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7/30/2019 ACCT5001 - S1-2010 Week3
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Week 3, Chapter 2
The AccountingInformation System
PowerPoint presentationdeveloped by Dr Anne Abrahamand adapted by Sharron ONeill
2009 John Wiley & Sons Australia, Ltd
Recap last week
Review the content and purpose of the four majorFinancial Statements Income statement Statement of Changes in Owners Equity Statement of Financial Position Statement of Cash Flows
Explain elements of the accounting framework
Principles and assumptions: Monetary principle, goingconcern, accounting entity assumption, periodassumption, historical cost, conservatism, full disclosure
Qualitative characteristics: relevant, reliable,comparable, understandable, timely, cost-benefit
Week 3 The Accounting InformationSystem
Text: Chapter 2, Learning Objectives 1-8
Demonstration Questions: PSA2.3; PSA2.6 PSA2.9, BBS2.4*
Self-Study Questions: Q.1,5,8; E2.6;E2.7; E2.8; PSA2.2; PSA2.4,
PSA2.7;PSA2.10 PSB2.5*
* optional
Outline:
A) Ident ify and Analyse A cco unt ing Transacti onsB) Journal ise Transactions
C) Postings to General Ledger
D) Prepare Trial Balance
THE ACCOUNTING CYCLE
Steps in the accounting cycle Accounting Records
1. Identify & analyse transactions1. Identify & analyse transactions
2. Journalise transactions2. Journalise transactions
3. Post to ledger accounts3. Post to ledger accounts
4. Prepare trial balance of GL4. Prepare trial balance of GL
5. Prepare financial statements5. Prepare financial statements
Source documentsSource documents
General journalGeneral journal
General ledgerGeneral ledger
Trial balanceTrial balance
Financial statementsFinancial statements
5
A) ACCOUNTING TRANSACTIONS
Transactions are external exchanges of economicvalue between a business & one or more entities
Events are internal exchanges of economic value andinclude price increases in assets during anaccounting period (revaluations) and the allocation ofthe cost of the long-lived assets of an entity todifferent accounting periods (depreciation)
Accounting must record business transactions andevents because every transaction affects the assets,liabilities and equity of the business
IDENTIFY & ANALYSE TRANSACTIONS
What do we need to know?
a)Has an economic transaction actually occurred ?
- Check the source document
b) If so, is the transaction a business transaction ?
- Not a personal transaction
- Not a transaction relating to a different business
c) What accounts are affected by the transaction andhow does it affect the accounting equation?
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ACCOUNTS
An account is the basic summary devise offinancial accounting.
Each account provides a record of the increasesand decreases in the specific item indicated bythe account name. eg Cash at bank, Sales revenue, Inventory
Accounts are grouped into five categories:Assets, Liabilities, Equity, Income, Expenses
A list of all the accounts, and each correspondingaccount number, is called the Chart of Accounts
The group of all accounts is called the generalledger
IMPACT OF TRANSACTIONS ON THEACCOUNTING EQUATION
Transaction analysis is the process of identifying
the specific effects of business transactions onthe accounts in the accounting equation.
LIABILITIESASSETS EQUITY= +
Remember: Following the principles ofdouble entry book-keeping
a business transaction
WILL cause CHANGES in at least two INDIVIDUAL accounts, but
WILL NOT CHANGE the fundamental EQUALITY of the accounting equation
The accounting equation must ALWAYSALWAYS balance.
EXTENDING THE ACCOUNTING EQUATION
*Share * RetainedShare * Retained
Capital EarningsCapital Earnings
Assets = Liabilities + Equity
DividendsDividends
Permanent accounts Statement of financial positionTemporary accounts income statement & changes in equity
Note: for a sole trader or partnership
the Share Capital and Retained Earnings accounts are replaced bya single account for each owner called Capital-Owners Name
the Dividends account is replaced by a Drawings account
IncomeIncome
ExpensesExpenses
Stuart Lang decided to start a cleaning business on 1st
January 2010. He withdrew $20,000 from his own bankaccount and opened a new business bank account.
