topic two: measuring and recording business transactions

Topic two:Topic two:Measuring and recording Business

Transactions

1.0 Introduction

- Recap of topic one:- We learnt about the accounting equation;Assets = Capital + Liabilities

- We noted the importance of accounting information to various users and the importance of credible information

In this topic, we learn more on measuring and recording accounting transactions

Topic two: measuring and recording transactions23-04-19 2

Learning objectives

After this topic you should be able to;

Describe the accounting equation Describe the double entry system Draw T Accounts Record transactions in the T Accounts Balance off T AccountsDescribe the various steps in the accounting

cycle Identify books of original entry

23-04-19Topic two: measuring and recording transactions 3


No Term Definition

1 T Account A an account with a debit and credit side where transactions are recorded as called a ledger

2 Technical insolvency

A situation where an organisation’s capital (equity) is negative

3 Double entry system

A system of recording where each accounting transaction has both a debit and credit entry

4 Debit The left hand side of a T Account

5 Credit The right hand side of a T Account6 Balancing off Determining totals in a T Account. The difference

between the side with the higher amounts and that with lower amounts is added as a balance to ensure that totals in the two sides are equal.

7 Posting Recording an accounting transaction

Financial position and accounting equation

Organisations with high levels of debt are said to have high financial risks

Investors will be apprehensive to inject their capital into such

Negative reserves is an indication of technical insolvency

See examples in the notes


Double entry system: T Accounts

A T account has a credit and debit sideCredit side is the right hand sideDebit side is the right hand side

see next slide for an illustration



Title of the account

Period covered

Debit Credit

Reference Date Amount Reference Date Amount

Increase Increase

Decreases Decreases

Double entry system: T Accounts (Cont’d)

Impact of transactions is recorded differently in the accounts as learnt in topic one.

Please see the summary presented in the next slide.



Account Increase Decrease

Assets Debit Credit

Capital Credit Debit

Liabilities Credit Debit

Important lesson

Accounting equation

Liabilities + Capital

= Assets

Posting of transactions should always leave the equation balanced


Balancing off accounts

- At the end of the period, T accounts are closed

- Please see illustration in the notes


Balancing off accounts (Cont’d)

Key lessons;Increase in an expense item debit, decrease

creditIncrease in a liability account credit, decrease

debitIncrease in an income credit, decrease debitIncrease in an asset account debit, for a

decrease credit


Accounting cycle

◦A number of activities involved in generation of an accounting entry all the way to reporting

◦Completion of once cycle marks beginning of another

◦The cycle forms the basis of our course◦We shall summarize the cycle in 8 steps


Accounting cycle (Cont’d)1.Initiation of a transaction2.Record the transaction3.Prepare a trial balance4.Prepare adjusting entries5.Prepare an adjusted trial balance6.Prepare financial statements7.Prepare closing entries8.Prepare a post closing trial balance


1. Initiation of a transaction- Transactions are initiated through posting in the

original books of entry or adjusting journals

2. Recording- Details in the original books of entry are

transferred to the T Accounts

3. Prepare trial balance- Balances in T Accounts are transferred to the trial balance

4. Adjusting entries- journal entries are posted to adjust accounts at year end. We shall learn more on Topic 5


5. Prepare adjusted trial balance- The trial balance prepared in step 3 is adjusted for the effects of journal entries passed in step 4

6. Prepare financial statements- Financial reports prepared based on the adjusted trial balance

7. Prepare closing entries- Income statement items are closed off to the income summary and added to the balance added to retained earnings


8. Prepare a post closing trial balance- The adjusted trial balance is further adjusted with closing entries-Post closing trial balance is opening trial balance for the ensuing period

Note1. These steps are sequential with output

from one being input in the other.2. The cycle is continuous. An end of one

financial period marks beginning of another


Books of original entryTransactions are initiated from these

booksMarks the start of the accounting cycleThey include

Cash bookPetty cashSales ledgerPurchase books Purchase returnsjournals


Cash book◦Is a record of all receipts and payments◦Helps to determine cash position of an entity

Sales ledger◦Is a record of all sales generated

Sales returns◦Records returns by customers


Purchase returns◦Records returns to suppliers

Petty cash◦Record payments for minor expenses

Journals◦Records transactions initiated outside the original books of entry

Note: control should be maintained over these books to ensure assets are not misappropriated


Practice Quiz

See notes


Questions


topic two: measuring and recording business transactions

Documents

illustration topic

introductionrecap of

t accounts record transactions

assetsposting of transactions

t accounts balance

t accountsdescribe

accounting transactionstopic

t account5creditthe