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

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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=

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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

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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

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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:

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2. Enter transaction information in a general journal

3. Transfer journal information to appropriate accountsin the general ledger



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

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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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Recall the steps in the accounting cycle1. Analyse each transaction in terms of its effects on the

accounts


3. Transfer journal information to appropriate accounts inthe general ledger



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

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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




3. Transfer journal information to appropriate accounts inthe general ledger



Part d) will demonstrate step 4

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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

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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.

Documents

ACCT5001 - S1-2010 Week3