51144023 2 Double Entry Recording Process CLC

7/30/2019 51144023 2 Double Entry Recording Process CLC

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Principle of Accounting

Week 2

Chapter 4

The double-entry Recording Process

BA in International BusinessForeign Trade University


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Outline

An introduction to double-entry accountingFooting and balancing ledger accounts

The role of trial balanceDetecting errors through a trial balanceChart of account

Three-column ledger accountsAccounting for drawings


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The Account

Cash

Accountings main summary device is the account , the record of changes.

Accounts are grouped in three broad categories,according to the accounting equation:


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The Account

Assets are the economic resources thatbenefit the business now and in the future

Cash

Accounts receivableInventoryNotes receivablePrepaid expenses

Land

BuildingsEquipment,

furniture,and fixtures


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The Account

Liabilities are the debts of the company .

Notes payableAccounts payableAccrued liabilities

(for expenses incurred but not paid)Long-term liabilities (bonds)


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The Account

Stockholders (owners) equity is theowners claims to the assets of a corporation.

A proprietorship uses a single account .

A partnership uses separate accounts for each

owners capital balance and withdrawals. A corporation uses separate capital

accounts for each source of capital.


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The Account

Common Stock Retained Earnings

Dividends Revenues Expenses


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Transactions

A transaction is any event that both affectsthe financial position of the business entity

and can be reliably recorded.


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Double-Entry Accounting

Double-entry bookkeeping means to recordthe dual effects of each business transaction.


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Ledger Accounts

Ledger - a group of related accounts kept currentin a systematic manner Think of a ledger as a book with one page for each

account. The ledger is a companys books.

General ledger - the collection of

accounts that accumulates theamounts reported in the majorfinancial statements

Ledger


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Ledger Accounts

A simplified version of a ledger account iscalled the T-account.

They allow us to capture the essence of theaccounting process without having to worryabout too many details.

The account is divided into two sides for

recording increases and decreases in theaccounts. Account Title

Left Side Right Side


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Ledger Accounts

Balance - difference between total left-sideamounts and total right-side amounts at

any particular time Assets have left-side balances.

Increased by entries to the left side

Decreased by entries to the right side Liabilities and Owners Equity have right -side

balances. Decreased by entries to the left side

Increased by entries to the right side


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Ledger Accounts

T-accounts and the balance sheet equation:

Assets = Liabilities + Owners Equity

Assets

Increases Decreases

Liabilities

Decreases Increases

Owners Equity

Decreases Increases


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Debits and Credits

Debit (dr.) - an entry or balance on the leftside of an account

Credit (cr.) - an entry or balance on theright side of an account

Remember: Debit is always the left side! Credit is always the right side!


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The T-Account

Account Title

Debit

LEFT SIDE RIGHT SIDE

Credit

AccountingEquation: Assets = Liabilities +

Stockholders Equity

Rules of Debit andCredit: Debit

+Debit

Debit

Credit

Credit

+Credit

+


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Recording entries in ledger accounts

Identify the transaction and state two ledger accountsaffected by the transaction

Determine whether each account isincreased or decreased by the transaction

State whether the accounts will have a debit or a credit entry

Classify the ledger accounts according totheir report classification


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Air & Sea received $50,000 from issuing stock.

Assets = Liabilities +Stockholders

Equity

Debitfor

Increase,50,000

Creditfor

Increase,50,000

Cash Common Stock


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Air & Sea purchased land for $40,000 cash.

Common Stock

Bal. 50,000

CashCredit

forDecrease,40,000

Bal. 50,000

LandDebit

forIncrease,40,000

Assets = Liabilities +Stockholders

Equity


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Recording Transactionsin the Journal

Date Accounts and Explanation Debit Credit Journal Page 1

April 2 Cash 50,000Common Stock 50,000

Issued common stock


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Posting from Journal to Ledger

The ledger is a grouping of all theaccounts; it shows their balances.

Data must be copied to the ledger a process called posting.

The journal is a chronological recordof all transactions listed by date.


