Financial Accounting

4ACCN008C-n
Semester 1, 2024/2025
Lecture 2: Accounting Cycle: categories of
accounts, double-entry rules

[Link]@[Link]
Learning Outcomes:
Upon successful completion of the session, students will be able …

1. To analyze the stages of Accounting Cycle;

2. To classify Categories of Accounts;
3. To define and identify assets, liabilities, equity, revenue and expenses;
4. To apply the accounting equation;
5. To demonstrate the use of double-entry in accounting systems.
 Accounting Cycle
SOURCE
DOCUMENTS Transactions
Where original information is to be
(e.g. invoices, receipts) Classified and
found
recorded in
ORIGINAL ENTRY
Books of Original Entry/Day Books
What happens to it (list of transactions)

Accounting cycle refers to the sequence in which data is recorded and processed until
it becomes part of the financial statements at the end of the period

1. Occurrence of transactions: transactions are financial or economic events which are

measurable in monetary terms and recorded in the accounting books.
2. Recording of these transactions in journals or books of original entry – examples of
books of original entry are sales journals, purchase journals, cash book.
 Accounting concept*
Objectivity – personal / individual bias
should be minimized when
interpreting the accounting rules and
adapting them to suit particular
circumstances.

Values are based upon a factual

occurrence.

No own interpretation on the facts.

Source documents
Purchase Order
Sales Order
Deivery Note
Goods Received Note
Invoice

Buyer Debit Note Seller

Credit Note

Statement
Remittance Advice

Cheque
Receipt

5
 Source documents
Contents Purpose

Purchase order Details of supplier, e.g. name, address. Sent to supplier as a request for supply.
Quantity/description/details of goods required and
price. Terms and conditions of delivery, payment, etc.
Sales order Quantity/description details of goods required by a Generated by the supplier, and when received, will be cross-
customer including price and other criteria checked by the purchase order placed by the [Link] to the
warehouse department for processing.
Delivery note Details of supplier, e.g. name and address. Provided by supplier. It can be used as a checklist by customer to
(dispatch note) Quantity and description of goods. ensure that everything is there. Every item contained in a delivery
note has to be in the accompanying shipment.

Goods received Quantity and description of goods. Produced by company receiving the goods as proof of
note (GRN) receipt. Matched with delivery note and purchase order.

Invoice Name and address of supplier and customer, Issued by supplier of goods as a request for payment. For
details of goods, e.g. quantity, price, value, the supplier selling the goods/services this will be treated
sales tax, terms of credit, etc as a sales invoice. For the customer this will be treated as
a purchase invoice.

6
Debit note Details of the supplier. Contain details of goods returned, Issued by the company receiving the
e.g. quantity, price, value, sales tax, terms of credit, etc. goods.
Credit note Details of supplier, e.g. name and address. Contain details Issued by the supplier. Checked with
of goods returned, e.g. quantity, price, value, sales tax, documents regarding goods returned.
terms of credit, etc.
Statement Details of supplier, e.g. name and address. Has details of Issued by the supplier. Checked with
date, invoice numbers and values, payment made, refunds, other documents to ensure that amount
amount owing owing is correct.
Remittance Method of payment, invoice number, account number, date, Sent by a buyer to a seller,
advice etc. informing the seller that an
invoice has been paid.
Cheque The name of the payer,the amount to be paid, and the date. Issued by the customer. A cheque is
an authorization to draw funds from
a bank account.
Receipt Details of payment receipt Issued by the selling company
indicating the payment received.

7
 Invoice: Example
Purchase Order: 10/A/980
Invoice No 16554 Wood&plus Ltd
7 Amir Temur
Tashkent 10000 1
To: Furniture Co. Ltd July 2024
15 Nukus street
Tashkent 10000

Price per unit ($) Total ($)

21 counts of Wood (length 4m) 20 420
10 boxes nails 3 30
Terms 1,25% discount if
Paid within one month
Credit & Debit note

Furniture Co. Ltd

Debit Note No 989 15 Nukus street Tashkent
10000
To: Wood&plus Ltd
7 Amir Temur str.
Tashkent 10000 7 July
2024
Price per unit ($) Total ($)

10 counts of Wood (length 4m) is being returned 20 200

 Books of original entry

Books of original entry (Day Books) are books in which we first record
transactions.
It only lists similar type of transactions in one book.

