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Session3:IIMCPGP201719
AccountingMechanics
Learning Goals
MeasurementIssues
TheAccount theTAccount
RulesofDebitsandCredits,NormalBalance
AccountingCycle
TransactionAnalysis
Journalising,LedgerPosting:PreparationofTrialBalance
AdjustmentEntries:Adjustedtrialbalance
PreparingFinancialStatements
ClosingEntries
Assignments
MariaCase:Revisit
2
MeasurementIssues
Recognitionmeanstherecordingofatransaction. WHENtorecord
Referstothedifficultyofdecidingwhen abusinesstransactionshould
berecorded
Pointofrecognitionisimportantbecauseitaffectsthefinancial
statements.
EventVsTransaction:HiringnewemployeesVsPayingwagesfor
workperformed
Valuation:Focusesonassigningamonetaryvaluetoatransaction
Practiceofrecordingtransactionsatcostfollowsthecostprinciple.
WHATVALUE
Classification: Istheprocessofassigningtransactionstotheappropriate
accounts HOWTOCATEGORIZE
Ethicalreportingrequires:
Recognition,valuation,andclassificationaretreatedproperly.
3
Account,TheTAccount
Account Name
Account Name
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.
$10,000 $3,000
$10,000 $3,000
$8,000
$8,000
Basic
Assets = Liabilities + Stockholders Equity
Equation
Expanded
Basic
Equation
8
OpeningRE
NormalBalanceDebit
Assets Dividends Expense
Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr.
Assets Debitsshouldexceedcredits.
Dividends andexpenses decreasestockholdersequity(debit).
NormalBalanceCredit
Liabilities Common Stock Revenue
Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr.
Liabilities Creditsshouldexceeddebits.
Investmentsbystockholders andrevenuesincreasestockholdersequity(credit).
29062017 9
AccountingCycle
10
BusinessTransactionAnalysis
ForEverytransaction:
1. Statethetransaction.
SourceDocuments(SalesInvoice,Receipts,Chequesetc):
Evidenceoftransaction,Supportsdetailsofatransaction
2. BasicAnalysisandEquationAnalysis:Analyzethetransactionto
determinewhichaccountsareaffected
3. DebitCreditAnalysis:Applytherulesofdoubleentryaccounting
4. Journalize:Recordtheentryinjournalform.Provideacomment
thatwillhelpapplytherulesofdebitandcredit.
Journal:PrimaryBookwheretransactionsrecordedin
chronologicalorder BooksofOriginalEntry
Journalising:Process ofrecordingalltransactionsinajournal
chronologically
Contributionstotherecordingprocess:Disclosesthecompleteeffectsofa
transaction,Providesachronologicalrecord oftransactions,Helpsto
preventorlocateerrors 11
Journalizing Illustration1
STATE Oct.1:Sierraissuedcommonstockinexchangefor$10,000cash
ANALYZE
12
Journalizing Illustration2
STATE Oct.1:Sierraborrowed$5,000bysigninganote
ANALYZE
13
Journalizing Illustration3
STATE Oct.2:Sierrapurchasedequipmentfor$5,000
ANALYZE
Dr Cr.
Increase in assets (Equipment) Debited Equipment - Dr
Decrease in assets (Cash) Credited Cash - Cr.
JOURNALIZE
General Journal
Date Account Title Ref. Debit Credit
July 2 Equipment 5,000
Cash 5,000
(Purchased equipment for cash)
14
LedgerAccounts
TheGeneralLedgercontains:Allaccountsmaintainedbythecompany
groupedtogethermanuallyorelectronically
Accounttitleandnumberappearattopofaccountform
Thedateappearsinthefirsttwocolumns(asinthejournal)
Itemcolumnisrarelyusedbecauseexplanationsalreadyappearinthejournal
Post.Ref.columnusedtonotethejournalpageonwhichtheoriginalentryfor
thetransactioncanbefound
Dollar/RupeesamountisenteredinappropriateDebitorCreditcolumn
Newaccountbalanceiscomputedinthelasttwocolumns againsteachentry
Posting
Processoftransferringdebitandcreditamountsfromthejournalto
theledgeraccounts ingeneralledger
16
PostingaTransaction:Illustration
General Journal Page 2 1. Locate debit account in the
Post.
