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School of Business and LawEdith Cowan University
Financial Statements for Decision Making – Recording Transactions
A study of the process of recording economic transactions to build financial
statements to facilitate decision-making.
School of Business and LawEdith Cowan University
Our learning road map
School of Business and LawEdith Cowan University
Self Learning Focus
• Chapter 2 – Financial Statements for decision making– Should be read for review purposes– Examinable
• Chapter 3– Learning Objective 1 – Nature, purpose and
evidence for transactions– Learning Objective 5 – Trial Balance
School of Business and LawEdith Cowan University
Lecture Focused Learning Objectives
Our focus this week in the lecture is on Chapter 3 and developing an understanding of1.Learning Objective 2 (A): The accounting cycle2.Learning Objective 3: The rules of debit and credit in double-entry accounting3.Learning Objective 4: The General Journal4.Learning Objective 2 (B) The Ledgers
4
School of Business and LawEdith Cowan University
THE ACCOUNTING CYCLELearning Objective 1
School of Business and LawEdith Cowan University
The Accounting Cycle
School of Business and LawEdith Cowan University
THE RULES OF DEBIT AND CREDIT IN DOUBLE-ENTRY ACCOUNTING
Learning Objective 2
School of Business and LawEdith Cowan University
Historical Nature of Double-entry accounting
Debits, credits, journal entries, ledgers, accounts, trial balances, balance sheets and income statements all date back to the Renaissance (~1494)… Accounting students can take pride in their heritage. Part of this heritage is a rich vocabulary, almost all of which dates back to this period and much of which is fascinating in its origin.” Hendriksen & Van Breda, 1993, p. 36.
School of Business and LawEdith Cowan University
Double-entry Accounting• Each transaction must be
analysed to determine:– What type of accounts are
affected• Assets; Liabilities; Equity;
Income; Expense– By how much each item
must be increased or decreased
• At least two accounts are affected by each transaction
School of Business and LawEdith Cowan University
Debit and Credit Formatting Rules• Debits are recorded in
the – Left hand column in a
journal– Left hand side of a T-
Account– Left hand column in the
running balance format ledger
• Credits are recorded in the – Right hand column in a
journal– Right hand side of a T-
Account– Right hand column in
the running balance format ledger
School of Business and LawEdith Cowan University
Debit & Credit Rules Summary
School of Business and LawEdith Cowan University
THE GENERAL JOURNALLearning Objective 3
School of Business and LawEdith Cowan University
The Accounting Cycle
School of Business and LawEdith Cowan University
The General Journal• The journal or general
journal used for the initial recording of a transaction
• Chronological (date) order of all transactions
• Useful for locating and reducing errors as debits and credits shown together
School of Business and LawEdith Cowan University
The General Journal: The Rules
• Always two or more accounts are affected by each transaction
• The entry must balance: Debits = Credits• Compound entries
– Enter all debit entries first (Left column)– Then enter all credit entries (Right column)
• Always in date order
School of Business and LawEdith Cowan University
The General Journal Illustrated
School of Business and LawEdith Cowan University
General Journal in Practice
• Starting a business• Darren Jones has decided to setup a lawn
mowing business (sole trader) called Darren’s Lawn and Gardening Services1. On January 2, 2012 Darren invested $35,000
of his savings into the business
School of Business and LawEdith Cowan University
General JournalDate Particulars Post Ref Debit Credit2012Jan 2 Cash at Bank 35,000
Jones, Darren – Capital 35,000
Investment in the business by Darren Jones
School of Business and LawEdith Cowan University
General Journal in Practice
• Purchase of assets• Darren’s Lawn and Gardening Services
purchased assets for the business2. A vehicle at a cost of $21,000 and equipment
for a discounted price of $9,000 cash on January 3, 2012
School of Business and LawEdith Cowan University
General JournalDate Particulars Post
RefDebit Credit
2012Jan 2 Cash at Bank 35,000
Jones, Darren – Capital 35,000
Investment in the business by Darren Jones
Jan 3 Vehicles 21,000
Equipment 9,000
Cash at Bank 30,000
Purchase of vehicle and equipment for cash
School of Business and LawEdith Cowan University
General Journal in Practice
• Purchase of supplies• Darren’s Lawn and Gardening Services
purchased fuel supplies for the business on January 4, 20123. $2,500 of fuel and agreed to pay for the
