Module 6:

Accounting cycle I:
Recording business
transactions and
accounting for service
entities
Part B
Chapter 6
Prepared by Wahseem
Soobratty

After studying this chapter you

should be able to:
1.Prepare T-Ledger and understand the
difference between T Accounts and
running balance accounts
2.Prepare and use a Trial Balance
3.Explain the use of special journals
4.Introduction to GST
Prepared by Wahseem Soobratty

Where to record information -Ledger

Accounts

Once we have identified the source documents, where do we record the

transaction?

All components of an organisations financial activity is recorded within

specific ledger accounts.

Each account records one thing only. Eg.s

Cash: The amount of cash available to the business

Accounts Receivable: Amount owed by customers
Inventory: Value of inventory held by the business
Accounts Payable: Amount owed to suppliers
Loan Payable: Amount owed to lenders
Capital: Assets contributed to the business by the owner
Retained Profits: Owners share of profits

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Financial Accounting
Elements

Each ledger account can be classified into one

of five elements. The elements, and the
statement in which they appear, is shown
below:
1. Assets

Balance

2. Liabilities

Sheet

3. Owners Equity
4. Revenues

Income

5. Expenses

Statement

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ACCOUNTS: BALANCE SHEET

Asset Accounts

Cash at bank

Accounts receivable

Other receivables and debtors

Prepaid expenses

Land

Buildings

Plant and equipment

Prepared by Wahseem Soobratty

ACCOUNTS: BALANCE SHEET

Liability Accounts

Accounts payable

Unearned income

Other current liabilities

GST Collection

Mortgage payable

Prepared by Wahseem Soobratty

ACCOUNTS: BALANCE SHEET

Equity Accounts

Four main types of transactions

Investment of assets by the owner

Withdrawal of assets by the owner

Income derived

Expenses incurred

Two account types

Capital

Drawings or withdrawals

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ACCOUNTS: INCOME
STATEMENT

Income

Revenues

Income that arises in the course of ordinary activities of an

entity

Usually through the provision of services or sale of goods

Gains

Incomes that does not usually arise in the course of ordinary

activities of an entity

Usually of a non-recurring nature

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ACCOUNTS: INCOME
STATEMENT

Expenses

Profit

The cost of services and economic benefits consumed or

lost or liabilities incurred during the period

When total income exceeds total expenses

Loss

When total expenses exceeds total income

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Example
1.

Cynthia Jones deposits $53 000 in a business bank account

2.

Cynthia purchases a Van for $32 000 and Massage and Nail Tables for
$6 000 cash

3.
Cynthia

purchases Nail supplies for $2 500 on credit

4.
CashDr

53 000

Capital

Motor

Cr

53 000

Vehicles Dr

32 000

Cash Cr

32 000

Equipment
Cash Cr

Supplies

Dr

Dr

6 000

6 000
2 500

Accounts Payable

Cr

2 500

2.

1.

Prepared by Wahseem Soobratty

There would be a separate ledger

account for each red heading
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LEDGER ACCOUNT FORMATS

T-Accounts

Convenient way to show individual accounts

Illustrate effects of transactions on an account

Still used in practice for quick calculations

Running Balance Accounts

Used in formal accounting systems

Standard presentation for computerised systems

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LEDGER ACCOUNTS: TACCOUNT

Three Basic Parts

Title (& usually account number too)

Place for recording increases

Place for recording decreases

Account Number
Date

Explanation

Debit (Dr) side

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Account Title
Amt

Date

Explanation

Credit (Cr) side

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Amt

LEDGER ACCOUNTS: T-ACCOUNT

Account: 100
Date

Explanation

Cash at Bank
Amt

2016

Date

Explanation

Amt

2016

1 Cynthia Jones,
Capital

53 000

2 Vehicle

32 000

2 Beauty Services
Equipment
Balance c/d

53 000
Balance b/d

Prepared by Wahseem Soobratty

15 000

6 000
15 000

53 000

LEDGER ACCOUNT: RUNNING

BALANCE FORMAT
ACCOUNT
Date

Cash at Bank

Explanation

Account No.
100
Debit

Credit

Balance

2013
Jan. 1 Cynthia Jones, Capital
2 Vehicle

53 000

53 000
32 000

21 000

6 000

15 000

2 Beauty Services Equipment

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Journal Example 1

Owner contributes $100,000 to commence a business.

What is the journal entry?
Step 1 - identify the transaction from source documents
Step 2 what are the accounts?

Step 3 are they increasing or decreasing in value?

