Section 2:
The Bookkeeping Process
(Module 3)
This Section of the Course …
Bookkeeping Process
Double Entry Bookkeeping Rules of Debits and Credits The T-Account
Bookkeeping
The procedure commonly known as
bookkeeping is the record keeping phase of accounting. Bookkeeping can also be defined as the process of keeping records of cash
The Bookkeeping Process
The three steps in the bookkeeping process are:
1. Creating a journal entry to record the
transaction
Source Documents
First step is to the locate the source document:
examples include cheques, invoices, deposit slips (records of “accounting transactions”)
Source documents include date, name of the
Recording the transaction
The bookkeeper records the transaction in the
journal (there are several types)
Once the information is recorded in the journal
Ledgers
Two primary types of ledgers:
General ledger lists all the accounts in the Chart of
Accounts
The Subsidiary Ledger lists amounts owing from
Trial Balance
Once the information has been “posted” to the
ledgers, the debit or credit balance of each ledger is used to prepare the Trial Balance
The Trial Balance lists the debits and credit
balances of each account (from each account’s ledger) and proves the accounting records are in balance – total debits must equal total
Double Entry Bookkeeping
The Double Entry Bookkeeping system requires a transaction to be recorded in two or more
different accounts
For every transaction recorded, the debits must always equal the credits.
GST/HST
If a company sells a product or service, they will collect the GST/HST. This amount must be submitted to the Receiver General (Federal Government)
However, companies often pay the GST/HST when
they purchase products or services
Companies keep track of how much GST/HST they
have paid, and this amount is subtracted from the amount they need to submit
GST/HST Accounts
GST/HST a company pays is recorded in an
account called GST Paid on Purchases
GST/HST a company collects is recorded in an
account called GST Charged on Sales
An assumption is made that a company will
GST/HST
Instead of having a single account called GST,
companies track GST Charged and GST Paid separately. The difference between GST
Charged and GST Paid is submitted to the Receiver General (Federal Government)
If GST Paid is greater than GST Charged (very
unusual), the Receiver General will write the company a cheque for the difference!
GST Paid on Purchases
(Contra-Liability)
GST/HST Paid on Purchases is considered to
be a contra-liability account. It is classified as a liability account (although it is more similar to an asset)
It is an example of an “Unusual Account”
Just as Accumulated Depreciation isn’t really
an asset – it reduces the “book value” of an asset. GST Paid on Purchases reduces the
Debits and Credits
Debits are on the left side and credits are on the right
side
Every time a transaction is recorded at least one
account is debited and one is credited.
Two or more account balances will change each time
a transaction is recorded.
The Accounting Equation always remains in balance
T-Account
The T-Account Form is used to analyze debit
and credit entries for each transaction. Debits are recorded in the left column and credits in the right column
Every transaction will have AT LEAST two
T-Account and The Ledgers
Please note that the t-account is not something
that actually exists in the accounting system
It is to help the bookkeeper/accountant plan
journal entries (next section of the course)
The ledgers in the accounting system have
Form of the T-account
Name of the Account
Debit
Credit
Increase for Decrease for
Assets, Expenses Assets, Expenses
Decrease for Increase for
Liabilities, Revenue Liabilities, Revenue
T-Account for a Cash Purchase:
Cash/Bank GST Paid on Purchases Credit Debit
T-Account for a Credit Sale:
Accounts Receivable GST Charged on Sale
Debit Credit
Sales
T-Account: Petty Cash Fund
To set up the Fund:Petty Cash (an asset) Bank/Cash
To Replenish the Fund:
Expense Account(s) GST Paid on Purch. Bank/Cash
Bank Reconciliation
What the company has a balance (in the
ledgers) for cash in the bank may be different from what the bank actually states is the
balance in the bank.
Bank Reconciliation, ctd.
For example, if a company receives a cheque from a
supplier on Friday, they will debit Cash/Bank account that day and deposit the cheque in the bank.
However, the bank won’t recognize the cash until the
customer’s cheque clears (the amount is transferred from their bank). This process often takes several days.
The company and bank will have different amounts
Bank Reconciliation, ctd.
The process of determining why the bank and
company records (balance of cash in the ledgers) are different is called the Bank Reconciliation.
Other sources of difference are bank service
fees, bank interest, automatic withdrawals and mistakes (by either the bank or the company).
The company’s bookkeeper must find and
