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School of Business and LawEdith Cowan University

Financial Statements for Decision Making – Recording Transactions

A study of the process of recording economic transactions to build financial

statements to facilitate decision-making.

School of Business and LawEdith Cowan University

Our learning road map

School of Business and LawEdith Cowan University

Self Learning Focus

• Chapter 2 – Financial Statements for decision making– Should be read for review purposes– Examinable

• Chapter 3– Learning Objective 1 – Nature, purpose and

evidence for transactions– Learning Objective 5 – Trial Balance

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Lecture Focused Learning Objectives

Our focus this week in the lecture is on Chapter 3 and developing an understanding of1.Learning Objective 2 (A): The accounting cycle2.Learning Objective 3: The rules of debit and credit in double-entry accounting3.Learning Objective 4: The General Journal4.Learning Objective 2 (B) The Ledgers

4

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THE ACCOUNTING CYCLELearning Objective 1

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The Accounting Cycle

School of Business and LawEdith Cowan University

THE RULES OF DEBIT AND CREDIT IN DOUBLE-ENTRY ACCOUNTING

Learning Objective 2

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Historical Nature of Double-entry accounting

Debits, credits, journal entries, ledgers, accounts, trial balances, balance sheets and income statements all date back to the Renaissance (~1494)… Accounting students can take pride in their heritage. Part of this heritage is a rich vocabulary, almost all of which dates back to this period and much of which is fascinating in its origin.” Hendriksen & Van Breda, 1993, p. 36.

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Double-entry Accounting• Each transaction must be

analysed to determine:– What type of accounts are

affected• Assets; Liabilities; Equity;

Income; Expense– By how much each item

must be increased or decreased

• At least two accounts are affected by each transaction

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Debit and Credit Formatting Rules• Debits are recorded in

the – Left hand column in a

journal– Left hand side of a T-

Account– Left hand column in the

running balance format ledger

• Credits are recorded in the – Right hand column in a

journal– Right hand side of a T-

Account– Right hand column in

the running balance format ledger

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Debit & Credit Rules Summary

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THE GENERAL JOURNALLearning Objective 3

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The Accounting Cycle

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The General Journal• The journal or general

journal used for the initial recording of a transaction

• Chronological (date) order of all transactions

• Useful for locating and reducing errors as debits and credits shown together

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The General Journal: The Rules

• Always two or more accounts are affected by each transaction

• The entry must balance: Debits = Credits• Compound entries

– Enter all debit entries first (Left column)– Then enter all credit entries (Right column)

• Always in date order

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The General Journal Illustrated

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General Journal in Practice

• Starting a business• Darren Jones has decided to setup a lawn

mowing business (sole trader) called Darren’s Lawn and Gardening Services1. On January 2, 2012 Darren invested $35,000

of his savings into the business

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General JournalDate Particulars Post Ref Debit Credit2012Jan 2 Cash at Bank 35,000

Jones, Darren – Capital 35,000

Investment in the business by Darren Jones

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General Journal in Practice

• Purchase of assets• Darren’s Lawn and Gardening Services

purchased assets for the business2. A vehicle at a cost of $21,000 and equipment

for a discounted price of $9,000 cash on January 3, 2012

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General JournalDate Particulars Post

RefDebit Credit

2012Jan 2 Cash at Bank 35,000

Jones, Darren – Capital 35,000

Investment in the business by Darren Jones

Jan 3 Vehicles 21,000

Equipment 9,000

Cash at Bank 30,000

Purchase of vehicle and equipment for cash

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General Journal in Practice

• Purchase of supplies• Darren’s Lawn and Gardening Services

purchased fuel supplies for the business on January 4, 20123. $2,500 of fuel and agreed to pay for the

supplies later, i.e., a credit purchase

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General JournalDate Particulars Post

