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BAFS Compulsory PartIntroduction to Accounting
Topic C06: The Accounting Cycle
Technology Education SectionCurriculum Development Institute
Education Bureau, HKSARGApril 2009
Topic C06The Accounting Cycle
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Beauty Full Co.Beauty Full Co.
Topic C06The Accounting Cycle
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The Accounting Cycle
Topic C06The Accounting Cycle
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Source Documents
Evidence of transactions, including:Sales and purchases invoicesDebit and credit notes Bank statementsCopies of cheques issued and recievedCash vouchers
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Double Entry System:Assets, Liabilities and Capital
Liabilities
Capital
Assets
Types of accounts
CreditDebit
An increaseA decrease
Accounts payable, bank loan, etc.
CreditDebit
An increaseA decrease
Owner’s capital
DebitCredit
An increaseA decrease
Premises, van, fixtures, stock, cash, cash in
bank, accounts receivable, etc.
Entry in the accountTo recordExamples
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Example
On July 2 of Year 1, BF Co. purchased a van for $50,000 in cash.
CreditDecreaseAssetCash
DebitIncreaseAssetVan
Entry in the account
Increase / decrease
Types of AccountsAccounts
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Example
Van
Year 1 $July 1 Cash 50,000
Cash
Year 1 $July 1 Van 50,000
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Example
On July 15 of Year 1, BF Co. bought fixtures for $30,000 from BD Ltd on credit.
???BD Ltd
???Fixtures
Entry in the account
Increase / decrease
Types of AccountsAccounts
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Answer
On July 15 of Year 1, BF Co. bought fixtures for $30,000 from BD Ltd on credit.
CreditIncreaseLiabilityBD Ltd
DebitIncreaseAssetFixtures
Entry in the account
Increase / decrease
Types of AccountsAccounts
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Example
Year 1 $July
Year 1 $July
Year 1 $July
Year 1 $July
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Answer
Fixtures
Year 1 $July 15 BD Ltd 30,000
Year 1 $July 15 Fixtures 30,000
Year 1 $July
Year 1 $July
BD Ltd
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Double Entry System:Stocks
CreditDebit
An increaseA decreaseReturns outwards
DebitCredit
An increaseA decreaseReturns inwards
CreditDebit
An increaseA decreaseSales
DebitCredit
An increaseA decreasePurchases
Entry in the accountTo recordTypes of
accounts
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Example
On July 8 of Year 1, BF Co. sold goods for $10,000 to M Chan on credit.
CreditIncreaseSalesSales
DebitIncreaseAssetM Chan
Entry in the account
Increase / decrease
Types of AccountsAccounts
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Example
M ChanYear 1 $July 8 Sales 10,000
SalesYear 1 $July 8 M Chan 10,000
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Example
On July 22 of Year 1, M Chan refunded goods he bought for $1,000.
CreditDecreaseAssetM Chan
DebitIncreaseReturnsInwards
Returns Inwards
Entry in the account
Increase / decrease
Types of AccountsAccounts
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Example
Returns InwardsYear 1 $July 22 M Chan 1,000
M ChanYear 1 $July 22 Returns
Inwards 1,000
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Example
On July 6 of Year 1, BF Co. purchased goods for $9,000 from F Li on credit.
???F Li
???Purchases
Entry in the account
Increase / decrease
Types of AccountsAccounts
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Answer
On July 6 of Year 1, BF Co. purchased goods for $9,000 from F Li on credit.
CreditIncreaseLiabilityF Li
DebitIncreasePurchasesPurchases
Entry in the account
Increase / decrease
Types of AccountsAccounts
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Example
Year 1 $July
Year 1 $July
Year 1 $July
Year $July
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Purchases
Answer
Year 1 $July 6 F Li 9,000
Year 1 $July 6 Purchases 9,000
Year 1 $July
Year 1 $July
F Li
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Example
On July 27 of Year 1, BF Co. returned goods previously bought from F Li for $800.
???Returns Outwards
???F Li
Entry in the account
Increase / decrease
Types of AccountsAccounts
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Answer
On July 27 of Year 1, BF Co. returned goods previously bought from F Li for $800.
CreditIncreaseReturns outwards
Returns Outwards
DebitDecreaseLiabilityF Li
Entry in the account
Increase / decrease
Types of AccountsAccounts
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Example
Year 1 $July
Year 1 $July
Year 1 $July
Year 1 $July
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F Li
Answer
Year 1 $July 27 Returns
Outwards 800
Year 1 $July 27 F Li 800
Year 1 $July
Year 1 $July
Returns outwards
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Double Entry System:Revenue and Expenses
Expense
Revenue
Types of Accounts
DebitCredit
An increaseA decrease
Rent, government rates, motor
expense, salary, etc.
CreditDebit
An increaseA decrease
Commission received, etc.
Entry in the accountTo recordExamples
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Example
On 28 July of Year 1, BF Co. paid motor expenses for $3,500 by cheque.
CreditDecreaseAssetBank
DebitIncreaseExpenseMotor
Expenses
Entry in the account
Increase / decrease
Types of AccountsAccounts
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Example
Motor ExpensesYear 1 $July 28 Bank 3,500
BankYear 1 $July 28 Motor
expenses 3,500
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Example
On July 3 of Year 1, BF Co. paid rent expenses for $15,300 by cash.
???Cash
???Rent
Expenses
Entry in the account
Increase / decrease
Types of AccountsAccounts
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Answer
On July 3 of Year 1, BF Co. paid rent expenses for $15,300 by cash.
