Basics of Accounting

Accounting cycle (I): Journalizing

posting and preparing Trial Balance,

Final Accounts

Accounting Meaning & Cycle

An accounting system is a means of collecting, summarizing, analyzing and reporting in monetary terms, information about the business.

Accounting period /fiscal period: any span of time covering a complete accounting cycle

E.g. a month ,a quarter or half a year, a year

Fiscal year/accounting year: twelve consecutive months

Basic Accounting Terms

Capital = Assets – Liabilities

Capital Expenditure

Revenue Expenditure

Debtors

Creditors

The Accounting Cycle

Journalize

transactions.Post entries to

the ledger

accounts.

Prepare trial

balance.

Complete a

work sheet.

Prepare

financial

statements.

Communication the

results.

Analysis and

Intrepretation.

Journalize and

post adjusting

entries.

Classification of Accounts

Personal Accounts

(Dr the Receiver,

Cr the Giver)

Natural Personal Accounts

Artificial Person Accounts

Representative Person Accounts

Impersonal Accounts

Real Accounts

(Dr . What comes in, Cr what goes

out)

Nominal Accounts

(Dr all expenses and losses, Cr all

income and gains)

Double Entry Book Keeping

Newton’ third law of Motion for every action there is an equal and opposite reaction.

Accounting rules

For every debit there is an equal and opposite credit in the accounting records

Double Entry Book Keeping

T- account format:

Debit Side Credit Side

Assets = Liabilities + Owner’s Equity

Assets = +Dr –Cr

Liabilities= -Dr +Cr

Owner’s Equity = -Dr +Cr

Equipment

(3) 26,000

GENERAL JOURNAL Page 123

Date Description

Post.

Ref. Debit Credit

Step 3: Record

transactions in a

journal.

Steps in Journalizing

Step 1: Examine

source documents.

Equipment

(3) 26,000

Liabilities EquityAssets = +

Step 2: Analyze

transactions.

The Journal

In an actual accounting system, transactions

are initially recorded in the journal.( handout)

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

2013

Jan 1 Cash 10,00,000

Li, Capital 10,00,000

Owner invested cash in the business.

Posting Journal Entries to the Ledger Accounts

Posting involves copying

information from the journal to

the ledger accounts.

The Ledger

The entire group of

accounts is kept

together in an

accounting record

called a general

ledger

Cash

Accounts

Payable

Capital

Accounts are

individual records

showing increases

and decreases.

Posting

Sorting out and copying the information from the journal to the ledger account.

Posting Journal Entries to the Ledger Accounts

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

1998

Jan 1 Cash 1,000,000

li, Capital 1,000,000

Owner invested cash in the business.General Ledger

Cash

Date Debit Credit Balance

1998

Jan 1 1,000,000 1,000,000

Posting Journal Entries to the Ledger Accounts

GENERAL JOURNAL

Date Account Titles and Explanation Debit Credit

1998

Jan 1 Cash 1,000,000

LI, Capital 1,000,000

Owner invested cash in the business.General Ledger

li, Capital

Date Debit Credit Balance

1998

Jan 1 1,000,000 1,000,000

Cross –reference

3) Insert the page number of the journal in the posting reference column of the ledger account

4) Insert the ledger account number in the posting reference column of the journal

ACCOUNT NAME: ACCOUNT No.

Date Description PR Debit Credit Balance

Step 4: Record the

journal information in a

ledger.

GENERAL JOURNAL Page 123

Date Description

Post.

Ref. Debit Credit

Step 3: Record

transactions in a

journal.

Step 5: Prepare a

trial balance.

Steps in Processing Transactions

Step 1: Examine

source documents.

Equipment

(3) 26,000

Liabilities EquityAssets = +

Step 2: Analyze

transactions.

TRIAL BALANCE

DEFINITION

IT IS A STATEMENT SHOWING CREDIT AND DEBIT

BALANCES FROM THE LEDGER.

HELPS ARITHMETICAL ACCURACY AND FACILITATES

FINAL ACCOUNTS.

TRIAL BALANCE

BASIC PRINCIPLE :

SINCE IT IS DOUBLE ENTRY BOOK-KEEPING, HENCE,

ASSETS AND EXPENSES ARE DEBIT BALANCES

LIABILITIES AND INCOMES ARE CREDIT BALANCES

. IN CASE OF ARITHMETICAL INACCURACY IDENTIFY

CLERICAL/PRINCIPLE ERRORS AND RECTIFY

TRIAL BALANCE

TYPES OF ERRORS:

A) CLERICAL ERRORS

-- ERRORS OF OMISSION

--- OMISSION OF TRANSACTION FROM BOOKS

--- COMPLETE OMISSION NOT AFFECTING TRIAL

BALANCE

--- PARTIAL OMISSION AFFECTING TRIAL

BALANCE

TRIAL BALANCE

-- ERRORS OF COMMISSION

--- FIGURE POSTED ON THE WRONG SIDE OR WITH

WRONG AMOUNT

-- COMPENSATING ERRORS

--- ONE ERROR BALANCES ANOTHER ERROR

. B) ERRORS OF PRINCIPLE

-- ERRORS IN CONTRAVENTION OF ACCOUNTING

PRINCIPLES

TRIAL BALANCE

RECTIFICATION OF ERRORS IS A SERIES OF STEPS:

PASS THE CORRECT ENTRY

COMPARE THE WRONG ENTRY WITH THE CORRECT

ONE

PASS THE RECTIFICATION ENTRY

IF TRIAL BALANCE DOES NOT TALLY THEN

DIFFERENCE IS TRANSFERRED TO SUSPENCE

ACCOUNT

TRIAL BALANCE

TYPICAL TRIAL BALANCE

N A M E DEBIT CREDIT

CAPITAL X

DRAWINGS X

PURCHASES X

SALES X

EXPENSES X

DEBTORS(CUSTOMRES) X

CREDITORS(SUPPLIERS) X

CASH X

SALES RETURN X

TRIAL BALANCE

TYPICAL ERRORS:

-- CLERICAL:

A) SALARY PAID 1000/- BUT POSTED AS 10, 000/-.

RECTIFICATION: CREDIT SALARY WITH 9000/-.

B) SALARY PAID 1000/- BUT POSTED IN RENT A/C.

RECTIFICATION: DEBIT SALARY AND CREDIT RENT WITH

1000/-.