Is this a transaction (if so, what is the source document)?Yes, Bank deposit slip
Is this a business transaction?Yes changes the business bank account balance
How does this affect the accounting equation?
EXAMPLE
20,000
Cash Assets
20,000+0=
Capital =Equity+Liabilities=
11
Demonstration Question PSA 2.3
Recall the steps in the accounting cycle
1. Analyse each transaction in terms of its effects on theaccounts
2. Enter transaction information in a journal
3. Transfer journal information to appropriate accountsin the general ledger
4. Prepare a Trial Balance
5. Prepare financial statements
This exercise will demonstratesteps 1 and 5
B) Step 2. Recording Business Transactions
in the GENERAL JOURNAL
General journal entries:
Are prepared in chronological order
Record the effects of each business transaction
Show the amounts to be debited or credited tothe accounts in the general ledger
So, what is a Debit? What is a Credit?
Debit means LEFT hand side
Credit means RIGHT hand side
=DebitAsset
CreditLiabilities + Equity
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DEBITS and CREDITS BY ACCOUNT TYPE
Double entry system: each transaction affects at least two accounts total debits must equal total credits
=
1. Dr/Cr rules for Asset and Liability accounts
ASSETS
Debit to Credit to
Increase Decrease
Normalbalance
LIABILITIES
Debit to Credit to
Decrease IncreaseNormalbalance
DebitsAsset
CreditsLiabilities + Equity
Example
So, if a business took a bank loan of $4,000 on 6 Jan
4,000
Cash Debit
Assets
4,000=
Bank loan =Credit
Equity+
Credit
Liabilities=
CASH AT BANK
1/1 Bal. 2,000
6/1 Loan 4,000
BANK LOAN
6/1 Cash 4,000
RECALL: THE ACCOUNTING EQUATION
*Share * RetainedShare * RetainedCapital EarningsCapital Earnings
Assets = Liabilities + Equity
DividendsDividends
Share capital is an equity a/c, and so normal balance will be thesame sign as the Equity (i.e. Credit)
Retained earnings is an equity a/c, and so normal balance willbe the same sign as Equity (i.e. Credit)
Income increase equity and so normal balance will be the samesign as the Equity (i.e. Credit)
Dividends (or Drawings) and Expenses decrease equity and sonormal balance will be the opposite sign (i.e. Debit)
IncomeIncome
ExpensesExpenses
16
Debit and credit procedures continued
2. Dr/Cr rules for Owners Equity accounts:
a. ShareCapital
b. RetainedEarnings
SHARE CAPITAL
Debit to Credit to
decrease increase
Normalbalance
RETAINED EARNINGS
Debit to Credit todecrease increase
Normalbalance
17
Debit and credit procedures continued
c. Dividends
3. Dr/Cr procedures for Income & Expenses:
Dividends
Debit to Credit to
Increase DecreaseNormalbalance
DIVIDENDS
Debit to Credit to
increase decreaseNormalbalance
EXPENSES
Debit to Credit to
increase decrease
Normalbalance
INCOME (REVENUES)
Debit to Credit to
decrease increaseNormalbalance 18
Equity section of Statement
of Financial Position
Opening balance of retained earnings
+ Profit
Loss
Balance of the Dividends account
RetainedEarnings
Total sum invested into the business byits shareholders
Share capital
Calculated by:Account shown
or from the Income Statement
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THE GENERAL JOURNAL
Ajournal is a chronological record of alltransactions
The complete effect of a transaction isdisclosed in one place
This helps prevent errors as debit and creditamounts are easily compared
EXAMPLE of JOURNALISING
210
130
A/c
Purchased stationery from Officeworks
2,000Accounts Payable
2,000Stationery12 / 1 / 10
CreditDebitDetailsDate
Transaction:Ted purchased $2,000 stationery on account from
Officeworks Ltd on the 12th January 2010.