Cash
Capital
Cash Increasing the entity has more
Capital Increasing the entity has more of a claim against it

Step 4 apply debit/credit rules

Cash is debit in nature. It is increasing therefore enter the

amount on its natural side = debit cash
Capital is credit in nature. It is increasing therefore enter
the amount on its natural side = credit capital

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Solution Journal Example 1

General Journal p.1
Date

Details

Debit

Credit

20x1
30 June Cash
Capital

100,000
100,000

(Owner contributed cash into the business)

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Ledger Accounts: T-Account

Cash 101
Jun 30 100,000

Capital 301
Jun 30 100,000

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Journal Example 2

Entity purchases $20,000 of goods on credit.

What is the journal entry?
Step 1 - identify the transaction from source documents
Step 2 what are the accounts?
Inventory
Accounts Payable

Step 3 are they increasing or decreasing in value?

Increasing the business has more
Increasing the business owes more

Step 4 apply debit/credit rules

Inventory is an asset. Assets are debit in nature. The account is
increasing therefore enter the amount on the debit side
Accounts payable is a liability. Liabilities are credit in nature. The
account is increasing therefore enter the amount on the credit side

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Solution Journal Example 2

General Journal Entry
Date

Details

20x1
30 Jun Inventory
Accounts Payable

Debit

Credit

20,000
20,000

(Purchased goods on credit)

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Journal Example 3

Sell $15,000 of goods on credit

Pay telephone expense of $1,000

Apply the 4 steps: which accounts;

increasing/decreasing; debit or credit?

What are the journal entries?

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Solution Journal Example 3

General Journal Entries
Date
Details
20x1
30 June Accounts Receivable
Sales Revenue
(Sold goods on credit)

Debit

Credit

15,000
15,000

30 June Telephone Expense

1,000
Cash
(Paid telephone expense)
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1,000

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Journal Example 4

Purchase land for $45,000 cash and $15,000 loan.

Apply the 4 Steps and journalise

Date

Details

Debit

Land

60,000

Credit

20x1
30 June

Cash

45,000

Loan

15,000

(Purchased land for cash and on credit)

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Summary of Journal Entries

Date

Particulars

30 Jun

Cash

Debit
100,000

Capital
30 Jun

Inventory

100,000
20,000

Accounts Payable
30 Jun

Accounts Receivable

20,000
15,000

Sales Revenue
30 Jun

Telephone expense

15,000
1,000

Cash
30 Jun

Land

Credit

1,000
60,000

Cash

45,000

Loan

15,000

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Post from the Journal to the Ledger (TAccount)

Cash
Date

Details

30-JunCapital

Amount
$ 100,000.00

Date

Details

Amount

30-JunTelephone Expense

30-JunLand

$ 45,000.00

Balance C/D

$ 54,000.00

$ 100,000.00

1-JulBalance B/D

Prepared by Wahseem Soobratty

$ 54,000.00

1,000.00

$ 100,000.00

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Prepare and Use a Trial Balance

The

trial balance is a listing of all general

ledger accounts and their balances at a
particular date

Prepared each time the ledger accounts are balanced

Why

prepare a trial balance?

To ensure that the total of all Dr balances = the total of all Cr

balances
If total Dr balances total Cr balances, a mistake has been
made which must be identified and corrected

However,

equality of Drs and Crs does not

guarantee no mistakes have been made eg:

If a journal entry Dr is posted as a Dr to the wrong account,

the trial balance will still balance
Prepared
Soobratty
by Wahseem
If a journal
entry is not posted at all, the trial25 balance will still
balance

Trial Balance
Account
Cash

Debit

Credit

54,000

Accounts Receivable

15,000

Inventory

20,000

Land

60,000

Accounts Payable

20,000

Loan

15,000

Capital

100,000

Sales

15,000

Telephone Expense
Total
Prepared by Wahseem Soobratty

1,000
$150,000

$150,000
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INTRODUCTION TO GST IN AUSTRALIA

GST Goods and Services Tax

In Australia, GST is levied at 10% on the supply of taxable goods and
services

All supplies of goods and services are subject to GST unless they are nontaxable (if a business is registered for GST)

Only non-taxable supplies are GST exempt, eg:

Salaries, wages & other employment related expenses

Capital contributions and/or drawings

Financial services (eg loans, bank fees, interest)

In accrual accounting, GST collections & outlays are recorded when an

invoice is issued/received or cash is received/paid (whichever occurs first)

Firms must keep records of GST collections & outlays

Source documents must include GST information
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GST IN BUSINESS

GST Registration

Turnover < $75 000 optional

Turnover > $75 000 required

A business with a turnover greater than $75,000:

Must obtain an Australian Business Number (ABN).

By law, has a responsibility to collect and pay GST to the Australian Taxation
Office (ATO).

The price of goods and services must include GST (i.e. price is GST
inclusive).

To calculate GST included within the price divide amount by 11

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End of Module 6

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