Slide 1 Principle of Accounting Chapter 4 The double entry Recording Process BA in International Business Foreign Trade University Outline An introduction to double entry accounting Footing and balancing ledger accounts The role of trial balance Detecting errors through a trial balance Chart of account Three column ledger accounts Accounting for drawings The Account Accounting’s main summary device is the account, the record of changes Accounts are grouped in three broad categories, according to.
Principle of Accounting Chapter The double-entry Recording Process BA in International Business Foreign Trade University Outline • • • • • • • An introduction to double-entry accounting Footing and balancing ledger accounts The role of trial balance Detecting errors through a trial balance Chart of account Three-column ledger accounts Accounting for drawings The Account Accounting’s main summary device is the account, the record of changes Accounts are grouped in three broad categories, according to the accounting equation: Cash The Account Assets are the economic resources that benefit the business now and in the future Cash Accounts receivable Inventory Notes receivable Prepaid expenses Land Buildings Equipment, furniture, and fixtures The Account Liabilities are the debts of the company Notes payable Accounts payable Accrued liabilities (for expenses incurred but not paid) Long-term liabilities (bonds) The Account Stockholders’ (owners’) equity is the owners’ claims to the assets of a corporation A proprietorship uses a single account A partnership uses separate accounts for each owner’s capital balance and withdrawals A corporation uses separate capital accounts for each source of capital The Account Accounting Accounting Transactions Transactions Transactions are economic events that require recording in the financial statements May be external or internal Not all activities represent transactions Each transaction has a dual effect on the accounting equation Double-Entry Accounting Double-entry bookkeeping means to record the dual effects of each business transaction The T-Account Account Title Debit Credit LEFT SIDE Three parts : 1) the Title of the account 2) a left or Debit side 3) a right or Credit side RIGHT SIDE Balancing – Example E 4.3 Cash at bank Feb Capital $60,000 Feb Rent $ 4,000 Sales $ 3,400 Shop fittings $ 12,000 Loan $ 5,000 Advertising 10 Sales $ 2,200 Stock control $ 3,600 $70,600 Balance $47,600 $ 600 14 Loan $ 2,000 15 Wages Balance $ 800 $ 47,600 $70,600 Closing the Accounts • Once the financial statements are prepared, the ledger accounts must be prepared to record the next period’s transactions This process is called closing the books – The balances in all “temporary” stockholders’ equity accounts are transferred to a “permanent” stockholders’ equity account – The revenue and expense accounts are “reset” to zero and the current net income is transferred to Retained Income Closing the Accounts • The Closing Process: – The revenue accounts are closed to Income Summary in the first entry – The expense accounts are closed to Income Summary in the second entry – The amount of Net Income (revenues expenses) is then transferred from Income Summary to Retained Income Preparing the Trial Balance • Once all transactions have been posted to the ledger, a trial balance is prepared • Trial balance - a list of all of the accounts with their balances – assets first, followed by liabilities, and then stockholders’ equity It is prepared as a test or check before continuing the recording process Preparing the Trial Balance • The purposes of the trial balance: – To help check on accuracy of posting by proving whether the total debits equal the total credits – To detect errors in double-entry recording – To establish a convenient summary of balances in all accounts for the preparation of formal financial statements Trial balance – An example Dr Capital – Mammone Rent 60,000 4,000 Shop fittings 12,000 Stock control 7,500 Advertising 600 Loan Wages 3,000 800 Sales 6,800 Costs of sales 3,800 Debtors 1,200 Creditors Cash at bank Cr 7,700 47,600 77,500 77,500 Trial balance (Cont’d) Some errors may not be detected by a trial balance: • • • • • Entering an incorrect amount for both the debit and credit Entering a debit or credit in the wrong account The debit and credit entries are reversed Omitting a transaction completely Compensating errors Detecting errors through a trial balance • • • Debit or credit omitted Duplication of a debit or credit Transposing error Search the records for a missing amount Divide the out-of-balance amount by (a debit treated as a credit or vice versa) Divide the out-of-balance amount by 9, which may indicate a slide or a transposition Chart of accounts • • • An organized index to the ledger accounts Groups the account together according to their accounting report classifications Facilitate report preparation Three-column ledger accounts • • • A simpler form of ledger with three columns: debit entry, credit entry and the balance of account Advantage: the balances of all accounts are readily available Ideal for computerized system Eg: Three-column ledger – Cash at bank account Date Account Dr Cr Balance Capital 25,000 25,000 Dr Loan 10,000 35,000 Dr Loan 500 34,500 Dr Stock control 600 33,900 Dr Accounting for Drawings • • Drawings: withdrawals of assets by the owner for personal use The balance of drawings is accounted for as a deduction against the owners’ equity Example: – The proprietor withdraws $500 cash for personal use – Balances of accounts under owners’ equity section are as follows: Capital account: $50,000 Profit earned for the year: $20,000 Drawings for the year: $10,000 Requirement: Record the transaction and prepare an extract of the statement of financial position, owners’ equity section Accounting for Drawings (Cont’d) Dr Drawings a/c Cr Cash at bank a/c $500 $500 Extract statement of financial position Owners’ equity Capital Plus Net profit Less Drawings $50,000 $20,000 $70,000 $10,000 $60,000 The Recording Process • The sequence of steps in recording transactions: Transactions Financial Statements Documentation Journal Trial Balance Ledger Practice questions Exercise 4.4 Exercise 4.10 Homework Exercise 4.5 Exercise 4.9 Exercise 4.11 ... transactions Each transaction has a dual effect on the accounting equation Double- Entry Accounting Double- entry bookkeeping means to record the dual effects of each business transaction The T-Account... introduction to double- entry accounting Footing and balancing ledger accounts The role of trial balance Detecting errors through a trial balance Chart of account Three-column ledger accounts Accounting. .. chart provides an analysis of a financial transaction to determine the doubleentry to be recorded in ledger accounts • An analysis chart helps to ensure that the double- entry for each transaction