supplies later, i.e., a credit purchase
School of Business and LawEdith Cowan University
General JournalDate Particulars Post
RefDebit Credit
2012Jan 4 Fuel Supplies 2,500
Fuel Payable 2,500
Purchase of fuel supplies on credit
School of Business and LawEdith Cowan University
General Journal in Practice
• Provision of services• Darren’s Lawn and Gardening Services
performed services for cash and credit4. January 6 - Services for customers paid in
cash - $2,200 5. January 8 - Services for the local council –
invoiced $550 to be paid within 30 days
School of Business and LawEdith Cowan University
General JournalDate Particulars Post
RefDebit Credit
2012Jan 6 Cash at Bank 2,200
Lawn mowing services 2,200
Lawn mowing services provided for cash payment
Jan 8 Accounts Receivable 550
Lawn mowing services 550
Provision of services on credit
School of Business and LawEdith Cowan University
General Journal in Practice
• Recording expenses• Darren’s Lawn and Gardening Services
incurred the following expenses on January 306. Paid cash of $150 for wages to Sue an
employee7. A count of the fuel supplies on hand showed
that $800 of fuel supplies had been used
School of Business and LawEdith Cowan University
General JournalDate Particulars Post
RefDebit Credit
2012Jan 30 Wages Expense 150
Cash at Bank 150
Wages payment
Jan 30 Fuel Expense 800
Fuel Supplies 800
Recording consumption of fuel supplies
School of Business and LawEdith Cowan University
General Journal in Practice
• The following transactions occurred in Darren’s Lawn and Gardening Services on January 308. Collected the accounts receivable from
transaction no. 5 9. Paid the amount due to Adam Fuel Ltd – refer
to transaction no. 310.Darren withdrew $200 from the business for his
own personal use.
School of Business and LawEdith Cowan University
General JournalDate Particulars Post
RefDebit Credit
2012Jan 30 Cash at Bank 550
Accounts Receivable 550
Accounts receivable received
Jan 30 Fuel Payable 2,500
Cash at Bank 2,500
Payment of accounts payable
School of Business and LawEdith Cowan University
General JournalDate Particulars Post
RefDebit Credit
2012Jan 30 Darren Jones - Drawings 200
Cash at Bank 200
Withdrawal by Darren Jones
School of Business and LawEdith Cowan University
THE LEDGERSLearning Objective 4
School of Business and LawEdith Cowan University
Posting from the Journals to the Ledgers
• Normally a monthly process
• General Ledger contains a summary of the transactions for each account
• General ledger contains the balances of each account
School of Business and LawEdith Cowan University
The Accounting Cycle
School of Business and LawEdith Cowan University
The Ledger Accounts
• An account provides a record of increases and decreases in each item that appears in the financial statements
• A collective of accounts is known as the ledgers
• Each account has three basic parts:– A title and account number– A place to record increases– A place to record decreases
School of Business and LawEdith Cowan University
The Ledger Accounts
• Two common formats – The T-Account
• An accountants tool– The Running Balance Format
• Used formally in accounting records both manually and computerised
School of Business and LawEdith Cowan University
The Ledger Accounts
• Ledger accounts reflect the standard practice of– Debits in the left column (left side of the T)– Credits in the right column (right side of the T)
• Key details recorded are:– Date– Explanation (the other account affected by the
transaction)– Amount– Account balance (calculated)
School of Business and LawEdith Cowan University
Ledger Account Formats
• Running Balance Accounts– Used in formal accounting systems– Standard presentation for computerised systems– Familiar to most - format used in Bank
Statements
School of Business and LawEdith Cowan University
The Running Balance Format
School of Business and LawEdith Cowan University
T-Accounts
• T-Accounts– Came about because negative numbers not part of
math's until the 17th century, some two centuries after founding of double-entry accounting
– Convenient way to show individual accounts– Illustrate effects of transactions on an account– Still used in practice for quick calculations
• Shaped in the form of a capital T– Left side of the T is the debit side– Right side of the T is the credit side
School of Business and LawEdith Cowan University
The Structure of a T-AccountAccount Name and Number
Date Explanation Amount Date Explanation Amount
Debit Side (Dr) Credit Side (Cr)
School of Business and LawEdith Cowan University
T- Accounts
School of Business and LawEdith Cowan University
T-Accounts• Based on the accounting equation• Assets = Liabilities + Owners’ Equity• Debits = Credits• Referring back to Darren Jones decision to
