Recording Business

Transactions – Double
Entry Recording and
Week 3
Account
 In Your Textbook...
Roshayani Arshad, et al. (2009),
Financial Accounting An
Introduction, 3nd Edition, Malaysia,
McGraw Hill.
 Chapter 3: Accounting Equation and
Double Entry System (pp.28 – 40)
 Learning Objectives
1. Explain the need for an account
2. Explain the double entry system
and the rules of double entry.
3. Show how business transactions are
recorded in the accounts.
 An Account
 A part of the accounting system
used to classify
 It summaries
– the increases, decreases and balances
of each asset, liability and owner’s
equity.
 There is an account for each item
where it records or keeps account
of every changes to a particular
item.
 Major Account Classifications

Assets
Assets are
are Liabilities
Liabilities are
are debts
debts
resources
resources owned
owned owed
owed toto outsiders
outsiders
by
by the
the business.
business. (creditors).
(creditors).
>Cash/Bank >Accounts payable
>Office Supplies >Notes payable
>Inventory/Stock >Wages payable
>Building >Bank overdraft
>Accounts receivable
 Major Account Classifications
Liabilities
Liabilities are
are often
often identified
identified
Assets are on
on the
the balance
balance sheet
sheet
Liabilities by
by
are titles
titles
debts
Assets are Liabilities are debts
resources owned
resources owned that
that include
include
owed payable
payable
to ..
outsiders
owed to outsiders
by
by the
the business.
business. (creditors).
(creditors).

>Cash/Bank >Accounts payable

>Office Supplies >Notes payable
>Inventory/Stock >Wages payable
>Building >Bank overdraft
>Accounts receivable
 Major Account Classifications
Owner’s
Owner’s equityequity Revenues
Revenues are are Expenses
Expenses areare the
the
isis the
the owner’s
owner’s increases
increases inin using
using up
up of
of assets
assets
right
right to
to the
the owner’s
owner’s equity
equity asas or
or consuming
consuming of of
assets
assets ofof the
the aa result
result of
of selling
selling services
services to
to
business.
business. services
services or
or generate
generate revenue.
revenue.
>Chris, Capital products.
products. >Rent Expense
>Chris, Drawing >Fees Earned >Salary Expense
>Fares Earned >Utilities Expense
>Commission Revenue
>Sales
>Discount received
>Service revenue
 Cycle of
Accounting Record Process

Source Journal
Documents

Transactions
take place
Ledger/T account
Balance Sheet

Income Trial Balance

Statement
 Thesemajor account will then post to trial
balance and respective financial report :

Income Statement
(Statement of Comprehensive Income)
 Revenue
 Expense

Balance Sheet
(Statement of Financial Position)
 Asset
 Liability
 Owner’s Equity
To
To assist
assist you
you in
in learning,
learning,
an
an account
account can
can be
be drawn
drawn
to
to resemble
resemble the
the letter
letter T.
T.
The
The T-Account
T-Account
Cash

The
The T-account
T-account has
has aa title.
title.
 The
The T-Account
T-Account
Cash
Left side
debit

The
The left
left side
side of
of the
the account
account isis the
the debit
debit side.
side.
 The
The T-Account
T-Account
Cash
Left side Right side
debit credit

The
The right
right side
side of
of the
the account
account isis the
the credit
credit side.
side.
 The
The T-Account
T-Account

Dr Title of Account Cr
Date Particulars Folio Amount Date Particulars Folio Amount
$ $
 The
The T-Account
T-Account
Cash
John 3,750 Utilities 850
Interest 4,300 Supplies 1,400
Capital 2,900 Drawings 700
Creditors 2,900

Typical entries
 Columnar Format
 Has an advantage over the T format in
that with every entry in the account, a
new balance is created.
Title of Account
Date Particulars Folio Debit Credit Balance
$ $ $
 Example for columnar format