Day Book types:

Sales Day Book
Purchase Day Book
Returns Inwards Day Book
Returns Outwards Day Book
Cash Book (It also serves as a ledger)
Journal
 Books of original entry
BOOK OF ORIGINAL ENTRY TRANSACTIONS SOURCE DOCUMENT USED
RECORDED
SALES DAY BOOK CREDIT SALES OF INVENTORY SALES INVOICES
(STOCK)
PURCHASES DAY BOOK CREDIT PURCHASES OF INVENTORY PURCHASES INVOICES
(STOCK)
CASH BOOK ALL CASH AND BANK BANK DEPOSIT AND WITHDRAWAL
TRANSACTIONS, FOR EXAMPLE, SLIPS, CHEQUES DEBIT AND CREDIT
CASH SALES, RECEIPTS FROM CARD RECEIPTS
DEBTORS (ACCOUNTS
RECEIVABLES), PAYMENTS TO
CREDITORS
RETURN INWARDS JOURNAL GOODS RETURNED BY CUSTOMERS CREDIT NOTE SENT
RETURN OUTWARDS JOURNAL GOODS RETURNED TO SUPPLIERS CREDIT NOTE RECEIVED
GENERAL JOURNAL ALL TRANSACTIONS WHICH BILLS, RECEIPTS, VOUCHERS,
CANNOT BE RECORDED IN ANY CANCELLED CHEQUES.
OTHER BOOK OF ORIGINAL ENTRY

11
Journalizing

The journal is form of diary for other items that do not belong to above
5 Day Books.

Some of the main uses of the Journal:

The purchase and sale of fixed assets on credit

Writing off bad debts
The correction of errors in the ledger accounts
Opening entries.
Adjustments to any of the entries in the ledgers
 Accounting Cycle
ORIGINAL ENTRY
Books of Original Entry/Day Books
What happens to it (list of transactions)
Posted to
DOUBLE ENTRY

Ledgers
How the dual aspect of each
transaction is recorded (debits and credits)

3. Transferring or “posting” of the entries from the journals to the ledger accounts or ledger. The
ledger account is a form of record used to record increases and decreases in a single item. In the
ledger accounts, the items are separated and classified.
4. Balancing off the accounts in the ledger/s at the end of the accounting period to determine debit
or credit balances.
5. Making end of the period adjustments – for example, the recording of depreciation as an expense
at the end of the accounting period.
 Assets
Assets are possessions or resources OWNED by an entity.
They include physical or tangible possessions such as property, plant, machinery, stock,
cash and bank balances.

•They also include intangible assets, i.e. such as copyright , franchise and patent rights
15
 Categories of Assets

TANGIBLE
NON- INTANGIBLE
CURRENT
(FIXED)
ASSETS FINANCIAL

CASH
STOCK(INVENTORY)

CURRENT ACCOUNTS RECEIVABLE

(DEBTORS)
ASSETS
PREPAYMENTS

INVESTMENTS
Liabilities
• Liabilities are the amounts OWED by an entity to outside parties.

They include loans, bank overdrafts, creditors, i.e. amounts owing to

parties for the supply of goods and services to the entity that have not
yet been settled in cash.
18
Categories of Liabilities
BANK OVERDRAFT

ACCOUNTS PAYABLE (CREDITORS)

