TOPIC 6_bookeeping Procedures

8/14/2019 TOPIC 6_bookeeping Procedures

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TOPIC 6:

BOOK-KEEPING

PROCEDURES


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By the end of this chapter, you should be able to:

Explain what is meant by the accounting equation;

Understand definition of items in financial statements;

Understand the effect of business transactions on the

financial position;

Define debits and credits and explain how they are used to

record business transactions;

Identify the basic steps in the recording process;

Explain what a journal and ledger is and how it helps in

the recording process;

Prepare a trial balance and explain its purposes;


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Explain the time period assumption;

Explain why adjusting entries are needed;

Explain the major types of adjusting entries;

Prepare adjusting entries for prepayments and accruals;Understand errors and omissions and the method ofrectifying them;

Prepare correcting entries;

Prepare closing entries;

Prepare reversing entries;

Explain the difference between manual and computerizedaccounting.

By the end of this chapter, you should be able to:Continue..


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RULE IN BOOK-KEEPING

The main objective of financial accounting is toprovide

the information of financial position and financial

performance of the business.

Financial position

Balance Sheet: provides information on Assets;

Liability; and

Owners Equity.

Financial Performance

Income Statement.Provides information on the company

profitability.

(Revenue Expenses).

If PROFIT the owners equity will increase and if

LOSS will lower the owners equity.


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CLASSIFICATON OF ACCOUNTS

FIVE GROUP OF ACCOUNTS:

2) ASSETS

Resources owned by a business

Definition right or other access to future

economic benefits controlled by an entityas a result of past transactions or events

Two types of assets:Non current Assets Assets which have a

long life bought

with the intention to use in the businessand not with the intention to simplyresell them. Eg: land and building,

motor vehicle, premise, furniture etc.. Current Assets Goods for resale or items

having a short

life. Eg: bank, cash, stock, debtors etc..


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2) LIABILITY

Total of funds owed for assets supplied to abusiness or expenses incurred not yet paid.

Two types of liabilities:

Non-Current liabilities Liabilities that donot have to be

paid within twelve months of the balancesheet date.

Current Liabilities Liabilities to be paid forwithin a year of the balance sheet date.

3) OWNERS EQUITY

The total of resources invested and left in abusiness by its

owner.Increase in owners equity:

Owner increases its investment to abusiness either by

cash or by other assets.

any profits earned by the business


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Decrease in Owners Equity

Owner withdrawal cash or other assets from

the business.

Any losses sustained by the business.

4) REVENUE

The financial value of goods and services sold

to customers.Earning revenue causes owners equity to

increase.

5) EXPENSES

The value of all assets that have been used up

to obtainrevenues.

Often cited as cost of doing business

Expenses always cause a decrease in ownersequity.


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THE ACCOUNTING EQUATION or THEBALANCE SHEET EQUATION

The business can acquire assets eitherprovided by the owner or by other party(external sources) or combination ofboth.

The sum of the assets shown in balancesheet must be equal at all times to thesum of claims against those assets.

Therefore, accounting equation usually

shown the relationship between assets,liabilities, and owners equity of abusiness at a certain date.


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Example of simple accounting equations:

a) ASSETS = OWNERSEQUITY(Resources in the business) = (Resourcessupplied by the owner)

b) ASSETS = OWNERS EQUITY +LIABILITIES= (Resources supplied by the

owner & other party)

c) ASSETS = LIABILITIES

= (Resources supplied byother party)

Advanced Accounting Equation:

ASSETS = LIABILITY + OWNERS E UITY +


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THE EFFECT OF TRANSACTION TOWARDS THEACCOUNTING EQUATION

Paid Aseana RM125022

Jan

Paid rent RM890, wages RM4500 and utilityexpenses RM450 on cash

18Jan

Services being performed to Ali Trading; receivedRM250 in cash and RM1500 on credit.

15Jan

Paid advertising expense amounted RM75010Jan

Received cash for services rendered amountedRM2250

8 Jan

Bought an office supplies amounted RM3250 oncredit from Aseana4 Jan

Bought business furniture in cash at cost RM65003 Jan

Winnie started business with RM15,000 cash1 Jan

TransactionsDate


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Analyzed Accounting Equation

-Assets,Cash increased RM250, & Debtor increased 1500 &revenue increased RM1750

- F (6500) + C (10250) + OS(3250) + D(1500) =OE(15000)+OC(3250)+R(4000)

- Adv(750) +

15Jan

-Cash decreased RM750 & Expense (advertising) increasedRM750

-F (6500) + C (10000) + OS(3250) = OE(15000) +OC(3250) +R(2250)

- Adv(750)

10Jan

-Asset (Cash) increased RM2250 & Revenue increased RM2250

-F (6500) + C (10750) + OS(3250) = OE(15000) + OC(3250)+R(2250)