CASH

Date Particulars Folio Debit Credit Balance

$ $ $
2/2 Revenue 1,000 1,000

4/2 Interest income 50 1,050

8/2 Electricity expenses 200 850

Balancing
Balancing aa T-Account
T-Account
 Cash
First,
First, foot
foot
the debit John
the debit 3,750 Utilities 850
side.
side.Interest
4,300 Supplies 1,400
Capital 2,900 Drawings 700
10,950 Creditors 2,900
 Cash
John 3,750 Utilities 850
Interest 4,300 Supplies 1,400
Capital 2,900 Drawings 700
10,950 Creditors 2,900
Next,
Next, foot
foot the
the 5,850
credit
credit side.
side.
 Subtract
Subtract total
total credits
credits
Cash from
from total
total debits
debits to
to
obtain
obtain the
the account
account
3,750 balance.
850
balance.
4,300 1,400
2,900 700
5,100 10,950 2,900
5,850
 Balancing
Balancing The
The T-Account
T-Account

Cash
Enter
Enter the balance
John 3,750 balance
the Utilities
850
amount
amount as as c/d
c/d at
at the
the
Interest end 4,300 Supplies
end of period and
of period 1,400
and b/d
b/d
Capital for2,900
for the nextDrawings
the next 700
period.
period.
Creditors 2,900
Balance c/d 5,100
10,950 10,950
Balance b/d 5,100
 Assets = Liabilities + Owner’s Equity
Assets - Liabilities - Owner’s Equity = 0
Expenses/
+ - + -
Assets Drawings
Dr Cr Dr Cr

Balance b/d Balance b/d

N N
_ + - Revenues/ +
Liabilities
Dr Cr Dr Capital Cr

Balance b/d Balance b/d

N N
 Asset
 All accounts categories as asset will have
opening balances on the left-hand side
(debit entries).
 An increase is recorded on the debit side
while decrease on the credit side.
Dr Asset Account Cr
Balance b/d
Increase (+) Decrease (-)

Asset accounts will typically have debit

balances.
 Liability
 All accounts categories as liability will have
opening balances on the right-hand side
(credit entries).
 Increase is recorded on the credit side
while decrease on the debit side.
Dr Liability Cr
Balance b/d
Decrease (-) Increase (+)

Liability accounts will typically have credit

balances.
 Owner’s Equity
 Revenue and capital
 Increase is recorded on the credit side
while decrease on the debit side.

Dr Revenue / Capital Account

Cr
Balance b/d
Decrease (-) Increase (+)

Revenue and capital accounts will typically

have credit balances.
 Owner’s Equity
 Expenses and drawings
 Increase is recorded on the debit side
while decrease on the credit side.

Dr Expenses / Drawings Account Cr

Balance b/d

Increase (+) Decrease (-)

Expenses and drawings accounts will

typically have debit balances.
 Rules of Debit / Credit in
Statement of Financial Position
Debits Credits
Asset Increase (+) Decrease (-)
Liability Decrease (-) Increase (+)
Owner’s equity
*Capital Decrease (-) Increase (+)
*Drawings Increase (+) Decrease (-)
Rules of Debit / Credit in Statement
of Comprehensive Income
Debits Credits
Expense accounts………Increase (+) Decrease (-)
Revenue accounts…… Decrease (-) Increase (+)
Statement of Financial Position
( Accounts)
ASSETS LIABILITIES
Asset Accounts Liability Accounts
Debit for Credit for Debit for Credit for
increases decreases decreases increases
(+) (-) (-) (+)

OWNER’S EQUITY
Owner’s Equity Accounts
Debit for Credit for
decreases increases
(-) (+)
Statement of Comprehensive Income
(Accounts)
Expense Revenue
Asset Accounts Revenue Accounts
Debit for Credit for Debit for Credit for
increases decreases decreases increases
(+) (-) (-) (+)
Take A Break!
Transactions and Accounts
 On November 1,
20x6, Chris
begins a business
that will be
known as
Net Solutions.

UTAR/FHBM1214/Topic2
 (A) On
(A) On November
November 1, 1, Chris
Chris brings
brings in
in cash
cash
RM25,000 to
RM25,000 to start
start aa business
business in
in the
the name
name of
of
NetSolutions.
NetSolutions.

Date Cash Land Office Creditor

Supplies
a) +25,000 Capital +25,000

Effects of this entry in the account

Cash Chris, Capital
Nov 1 Cash
Nov 1 Capital 25,000
25,000
 (B) On
(B) On November
November 5,5, NetSolutions
NetSolutions bought
bought
land for
land for RM20,000,
RM20,000, paying
paying cash.
cash.

