Beruflich Dokumente
Kultur Dokumente
LESSON 4
Recording Changes in Financial Position
OBJECTIVES The purpose of this lesson is to examine how the various activities of the
organization’s credit operations are recorded. Double-entry accounting is
discussed and the methods of recording various transactions are presented.
Voucher preparation and journal entries are explained for both Balance
Sheet accounts (Assets, Liabilities and Equity) and Income Statement
accounts (Revenue and Expenses). In addition, the importance of the Cash
account and corresponding periodic bank reconciliations are discussed.
Lessons 4 and 5 describe the steps required from the time an economic
transaction occurs until it is ultimately reflected on the financial
statements.
Double-Entry Accounting
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Accounting Study Guide Lesson 4
Example:
Assume that an organization buys a motorcycle for Tk10,500 thus adding a
new asset. From an accounting perspective, does another asset decrease or
does a liability or equity item increase? There are only three possible
outcomes:
(1) If the organization pays cash for the motorcycle, another asset
decreases:
A = L + E
(2) If the organization borrows money to pay for the motorcycle, a liability
increases:
A = L + E
(3) If the organization borrows Tk8,000 and uses Tk2,500 cash to pay for the
motorcycle, an asset account decreases and a liability account increases:
A = L + E
Net Effect:
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Accounting Study Guide Lesson 4
Voucher Preparation
Journal Entries
What are debits and credits? Accountants use these words to describe the
left and right sides of a ledger account. An amount recorded on the left
side of the account is called a debit whereas an amount recorded on the
right side is called a credit.
Individuals who are unfamiliar with the ‘language’ of accounting often have
incorrect notions about the meaning of the words debit and credit. For
example, they may have the idea that the word credit is more favorable
than the word debit (e.g. “credit where credit is due”). However, in
accounting vocabulary this is not true. In accounting, the words “debit” and
“credit” simply refer to entries on the left and right side respectively for
increases or decreases in accounts.
The first step in creating accounting records is to record debits and credits.
This is done by preparing journal entries for each transaction.
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Accounting Study Guide Lesson 4
According to the debit and credit rules, increases in the left-side of the
equation (assets) are recorded by debits while increases in the right side
(liabilities or equity) are recorded by credits.
Title
Debit Credit
(left side) (right side)
Furniture
5,000
Cash
5,000
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Cash
200
Client Savings
200
3. Purchase building for $36,000 for $15,000 cash and $21,000 on credit:
Building
36,000
Cash
15,000
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Equipment
1,000
Cash
1,000
Normal Balances
To illustrate:
Any ASSET Account
Debit Credit
(increase) (decrease)
(decrease) (increase)
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Just as the accounting system includes a separate account for each item on
the Balance Sheet, a separate account is kept for each major type of
revenue and expense. For example, separate accounts are kept for salary
expense, rent expense, travel expense, etc.
Cash
5,000
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Cash
100
Interest Income
100
Note that each transaction shown above that affects an Income Statement
account also affects a Balance Sheet account. This is consistent with our
previous discussion of revenue and expenses. When recording revenue
transactions, we debit the assets received and credit a revenue account.
When recording expenses we debit an expense account and credit the asset
cash, or a liability account if the payment is to be made at a later date.
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Accounting Study Guide Lesson 4
If a transaction has been accrued, when the actual cash is received (in the
case of accrued interest revenue) or paid out (in the case of an accrued
expense - account payable) the corresponding entries do not affect the
Income Statement but affect accounts which are on the Balance Sheet only.
For example:
Cash
2,000
Rent Payable
2,000
Cash
100
Accrued Interest
100
The above examples affect the Balance Sheet only since no revenue was
received or new expense incurred. The revenue and expense accounts
would already have been recognized in a prior period. The accounts
affected - accrued interest and accrued rent payable - are Balance Sheet
accounts. The accrued interest would already have been recorded as an
asset in a previous period and the overdue rent would have been recorded
as a liability (account payable - credit) in a previous period.
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Accounting Study Guide Lesson 4
General Journal
GENERAL JOURNAL
* Refers to the chart of accounts which will be discussed in the next lesson.
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The Cash account (or bank account) is used to record all cash and bank
transactions. It differs from the General Journal in that it only records cash
transactions. It is important to mention the Cash account as it relates to
the accounting process and proper financial management for a micro-
finance organization. The Cash account is very important for the following
reasons:
• The number of cash transactions is large in most organizations or
businesses. Examples are salaries, rent, insurance, purchase of
goods, as well as the receipt of cash for sales of goods and fixed
assets.
• The chances of fraud being committed regarding cash are higher as
compared to other assets. Strict control is therefore required. A
properly maintained cash book helps to achieve this.
• Timely payments to an organization’s creditors increase the
reputation of the business. Similarly, timely payments from those
who owe the organization money improve the financial position of
the business.
In addition, all bank charges and credits not previously recorded in the
accounting records must be recorded. The new balance of the Cash account
must then equal the adjusted bank balance. For example:
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Accounting Study Guide Lesson 4
Debit Credit
- an increase in cash
- a decrease in loans outstanding
- receipt of interest revenue
5. Why should the bank account statement be reconciled with accounting records?
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GENERAL JOURNAL
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