ACT 1100Introduction

to Accounting

Lecturer: Troy J. Wishart

Summer Course

ACT 110Is EASY

POP!

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Accounting Cycle

Source Documents

Record in Daybooks/Journals

Post to Ledgers

ExtractTrial Balance

Prepare Financial

Statements

Posting to LedgersLecture Notes 2

Posting to Ledgers

Posting• Before transactions are posted

they are recorded in the Books of Original or Prime Entry/Journals

Posting to Ledgers

Posting• The Books of Prime Entry are then

used to Post to the Various accounts in the three ledgers: General Ledgers – Records general

transactions Purchase Ledgers – Records Credit

Purchases Sales Ledgers – Records Credit Sales

Posting to LedgersPosting• There are three types of transactions

that would occur in the Business:1. Transactions that affect Assets,

Capital and Liabilities2. Transactions that affect Expenses,

Revenue, Assets, Liabilities, and sometimes Capital

Posting to LedgersPosting

3. Transactions that affect the stock, assets, Liabilities and sometimes Capital

• Each transactions should be entered the Accounts in the Ledgers using the Double Entry Principle

Posting to Ledgers

Posting• How to identify the double entry

effect of a transaction? Identify the accounts affected

the transaction

Posting to LedgersPosting–In order to do so, ask yourself the

questions: Who is affected? What is happening? How its happening? Why is this happening?

Posting to LedgersPosting• After identifying accounts:

Post to the accounts within the Ledgers while

Ensuring that each debit entry is matched by equal corresponding credit or vice-versa.

Posting to LedgersPosting – RULES

• Debit all ExpensesCredit all Income• Debit the Receiver

Credit the Giver• Debit what Comes In

Credit What Goes Out

The Account Format

Title of AccountDate DateDetails Details$ $

Debit Side Credit Side

Posting to LedgersPosting - Example• Purchase Motor Vehicle for cash $2m and paid a

deposit of $500,000.• Purchase goods by credit $20,000• Sold goods for cash $30,000• Sold Goods on credit $26,000• Purchase goods for cash $50,000• Paid rent $50,000• Paid wages $250,000

Stock Adjustments PostingLecture Notes 2

Stock Adjustment PostingPurchases – Increase in Stock• Goods purchase for resale are entered

in the Purchases Account and not stock account. They are entered on the debit side of

the account, whether or not the transaction is for cash or credit.

The corresponding entries are made either to the cash or creditor’s account (creditor).

Stock Adjustment PostingPurchases – Increase in Stock• Why are goods bought not entered in

stock account– If goods purchased for resale were

entered in the stock account at cost, when they are sold they would have to be entered in the stock account at cost, requiring calculations for each transaction of sale.

Stock Adjustment Posting

Sales – Decrease in Stock• Goods sold for cash or credit are

entered in Sales Account.• Both cash and credit sales of

trading goods are entered on the credit side of the sales account.

Stock Adjustment PostingSales – Decrease in Stock• The corresponding entry if it is a cash

sale goes to the debit side of the cash account. • A credit sale will require a debit entry

to the debtor’s account (credit customer).

Stock Adjustment PostingSales Returns – Return of Stock by

Customer• Return of sales, are entered in a

separate account known as the sales return or returns inward account.

• The corresponding account if the sales transaction was on credit would be a credit to the debtor’s account.

Stock Adjustment PostingPurchases Returns – Return of Stock to

supplier• Return of purchases, are entered in

the purchases return account or returns outward account.

• The corresponding account if the purchase was on credit would be a debit to the creditor’s account.

Stock Adjustment Posting

Other Considerations• Purchases and Sales Return

accounts are used so as not to offset the transactions in one account and thus reduce our ability to analyze.

Stock Adjustment Posting

Other Considerations• Cost is defined in relation to the

different categories of stock as being that expenditure which has been incurred in the normal course of business in bringing the product or service to its present location and condition.

Stock Adjustment Posting

Other Considerations• This expenditure should include, in

addition to purchase; such costs of conversion as are appropriate to the location and condition.

Closing an AccountLecture Notes 2

Closing and AccountHow to Close off the Accounts• Add both sides• Place the greater of the two sides on both

sides• Record the difference on the smaller side.• Balance (bal.) carried down (c/d) is placed

next the balancing figure and balance brought down (b/d) at the bottom figure under the total of the greater side.

The Account Format

Purchases AccountDate DateDetails Details$ $

Credit Purchases Balance c/d

2,000Cash Purchases

5,000 7,0007,0007,000

7,000Balance b/d

15/1/11

31/1/11 31/1/11

01/2/11

Closing and AccountAccounting Steps• Double entry bookkeeping for each

transaction or event.• Closing of the accounts and bring down

the balances.• Prepare a trial balance indicating Balance

Sheet items and Profit and Loss items.• Prepare a Trading and Profit and Loss

Account.• Prepare Balance Sheet Statement

Trial BalanceLecture Notes 2

Trial Balance

DefinitionThe Trial Balance is a summary of the balances in a double entry system, and is used to check the arithmetic accuracy, and prepare the financial statements.

Trial Balance

Errors that are not revealed in the Trial Balance:-• Errors of Omission – there is

neither a debit nor a credit in relation to the transaction. • Errors of Principle – the amount is

correctly recorded but placed in the wrong class of account.

Trial BalanceErrors that are not revealed in the Trial Balance:-

• Errors of Commission - where an amount is correctly recorded but entered in the wrong personal account.• Errors of Original Entry - where the

transaction is recorded with the wrong amount.

Trial BalanceErrors that are not revealed in the Trial Balance:-

• Errors of Compensation – here the error on one side is compensated by an error/s of similar amount on the other side.

• Complete Reversal of Entry – Incorrect posting of the debit and credit of a transaction, that is the debit of the transaction is credited and the credit is debited.

Trial BalanceErrors that are revealed in the Trial

Balance:-• Errors in extraction of the Trial

Balance.• Omission of an account balance.• Errors in computation of the balances

of the accounts.• Non-correspondence of debit and

credit.

Trial Balance

• Other Considerations:-• In the Trial Balance, the stock

usually is of the previous year or the Opening Stock. • The value of the stock at the end

of the year or at the Trial Balance date is usually given as a note.

Trial Balance• Other Considerations:-• Items or accounts that will always

appear on the debit side of the Trial Balance:- –All assets–Debtors–Cash at Bank–Cash in Hand

Trial Balance

• Other Considerations:-• These accounts are also referred to

as debit balances, as the debit side is greater than the credit side.

Trial Balance• Other Considerations:-• Those that will appear on the credit

side:-–All liabilities–Creditors–Capital–Bank Overdraft

Trial Balance• Other Considerations:-• These accounts are referred to as

credit balances, as the credit side is greater than the debit side.

• Those accounts with the debit side being equal to the credit side are referred to as zero balances.

• Such accounts are not placed in the trial balance.