Date Cash Land Office Creditor

Supplies

b) -20,000 +20,000

Effects of this entry in the account

Cash Land
Nov 5 Land Nov 5 Cash 20,000
Nov 1 25,000 20,000
 (C) On
(C) On November
November 10,
10, NetSolutions
NetSolutions purchased
purchased
office supplies
office supplies on
on account
account for
for RM1,350.
RM1,350.

Cash Land Office Creditor

Supplies
c) +1,350 +1,350

Effects of this entry in the account

Office Supplies Accounts Payable
Nov 10 Supplies
Nov 10 Acc. Payable 1,350
1,350
 (D) On
(D) On November
November 18,
18, NetSolutions
NetSolutions received
received fees
fees of
of
RM7,500 from
RM7,500 from customers
customers for
for services
services provided
provided ..

Cash Land Office Creditor

Supplies
d) +7,500 Service +7,500
revenue

Effects of this entry in the account.

Cash Fees Earned/Service revenue

Nov. 1 25,000 Nov. 5 20,000 Nov 18 Cash
18 Fees
7,500
7,500
e. Net
e. Net Solutions
Solutions paid
paid the
the following
following expenses:
expenses:
wages, RM2,125;
wages, RM2,125; rent,
rent, RM800;
RM800; utilities,
utilities,
RM450; and
RM450; and miscellaneous,
miscellaneous, RM275.
RM275.
Assets = Liability + Owner’s Equity
Cash Land Office Creditor
Supplies

e)
-2,125 Wages -2,125
-800 Rent -800
-450 Utilities -450
-275 Miscell -275

UTAR/FHBM1214/Topic2
 (E) Throughout
(E) Throughout thethe month,
month, NetSolutions
NetSolutions incurred
incurred
the following
the following expenses:
expenses: wages,
wages, RM2,125;
RM2,125; rent,
rent,
RM800; utilities,
RM800; utilities, RM450;
RM450; and
and miscellaneous,
miscellaneous,
RM275 ..
RM275
Effects of this entry in the account.
Cash
Nov. 1 25,000 Nov. 5 30 Wages Wages Expense
20,000 Nov 30 Cash
18 7,500 2,125
2,125
Rent
800
Utilities 450 Utilities Expense
Rent Expense Miscell 275 Nov 30 Cash
Nov 30 Cash 450
800 Miscellaneous Expense
Nov 30 Cash
275
 (F) On
(F) On November
November 30,30, NetSolutions
NetSolutions
paid creditors
paid creditors on
on account,
account, RM950.
RM950.

Cash Land Office Creditor

Supplies

f)
-950 -950

Effects of this entry in the account

Cash Accounts Payable
Nov. 1 25,000 Nov. 5 20,000 Nov 30 Cash Nov. 10 1,350
30 950
18 7,500
3,650 30 Acc. Payable
950
In
In every
every entry
entry the
the sum
sum ofof
the
the debits
debits always
always equal
equal
the
the sum
sum of
of the
the credits.
credits.
 Double-Entry
Double-EntryAccounting
Accounting
“ Double-entry accounting is based on a simple
concept: each party in a business transaction
will receive something and give something in
return. In bookkeeping terms, what is received
is recorded on one side and what is given is on
the other side. The T account is a
representation of a scale of balance.”

Scale of Balance T account

Receive Give
Luca Pacioli
Developer of
Double-Entry Receive Give
Accounting
 Lecture Exercise 1
Record the following transactions in the T account.
Jan 1 Began business by investing RM50,000 cash.
3 Purchased RM2,300 for office supplies on
credit.
10 Owner brought in office equipment for
business use which values RM5,000.
11 Paid RM1,500 for the office supplies
purchased on 3 January.
20 Paid RM3,000 to purchase new office
furniture.
29 The remaining balance for supplies
purchased on 3 January was paid.
30 The bank has approved a loan to the business
for RM100,000.
Balance the accounts and find
its balance c/d.
 Expansion of Accounting
Equation
 Return Inwards

 Return Outwards

 Drawings
 Returns Inwards Account /
Sales Returns Account
 A customer may return goods sold to him
because they are defective, damaged,
unsatisfactory, of the wrong brand or
specification.
 Effect:
– reduce in the amount of revenue earned by the
business.
 For better control and a clearer record of
sales,
– a separate Return Inwards Account/Sales
Returns Account is opened and debited.
+ Assets - Liabilities - Owner’s Equity = 0

To record return inwards :

Dr Cr
Return inwards Cash/Bank/Debtor

*Return inwards will not be deducted in sales/revenue

account
 Example:
12 Jul 20x5 Sold goods on credit to Chen for $4,000.
20 Jul 20x5 Chen returns defective goods worth $500.