CreditDecreaseAssetCash
DebitIncreaseExpenseRent
Expenses
Entry in the account
Increase / decrease
Types of AccountsAccounts
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Example
Year 1 $July
Year 1 $July
Year 1 $July
Year 1 $July
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Rent expense
Answer
Year 1 $July 3 Cash 15,300
Year 1 $July 3 Rent
Expense 15,300
Year 1 $July
Year 1 $July
Cash
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Double Entry System:Drawings
DebitCredit
An increaseA decrease
Drawings
Entry in the accountTo recordType of
Account
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Example
On July 20 of Year 1, owner of BF Co. drew cash for $5,000.
CreditDecreaseAssetCash
DebitIncreaseDrawingsDrawings
Entry in the account
Increase / decrease
Types of AccountsAccounts
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Example
DrawingsYear 1 $July 20 Cash 5,000
CashYear 1 $July 20 Drawings 5,000
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Example
On July 28 of Year 1, owner of BF Co. took away goods of $3,000.
CreditDecreasePurchasesPurchases
DebitIncreaseDrawingsDrawings
Entry in the account
Increase / decrease
Types of AccountsAccounts
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Example
DrawingsYear 1 $July 28 Purchases 3,000
PurchasesYear 1 $July 28 Drawings 3,000
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Journalise Transactions
Transactions are classified and entered into books of original entry.Books of original entry include:
Sales journalPurchase journalReturns inwards journalReturns outwards journalCash bookGeneral journal
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Open the Books
Open a general journal to record the assets, liabilities and capital of Beauty Full Co based on the background information given.
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Example
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Sales Journals
Record credit sales transactions in the sales journal.
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Returns Inwards Journal
Record the sales returns to the returns inwards journal.
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Topic C06The Accounting Cycle
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Purchase Journal
Record credit purchases transactions in the purchases journal.
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Returns Outwards Journal
Record the purchases returns to the returns outwards journal.
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General Journal & Cash Book
Make use of the bank statement, copies of cheques issued and received, cash vouchers and invoice and record the respective transactions in the general journal and cash book.
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Example – Rent PaymentTo record anincrease in expense,entry made in the debit side
To record a decrease in asset (bank balance),entry made in the credit side
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Example – Rent Payment
Also record the payment by cheque on the right-handside (credit) of the cash book
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Example – Debtor Repayment
5% cash discount if paidwithin 60 days
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Example – Debtor Repayment
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Example – Creditor Settlement
5% cash discount if paidwithin 60 days
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Example – Creditor Settlement
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Topic C06The Accounting Cycle
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Topic C06The Accounting Cycle
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Post Entries to Ledger Accounts
Set up the following ledger accounts for Beauty Full Co:
General ledgerAccounts receivable ledgerAccounts payable ledger
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Example – Posting to General Ledger
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Example – Posting to Accounts Receivable Ledger
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Example – Posting to Accounts Payable Ledger
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Example – Posting to General Ledger
Posted tocash book
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Example– Posting to General Ledger
①
Topic C06The Accounting Cycle
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Example – Posting to Accounts Receivable Ledger
②
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Example – Posting to Accounts Receivable Ledger
Post to cash book
Post to cash salesdiscount account
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Example – Posting to Accounts Payable Ledger
①
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Example – Posting to Accounts Payable Ledger
②
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Example – Posting to Accounts Payable Ledger
Post to cash book
Post to cash purchasesdiscount account
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Uses of Trial Balance
Checking the accuracy of double entry records:Under the double entry system, total debit balances and total credit balances are equal. If they are not equal, it means error(s) have been made.There could still be errors even if trial balance balances.
Used as a basis for preparing the income statement and the balance sheet.
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Steps to Prepare Trial Balance
Balance off all the ledger accounts and the cash book.List all balances, either debit or credit, of all accounts in the trial balance separately.Add up all the debit and credit balances correspondingly and check whether the totals of debit side and credit side are equal. Check for errors if they are not equal.
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Balance Off an AccountInput $400,000 to thecredit side of the Premises account tobalance it off. The balance is then transfer to next month.
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Prepare Financial Statements
Two most important financial statements are:
Income statementBalance sheet
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Income Statement
SalesSalesSales
Cost of good soldCost of good soldCost of good sold
Gross profitGross profitGross profit
Other incomesOther incomesOther incomes
ExpensesExpensesExpenses
Net ProfitNet ProfitNet Profit
LessLess
==
AddAdd
LessLess
==
List all expensesList all expenses
Calculate from openingstock, purchase, cash Purchase discount, Returns outwards & closing stock
Calculate from openingstock, purchase, cash Purchase discount, Returns outwards & closing stock
Less cash sales discount & returns inwards
Less cash sales discount & returns inwards
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Topic C06The Accounting Cycle
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Balance SheetFixed AssetsFixed AssetsFixed Assets
Current AssetsCurrent AssetsCurrent Assets
Less Current LiabilitiesLess Current LiabilitiesLess Current LiabilitiesNet Current
AssetsNet CurrentNet Current
AssetsAssets
Long-term LiabilitiesLongLong--term Liabilitiesterm Liabilities
Financed by:Capital
Financed by:Financed by:Capital Capital
++
--
==
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Conclusions
Accounting helps us toRecord, classify and summarise dataCommunicate informationCalculate profit and lossHave a better control of the financial resources Enhance effective operations
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The End