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

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 of
rectifying them;
Prepare correcting entries;
Prepare closing entries;
Prepare reversing entries;
Explain the difference between manual and computerized
accounting.
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RULE IN BOOK-KEEPING
The main objective of financial accounting is to
provide
the information of financial position and financial
performance of the business.

• Financial position
Balance Sheet: provides information on –
Assets;
Liability; and
Owner’s Equity.
• Financial Performance
Income Statement.
Provides information on the company
profitability.
(Revenue – Expenses).
If PROFIT the owner’s equity will increase and if
LOSS will lower the owner’s equity. 4
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 entity
as 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 business
and not with the intention to simply
resell them. Eg: land and building,
motor vehicle, premise, furniture etc..
Current Assets – Goods for resale or items
having a short 5
life. Eg: bank, cash, stock, debtors etc..
2) LIABILITY
Total of funds owed for assets supplied to a
business or expenses incurred not yet paid.
Two types of liabilities:
Non-Current liabilities – Liabilities that do
not have to be
paid within twelve months of the balance
sheet date.
Current Liabilities – Liabilities to be paid for
within a year of the balance sheet date.
3) OWNER’S EQUITY
The total of resources invested and left in a
business by its
owner.
Increase in owner’s equity:
Owner increases its investment to a
business either by
cash or by other assets.
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any profits earned by the business
Decrease in Owner’s 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 owner’s equity to
increase.
5) EXPENSES
The value of all assets that have been used up
to obtain
revenues.
Often cited as “cost of doing business”
Expenses always cause a decrease in owner’s
equity. 7
THE ACCOUNTING EQUATION or THE
BALANCE SHEET EQUATION

• The business can acquire assets either


provided by the owner or by other party
(external sources) or combination of
both.
• The sum of the assets shown in balance
sheet must be equal at all times to the
sum of claims against those assets.
• Therefore, accounting equation usually
shown the relationship between assets,
liabilities, and owner’s equity of a
business at a certain date.

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Example of simple accounting equations:

a) ASSETS = OWNERS’
EQUITY
(Resources in the business) = (Resources
supplied by the owner)

b) ASSETS = OWNERS’ EQUITY +


LIABILITIES
= (Resources supplied by the
owner & other party)

c) ASSETS = LIABILITIES
= (Resources supplied by
other party)

• Advanced Accounting Equation:


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ASSETS = LIABILITY + OWNER’S EQUITY +


THE EFFECT OF TRANSACTION TOWARDS THE
ACCOUNTING EQUATION

Date Transactions

1 Jan Winnie started business with RM15,000 cash

3 Jan Bought business furniture in cash at cost RM6500

4 Jan Bought an office supplies amounted RM3250 on


credit from Aseana
8 Jan Received cash for services rendered amounted
RM2250
10 Paid advertising expense amounted RM750
Jan
15 Services being performed to Ali Trading; received
Jan RM250 in cash and RM1500 on credit.
18 Paid rent RM890, wages RM4500 and utility
Jan expenses RM450 on cash
22 Paid Aseana RM1250
Jan 10
Analyzed Accounting Equation
Date Effect on Accounting Equation
1 Jan - Asset (cash) increased RM15000 & Owner Equity increased
RM15000
- Cash(RM15000) = OE (RM15000)
3 Jan -Asset (furniture) increased RM6500 & cash decreased RM6500
-Furniture (RM6500) + Cash (RM8500) = OE (RM15000)
4 Jan -Asset (office supplies) increased RM3250 & liability (other
creditor – Aseana) increased RM3250)
-F (6500) + C (8500) + OS(3250) = OE(15000) + OC(3250)
8 Jan -Asset (Cash) increased RM2250 & Revenue increased RM2250
-F (6500) + C (10750) + OS(3250) = OE(15000) + OC(3250)+
R(2250)
10 -Cash decreased RM750 & Expense (advertising) increased
Jan RM750
-F (6500) + C (10000) + OS(3250) = OE(15000) +OC(3250) +
R(2250)
15 -Assets,Cash increased RM250, & Debtor increased 1500 &
- Adv(750)
Jan revenue increased RM1750
- F (6500) + C (10250) + OS(3250) + D(1500) =
OE(15000)+OC(3250)+R(4000)
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- Adv(750) +
D Effect on Accounting Equation
ate -Asset (cash) decreased RM5840 & Expenses increased
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Jan (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)]
22 -Asset (cash) decreased RM1250 & Liability (other
Jan creditor – 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)]
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DOUBLE ENTRY SYSTEM
The financial transaction has two effects
on the financial position of the business.
This means that each transaction must
be recorded twice in the books of
accounts i.e. DEBIT and CREDIT.
Thus, for any transaction, the amount of
debit must be EQUAL with the amount of
credit. Examples;
If transaction reduces an asset it must
also:
↔Increase another asset,or
↔Decrease a liability, or
↔Decrease owner’s equity
An item that increases/decrease Assets
must be debit/credit; 13

An item that increase/decrease Liability


BOOK-KEEPING RULES

Debit and Credit Procedures

Type of Accounts Increase Decrease

Assets Debit Credit

Liability Credit Debit

Owner’s Equity Credit Debit

Revenue Credit Debit

Expenses Debit Credit

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DEBITS AND CREDITS

The term DEBIT AND CREDIT mean left and


right

Cash A/c

DEBIT CREDIT

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

Date Transactions
1 Jan Winnie started business with RM15,000 cash
3 Jan Bought business furniture in cash at cost
RM6500
4 Jan Bought an office supplies amounted RM3250 on
credit from Aseana
8 Jan Received cash for services rendered amounted
RM2250
10 JanPaid advertising expense amounted RM750
15 Jan Services being performed to Ali Trading;
received RM250 in cash and RM1500 on credit.
18 JanPaid rent RM890, wages RM4500 and utility
expenses RM450 on cash 16

