Learning objectives

After studying this presentation, you should be able to:

1. Analyse the effect of accounting transactions and
events on the basic accounting equation.
2. Explain what an account is and how it helps in the
recording process.
3. Define debits and credits and explain how they are
used to record accounting transactions.

Week 2 4. Identify the basic steps in the recording process.

The recording process

Ch. 2, Carlon et al.

Learning objectives
5. Explain what a journal is and how it helps in the
recording process.
6. Explain what a general ledger is and how it helps in the
recording process.
7. Explain what posting is and how it helps in the
recording process.
8. Explain the purposes of a trial balance.

2.1 Accounting transactions and events Analysing transactions

• Transactions are external exchanges of something of • Transaction analysis is the process of identifying the
value between two or more entities. specific effects of transactions and events on the
• Events include price increases in assets during an accounting equation.
accounting period or the allocation of the cost of the
long-lived assets of an entity to different accounting • The accounting equation must ALWAYS balance.
periods.
• Accounting transactions and events must be recorded
because they have an effect on assets, liabilities and ASSETS = LIABILITIES + EQUITY
equity.
Analysing transactions Analysing transactions

1. Issues shares for $10,000 cash: 2. Borrows $5,000 cash from ANZ bank:

Analysing transactions Analysing transactions

3. Purchases office equipment for $5,000 cash: 4. Receives $1,200 cash in advance from customer for
advertising services to be provided in the next 3
months:

Analysing transactions Analysing transactions

5. Renders services for $10,000 cash: 6. Pays $900 rent in cash:

Analysing transactions Analysing transactions

7. Pays $600 for insurance in cash: 8. Purchases supplies on credit for $2,500:

Summary of accounting transactions 2.2 The account

• Each transaction is analysed in terms of effect of its • An account is an individual accounting record of
effect on assets, liabilities and equity. increases and decreases in a specific asset, liability or
equity item.
• The two sides of the accounting equation must always
be equal:
– Assets must equal liabilities plus equity.

• The cause of each change in equity must be indicated.

Debits and credits Debit and credit procedures

• Debit: Double entry system:
– Refers to the left side. – each transaction affects at least two accounts
– total debits must equal total credits.
– Commonly abbreviated as Dr.

1. Dr/Cr procedures for assets & liabilities:

• Credit:
– Refers to the right side.
– Commonly abbreviated as Cr.
Debit and credit procedures Debit and credit procedures
2. Dr/Cr procedures for Equity: c. Dividends:

a. Share
Capital:

3. Dr/Cr procedures for Revenue & Expenses:

b. Retained
Earnings:

Equity relationships Expanded accounting equation

2.3 Steps in the recording process The journal

1. Analyse each transaction in terms of its effects on the • A journal is a chronological record of all transactions.
accounts.

• Discloses the complete effect of a transaction.

2. Enter transaction information in a journal.

• This helps prevent errors as debit and credit amounts

3. Transfer (POST) journal information to appropriate are easily compared.
accounts in the ledger.
 The journal Chart of accounts
Wong Pty Ltd - first three transactions: • List of all entity's ledger account numbers and names.
1.
• Like together sections of ledger are grouped and in
order they appear in the financial statements.
2.

3.

The general ledger Posting

• Contains all asset, liability and equity accounts. • Posting is the procedure of transferring journal entries to
ledger accounts.
• Steps in the process:
1. Enter date in account to be debited.
2. Enter name of ledger account to be credited.
3. Enter amount to be debited.
4. Tick account no. in general journal to show entry is posted.
5. Repeat steps 1-4 for the credit side.

Balancing the accounts 2.4 The recording process illustrated

• Cash ledger account – Wong Pty Ltd:
Name of account that was credited with 10,000 General Ledger account name
Account number

Balancing figure, excess of debits over credits

The recording process illustrated The recording process illustrated

The recording process illustrated The recording process illustrated

The recording process illustrated The recording process illustrated

The recording process illustrated 2.5 The trial balance
• A trial balance is a list of all the accounts and their
balances at a given time listed in order as they appear in
general ledger.

• It proves the mathematical equality of debits and credits

after posting.

• Steps to prepare a trial balance:

[Link] account numbers, titles and balances.
[Link] debit and credit columns.
[Link] equality of debit and credit columns.

The trial balance Limitations of a trial balance

• Errors not detected in a trial balance:
– A transaction is not journalised.
– A correct journal entry is not posted.
– A journal entry is posted twice.
– Incorrect accounts used in journalising or posting.
– Offsetting errors made in recording the amount of a transaction.

Decision toolkit Demonstration problem

• Western Farmers’ Cooperative Ltd (page 123 - 124 of • Niky’s Dry Cleaning Pty Ltd (page 126 – 129 of the
the textbook). textbook).

• Work through on your own and check your results with • Work through on your own and check your results with
the suggested solution provided. the suggested solution provided.
Key concepts Key concepts:
Can you: 5. Explain what a journal is and how it helps in the
1. Analyse the effect of accounting transactions and recording process.
events on the basic accounting equation. 6. Explain what a general ledger is and how it helps in the
2. Explain what an account is and how it helps in the recording process.
recording process. 7. Explain what posting is and how it helps in the
3. Define debits and credits and explain how they are recording process.
used to record accounting transactions. 8. Explain the purposes of a trial balance.
4. Identify the basic steps in the recording process.