RefDebit Credit

2012Jan 4 Fuel Supplies 2,500

Fuel Payable 2,500

Purchase of fuel supplies on credit

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General Journal in Practice

• Provision of services• Darren’s Lawn and Gardening Services

performed services for cash and credit4. January 6 - Services for customers paid in

cash - $2,200 5. January 8 - Services for the local council –

invoiced $550 to be paid within 30 days

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General JournalDate Particulars Post

RefDebit Credit

2012Jan 6 Cash at Bank 2,200

Lawn mowing services 2,200

Lawn mowing services provided for cash payment

Jan 8 Accounts Receivable 550

Lawn mowing services 550

Provision of services on credit

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General Journal in Practice

• Recording expenses• Darren’s Lawn and Gardening Services

incurred the following expenses on January 306. Paid cash of $150 for wages to Sue an

employee7. A count of the fuel supplies on hand showed

that $800 of fuel supplies had been used

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General JournalDate Particulars Post

RefDebit Credit

2012Jan 30 Wages Expense 150

Cash at Bank 150

Wages payment

Jan 30 Fuel Expense 800

Fuel Supplies 800

Recording consumption of fuel supplies

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General Journal in Practice

• The following transactions occurred in Darren’s Lawn and Gardening Services on January 308. Collected the accounts receivable from

transaction no. 5 9. Paid the amount due to Adam Fuel Ltd – refer

to transaction no. 310.Darren withdrew $200 from the business for his

own personal use.

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General JournalDate Particulars Post

RefDebit Credit

2012Jan 30 Cash at Bank 550

Accounts Receivable 550

Accounts receivable received

Jan 30 Fuel Payable 2,500

Cash at Bank 2,500

Payment of accounts payable

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General JournalDate Particulars Post

RefDebit Credit

2012Jan 30 Darren Jones - Drawings 200

Cash at Bank 200

Withdrawal by Darren Jones

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THE LEDGERSLearning Objective 4

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Posting from the Journals to the Ledgers

• Normally a monthly process

• General Ledger contains a summary of the transactions for each account

• General ledger contains the balances of each account

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The Accounting Cycle

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The Ledger Accounts

• An account provides a record of increases and decreases in each item that appears in the financial statements

• A collective of accounts is known as the ledgers

• Each account has three basic parts:– A title and account number– A place to record increases– A place to record decreases

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The Ledger Accounts

• Two common formats – The T-Account

• An accountants tool– The Running Balance Format

• Used formally in accounting records both manually and computerised

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The Ledger Accounts

• Ledger accounts reflect the standard practice of– Debits in the left column (left side of the T)– Credits in the right column (right side of the T)

• Key details recorded are:– Date– Explanation (the other account affected by the

transaction)– Amount– Account balance (calculated)

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Ledger Account Formats

• Running Balance Accounts– Used in formal accounting systems– Standard presentation for computerised systems– Familiar to most - format used in Bank

Statements

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The Running Balance Format

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T-Accounts

• T-Accounts– Came about because negative numbers not part of

math's until the 17th century, some two centuries after founding of double-entry accounting

– Convenient way to show individual accounts– Illustrate effects of transactions on an account– Still used in practice for quick calculations

• Shaped in the form of a capital T– Left side of the T is the debit side– Right side of the T is the credit side

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The Structure of a T-AccountAccount Name and Number

Date Explanation Amount Date Explanation Amount

Debit Side (Dr) Credit Side (Cr)

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T- Accounts

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T-Accounts• Based on the accounting equation• Assets = Liabilities + Owners’ Equity• Debits = Credits• Referring back to Darren Jones decision to

to setup a lawn mowing and his initial investment of $35,000. The Cash at Bank T-Account would have reflected the transaction thus …

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Illustration of a T- Account Cash at Bank (Asset)

2012Jan 2 Darren Jones,

Capital35,000

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Illustration of a T- Account • Please record the

remaining Darren Jones transactions in the T-Accounts

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Illustration of a T- Account Cash at Bank (Asset)