22 JanPaid Aseana RM1250


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 business
transaction only will be taken into
consideration in recording process.
2. SOURCE OF DOCUMENT
Any kind of document that are prepared for
every business transaction.
Eg: invoices, cheque butt,debit notes and
credit notes etc..
Purpose:
the document are prepared as a written
evidence for each transaction.
to be used by an accountant to support the
entry made in the accounting record.
3. JOURNAL
Transaction are initially recorded in
chronological order in a journal before being
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transferred to the account. (BOOK OF
ORIGINAL ENTRY)
Purpose:
Disclose one place the complete effect of
transaction
Provide chronological record of transactions
Helps to prevent or locate errors.
Types of journal:
Special Journal – make an entry on the
frequently basis and
from the same category. Eg; credit sales and
credit purchase.
General Journal – entry that are not in the
special journal
category.
Example:Ray invested RM10,000 cash in the
Date
business Description
on 1 Jun Ref Debit Credit
1 Jun2000.
Cash 10,000
Capital 10,000
General Journal
J1 (Owner contribute cash
capital into a business 19
4. LEDGER
the entire group of account maintained by a
company is referred to collectively as a
ledger.
Purpose:
to ensure the entire recording process are
distribute among workers
to ensure the reference and controlling can
be done easily.
to increase efficiency in recording process.
format of Account Ledger:
Date Explanati Ref Debit Credit Balance
on Cash A/c No2

OR
Cash A/c
DEBIT CREDIT
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Types of Ledger:
General Leger
• is a group of account that will be presented
in the financial
statement, such as account asset, liability and
capital.
• also included in the general ledger are
DEBTORS or
CREDITORS CONTROL account. The control
account will
control subsidiary ledger of each debtors or
creditors.
Subsidiary Ledger
• is a detail ledger for a account such as
debtors and creditors.

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Posting procedures.
Ray contributed RM10,000 cash in the business on 1 Jun
1999.
General Journal J1
Date Description Ref Debit Credit
1 Jun Cash 2 10000
Capital 22 10000
(Owner contribute cash capital in a
business)

General Ledger
Cash
No 2
Date Explanati Ref Debit Credit Balanc
on e
1 Jun Capital J1 10000 10000

Capital
No22
Date Explanati Ref Debit Credit Balanc
on e
1 Jun Cash J1 10,000 10,000
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5. TRIAL BALANCE
Trial balance is a list of account and their
balances at their given time.
Purpose:
to prove the mathematical equality of debit and
credit.
the trial balance also discovers errors in
journalizing and
posting
useful in preparing financial statement
Format in preparing Trial Balance
Listing the account titles and balances at the
end of the
accounting period. How to know whether
the accounts
have DEBIT or CREDIT BALANCE?? If total
debits
exceed total credit, the account has a debit
balance and 23

vice versa.
Eg:
XYZ Company
Trial Balance as at 30 Jun 2000
Debit 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 and
recognizing revenue
and expenses.
Accounting period vs Fiscal year
•Fiscal year (one year period)
- usually begins with the first day of the month
and 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
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financial statement
Recognizing Revenue and Expenses
• In order for revenue to be recorded in the
period in which they are
earned and for expenses to be recognized in the
period in which
they are incurred, adjusting entry entry are
required.
• Matching between revenue and expenses that
are 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 26
7. CLOSING ENTRIES
Closing entries formally recognize in the
ledger to transfer of
net income or net loss and owner’s drawing
to owner’s capital.
These entries will produce a zero balance in
each 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 TEMPORARY accounts like all REVENUE
accounts, all EXPENSES accounts and OWNER’S
DRAWING.
ALL PERMANENT accounts no need to be
closed like all 27
Example:

- The expenses below show a balance on 31 Dec


2000
Rent RM300 and Salaries RM1200. Closed all
the accounts

Date Description Dt Ct
31 Dec Income 1,500
2000 Statement
Rent 300
Salaries 1200

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8. REVERSING ENTRIES
is an entry prepared for the beginning of the
next accounting
period. The entries are taking from the
adjustment entries
from accounting period.
Purpose:
to simplified and summarized the entries for
preparation the
new entries for the new accounting period.
XYZ Enterprise paid their workers salaries
every 2 weeks.
On the 31 December 2001, there are unpaid
salaries
amounted RM6000.
• Normal Entries:
31 Dec Dt Salary expense
6,000
Cr Unpaid Salary 29 6,000
• Reversing Entries:
9. CORRECTING ERRORS:
a. Errors no affecting trial balance
complete omission of transactions
reversal entry (entry suppose to debit are
credit instead)
an error of commission (debit in the wrong
account but
with the right type)
error of principle (entry made entirely wrong
type 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 ledger
incorrectly 30

entirely omitting a balance from trial


Example:
A trial balance extracted from the books of a
business on 31 December 2001 showed a total
debit balances equal to total credit balances.
However, the following errors were subsequently
discovered:
a) RM purchase invoice from G Smith had been
credited to J
Smith’s account in the purchase ledger
b) A cheque for wages of RM250 had been
entirely omitted from
the books of account.
c) A RM378 sales invoice relating to P Charles
had been recorded
as RM738 in the sales daybook.
d) The RM8500 cost new motor vehicle had been
debited to motor
expenses
e) A RM30 discount allowed to V Baker had31
been
debited to V