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AccountsPayable

Individual liability accountsLedger

All individualaccountscombined

make upthe ledger.

Individual stockholders equity accounts

CommonStock

Cash Individual asset accounts

Posting from Journal to Ledger


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Flow of Accounting Data

TransactionOccurs TransactionAnalyzed

Transaction

Entered inthe Journal

Amounts

Posted tothe Ledger


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Analysis chart

An analysis chart provides an analysis of a financialtransaction to determine the double-entry to berecorded in ledger accounts.

An analysis chart helps to ensure that the double-entry for each transaction is correctly determined.Example

Transaction A/c names Classifica-tion Increase/ DecreaseDebit/ Credit

Bought vehicle for$18,000

VehicleCash at bank

AssetAsset

IncreaseDecrease

DrCr


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Double-entry accounting

Cash at bank

Vehicles

Wages

Mar 1 Vehicles 18,000

Mar 4 Wages 400

Mar 1 Cash at bank 18,000

Mar 4 Cash at bank 400


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Revenue and Expense Transactions

Retained Income is merely accumulatedrevenues less expenses, but we cannot just

increase or decrease the Retained Incomeaccount directly. This would make preparing the income

statement very difficult

By accumulating revenues and expensesseparately, a more meaningful income

statement can be easily prepared.


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Revenue and expense accounts are a partof Retained Income.

Retained Income

Expense Revenue

Decrease Increase

Debit

Increase

Credit

Increase


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Summary of revenue and expense transactions: A credit to a revenue increases the revenue

and increases Retained Income. A debit to a revenue decreases the revenue and

decreases Retained Income.

A credit to an expense decreases the expenseand increases Retained Income.

A debit to an expense increases the expense

and decreases Retained Income.


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Examples Exercise 4.3

Transaction Accountnames

Classifi-cation

Increase/ Decrease

Debit/ Credit

Banked $60,000 cashto start business

Cash at bank Capital

AOE

IncreaseDecrease

DrCr

Paid the 1 st month rent$4,000

Bought shop fittingsfor cash $12,000

Purchased CDs for$4,300 on credit

Sold CDsCost $2,000


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Example Exercise 4.3 (Contd)


Classifi-cation

Increase/ Decrease

Debit/ Credit

Sold CDs for cash $4,300

Paid 1 months advertising$600

Borrowed cash from bank $5,000

Sold CDs on credit at cost$600(Record Cost of sale)

Sold CDs on credit for $1,200(Record revenue)

Purchased stock for cash$3,600


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Example Exercise 4.3 (Contd)


Classifi-cation

Increase/ Decrease

Debit/ Credit

Repaid the National Bank $2,000Paid wages $800

Cash sales of stock at cost$1,200 (record cost of sale)

Cash sales of stock for $2,200(record revenue)

Purchased inventory on creditfor $3,400


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Footing & balancing ledger accounts

To foot an account: (informal procedures)Calculate total debits and credits.

The difference is noted as the balance on the largerside (normally done by pencil).

To balance an account: (formal procedures)Total the two sides of ledger account, larger amount is

written on both sides of the account.The difference is entered as balance and written on theside with the lower amount.


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Footing Example E 4.3

Feb 1 Capital $60,000

5 Sales $ 3,400

8 Loan $ 5,000

10 Sales $ 2,200

Feb 2 Rent $ 4,000

3 Shop fittings $ 12,000

6 Advertising $ 600

9 Stock control $ 3,600

14 Loan $ 5,00015 Wages $ 800

$70,600 $23,000

47,600

Cash at bank


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Balancing Example E 4.3

Feb 1 Capital $60,000

5 Sales $ 3,4008 Loan $ 5,000

10 Sales $ 2,200

Feb 2 Rent $ 4,000

3 Shop fittings $ 12,0006 Advertising $ 600

9 Stock control $ 3,600

14 Loan $ 2,000

15 Wages $ 800Balance $ 47,600

$70,600 $70,600

Balance $47,600

Cash at bank


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Closing the Accounts

Once the financial statements are prepared,the ledger accounts must be prepared to

record the next periods transactions. Thisprocess is called closing the books. The balances in all temporary stockholders

equity accounts are transferred to apermanent stockholders equity account. The revenue and expense accounts are reset

to zero and the current net income is

transferred to Retained Income.