8 Jan

-Asset (office supplies) increased RM3250 & liability (othercreditor Aseana) increased RM3250)

-F (6500) + C (8500) + OS(3250) = OE(15000) + OC(3250)

4 Jan

-Asset (furniture) increased RM6500 & cash decreased RM6500

-Furniture (RM6500) + Cash (RM8500) = OE (RM15000)

3 Jan

- Asset (cash) increased RM15000 & Owner Equity increasedRM15000

- Cash(RM15000) = OE (RM15000)

1 Jan

Effect on Accounting EquationDate


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-Asset (cash) decreased RM1250 & Liability (othercreditor Aseana) decreased RM1250.

- F (6500) + C (3160) + OS(3250) + D(1500) =

OE(15000)+OC(2000)+R(4000)

-[ Adv(750) +rent(890)

+wages(4500)+utility(450)]

22Jan

-Asset (cash) decreased RM5840 & Expenses increased(rent)RM890, (wages)RM4500& (utility) RM450

- F (6500) + C (4410) + OS(3250) + D(1500) =OE(15000)+OC(3250)+R(4000)

-[ Adv(750) +

rent(890)+wages(4500)+utility(450)]

18Jan

Effect on Accounting EquationD

ate


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DOUBLE ENTRY SYSTEM

The financial transaction has two effectson the financial position of the business.

This means that each transaction mustbe recorded twice in the books ofaccounts i.e. DEBIT and CREDIT.

Thus, for any transaction, the amount ofdebit must be EQUAL with the amount of

credit. Examples;

If transaction reduces an asset it mustalso:

Increase another asset,orDecrease a liability, or

Decrease owners equityAn item that increases/decrease Assets

must be debit/credit;An item that increase/decrease Liabilit


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BOOK-KEEPING RULES

Debit and Credit Procedures

DebitCreditRevenue

CreditDebitExpenses

Credit

Credit

Debit

Increase

DebitOwners Equity

DebitLiability

CreditAssets

DecreaseType of Accounts


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DEBITS AND CREDITS

The term DEBIT AND CREDIT mean left andright

Cash A/c

DEBIT CREDIT


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Use the same examples in accounting equation butchange to double entry system.

Date Transactions

1 Jan Winnie started business with RM15,000 cash

3 Jan Bought business furniture in cash at cost

RM65004 Jan Bought an office supplies amounted RM3250 on

credit from Aseana

8 Jan Received cash for services rendered amountedRM2250

10 JanPaid advertising expense amounted RM75015 Jan Services being performed to Ali Trading;

received RM250 in cash and RM1500 on credit.

18 JanPaid rent RM890, wages RM4500 and utilityexpenses RM450 on cash

22 JanPaid Aseana RM1250


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6.2 STEPS IN ACCOUNTING CYCLE

ANALYSED DATA

IDENTIFY TRANSCTION (SOURCE OF DOCUMENTS)

PREPARE JOURNAL ENTRY

POSTING TO LEDGER

PREPARE ADJUSMENT ENTRY

BALANCE UP ALL ACCOUNTS

TRIALBALANCE AFTER ADJUSMENT

PREPARE FINANCIAL STATEMENT

CLOSING ENTRY

POSTING TO LEDGER

REVERSING ENTRY


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STEPS IN ACCOUNTING CYCLE (IN DETAIL)

1. ANALYSED DATA

Accounting data that is related to the businesstransaction only will be taken intoconsideration in recording process.

2. SOURCE OF DOCUMENT

Any kind of document that are prepared forevery business transaction.

Eg: invoices, cheque butt,debit notes andcredit notes etc..

Purpose:

the document are prepared as a writtenevidence for each transaction.

to be used by an accountant to support theentry made in the accounting record.

3. JOURNAL

Transaction are initially recorded inchronological order in a journal before being

transferred to the account. (BOOK OFORIGINAL ENTRY


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Purpose:

Disclose one place the complete effect oftransaction

Provide chronological record of transactions

Helps to prevent or locate errors.

Types of journal:

Special Journal make an entry on thefrequently basis and

from the same category. Eg; credit sales andcredit purchase.

General Journal entry that are not in thespecial journal

category.

Example:Ray invested RM10,000 cash in thebusiness on 1 Jun

2000.

General JournalJ1 (Owner contribute cash

capital into a business

10,000Capital

10,000Cash1 Jun

CreditDebitRefDescriptionDate


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4. LEDGER

the entire group of account maintained by acompany is referred to collectively as aledger.