Date Description Ref. Debit Credit ledger
20xx 2. Enter date of transaction
July 30 Telephone Expense 513 140
Accounts Payable 140 and journal page number in
Received bill from telephone Post. Ref. column
company
General Ledger 3. Enter in Debit column
Accounts Payable Account No. 212
Post. Balance amount of debit from
Date Item Ref. Debit Credit Debit Credit journal
20xx
July 5 J1 1,500 1,500 4. Calculate account balance
6 J1 2,600 4,100
9 J1 1,000 3,100 and enter in appropriate
30 J2 140 3,240 Balance column
General Ledger 5. In journal Post. Ref.
Telephone Expense Account No. 513
Post. Balance Column, enter account
Date Item Ref. Debit Credit Debit Credit number to which amount
20xx
July 30 J2 140 140
was posted
17
TheRecordingProcessIllustrated
Additional
Transactions
The
Recording
Process
Illustrated
Additional
Transactions
The
Recording
Process
Illustrated
Additional
Transactions
The
Recording
Process
Illustrated
Additional
Transactions
The
Recording
Process
Illustrated
Additional
Transactions
TheRecordingProcessIllustrated
Additional Transactions
The
Recording
Process
Illustrated
Additional
Transactions
The
Recording
Process
Illustrated
Additional
Transactions
SummaryIllustrationofJournalizing
SummaryIllustrationofJournalizing
Summary
Illustrationof
Posting
Assets=Liabilities+ShareholdersEquity
23,300=8,700+14,600
TrialBalance
Recorddebit
STEPSofPreparation: Recordcredit
balancesinleft
1. ListeachTaccountthat balancesin
column
hasabalance rightcolumn
Listaccountsintheorder
thattheyappearinthe
ledger
Recorddebitbalancesin
theleftcolumn
Recordcreditbalancesin
therightcolumn
2. Addeachofthecolumns
(LeftDebitColumnand
RightCreditColumn)
3. Comparethecolumntotals
toVERIFY
Totaldebits=Totalcredits Totaleachcolumn
Mayalsouncovererrorsinjournalizingandposting.
Usefulinthepreparationoffinancialstatements. 32
TheTrialBalance
TrialBalance:Alistofaccountsandtheirbalancesonaspecificdate
Foreveryamountdebited,anequalamountmustbecredited
Result:ThetotalofdebitsandcreditsforalltheTaccountsmustbe
equal.
Trialbalanceispreparedtotestthis
Usuallypreparedattheendofamonthoraccountingperiod
Canbepreparedanytime
Purpose:
Thetrialbalanceproveswhethertheledgerisinbalance
Totalofalldebitsrecorded=Totalofallcreditsrecorded
Whatitdoesnotdo(Limitations)
DoesntProvethatalltransactionswereanalyzedcorrectly
Doesntdeterminethatamountswererecordedintheproperaccounts
DoesntDetectwhethertransactionshavebeenomittedfrom
journalizing/posting,orajournalentrypostedtwice
DoesntDetecterrorsofsameamountmadeinbothadebit&acredit
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Page117: BRIEFEXERCISE38
Aug1:IssuessharesofCStoinvestorsfor$10,000
(a) BasicAnalysis
TheassetCashisincreased;thestockholdersequityaccountCommonStockisincreased.
(b)DebitCreditAnalysis
Debitsincreaseassets:debitCash$10,000.
Creditsincreasestockholdersequity:creditCommonStock$10,000.
Aug4:Paysinsuranceinadvancefor3months,$1,500
(a) BasicAnalysis
TheassetPrepaidInsuranceisincreased;theassetCashisdecreased.
(b)DebitCreditAnalysis
Debitsincreaseassets:debitPrepaidInsurance$1,500.
Creditsdecreaseassets:creditCash$1,500.
Aug16:Receives$900fromclientsforservicesrendered
(a) BasicAnalysis
TheassetCashisincreased;therevenueServiceRevenueisincreased.
(b)DebitCreditAnalysis
Debitsincreaseassets:debitCash$900.
Creditsincreaserevenues:creditServiceRevenue$900. PROBLEM35A(Page125)
Aug27:Paysthesecretary$620salary
(a) BasicAnalysis
TheexpenseSalariesandWagesExpenseisincreased;theassetCashisdecreased.
(b)DebitCreditAnalysis
Debitsincreaseexpenses:debitSalariesandWagesExpense$620.
Creditsdecreaseassets:creditCash$620.
Selected transactions from the journal of Faital Inc. during its first
month of operations are presented below. Post these transactions to T-accounts.
SummaryoftheAccountingCycle
36
ThankYou
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