, journal page, amount 2.Enter DR account no. in journal reference column 3.Post to CR account – date, journal page, amount 4.Enter CR account no. in journal reference column PowerPoint presentation by Dr Anne 23 Abraham, University of Western Sydney  The ledger continued A chart of accounts is a listing of all accounts and associated account numbers for a business The numbering system usually starts with the statement of financial position accounts and follows with the income statement accounts Gaps are left in the numbering system to permit the insertion of new accounts as needed during the life of the business PowerPoint presentation by Dr Anne 24 Abraham, University of Western Sydney  Question 6 LO6 The principle purpose of posting is to A. help identify errors made in the journal B. accumulate the effects of journalised transactions in the individual accounts C. enter transactions directly into the ledger D. help determine if the financial statements are ready to be prepared PowerPoint presentation by Dr Anne 25 Abraham, University of Western Sydney  THE RECORDING PROCESS ILLUSTRATED 1. Investment of cash by owner 1 October, C.R. Hill invests $10 000 cash in a Transaction business, The Pioneer Advertising Agency Basic The asset Cash is increased $10 000, and analysis owner’s equity, C. R. Hill, Capital is increased $10 000 Debit-credit Debits increase assets: debit Cash $10 000. analysis Credits increase owner’s equity: credit C.R. Hill, Capital $10 000 PowerPoint presentation by Dr Anne 26 Abraham, University of Western Sydney  THE RECORDING PROCESS ILLUSTRATED continued Debit-credit Debits increase assets: debit Cash $10 000 analysis Credits increase owner’s equity: credit C.R. Hill, Capital $10 000 Oct 1 Cash 101 10 000 Journal entry C.R. Hill, Capital 301 10 000 (Owner’s investment of cash in business) Cash 101 C.R. Hill, Capital 301 Posting Oct 1 10 000 Oct 1 10 000 PowerPoint presentation by Dr Anne 27 Abraham, University of Western Sydney  THE RECORDING PROCESS ILLUSTRATED continued 2. Purchase of office equipment 1 October, office equipment costing $5000 is Transaction purchased by signing a 3-mth, 12%, $5000 note payable Basic The asset Office Equipment is increased $5000, analysis and the liability, Notes Payable, is increased $5000 Debits increase assets: debit Office Equipment Debit-credit $5000 analysis Credits increase liabilities: credit Notes Payable $5000 PowerPoint presentation by Dr Anne 28 Abraham, University of Western Sydney  THE RECORDING PROCESS ILLUSTRATED continued Debits increase assets: debit Office Equipment Debit-credit $5000 analysis Credits increase liabilities: credit Notes Payable $5000 Oct 1 Office Equipment 157 5 000 Journal entry Notes Payable 200 5 000 (Issued 3 mth 12% note for equipment) Office Equipment 157 Notes Payable 200 Posting Oct 1 5 000 Oct 1 5 000 PowerPoint presentation by Dr Anne 29 Abraham, University of Western Sydney  THE RECORDING PROCESS ILLUSTRATED continued 3. Receipt of cash for future services 2 October, a $1200 cash advance is received Transaction from client R. Phillips, for advertising services that are expected to be completed by 31 Dec Basic The asset cash is increased $1200. the liability analysis Unearned Revenue is increased $1200 because the service has not been provided yet Debit-credit Debits increase assets: debit Cash $1200 analysis Credits increase liabilities: credit Unearned Income $1200 PowerPoint presentation by Dr Anne 30 Abraham, University of Western Sydney  THE RECORDING PROCESS ILLUSTRATED continued Debit-credit Debits increase assets: debit Cash $1200 analysis Credits increase liabilities: credit Unearned Revenue $1200 Oct 2 Cash 101 1 200 Journal entry Unearned Revenue 209 1 200 (Received cash from R Phillips for future service) Cash 101 Unearned Revenue 209 Posting Oct 2 1 200 Oct 2 1 200 PowerPoint presentation by Dr Anne 31 Abraham, University