ACCRUED TAX
SHORT-TERM
PAYROLL

CURRENT PORTION OF
LONG-TERM DEBT

BOND PAYABLE

LONG -TERM MORTGAGE PAYABLE

DEBENTURE PAYABLE
 Capital (Owner’s equity)
Capital is the amount invested in a business by its owner (the sole trader/shareholders). It may
include:
-Money initially injected by the sole trader to start the business up
-Money subsequently injected by the sole trader
- Profits made by the business, less
- Money taken out of the business by the sole trader as drawings.
Note that profits made by a business are effectively a return for the sole trader on the money that
they initially invested. Any profits not taken out of the business as drawings are therefore in effect
extra capital.
Capital is a type of liability to the business, as the business theoretically owes this amount back to
the sole trader.
DRAWINGS*
Drawings are a reduction in the liability of business to the owner. If the owner takes out cash or
goods from business for personal use, it reduces the liability of the business towards owner.
 Revenues
• Turnover (sales)
• Profits on sale of fixed assets
• Interest receivable
• Investment income
• Discounts received
• Share of profit from
associated companies
 Expenses
Expenses are usually seen as being the costs
incurred in earning the revenues that are recognized
during that period

• Cost of Goods Sold (COGS)

• Depreciation
• Losses from the sale of fixed assets
• Discounts allowed
• Increase in provision
 Accounting concept*
Accounting equation – states that
Assets = Liabilities + Owners’ Equity,
in other words,
what you Have = Owe + Own.
This equation is the basis used in the
preparation of the balance sheet.
Accounting Equation

Example:
John invested $5,000 cash in his business. The cash is an asset and the
investment is John’s business’ capital.

ASSETS CAPITAL
Cash $5,000 = Capital $5,000
 Accounting Equation
ASSETS CAPITAL
=
Cash $5,000 Capital $5,000

Then, he borrowed $2,000 from Edward for his business.

ASSETS CAPITAL LIABILITIES

Cash $7,000 = Capital $5,000 + Loan from Edward
$2,000

He purchased goods for cash of $1000

ASSETS CAPITAL LIABILITIES
Cash and goods = Capital $5,000 + Loan from Edward
$6000 + $1,000 $2,000
EXPANDED FORM OF ACCOUNTING EQUATION

Assets = Liabilities + Capital + Profit / (Loss) – Drawings

Net Assets Equation:

Assets – Liabilities = Capital + Profit –Loss – Drawings

Net Assets = Capital + Profit –Loss– Drawings

Accounting Concept*

Duality – for each and every accounting transaction two entries

are affected
Debit and Credit

Accountants use the term

debit (Dr) to denote an entry or
balance on the left side of any
account and the term credit (Cr)
to denote an entry or balance on
the right side. In accounting debit
and credit mean simply left-side
entry and right- side entry
 Double entry
An account is a place where all the information referring to a particular asset,
liability, capital, revenue, or expense is recorded.
The layout of a page of an account book:

Title of an account written here

DEBIT CREDIT
Debit and Credit affects
DEBIT CREDIT

ASSETS + -
LIABILITIES - +
CAPITAL - +
REVENUES - +
EXPENSES + -
Rules of Debit and Credit
Assets Liabilities Capital (Owner’s equity)

Debit Credit Debit Credit Debit Credit

+ - - + - +
Increase Decrease Decrease Increase Decrease Increase
Left Right Left Right Left Right
Normal bal. Normal bal. Normal bal.

Revenues Expenses

Debit Credit Debit Credit

- + + -
Decrease Increase Increase Decrease
Left Right Left Right
Normal bal. Normal bal.

31
For every debit entry there must be credit entry

AND

For every credit entry there must be debit entry

Transaction analysis
Beginners may find this useful before recording the entries in the journals /
ledgers.
The following steps are involved:
[Link] the two accounts affected / involved.
[Link] the two accounts according to the 5 elements identified as
above.
[Link] whether there is an increase or decrease in each of the two
accounts.
[Link] the entries in the books of account according to the double-entry
rules.
Journalizing
Journalizing - Entering transaction data in the journal.
Illustration: On September 1, Ray Neal invested $15,000 cash in the
business, and Softbyte purchased computer equipment for $7,000 cash.