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Closing the Accounts

The Closing Process: The revenue accounts are

closed to Income Summaryin the first entry.

The expense accounts areclosed to Income Summaryin the second entry.

The amount of Net Income (revenues -expenses) is then transferred from Income

Summary to Retained Income.


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Preparing the Trial Balance

Once all transactions have been posted to theledger, a trial balance is prepared.

Trial balance - a list of all of the accountswith their balances assets first, followed byliabilities, and then stockholders equity. It isprepared as a test or check before continuingthe recording process.


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Preparing the Trial Balance

The purposes of the trial balance: To help check on accuracy of posting by

proving whether the total debits equal the totalcredits

To detect errors in double-entry recording

To establish a convenient summary of balances in all accounts for the preparation of formal financial statements


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Trial balance An example

Dr Cr

Capital Mammone 60,000

Rent 4,000

Shop fittings 12,000

Stock control 7,500

Advertising 600

Loan 3,000

Wages 800

Sales 6,800Costs of sales 3,800

Debtors 1,200

Creditors 7,700

Cash at bank 47,600

77,500 77,500


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Trial balance (Contd)

Some errors may not be detected by a trialbalance:

Entering an incorrect amount for both the debit andcredit.Entering a debit or credit in the wrong account.The debit and credit entries are reversed.Omitting a transaction completely.Compensating errors.


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Detecting errors througha trial balance

Debit or credit omittedDuplication of a debit or credit

Transposing errorSearch the records for a missing amount .Divide the out-of-balance amount by 2

(a debit treated as a credit or vice versa).

Divide the out-of-balance amountby 9, which may indicate a slide

or a transposition .


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Chart of accounts

An organised index to the ledger accountsGroups the account together according to theiraccounting report classificationsFacilitate report preparation


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Three-column ledger accounts

A simpler form of ledger with three columns: debit entry,credit entry and the balance of account.Advantage: the balances of all accounts are readilyavailable.

Ideal for computerised system. Eg: Three-column ledger Cash at bank account

Date Account Dr Cr Balance

1 Capital 25,000 25,000 Dr

2 Loan 10,000 35,000 Dr

4 Loan 500 34,500 Dr

5 Stock control 600 33,900 Dr


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Accounting for Drawings

Drawings: withdrawals of assets by the ownerfor personal use.The balance of drawings is accounted for as adeduction against the owners equity.

Example: The proprietor withdraws $500 cash for personal use. Balances of accounts under owners equity section are as

follows:Capital account: $50,000Profit earned for the year: $20,000Drawings for the year: $10,000Requirement: Record the transaction and prepare an extract of

the statement of financial position, owners equity section.


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Accounting for Drawings (Contd)

Dr Drawings a/c $500Cr Cash at bank a/c $500

Extract statement of financial positionOwners equity

Capital $50,000Plus Net profit $20,000 $70,000

Less Drawings $10,000 $60,000


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The Recording Process

The sequence of steps in recordingtransactions:

Transactions Documentation Journal

FinancialStatements

TrialBalance

Ledger


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Practice questions

Exercise 4.4Exercise 4.10


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Homework

Exercise 4.5Exercise 4.9Exercise 4.11


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Quiz

Give appropriate terms for the below definitions.1. A numerical list of all the accounts used by a company.2. An entry on the left side of an account.

3. A list of each account and its balance at a specific point intime used to prove the equality of debits and credits.

4. A system of accounting in which every transaction isrecorded with equal debits and credits.

5. An entry on the right side of an account6. An analysis of a financial transaction leading to determine

the double-entry to be recorded in ledger accounts.

51144023 2 Double Entry Recording Process CLC

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