Purpose:

to ensure the entire recording process aredistribute among workers

to ensure the reference and controlling canbe done easily.

to increase efficiency in recording process.format of Account Ledger:

Cash A/c No2

OR

Cash A/c

DEBIT CREDIT

BalanceCreditDebitRefExplanation

Date


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Types of Ledger:

General Leger

is a group of account that will be presented

in the financialstatement, such as account asset, liability and

capital.

also included in the general ledger areDEBTORS or

CREDITORS CONTROL account. The controlaccount will

control subsidiary ledger of each debtors orcreditors.

Subsidiary Ledger

is a detail ledger for a account such asdebtors and creditors.


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Posting procedures.

Ray contributed RM10,000 cash in the business on 1 Jun1999.

General Journal J1

General Ledger

10000

Debit

(Owner contribute cash capital in abusiness)

1000022Capital

2Cash1 Jun

CreditRefDescriptionDate

1000010000J1Capital1 Jun

Balance

CreditDebitRefExplanation

Date

CashNo 2

Balance

CreditDebitRefExplanation

Date

10,00010,000J1Cash1 Jun

CapitalNo22


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5. TRIAL BALANCE

Trial balance is a list of account and theirbalances at their given time.

Purpose:to prove the mathematical equality of debit and

credit.

the trial balance also discovers errors injournalizing and

postinguseful in preparing financial statement

Format in preparing Trial Balance

Listing the account titles and balances at theend of the

accounting period. How to know whetherthe accounts

have DEBIT or CREDIT BALANCE?? If totaldebits

exceed total credit, the account has a debit

balance andvice versa.


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Eg:

XYZ Company

Trial Balance as at 30 Jun 2000Debit Credit

Capital 15,000

Cash 15000

15000 15000


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6. Adjustment Entry and Correcting Errors:

Why we need to make adjustments to the

financial statement? Reason: there is a timing differences andrecognizing revenue

and expenses.

Accounting period vs Fiscal year

Fiscal year (one year period)

- usually begins with the first day of the monthand ends 12

month later.

Accounting period- accounting period usually coincides with

calendar year

(1 January until 31 December)

- eg; If the company chooses to prepare their

financial statement


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Recognizing Revenue and Expenses

In order for revenue to be recorded in theperiod in which they are

earned and for expenses to be recognized in theperiod in which

they are incurred, adjusting entry entry arerequired.

Matching between revenue and expenses thatare earned and

charge. (MATCHING CONCEPT)

Example: Rent expense: RM1200 per year

1 Jan 31 Dec

1 Jun Accounting Period 31 May

Types of Adjusting entry:

Depreciation

Bad debt/Allowance for doubtful debt


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7. CLOSING ENTRIES

Closing entries formally recognize in theledger to transfer of

net income or net loss and owners drawingto owners capital.

These entries will produce a zero balance ineach temporary

account. Data can be accumulating to separate data in

the next

accounting period from data prior period.

Types of account need to be closed

- ALL TEMPORARYaccounts like all REVENUEaccounts, all EXPENSES accounts and OWNERSDRAWING.

ALL PERMANENT accounts no need to be

closed like all


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Example:

- The expenses below show a balance on 31 Dec2000

Rent RM300 and Salaries RM1200. Closed allthe accounts

1200Salaries

300Rent

1,500IncomeStatement

31 Dec2000

CtDtDescriptionDate


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8. REVERSING ENTRIES

is an entry prepared for the beginning of thenext accounting

period. The entries are taking from theadjustment entries

from accounting period.

Purpose:

to simplified and summarized the entries for

preparation thenew entries for the new accounting period.

XYZ Enterprise paid their workers salariesevery 2 weeks.

On the 31 December 2001, there are unpaidsalaries

amounted RM6000.

Normal Entries:

31 Dec Dt Salary expense6,000

Cr Unpaid Salary 6,000 Reversing Entries:


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9. CORRECTING ERRORS:a.Errors no affecting trial balance

complete omission of transactions

reversal entry (entry suppose to debit arecredit instead)

an error of commission (debit in the wrongaccount but

with the right type)

error of principle (entry made entirely wrongtype of

account)

error at the book of prime entry

a pair of compensating error

b.Errors affecting trial balance

error of single entry

error of amount entered into the books

calculating the balance in the ledgerincorrectly

entirely omitting a balance from trial


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Example:

A trial balance extracted from the books of abusiness on 31 December 2001 showed a totaldebit balances equal to total credit balances.However, the following errors were subsequentlydiscovered:

a) RM purchase invoice from G Smith had beencredited to J

Smiths account in the purchase ledgerb) A cheque for wages of RM250 had beenentirely omitted from

the books of account.

c) A RM378 sales invoice relating to P Charles

had been recordedas RM738 in the sales daybook.

d) The RM8500 cost new motor vehicle had beendebited to motor

expenses

e) A RM30 discount allowed to V Baker had beend bi d

Documents

TOPIC 6_bookeeping Procedures