Dr Chen (Debtor) Cr
Jul 12 Sales 4,000 Jul 20 Return Inwards 500

Dr Sales Account Cr
Jul 12 Chen 4,000

Dr Return Inwards Account Cr

Jul 20 Chen 500
 Returns Outwards Account /
Purchases Returns Account
 A trader may return goods to his supplier
for similar reasons as returns inwards.
 Effect:
– reduce in the amount of purchases by the
business.
 Any purchases that are returned are
recorded in Returns Outwards Account or
Purchases Returns Account.
+ Assets - Liabilities - Owner’s Equity = 0

To record return outwards :

Dr Cr
Return outwards Cash/Bank/creditor

*Return outwards will not be deducted in purchases

account
Example: 19 Nov Trader returned goods
previously bought on credit worth RM250 to Li
Brothers, his supplier, because they were of the
wrong brand.

Dr Li Brothers (Creditor)
Cr
Nov 19 Returns Outwards 250

Dr Returns Outwards Account Cr

Nov 19 Li Brothers 250

 Lecture Exercise 2
Record the following transactions in the T account.
Feb 1Paris started her salon business with self cash
capital of RM25,000 and furniture cost RM20,000.
1 Bought some beauty stocks from Kent Bhd at cost
RM3,000 on account.
1 Paid one month rental of RM1,000 for the shop.
2 Paid for advertising cost amounting to RM1,200.
15 The salon started to serve many customers and
generate revenues amounting RM3,100 cash and
RM5,000 on credit from Royal Dance Club.
24 Billed the Royal Dance Club for services rendered by
the salon for RM2,200. No payment received yet.
26 A credit note was sent for over-charging Royal
Dance Club on account amounting RM500.
28 Paid salaries for the month, RM10,000.
28 Paid Kent Bhd the full amount owed.
Balance the accounts and find
its balance c/d.
 Drawings
 An owner may withdraw cash or other assets
belonging to the business for his personal use.

 Withdrawal is opposite from investment capital

 Asset = Liabilities + OE – Owners Drawings

 Any increase of drawing will cause an increase

(debit side) in drawing account and decrease
(credit side) accounts used for withdrawal
– eg cash, supplies
+ Assets - Liabilities - Owner’s Equity = 0

Drawings BF

+ -
Drawings
Dr Cr

N
 Normal Balances of Accounts
Increase
(Normal Balances) Decreases

Statement of Financial Position:

Asset Debit Credit
Liability Credit Debit
Owner’s Equity:
Capital Credit Debit
Drawing Debit Credit
Statement of Comprehensive Income:
Revenue Credit Debit
Expense Debit Credit
 Flow
Flow of
of Business
Business Transactions
Transactions
Transaction Transaction Document
1 authorized 2 takes place 3 prepared

Entry recorded Entry posted to

4 in journal 5 ledger
 Lecture Exercise 3
The account balances as at the end of April 06 for
Sean Enterprise are as follows:

Accounts RM
Cash 48,500
Accounts Receivable 76,700
Stock 750
Accounts Payable 26,000
Sean, Capital 119,450
Sean, Drawing 19,500
 Lecture Exercise 3
Record the opening balances and the following
transactions in the T account of Sean Enterprise.
May 1 Purchase goods on account RM1,700.
3 Received cash from clients on account, RM67,900.
5 Paid insurance premiums for May, RM350.
11Returned a portion of the goods purchased on 1 May.
The cost was RM500.
15 Paid advertising expense, RM3,800.
17 Paid creditors, RM14,800.
21 Paid monthly office rent, RM4,500
23 Recorded CREDIT sales made during the month
RM91,900.
27 Withdrew cash for personal use, RM4,500.
31 Paid salaries and commissions for the month,
RM61,200.
Record the opening balances
below in its account.
Accounts RM
Cash 48,500
Accounts Receivable 76,700
Stock 750
Accounts Payable 26,000
Sean, Capital 119,450
Sean, Drawing 19,500
Balance the accounts and find
its balance c/d