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FINANCIAL ACCOUNTING

Recording changes in Financial Position

Prepared by:
Raza Saeed,
FCMA, MBA, ACIS, CIA, DAIBP
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Learning Objectives
After studying this chapter, you should be able to

• Describe a ledger account and a ledger.


• State the rules of debit and credit for balance sheet accounts.
• Explain the double-entry system of accounting.
• Explain the purpose of a journal and its relationship to the ledger.
• Prepare journal entries to record common business transactions.
• Prepare a trial balance and explain its uses and limitations.
• Describe the basic steps of the accounting cycle in both manual
and computer-based accounting systems.
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The Ledger
• The form of record used to record increase or decrease in
a single balance sheet, liabilities and Owners Equity item
is called an account or sometime a ledger account.
• Entire group of account is called a ledger.
• Element of account:
• A title , name of particular asset, liabilities and Owners
Equity
• A left side, called Debit side
• A right side, called Credit side
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Debit and Credit Entries


• Debit or Debit entry
• An amount recorded on the left or debit side of the account
• Credit or Credit entry
• An amount recorded on the right or Credit side of the account
• Debiting and Crediting

Cash
9/1 $180,000 9/3 $141,000

9/20 1,500 9/5 15,000

9/30 3,000
181,500 159,000

9/30 balance 22,500


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Rule of Debit and Credit


• Assets = Liabilities + Owner’s Equity

Assets Account Liability & Owners Equity


Increase are recorded by debit Increase are recorded by credits

decrease are recorded by credit decrease are recorded by debits


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Recording Transactions in Ledger


• Transaction – a
• September 1, Roberts invested $ 180,000 in cash

Analysis Rule Entry


The asset cash was increased Increase in assets are Debit : Cash $ 180,000
recorded by debits
The Owner’s equity was Increase in Owner’s equity are Credit : James Roberts
increased recorded by credits Capital $ 180,000

Cash James Roberts, Capital


9/1 (a) 180,000 9/1 (a) 180,000
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Recording Transactions in Ledger


• Transaction – b
• September 3, Roberts Real Estate Company purchased
Land for cash in the amount of $ 141,000.
Analysis Rule Entry
The asset Land was Increase in assets are Debit : Land $ 141,000
increased recorded by debits
The asset cash was Decrease in Asset are Credit : Cash $ 141,000
decreased recorded by credits

Cash Land
9/1 (a) 180,000 9/3 (b) 141,000 9/3 (b) 141,000
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Recording Transactions in Ledger


• Transaction – C
• September 5, purchased a complete office Building at a price of $36,000 (
included the cost of moving the building and installing at site) The terms of
payment was immediate cash payment $ 15,000 and payment of balance $
21,000 within 90 days.
Analysis Rule Entry
A new asset Building was Increase in assets are Debit : Building $ 36,000
acquired recorded by debits
The asset cash was Decrease in asses are Credit : Cash $ 15,000
decreased recorded by credits
A new liability, Accounts Increase in liabilities are Credit : A/P $ 21,000
Payable, was incurred recorded by credits

Cash Building
9/1 (a) 180,000 9/3 (b) 141,000 9/5 (C) 36,000
9/5 (c) 15,000

Accounts Payable
9/5 (c) 21,000
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Recording Transactions in Ledger


• Transaction – d
• September 10, Robert company sold a small, unused corner of the lots to
Carter’s Drugstore for a price of $11,000 to be paid within three months.
Analysis Rule Entry
A new asset Accounts Increase in assets are Debit : Accounts Receivable $
Receivable was acquired recorded by debits 11,000
The asset Land was Decrease in asses are Credit : Land $ 11,000
decreased recorded by credits

Accounts Receivable Land


9/3 141,000 9/10 (d) 11,000
9/10 (d) 11,000
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Recording Transactions in Ledger


• Transaction – f
• September 20, Cash was received from Carters Drugstore as partial
settlement of Accounts Receivable $ 1,500.
Analysis Rule Entry
A asset cash was increased. Increase in assets are Debit : Cash $ 1,500
recorded by debits
The asset Account Decrease in asses are Credit : Account Receivable $ 1,500
Receivable was decreased recorded by credits

Cash Accounts Receivable


9/1 (a) 180,000 9/3 (b) 141,000 9/10 (d) 11,000 9/20 (f) 1,500
9/20 (f) 1,500 9/5 (c) 15,000
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Recording Transactions in Ledger