to setup a lawn mowing and his initial investment of $35,000. The Cash at Bank T-Account would have reflected the transaction thus …
School of Business and LawEdith Cowan University
Illustration of a T- Account Cash at Bank (Asset)
2012Jan 2 Darren Jones,
Capital35,000
School of Business and LawEdith Cowan University
Illustration of a T- Account • Please record the
remaining Darren Jones transactions in the T-Accounts
School of Business and LawEdith Cowan University
Illustration of a T- Account Cash at Bank (Asset)
2012Jan 2 Darren Jones, Capital 35,000 Jan 3 Vehicles 21,000
Jan 6 Lawn Mowing Services 2,200 Equipment 9,000
Jan 30 Accounts Receivable 550 Jan 30 Wages Expense 150
Jan 30 Fuel Payable 2,500
Jan 30 Drawings 200
School of Business and LawEdith Cowan University
Illustration of a T- Account Vehicle Account (Asset)
2012Jan 3 Cash at Bank 21,000
School of Business and LawEdith Cowan University
Illustration of a T- Account Equipment Account (Asset)
2012Jan 3 Cash at Bank 9,000
School of Business and LawEdith Cowan University
Illustration of a T- Account Fuel Supplies (Asset Account)
2012Jan 3 Fuel Payable 2,500 Jan 30 Fuel Expense 800
School of Business and LawEdith Cowan University
Illustration of a T- Account Fuel Payable (Liability)
2012 2012Jan 30 Cash at Bank 2,500 Jan 3 Fuel Supplies 2,500
School of Business and LawEdith Cowan University
Illustration of a T- Account Lawn Mowing Services (Revenue)
2012Jan 8 Cash at Bank 2,200
Accounts Receivable 550
School of Business and LawEdith Cowan University
Illustration of a T- Account Accounts Receivable (Asset)
2012 2012Jan 8 Lawn Mowing Services 550 Jan 30 Cash at Bank 550
School of Business and LawEdith Cowan University
Illustration of a T- Account Wages Expense
2012Jan 30 Cash at Bank 150
School of Business and LawEdith Cowan University
Illustration of a T- Account Fuel Expense
2012Jan 30 Fuel Supplies 800
School of Business and LawEdith Cowan University
Illustration of a T- Account Drawings (Owners’ Equity)
2012Jan 30 Cash at Bank 200
School of Business and LawEdith Cowan University
Process of Balancing a T- Account
• Balancing only required if more than one entry in the month
• We need to determine the balance carried down (Balance c/d)
School of Business and LawEdith Cowan University
Process of Balancing a T- AccountCash at Bank (Asset)
2012Jan 2 Darren Jones, Capital 35,000 Jan 3 Vehicles 21,000
Jan 6 Lawn Mowing Services 2,200 Equipment 9,000
Jan 30 Accounts Receivable 550 Jan 30 Wages Expense 150
Jan 30 Fuel Payable 2,500
Jan 30 Drawings 200
37,750 32,850
School of Business and LawEdith Cowan University
Process of Balancing a T- AccountCash at Bank (Asset)
2012Jan 2 Darren Jones, Capital 35,000 Jan 3 Vehicles 21,000
Jan 6 Lawn Mowing Services 2,200 Equipment 9,000
Jan 30 Accounts Receivable 550 Jan 30 Wages Expense 150
Jan 30 Fuel Payable 2,500
Jan 30 Drawings 200
Jan 30 Balance c/d 4,900
37,750 37,750Feb 1 Balance b/d 4,900
School of Business and LawEdith Cowan University
Illustration of a T- Account Fuel Supplies (Asset Account)
2012Jan 3 Fuel Payable 2,500 Jan 30 Fuel Expense 800
Jan 30 Balance c/d 1,700
2,500 2,500
Feb 1 Balance b/d 1,700
School of Business and LawEdith Cowan University
Illustration of a T- Account Lawn Mowing Services (Revenue)
2012 2012Jan 30 Balance c/d 2,750 Jan 8 Cash at Bank 2,200
Accounts Receivable 550
2,750 2,750
Feb 1 Balance b/d 2,750
School of Business and LawEdith Cowan University
INTRODUCTION TO GSTLearning Objective 4
School of Business and LawEdith Cowan University
Goods and Services Tax (GST)• GST is a Good and
Services Tax imposed on the sale of goods and services.
• It is NOT recorded or added to payments of accounts.
• GST is accounted for at the time of sale
School of Business and LawEdith Cowan University
Goods and Services Tax (GST)
• When a sale is recorded in the Sales Journal or General Journal – The seller records the applicable amount of GST
in their GST Payable account• When the purchaser (buyer) records a
purchase of inventory, supplies or services etc– The purchaser (buyer) records the amount of
GST in their GST Receivable account
School of Business and LawEdith Cowan University
Goods and Services Tax (GST)• To determine the amount of GST we need to know
if it is GST Plus or GST Inclusive• GST Plus – Add 10% to the price of the goods or
services– Price x 1.10
• GST Inclusive…– Divide the price by 11 to determine amount of GST– Divide the price by 1.10 to determine price excluding
GST
School of Business and LawEdith Cowan University
Further Reading• Please review the
appendix to Chapter 3 of the text book.
School of Business and LawEdith Cowan University
THE END