UNIT-3 Acct - 103

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UNIT-3

Acct - 103

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Syllabus

Accounting cycle: Analysis and Recording

Transactions, dealing with journal and

Ledger.

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Objective of This Unit

1 Explain what an account is and how it helps in the

recording process

2 Define debits and credits and explain how they are

used to record business transactions

3 Identify the basic steps in the recording process

4 Explain what a journal is and how it helps in the

recording process

5 Explain what a ledger is and how it helps in the

recording process

6 Explain what posting is and how it helps in the

recording process

3 Dr Masharique Ahmad Asst. Prof, Deptt. of

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THE RECORDING PROCESS

1 A

nalyze each transaction

(+, -)

2 E

nter transaction in a journal

3 T

ransfer journal information to

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THE JOURNAL

Transactions

Are initially recorded in chronological order

before they are transferred to the ledger

accounts.

Steps in journal;

o

Spaces for dates

o

Account titles and explanations

o

References

o

Two amount columns

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A

journal

makes several contributions to recording

process:

1 discloses in one place the complete effect of a

transaction

2 provides a chronological record of transactions

3 helps to prevent or locate errors as debit and

credit

amounts for each entry can be compared

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JOURNALIZING

• Entering transaction data in the journal is

known as

journalizing

.

• Separate journal entries are made for each

transaction.

• A complete entry consists of:

1 the date of the transaction,

2 the accounts and amounts to be debited and

credited,

3 a brief explanation of transaction.

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EXPANDED BASIC EQUATION &

RULES OF DEBIT (Dr) /CREDIT (Cr) & EFFECTS

Liabilities

Assets _{Owner’s Equity}

= + -+ = + -Assets Dr. Cr. + -Liabilities Dr. Cr. - + Dr. Cr. Owner’s Drawing + -Revenues Expenses Dr. Cr. Owner’s Capital - +

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TECHNIQUE OF JOURNALIZING

The date of the transaction is entered into the date

column.

_{GENERAL JOURNAL} J1

Dat e

Account Titles and Explanation Ref .

Debit Credit 2005

Sept. 1 Cash 15,000

R. Neal, Capital 15,000

(Invested cash in business)

1 Computer Equipment 7,000

Cash 7,000

(Purchased equipment for

cash)

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The debit account title is entered at the extreme left margin of the Account Titles and Explanation column. The credit account title is indented on the next line.

Dat e

Debit Credit 2005

Sept. 1 Cash 15,000

R. Neal, Capital 15,000

Cash 7,000

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The amounts for the debits are recorded in the Debit column and the amounts for the credits are recorded in the Credit column.

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Dr Masharique Ahmad Asst. Prof, Deptt. of Accounting, CBAK

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A brief explanation of the transaction is given.

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A space is left between journal entries. The blank space separates individual journal entries and makes the

entire journal easier to read.

Dat e

Debit Credit 2005

Sept. 1 Cash 15,000

R. Neal, Capital 15,000

Cash 7,000

(Purchased equipment for

cash)

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Dr Masharique Ahmad Asst. Prof, Deptt. of Accounting, CBAK

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The column entitled Ref. is left blank at the time journal entry is made and is used later when the journal entries are transferred to the ledger accounts.

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THE

ACCOUNT

OR THE

LEDGER

An account is an individual accounting recording of increase and decrease in a specific asset, liability, expenses revenue, or owner’s equity item.

A Group of accounts maintained by a company is called the ledger.

There are separate accounts for the items we used in transactions such as Cash, Salaries Expense, Sales Purchase etc.

A ledger contains all the assets, liabilities, and owner’s

equity, cash, salaries accounts

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BASIC FORM OF ACCOUNT

STUDY OBJECTIVE 2

• The simplest form an account consists of

❑ The title of the account ❑ Left or debit side

❑ Right or credit side

• The alignment of these parts resembles the letter T =

T

account

Left or debit side

Title of Account

Right or credit side Debit balance Credit balance

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DEBITS AND CREDITS

❖ Debit indicates left and Credit indicates right

❖ Recording SR. on the left side of an account is debiting (Dr) the account

❖ Recording SR. on the right side is crediting (Cr) the account

❖ If the total of debit amounts is bigger than credits, the account has a

debit balance

❖ If the total of credit amounts is bigger than debits, the account has a

credit balance

Balance of Accounts:

Either will be; Dr OR Cr

Debit (Dr) = Excess of DEBIT balance over CREDIT balance, Gives Debit Balance of the concern accounts.