• Transaction – g
• September 30, Robert Real Estate Company paid $ 3,000 in cash to General
Equipment Inc.
Analysis Rule Entry
A liability Accounts Payable Decrease in Liabilities Debit : Account Payable $ 3,000
was decreased. are recorded by debits
The asset Cash was Decrease in asses are Credit : Cash $ 3,000
decreased recorded by credits

Cash Accounts Payable


9/1 (a) 180,000 9/3 (b) 141,000 9/30 (g) 3,000 9/5 (c) 21,000
9/20 (f) 1,500 9/5 (c) 15,000 9/14 (e) 5,400
9/30 (g) 3,000
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Running Balance Form of Accounts

Cash Account #
Date Explanation Ref Debit Credit Balance
20----

Sept 1 180,000 180,000

3 141,000 39,000

5 15,000 24,000

20 1,500 25,500

30 3,000 22,500
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The Journal
• Initially each transaction is recorded in an accounting
record – Journal or book of original entry
• After transaction recorded in Journal, debit and credit
changes in the individual accounts are recorded in the
Ledger.
• Chronological record of business transaction
• Advantages – use of journal and Ledger
• Journal provide all information about transaction in one place and
also an explanation of the transaction
• Journal provide a chronological record of all the events in the life of
the business
• Journal helps to prevent errors
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General Journal
General Journal Account #
Date Account Title and Explanation LP Debit Credit
20----

Sept 1 Cash 180,000


James Robert- Capital 180,000
Invested cash in the business
3 Land 141,000
Cash 141,000
Purchased land for office site
5 Building 36,000
Cash 15,000
Accounts Payable 21,000
Purchase building to be moved to our lot. Paid part
cash , balance payable within 90 days to Kent
Company
10 Accounts Receivable 11,000
Land 11,000
Sold the unused part of our lot at cost to Carter’s
Drugstore due within three months
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General Journal
General Journal Account #
Date Account Title and Explanation LP Debit Credit
20----

Sept 14 Office Equipment 5,400


Accounts Payable 5,400
Purchase equipment on credit from General
Equipments Inc
20 Cash 1,500
Accounts Receivable 1,500
Collected part of receivable from Carters Drugstore
30 Accounts Payable 3,000
Cash 3,000
Made partial payment of the liability to General
Equipments Inc
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Ledger Accounts after posting

Cash Account # 1
Date Explanation Ref Debit Credit Balance
20----

Sept 1 180,000 180,000

3 141,000 39,000

5 15,000 24,000

20 1,500 25,500

30 3,000 22,500
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Ledger Accounts after posting


Accounts Receivable Account #04
Date Explanation Ref Debit Credit Balance
20----

Sept 10 1 11,000 11,000

20 1,500 9,500

Land Account # 20
Date Explanation Ref Debit Credit Balance
20----

Sept 3 1 141,000 141,000

10 11,000 130,000
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Ledger Accounts after posting


Building Account #22
Date Explanation Ref Debit Credit Balance
20----

Sept 5 1 36,000 36,000

Office Equipment Account # 25


Date Explanation Ref Debit Credit Balance
20----

Sept 14 1 5,400 5,400


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Ledger Accounts after posting


Accounts Payable Account #32
Date Explanation Ref Debit Credit Balance
20----

Sept 5 1 21,000 21,000

14 5,400 26,400

30 3,000 23,400

James Robert’s Capital Account #50


Date Explanation Ref Debit Credit Balance
20----

Sept 1 1 180,000 180,000


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Trial Balance
• Proof of the equality of debit and credit balance is called
Trial Balance
• Two column schedule listing the names and balances of
all the accounts in the order in which they appear in the
Ledger
• Debit balances are listed in left hand column and
Credit balances in the right hand column
• Total of two columns should agree
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Robert Real Estate Company


Trial Balance
September 30, 20------
Cash $ 22,500
Accounts Receivable 9,500
Land 130,000
Building 36,000
Office Equipment 5,400
Accounts Payable 23,400
James Robert Capital 180,000
$203,400 $203,400
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The Accounting Cycle


• Sequence of accounting procedures used to record,
classify and summarize accounting information –
accounting cycle
• Record transaction in the Journal
• Post to Ledger Accounts
• Prepare trial balance
• Prepare financial statements
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Accounting Cycle
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THANK YOU