Date Account Title Ref . Debit Credit

Sept. 1 Cash 15,000

R. Neal, Capital 15,000

Issued common stock

Computer equipment 7,000

Cash 7,000
General Journal
Date Entry Accounts and Explanation Debit Credit
2020 Cash 400 000
Jan 2 1 Paid-in capital 400 000
Capital stock issued to Lopez
2020 2 Cash 100 000
Jan 2 Note payable 100 000
Borrowed at 9% interest on a one year note
2020 3 Store equipment 15 000
Jan 3 Cash 15 000
Acquired store equipment for cash
 General Ledger
Cash Account No. 100
Date Explanation Journ. Ref. Debit Date Explanation [Link]. Credit
2020 1/2 1 400 000 2020 1/3 3 15 000
(often blank because the explanation is already in
2020 1/2 the journal 2 100 000

Store equipment Account No. 170

Date Explanation Journ. Ref. Debit Date Explanation [Link]. Credit
2020 1/3 3 15 000

Note payable Account No. 202

Date Explanation Journ. Ref. Debit Date Explanation [Link]. Credit
2020 1/2 2 100 000

Paid-in Capital Account No. 300

Date Explanation Journ. Ref. Debit Date Explanation [Link]. Credit
2020 1/2 1 400 000
 Posting transactions to
the General Ledger

Cash Account No. 100

Date Explanation Journ. Ref. Debit Credit Balance

2020

1/2 1 400 000 400 000

1/2 2 100 000 500 000

(often blank because the explanation
1/3 is already in the journal 3 15 000 485 000
 Accounting Cycle
DOUBLE ENTRY

How the dual aspect of each Ledgers

transaction is recorded
(debits and credits) Checked by
CHECK ARITHMETIC
Trial Balance
Checking the arithmetical (summary of debits and credits)
accuracy

P&L Profit and Loss Account (performance

Calculating P or L for the of entity)
period

6. Preparing the trial balance – to prove the equality of debit and credit balances in the ledger.

7. Preparing the financial statements – the profit and loss account, the balance sheet, cash flow
statement
Trial Balance, January 3,2020
Account
Number Account Title Debit Credit
100 Cash $485 000,00

170 Store Equipment $15 000,00

202 Note payable $100 000,00

300 Paid-in Capital $400 000,00

Total $500 000,00 $500 000,00

 Accounting Cycle
P&L Profit and Loss Account (performance
Calculating P or L for the of entity)
period

CLOSING Balance Sheet

FINANCIAL
(financial position)
POSITION

8. Closing the accounts – only the revenue and expense accounts will be closed.

9. Audit – after which the accounting cycle process repeats itself for a new accounting period.
Accounting Cycle
SOURCE Transactions
DOCUMENTS (e.g. invoices, receipts) Classified and
recorded in
ORIGINAL ENTRY Books of Original Entry/Day Books
(list of transactions)

Posted to
Ledgers
DOUBLE ENTRY
(debits and credits)

Checked by
Trial Balance
CHECK ARITHMETIC
(summary of debits and credits)

Profit and Loss Account (performance

P&L of entity)

CLOSING
Balance Sheet
FINANCIAL
POSITION (financial position)
 Lecture Roundup:
1. Ledger accounts summarize all the individual transactions listed in the
books of prime entry.
2. The journal is the record of prime entry for transactions which are not
recorded in any of the other books of prime entry.
3. The accounting equation is ASSETS = CAPITAL + LIABILITIES.
4. Trade accounts payable are liabilities. Trade accounts receivable are
assets.
5. Double entry bookkeeping is based on the idea that each transaction
has an equal but opposite effect. Every accounting event must be entered
in ledger accounts both as a debit and as an equal but opposite credit.
6. A debit entry will:
– Increase an asset
– Decrease a liability
– Increase an expense
A credit entry will:
– Decrease an asset
– Increase a liability
– Increase income
References
1. ACCA (2023) Study Text. Financial Accounting (FA/FFA). Kaplan
Commercial Limited (2023).Chapter 2

[Link] T. Horngren, Gary L Sundem Introduction to Financial Accounting ,

Ninth Edition, chapter 3