Example; Debit ˃ Credit = Debit (Dr) Balance

Credit (Cr) = Excess of CREDIT balance over DEBIT balance, Gives Credit balance of the concern accounts.

Example; Credit ˃ Debit = Credit (Cr) Balance

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DOUBLE-ENTRY SYSTEM

• Equal debits and credits made accounts

for each transaction

• Total debits always equal the total

credits

• Accounting equation always stays in

balance

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DEBIT AND CREDIT EFFECTS —

ASSETS AND LIABILITIES

Debits

Credits

Increase assets

Decrease assets

Decrease liabilities

Increase liabilities

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NORMAL BALANCES — ASSETS

AND LIABILITIES

Assets

Increase Decrease Debit Credit Decrease Increase Debit Credit

Liabilities

•Normal Balance

Normal

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DEBIT AND CREDIT EFFECTS —

OWNER’S CAPITAL

Debits

Credits

Decrease owner’s capital Increase owner’s capital

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NORMAL BALANCE — OWNER’S

CAPITAL

Owner’s Capital

Decrease Increase Debit Credit Normal Balance

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DEBIT AND CREDIT EFFECTS —

OWNER’S DRAWING

Debits

Credits

Increase owner’s drawing Decrease owner’s drawing

Remember, Drawing is a contra-account – an account that is backwards from the account it accompanies (the Capital

account).

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NORMAL BALANCE — OWNER’S

DRAWING

Owner’s Drawing

Normal Balance Increase Decrease Debit Credit

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DEBIT AND CREDIT EFFECTS —

REVENUES AND EXPENSES

Decrease revenues Increase revenues Increase expenses Decrease expenses

Debits

Credits

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NORMAL BALANCES —

REVENUES AND EXPENSES

Increase Decrease Debit Credit

Expenses

Revenues

Decrease Increase Debit Credit Normal Balance

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POSTING A JOURNAL ENTRY

In the ledger, enter in the appropriate columns of the account(s) debited the

date, journal page, and debit amountDr Masharique Ahmad Asst. Prof, Deptt. of shown in the journal. 27 Accounting, CBAK

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POSTING A JOURNAL ENTRY

In the ledger, enter in the appropriate columns of the account(s) credited the date, journal page, and credit amount shown in the journal.

GENERAL LEDGER CASH NO. 10 Dat e Explanation Ref .

Debit Credit Balance 2005

Sept. 1 J1 15,000 15,000

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PAYMENT OF MONTHLY

RENT

Basic Analysis Debit-Credit Analysis

Transaction October 3, office rent for October is paid in cash,

SR.900.

The expense Rent is increased SR.900

Payment pertains only to the current month Asset Cash is decreased SR.900.

Debits increase expenses: debit Rent Expense

SR.900. Credits decrease assets: credit Cash

SR.900.

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PAYMENT FOR INSURANCE

-Asset Prepaid Insurance increases SR.600

-Payment extends to more than the current month -Asset Cash is decreased SR.600.

-Payments of expenses benefiting more than one period are prepaid expenses or prepayments.

Transaction October 4, SR.600 Paid one-year insurance _{policy-expires next year on September 30.}

Basic Analysis

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WITHDRAWAL OF CASH BY

OWNER

Basic Analysis Debit-Credit Analysis

Transaction October 20, C. R. Byrd withdraws SR.500 cash

for personal use.

The owner’s equity account C. R. Byrd, Drawing is increased SR.500.

The asset Cash is decreased SR.500.

Debits increase drawings: debit C. R. Byrd, Drawing SR.500. Credits decrease assets: credit Cash SR.500.

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WITHDRAWAL OF CASH BY OWNER

JOURNAL ENTRY

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PAYMENT OF SALARIES

Basic Analysis

Debit-Credit Analysis

Transaction October 26, employee salaries of SR.4,000 are _{owed and paid in cash. (See October 9}

transaction.)

The expense account Salaries Expense is increased SR.4,000; the asset Cash is decreased SR.4,000.

Debits increase expenses: debit Salaries Expense

SR.4,000. Credits decrease assets: credit Cash

SR.4,000.

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PAYMENT OF SALARIES

JOURNAL ENTRY

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RECEIPT OF CASH FOR FEES

EARNED

Basic Analysis Debit-Credit Analysis Transaction

October 31, received SR.10,000 in cash from Copa Company for advertising services

rendered in October.

