Acct Week 3 Lecture

7/27/2019 Acct Week 3 Lecture

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ACCOUNTING WEEK 3 LECTURE.

THE ACCOUNT, THE LEDGER AND THE JOURNAL

An accountis the detailed record of all the changes that have occurred in a particular

asset, liability or owners equity during a period.

The journal is the chronological record of the transactions. Records similar transactions

eg. Cash transactions, sales journal, purchases journal etc. Allows for specialisation. Can also

have a general journal (unlikely).

The ledger is the record holding all accounts.

A list of all the ledger accounts, along with their balances, is called a trial balance.

Bank overdraft: exceeded payment, exceeds what you have in the bank. Banks can

charge interest. Spending more than what you have. Short term loans.

Record transactions in the journal Copy (post) to the ledger preparethe trial balance.

Assets: An asset is a resource controlled by an entity as a result of past events that is

expected to provide future economic benefits to the entity in the future:

Cash Accounts receivable (Debtors) Bills Receivable Inventories(things we buy with the purpose of selling) Prepaid expenses Land Buildings Plant + Equipment

Anything receivable is an asset.

If land/building is mortgaged, it is not an asset; it is a liability (financial).

An expense has no future economic benefit because it has been consumed by the

company.


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Liabilities: is a present obligation of the entity arising from past events, the settlement

of which is expected to result in an overflow from the entity of resources embodying

economic benefits.Anything payable is a liability-something the business owes.

Accounts payable Bills payable Accrues liabilities.

Must be a transaction involved.

Owners Equity: The financial estimate of owners claims to the value in a business is

called owners equity. It is the residual interest in the assets of an entity after deducting

all liabilities. If they have given the business money than the company owes them that

money. Cash withdrawals= dividends (when the owners withdraws money for personal

use). Can do this in a proprietorship. Is more difficult in a partnership (there arerestrictions), and nearly impossible in a company.

Capital Drawings Income

In book, look at chart of accounts Exhibit 2.2

Chart of Accounts: shows all accounts (balance sheet accounts). Gves instructions on what each

accounts should include.

DEBITS, CREDITS AND DOUBLE-ENTRY ACCOUNTING:

Accounting is based on a double-entry system. Each transaction affects at least 2 accounts. A popular format is called T-account.

The account category determines how increases and decreases in the account arerecorded as debits and credits.

The pattern of recording

Debit Credit

If it increases Cash its a debit. If it decreases cash its a credit.


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SUMMARY-DEBITS AND CREDITS:

Increase Decrease

Assets DR CR

Expenses DR CR

Liabilities CR DR

Income/Rev CR DR

Equity CR DR

Recording transaction in the journal

Identify the transaction from the source documentsSpecify each accountaffected by the transaction and classify it by type Determine whether theaccount is increased or decreased by the transactionFor opening balances, you always rely on the increase rule.

Nothing goes through the general ledger accounts without going through the journal.

Documents Journal Ledger.

THE TRIAL BALANCE

A trial balance summarises the ledger by listing all the accounts with their balances. Throughout the accounting process, total debits should always equal total credits. Errors can be detected by calculating the difference between total credits on the trial

balance.

SUMMARY:

The accounting equation must ALWAYS balance after each transaction is recorded. Toachieve this balance we records transactions using a double entry system.

A transaction