double entry principles, balancing off the accounts …

DOUBLE ENTRY PRINCIPLES,

BALANCING OFF THE ACCOUNTS AND THE TRIAL BALANCE

TOPIC 4

PART 1 – DOUBLE ENTRY

PRINCIPLES

What Are the Different Business

Transactions?

Invest money.

Buy and sell

goods or

services.

Borrow money.

Pay wages to

employees.

Purchase non-

current assets (e.g.

land, motor

vehicles, buildings,

and equipment.

Pay taxes to the

government.

Business

Transactions

Business (Source) Documents

Examples: Sales invoice, purchases order, check stub, etc.

Business documents are used:

to confirm that an arm’s-length transactionhas occurred.

to establish the amounts to be recorded.

to facilitate the analysis of business events.

These documents must be analyzed.

What is the Sequence of the Accounting Cycle?

Step 1Record the effects of the transactions.Step 2Summarize the effects of transactions.1. Posting journal entries.

2. Preparing a trial balance.

Step 3

Prepare reports.1. Adjusting entries.

2. Preparing financial statements.

3. Closing the books.

Step 4

Analyze transactions.

Step 1: Analyze Transactions

What accounts are

involved?

Did each account

increase or decrease?

By how much?

Transaction analysis framework

Transaction analysis:

breaks down complex

transactions into

manageable pieces.

provides a self-checking

mechanism.

What Is the Accounting

Equation?

Assets = Liabilities + Owners’ Equity

Resources Creditors’

claims

against

resources

= + Owners’

claims

against

resources

A = L + OE

Describe Effect of the Following

Transactions on a Company.

Borrow money

Invest in company

Pay off a creditor

Purchase

equipment by cash

Borrow funds to

settle a debt

What Is the Rule of Double-Entry

Accounting?

The debits must always equal the

credits.

Debits = Credits

Accounts provide an efficient method to categorize transactions.

A T-account is a simplified depiction of an account.

Using Accounts

Name of Account

Debit Credit

Debits and Credits

Debits are simply

entries on the left.

Credits are

simply

entries on

the right.

Remember:

DR CR DR CR DR CR

(+) (-) (-) (+) (-) (+)

Debits and Credits

Assets = Liabilities + Owners’ Equity

Asset accounts:

Debit is an increase.

Credit is a decrease.

Liabilities and owners’

equity accounts:

Debit is a decrease.

Credit is an increase.

Revenues

Increases in a company’s resources from the sale of goods or the performance of services.

Expenses

Decreases in a company’s resources incurred in the normal course of business (day-to-day operations) to generate revenues.

Expanding the Equation

Expanded Accounting Equation

Assets

DR CR

+ –

=Liabilities

DR CR

– +

+Owners’ Equity

DR CR

– +

Capital

DR CR

– +

Expenses

DR CR

+ –

Revenues

DR CR

– +

Step 2: Record Transactions

Record the results of the transactions in a journal.

Journalizing provides a chronological record of all business activities.

Journal --

book of

original entry

What is another name for the journal?

Step 2: Record Transactions

Record the results of the transactions in a

journal.

Journalizing provides a chronological record

of all business activities.

General Journal Entry Format:

Date Debit Entry . . . . . . . . . . . . . . . xx

Credit Entry . . . . . . . . . . . . xx

Explanation.

Journal Entries

What is the three-step process?

1 Identify which accounts are involved.

2 For each account, determine if it is

increased or decreased.

3 For each account, determine by

how much it will change.

On 1 January, supplies purchased for

RM25 on credit

Example 1: Journal Entry

Jan. 1 Purchases . . . . . . . . . . . . . . . . . . 25

Accounts Payable . . . . . . . . 25

(Purchased supplies on credit)

Example 2: Journal Entry

Feb. 1 Bank . . . . . . . . . . . . . . . . . . . . . 100

Revenue . . . . . . . . . . . . . . . . 100

(Received cash for services)

On 1 February, a check for RM100 is

received in payment for services

rendered.

Make the correct journal entry.

Example 3: Journal Entry

Mar. 1 Accounts Receivable. . . . . . . . 75

Sales …………... . . . . . . . . . . 75

Sold merchandise on account.

On 1 March, merchandise is sold to a

customer on credit for RM75. The cost

of the product was RM60.

Make the journal entries.

Mar. 1 Cost of Goods Sold . . . . . . . . . 60

Inventory. . . . . . . . . . . . . . . . 60

To record cost and reduce inventory.

Date Transaction Ref. Debits Credits

Jan. 1 Purchases 25

Accounts Payable 25

(Purchased supplies on account)

Feb. 1 Cash 100

Revenue 100

(Received cash for services)

Mar. 1 Accounts Receivable 75

Sales 75

(Sold merchandise on credit)

Journal 1

Step 3: Posting Journal Entries and Preparing a Trial Balance

Define the Following TermsPosting

transferring amounts from the journal to the ledger.

Ledger

a book of accounts where journal transactions are posted

and thereby summarized.

Posting reference

a cross-reference number between the general journal and

the accounts in the general ledger.

Chart of accounts

a systematic listing of all accounts used by a company.

Ledger

See Examples 4.1 to 4.20

PART 2 – BALANCING OFF THE

ACCOUNTS AND THE TRIAL

BALANCE

Determining Account Balances

Name of Account

Debit Credit

Accounts with

typical debit

balances are?

Accounts with

typical credit

balances are?

Expenses

Assets

Owners’ Equity

Revenues

Liabilities

An account’s

balance is usually

on the side that

increases the

account. It is

referred to as the

“Normal Balance.”

A listing of all

account balances;

provides a means to

assure that debits

equal credits.

Define The Trial Balance

From the data in the trial

balance, the Statement of

Financial Position and

Statement of Profit and

Loss can be prepared.

What is the Trial Balance

used for?

The Example CompanyTrial Balance

December 31, 2003

Debits Credits

Cash $ 21Accounts Receivable 15Inventory 12Land 200Accounts Payable $ 30Capital Stock 150Retained Earnings 24Sales Revenue 919Cost of Goods Sold 850Advertising Expense 10Miscellaneous Expenses 15 ______

Total $ 1,123 $ 1,123

Sample Trial Balance

The trial

balance shows

that debits

equal credits.