The asset Cash is increased SR.10,000; the revenue Fees Earned is increased SR.10,000.

Debits increase assets: debit Cash SR.10,000. Credits increase revenues: credit Fees Earned

SR.10,000.

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RECEIPT OF CASH FOR FEES

EARNED

JOURNAL ENTRY

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Practical Problems

▪: Journalise the following transactions:

On September 1, Mr.Fahad invested SR.15,000 cash in the business, and Soft byte purchased computer equipment for SR.7,000 cash.

Solution:

General Journal

Date Account Titles and Explanation _Ref. _Debit _Credit

2008 Sept. 1 1 Cash Fahad , Capital

(Owner’s investment of cash in business)

Computer Equipment Cash

(Purchase of equipment for cash)

15000

7000

15000

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Date Account Titles and Explanation

Ref. Debit Credit

2008 July 1 Delivery Equipment Cash Accounts Payable

(Purchased truck for cash with balance on account)

14,000

8,000

6,000

on July 1, Butler Company purchases a delivery truck costing SR.14,000. It pays SR.8,000 cash now and agrees to pay the remaining SR.6,000 on account (to be paid later). Make a compound entry for the above transactions.

Solution:

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Kashif engaged in the following activities in establishing his salon, Hair It Is:

1. Opened a bank account in the name of Hair It Is and deposited SR.20,000 of her own money in this account as her initial investment.

2. Purchased equipment on account (to be paid in 30 days) for a total cost of SR.4,800.

Prepare the entries to record the transactions. Solution:

General Journal

1

2

Cash

Kashif, Capital

(Owner’s investment of cash in business) Equipment

Accounts Payable

(Purchase of equipment on account

20,000

4,800

20,000

4,800

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On October 1, C. R. Byrd invests SR.10,000 cash in an advertising company called Pioneer Advertising Agency. Make Journal entry of this transaction and post it in the ledger.

Solution: Journal Entry Posting Cash CR.Byrd Capital Oct.1 10.000 Oct.1 10,000 Oct 1 Cash C. R. Byrd, Capital (Owner’s investment of cash in business 101 301 10,000 10,000

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On October 2, Pioneer receives a SR.1,200 cash advance from R. Knox, a client, for advertising services that are expected to be completed by December 31.

Cash Unearned Revenue

Oct 2 Cash

Unearned Revenue

(Received cash from R. Knox for future service) 101 209 1,200 1,200 Oct 2 1,200 Oct 2 1,200 43 Dr Masharique Ahmad Asst. Prof, Deptt. of

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On October 3, Pioneer pays office rent for October in cash, SR.900.

On October 4, Pioneer pays SR.600 for a one-year insurance policy that will expire next year on September 30.

Make Journal entries of above transactions and post then into ledger. Solution:

Journal Entries

Oct 3

Oct 4

Rent Expense Cash

(Paid October rent) Prepaid Insurance Cash

(Paid one-year policy;effective date October 1) 729 101 130 101 900 600 900 600

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Cash Rent Expense Oct 3 900 Oct 3 900 Oct 4 600 Prepaid Insurance Oct 4 600 45 Dr Masharique Ahmad Asst. Prof, Deptt. of

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Which one of the following represents the expanded basic accounting equation?

–

Assets = Liabilities + Owner’s Capital + Owner’s

Drawings – Revenue - Expenses.

–

Assets + Owner’s Drawings + Expenses =

Liabilities + Owner’s Capital + Revenue.

–

Assets – Liabilities – Owner’s Drawings =

Owner’s Capital + Revenue – Expenses.

–

Assets = Revenue + Expenses – Liabilities.

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HOME ASSIGNMENT - 3

Mr. Bob opened a shop on September 1, 2010. During the first month of operations the following transactions occurred.

Sept. 1 Invested SR.20,000 cash in the business.

2 Paid SR.1,000 cash for store rent for September.

3 Purchased washers and dryers for SR.25,000, paying SR.10,000 in cash and signing a SR.15,000, 6-month, 12% note payable.

4 Paid SR.1,200 for a one-year accident insurance policy.

10 Received a bill from the Daily News for advertising the opening of the Laundromat SR.200.

20 Withdrew SR.700 cash for personal use.

30 Determined that cash receipts for laundry services for the month were SR.6,200.

30 Instructions

(a) Journalize the September transactions. (Use J1 for the journal page number.) (b) Open ledger accounts and post the September transactions