of Western Sydney  THE RECORDING PROCESS ILLUSTRATED continued 4. Payment of monthly rent 1 October, office rent for October is paid in cash, Transaction $900 Basic The expense Rent is increased $900 because the analysis payment pertains only to the current month; the asset Cash is decreased $900 Debit-credit Debits increase expenses: debit Rent Expense analysis $900 Credits decrease assets: credit Cash $900 PowerPoint presentation by Dr Anne 32 Abraham, University of Western Sydney  THE RECORDING PROCESS ILLUSTRATED continued Debit-credit Debits increase expenses: debit Rent Expense analysis $900 Credits decrease assets: credit Cash $900 Journal entry Oct 3 Rent Expense 729 900 Cash 101 900 (Paid October rent) Rent Expense 729 Cash 101 Posting Oct 3 900 Oct 3 900 PowerPoint presentation by Dr Anne 33 Abraham, University of Western Sydney  THE RECORDING PROCESS ILLUSTRATED continued 5. Payment for insurance 4 October, $600 is paid for a 1-year insurance Transaction policy that will expire next year of 30 September Basic The asset Prepaid Insurance is increased $600 analysis because the payment extends to more than the current month; asset Cash is decreased $600 Debit-credit Debits increase assets: debit Prepaid Insurance analysis $600 Credits decrease assets: credit Cash $600 PowerPoint presentation by Dr Anne 34 Abraham, University of Western Sydney  THE RECORDING PROCESS ILLUSTRATED continued Debit-credit Debits increase assets: debit Prepaid Insurance analysis $600 Credits decrease assets: credit Cash $600 Oct 4 Prepaid Insurance 130 600 Journal entry Cash 101 600 (Paid 1-year policy; effective date 1 Oct) Prepaid Insurance 130 Cash 101 Posting Oct 4 600 Oct 4 600 PowerPoint presentation by Dr Anne 35 Abraham, University of Western Sydney  THE RECORDING PROCESS ILLUSTRATED continued 6. Purchase of supplies on credit 5 October, an estimated 3-month supply of Transaction advertising materials is purchased on account from Aero Supply for $2500 Basic The asset Advertising Supplies is increased analysis $2500; the liability Accounts Payable is increased $2500 Debits increase assets: debit Advertising Debit-credit Supplies $250 analysis Credits increase liabilities: credit Accounts Payable $2500 PowerPoint presentation by Dr Anne 36 Abraham, University of Western Sydney  THE RECORDING PROCESS ILLUSTRATED continued Debits increase assets: debit Advertising Debit-credit Supplies $250 analysis Credits increase liabilities: credit Accounts Payable $2500 Oct 5 Advertising Supplies 126 2 500 Journal entry Accounts Payable 201 2 500 (Purchased supplies on account from Aero Supply) Advertising Supplies 126 Accounts Payable 201 Posting Oct 5 2 500 Oct 5 2 500 PowerPoint presentation by Dr Anne 37 Abraham, University of Western Sydney  THE RECORDING PROCESS ILLUSTRATED continued 7. Hiring of employees 9 October, hire 4 employees who begin work on 15 October. Each is to receive a weekly salary of Transaction $500 for a 5-day work week, payable every 2 weeks – first payment made on 26 October A business transaction has not occurred. There Basic is only an agreement between the employer and analysis the employees to enter into a business transaction beginning on 15 October Debit-credit Not needed because there is no accounting analysis entry PowerPoint presentation by Dr Anne 38 Abraham, University of Western Sydney  THE RECORDING PROCESS ILLUSTRATED continued 8. Withdrawal of cash by owner 20 October, C.R. Hill withdraws $500 cash for Transaction personal use Basic The owner’s equity account C.R. Hill, Drawings analysis is increased $500; the asset Cash is decreased $500 Debit-credit Debits increase drawings: debit C.R. Hill, analysis Drawings $500 Credits decrease assets: credit Cash $500 PowerPoint presentation by Dr Anne 39 Abraham, University of Western Sydney  THE RECORDING PROCESS ILLUSTRATED continued Debit-credit Debits increase drawings: debit