2012Jan 2 Darren Jones, Capital 35,000 Jan 3 Vehicles 21,000

Jan 6 Lawn Mowing Services 2,200 Equipment 9,000

Jan 30 Accounts Receivable 550 Jan 30 Wages Expense 150

Jan 30 Fuel Payable 2,500

Jan 30 Drawings 200

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Illustration of a T- Account Vehicle Account (Asset)

2012Jan 3 Cash at Bank 21,000

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Illustration of a T- Account Equipment Account (Asset)

2012Jan 3 Cash at Bank 9,000

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Illustration of a T- Account Fuel Supplies (Asset Account)

2012Jan 3 Fuel Payable 2,500 Jan 30 Fuel Expense 800

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Illustration of a T- Account Fuel Payable (Liability)

2012 2012Jan 30 Cash at Bank 2,500 Jan 3 Fuel Supplies 2,500

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Illustration of a T- Account Lawn Mowing Services (Revenue)

2012Jan 8 Cash at Bank 2,200

Accounts Receivable 550

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Illustration of a T- Account Accounts Receivable (Asset)

2012 2012Jan 8 Lawn Mowing Services 550 Jan 30 Cash at Bank 550

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Illustration of a T- Account Wages Expense

2012Jan 30 Cash at Bank 150

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Illustration of a T- Account Fuel Expense

2012Jan 30 Fuel Supplies 800

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Illustration of a T- Account Drawings (Owners’ Equity)

2012Jan 30 Cash at Bank 200

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Process of Balancing a T- Account

• Balancing only required if more than one entry in the month

• We need to determine the balance carried down (Balance c/d)

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Process of Balancing a T- AccountCash at Bank (Asset)

2012Jan 2 Darren Jones, Capital 35,000 Jan 3 Vehicles 21,000

Jan 6 Lawn Mowing Services 2,200 Equipment 9,000

Jan 30 Accounts Receivable 550 Jan 30 Wages Expense 150

Jan 30 Fuel Payable 2,500

Jan 30 Drawings 200

37,750 32,850

School of Business and LawEdith Cowan University

Process of Balancing a T- AccountCash at Bank (Asset)

2012Jan 2 Darren Jones, Capital 35,000 Jan 3 Vehicles 21,000

Jan 6 Lawn Mowing Services 2,200 Equipment 9,000

Jan 30 Accounts Receivable 550 Jan 30 Wages Expense 150

Jan 30 Fuel Payable 2,500

Jan 30 Drawings 200

Jan 30 Balance c/d 4,900

37,750 37,750Feb 1 Balance b/d 4,900

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Illustration of a T- Account Fuel Supplies (Asset Account)

2012Jan 3 Fuel Payable 2,500 Jan 30 Fuel Expense 800

Jan 30 Balance c/d 1,700

2,500 2,500

Feb 1 Balance b/d 1,700

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Illustration of a T- Account Lawn Mowing Services (Revenue)

2012 2012Jan 30 Balance c/d 2,750 Jan 8 Cash at Bank 2,200

Accounts Receivable 550

2,750 2,750

Feb 1 Balance b/d 2,750

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INTRODUCTION TO GSTLearning Objective 4

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Goods and Services Tax (GST)• GST is a Good and

Services Tax imposed on the sale of goods and services.

• It is NOT recorded or added to payments of accounts.

• GST is accounted for at the time of sale

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Goods and Services Tax (GST)

• When a sale is recorded in the Sales Journal or General Journal – The seller records the applicable amount of GST

in their GST Payable account• When the purchaser (buyer) records a

purchase of inventory, supplies or services etc– The purchaser (buyer) records the amount of

GST in their GST Receivable account

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Goods and Services Tax (GST)• To determine the amount of GST we need to know

if it is GST Plus or GST Inclusive• GST Plus – Add 10% to the price of the goods or

services– Price x 1.10

• GST Inclusive…– Divide the price by 11 to determine amount of GST– Divide the price by 1.10 to determine price excluding

GST

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Further Reading• Please review the

appendix to Chapter 3 of the text book.

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THE END