Acc week 3

Recording Business Recording Business Transactions – Double Transactions – Double Entry Recording and Entry Recording and

Account Account

Week 3Week 3

In Your Textbook...In Your Textbook...

Roshayani Arshad, et al. (2007), Roshayani Arshad, et al. (2007), Financial Accounting An Financial Accounting An IntroductionIntroduction, 2, 2ndnd Edition, Malaysia, Edition, Malaysia, McGraw Hill.McGraw Hill.

Chapter 3: Accounting Equation and Chapter 3: Accounting Equation and Double Entry System (pp.27 – 38)Double Entry System (pp.27 – 38)

An AccountAn Account

A part of the accounting system A part of the accounting system used to classify and summarise the used to classify and summarise the increases, decreases and balances increases, decreases and balances of each asset, liability and owner’s of each asset, liability and owner’s equity.equity.

There is an account for each item There is an account for each item where it records or keeps account where it records or keeps account of every changes to a particular of every changes to a particular item.item.

Major Account ClassificationsMajor Account Classifications

AssetsAssets are are resources owned resources owned by the business.by the business.


LiabilitiesLiabilities are debts are debts owed to outsiders owed to outsiders

(creditors).(creditors).



CashSuppliesBuildingAccounts

receivable

Accounts payable

Notes payableWages payable






CashSuppliesBuildingAccounts

receivable

Accounts payable

Notes payableWages payable



Liabilities are often identified on the balance sheet by titles

that include payable.

Liabilities are often identified on the balance sheet by titles

that include payable.

Owner’s equity is the

owner’s right to the assets of the

business.

Owner’s equity is the

owner’s right to the assets of the

business.

RevenuesRevenues are are increases in increases in

owner’s equity as owner’s equity as a result of selling a result of selling

services or services or products.products.

RevenuesRevenues are are increases in increases in

owner’s equity as owner’s equity as a result of selling a result of selling

services or services or products.products.Chris, Capital

Chris, Drawing Fees EarnedFares EarnedCommission

Revenue

ExpensesExpenses are the are the using up of assets using up of assets or consuming of or consuming of

services to services to generate revenue.generate revenue.

ExpensesExpenses are the are the using up of assets using up of assets or consuming of or consuming of

services to services to generate revenue.generate revenue.

Rent ExpenseSalary ExpenseUtilities

Expense


To assist you in learning, an account can be drawn to resemble the letter T.

To assist you in learning, an account can be drawn to resemble the letter T.

The T-AccountThe T-AccountThe T-AccountThe T-Account

The T-account has a title.The T-account has a title.The T-account has a title.The T-account has a title.

Cash


The left side of the account is theThe left side of the account is the debitdebit side.side.The left side of the account is theThe left side of the account is the debitdebit side.side.

Cash

Left side debit


The right side of the account is the The right side of the account is the credit credit side.side.The right side of the account is the The right side of the account is the credit credit side.side.

Cash

Left side debit

Right side credit

Dr Title of Account Cr

Date Particulars Folio Amount

$

Date Particulars Folio Amount

$



CashJohn 3,750Interest 4,300Capital 2,900

Utilities 850Supplies 1,400Drawings 700Creditors 2,900

Typical entries

Balancing a T-AccountBalancing a T-AccountBalancing a T-AccountBalancing a T-Account

Cash3,7504,3002,900

8501,400

7002,90010,950

First, foot the debit

side.

First, foot the debit

side.

8501,400

7002,900

Cash3,7504,3002,900

10,9505,850

Next, foot thecredit side.

Next, foot thecredit side.

8501,400

7002,900

Cash3,7504,3002,900

10,9505,850

Subtract total credits from total debits to obtain the account

balance.

Subtract total credits from total debits to obtain the account

balance.

5,100

Balancing The T-AccountBalancing The T-AccountBalancing The T-AccountBalancing The T-Account

CashJohn 3,750Interest 4,300Capital 2,900

10,950Balance b/d 5,100

Utilities 850Supplies 1,400Drawings 700Creditors 2,900Balance c/d 5,100

10,950

Enter the balance amount as c/d at the end of period and b/d for the next

period.

Enter the balance amount as c/d at the end of period and b/d for the next

period.

Columnar FormatColumnar Format

Has an advantage over the T format in Has an advantage over the T format in that with every entry in the account, a that with every entry in the account, a new balance is created.new balance is created.