This transaction is recorded in the general journal asfollows:
21
Demonstration Question PSA 2.6
Recall the steps in the accounting cycle
1. Analyse each transaction in terms of its effects on theaccounts
2. Enter transaction information in a general journal
3. Transfer journal information to appropriate accountsin the general ledger
4. Prepare a Trial Balance
5. Prepare financial statements
Part b) will demonstrate steps 1 & 222
C) THE GENERAL LEDGER
Contains all asset, liability and equity accounts
Equipment Interest Payable Salaries Expense
Individualasset
accounts
Land
Supplies
Cash
Individualliability
accounts
Salaries Payable
Accounts Payable
Bank Loan
Individualequity
accounts
Service Revenue
Share Capital
Retained Profits
The General Ledger
23
THE POSTING PROCESS
Posting is the procedure where information istransferred from the general journal entries to thegeneral ledger accounts
Steps in the process:1. Find the account to be debited
2. Enter the transaction date in the account
3. Enter name of other account that will be credited
4. Enter amount of the debit
5. Go back to the journal and tick the account numberto show that part of the entry has been posted
6. Repeat steps 1-5 for the account to be credited
EXAMPLE of POSTING
210
130
A/c
Purchased stationery from Officeworks
2,000Accounts Payable
2,000Stationery12 / 1 / 10
CreditDebitDetailsDate
Recall our journal entry:
This journal is posted to the general ledger as follows:
12/1 Stationery 2,00012/1 Ac Pay. 2,000
Accounts Payable 210Stationery 130
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Demonstration Question PSA 2.6
Recall the steps in the accounting cycle1. Analyse each transaction in terms of its effects on the
accounts
2. Enter transaction information in a journal
3. Transfer journal information to appropriate accounts inthe general ledger
4. Prepare a Trial Balance
5. Prepare financial statements
Part c) will demonstrate step 326
D) THE TRIAL BALANCE
A trial balance is a list of all the accounts andtheir balances at a given time listed in order asthey appear in general ledger, with totals
The totals prove the equality of debits and creditsafter the posting process has been completed
Steps to prepare a trial balance
1. List account numbers, titles and balances
2. Calculate totals for debit and credit columns
3. Verify debit total equals credit total
27
THE TRIAL BALANCE example
True Tax Services LTDTrial Balance
as at 31 October 2010
No. Account title Debit Credit
100 Cash $ 15 200112 Prepaid Advertising 1 100130 Office Equipment 7 000
200 Accounts Payable $ 2 500213 Revenue Received in Advance 1 200
230 Bank Loan 5 000300 Share Capital 10 000320 Dividends 500400 Service Revenue 10 000500 Salaries Expense 4 000510 Rent Expense 900
$ 28 700 $ 28 70028
Demonstration Question PSA 2.6 part d
Recall the steps in the accounting cycle
1. Analyse each transaction in terms of its effects on theaccounts
2. Enter transaction information in a journal
3. Transfer journal information to appropriate accounts inthe general ledger
4. Prepare a Trial Balance
5. Prepare financial statements
Part d) will demonstrate step 4
29
Limitations of a Trial Balance
Errors that a trial balance will not detect :
A missing transaction (not journalised)
Posting of an incorrect journal entry
A journal entry posted twice
An incorrect account used in the journal
Offsetting errors made in recording theamount of a transaction
30
Demonstration Question PSA 2.9
We will now examine an incorrectlyprepared trial balance and:
1. Identify the errors that were made
2. Prepare a corrected trial balance
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PREPARATION FOR WEEK 4
Do Week 3 self-study questions
Check solutions on Blackboard aftercompleting the questions
Complete reflective, self-evaluation and learning strategiesexercise
Skim read Chapter 3. Start with the Summary of LearningObjectives on pp.172
Print a copy o f Week 4 lecture material from Blackboard tobring to class
Group Assignment: Sign up for groups will open on Tuesday.Make sure you signed up before you attend your next class.
Group size is between 3 and 4 students per group.
You can only sign up once and within the stream you areallocated to according to your timetable.
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