C.R. Hill, analysis Drawings $500 Credits decrease assets: credit Cash $500 Oct 20 C.R. Hill Drawings 306 500 Journal entry Cash 101 500 (Withdrew cash for personal use) C.R. Hill Drawings 306 Cash 101 Oct 20 500 Oct 1 10 000 Oct 3 900 Posting 2 1 200 4 600 20 500 PowerPoint presentation by Dr Anne 40 Abraham, University of Western Sydney  THE RECORDING PROCESS ILLUSTRATED continued 9. Payment of salaries 26 October, employee salaries of $4000 are Transaction owed and paid in cash Basic The expense account Salaries Expense is analysis increased $4000; the asset Cash is decreased $4000 Debit-credit Debits increase expenses: debit Salaries analysis Expense $4000 Credits decrease assets: credit Cash $4000 PowerPoint presentation by Dr Anne 41 Abraham, University of Western Sydney  THE RECORDING PROCESS ILLUSTRATED continued Debit-credit Debits increase expenses: debit Salaries analysis Expense $4000 Credits decrease assets: credit Cash $4000 Journal entry Oct 26 Salaries Expense 726 4 000 Cash 101 4 000 (Paid salaries to date) Salaries Expense 726 Cash 101 Oct 26 4 000 Oct 1 10 000 Oct 3 900 Posting 2 1 200 4 600 20 500 26 4 000 PowerPoint presentation by Dr Anne 42 Abraham, University of Western Sydney  THE RECORDING PROCESS ILLUSTRATED continued 10. Receipt of cash for services provided 31 October, received $10 000 in cash from Cops Transaction Advertising for advertising services provided in October Basic The asset Cash is increased $10 000; the analysis revenue account Service Revenue is increased $10 000 Debit-credit Debits increase assets: debit Cash $10 000 analysis Credits increase revenue: credit Service Revenue $10 000 PowerPoint presentation by Dr Anne 43 Abraham, University of Western Sydney  THE RECORDING PROCESS ILLUSTRATED continued Debit-credit Debits increase assets: debit Cash $10 000 analysis Credits increase income: credit Service Revenue $10 000 Oct 31 Cash 101 10 000 Journal entry Service Revenue 400 10 000 (Received cash for services provided) Cash 101 Service Revenue 400 Oct 1 10 000 Oct 3 900 Oct 31 10 000 Posting 2 1 200 4 600 31 10 000 20 500 26 4 000 PowerPoint presentation by Dr Anne 44 Abraham, University of Western Sydney  THE TRIAL BALANCE LO7 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 journalising and posting PowerPoint presentation by Dr Anne 45 Abraham, University of Western Sydney  THE TRIAL BALANCE continued The steps for preparing a trial balance are: 1. List the account titles and their balances 2. Total the debit and credit columns 3. Prove the equality of the two columns PowerPoint presentation by Dr Anne 46 Abraham, University of Western Sydney THE TRIAL BALANCE continued PIONEER ADVERTISING AGENCY Trial Balance as at 31 October 2010 Debit Credit Cash $ 15 200 Advertising Supplies 2 500 Prepaid Insurance 600 Office Equipment 5 000 Notes Payable $ 5 000 Accounts Payable 2 500 Unearned Revenue 1 200 C.R. Hill, Capital 10 000 C.R. Hill, Drawings 500 Service Revenue 10 000 Salaries Expense 4 000 Rent Expense 900 $ 28 700 $ 28 700 PowerPoint presentation by Dr Anne 47 Abraham, University of Western Sydney  Limitations of a trial balance A trial balance does not prove all transactions have been recorded or the ledger is correct Errors may arise even when DR = CR – A transaction is completely omitted – A correct journal entry is not posted – A journal entry is posted twice – Incorrect accounts are used in journalising or posting – Offsetting errors are made in recording PowerPoint presentation by Dr Anne 48 Abraham, University of Western Sydney  Question 7 LO7 If the sum of the debit column equals the sum of the credit column in a trial balance, it indicates A. no errors have been made B. no errors can be discovered C. that all accounts reflect correct balances D. the mathematical equality of the accounting equation PowerPoint presentation by Dr Anne 49 Abraham, University of Western Sydney 50