Title of Account

Date Particulars Folio Debit$

Credit$

Balance$

CASH

Date Particulars Folio Debit$

Credit$

Balance$

2/2

4/2

Revenue

Interest income

100

50

100

150

Asset AccountsAsset Accounts

Opening balances as entries on the left-Opening balances as entries on the left-hand side (debit entries).hand side (debit entries).

An An increaseincrease is recorded on the is recorded on the debitdebit side side while while decreasedecrease on the on the creditcredit side. side.

Dr Asset Account Cr

Balance b/d

Increase (+) Decrease (-)

Asset accounts will typically have debit balances.

Liability AccountsLiability Accounts

Opening balances as entries on the right-Opening balances as entries on the right-hand side (credit entries).hand side (credit entries).

IncreaseIncrease is recorded on the is recorded on the creditcredit side side while while decreasedecrease on the on the debitdebit side. side.

Dr Liability Account Cr

Balance b/d

Decrease (-) Increase (+)

Liability accounts will typically have credit balances.

Owner’s Equity AccountOwner’s Equity Account

Similar to liability accounts.Similar to liability accounts. IncreaseIncrease is recorded on the is recorded on the creditcredit side side

while while decreasedecrease on the on the debitdebit side. side.

Dr Owner’s Equity Account Cr

Balance b/d


OE accounts will typically have credit balances.

Debits Credits

Asset accounts………. Increase (+) Decrease (-)

Liability accounts…… Decrease (-) Increase (+)

Owner’s equity (capital) accounts…. Decrease (-) Increase (+)

Rules of Debit / Credit Balance Sheet Accounts

Credit for increases

(+)


(+)

Credit for decreases

(-)

Debit for increases

(+)

Debit for decreases

(-)

Debit for decreases

(-)

ASSETSAsset Accounts

LIABILITIESLiability Accounts

Owner’s Equity AccountsOWNER’S EQUITY

Balance Sheet Accounts

Transactions and Accounts

(A)(A) On November 1, Chris brings in cash On November 1, Chris brings in cash RM25,000 to start a business in the RM25,000 to start a business in the name of NetSolutions.name of NetSolutions.

(A)(A) On November 1, Chris brings in cash On November 1, Chris brings in cash RM25,000 to start a business in the RM25,000 to start a business in the name of NetSolutions.name of NetSolutions.

Effects of this entry in the account

CashNov 1 Capital 25,000 Nov 1 Cash 25,000

Chris, Capital


CashNov 1 25,000 Nov 5 Land 20,000

LandNov 5 Cash 20,000

(B)(B) On November 5, On November 5, NetSolutions bought land NetSolutions bought land for RM20,000, paying cash.for RM20,000, paying cash.

(B)(B) On November 5, On November 5, NetSolutions bought land NetSolutions bought land for RM20,000, paying cash.for RM20,000, paying cash.

(C)(C) On November 10, NetSolutions On November 10, NetSolutions purchased supplies on account purchased supplies on account for RM1,350.for RM1,350.

(C)(C) On November 10, NetSolutions On November 10, NetSolutions purchased supplies on account purchased supplies on account for RM1,350.for RM1,350.


SuppliesNov 10 Acc. Payable 1,350

Accounts PayableNov 10 Supplies 1,350

CashNov. 1 25,000 Nov. 5 25,000

18 7,500 30 3,650

Effects of this entry in the accountAccounts Payable

Nov. 10 1,350Nov 30 Cash 950

30 Acc. Payable 950

(F)(F) On November 30, NetSolutions On November 30, NetSolutions paid creditors on account, RM950.paid creditors on account, RM950.

(F)(F) On November 30, NetSolutions On November 30, NetSolutions paid creditors on account, RM950.paid creditors on account, RM950.

In every entry the sum of the debits always equal the sum of the credits.

In every entry the sum of the debits always equal the sum of the credits.

Double-Entry AccountingDouble-Entry AccountingDouble-Entry AccountingDouble-Entry Accounting

“ Double-entry accounting is based on a simple concept: each party in a business transaction will receive something and give something in return. In bookkeeping terms, what is received is recorded on one side and what is given is on the other side. The T account is a representation of a scale of balance.”

Luca PacioliDeveloper ofDouble-EntryAccounting

Scale of Balance

Receive Give

T account

Receive Give

Take A Break!Take A Break!

Lecture Exercise 1Lecture Exercise 1Record the following transactions in the T account.Record the following transactions in the T account.

Jan 1Jan 1 Began business by investing RM50,000 cash. 3 3 Purchased RM2,300 for office supplies on credit.. 10 10

Owner brought in office equipment for business use which values RM5,000.

11 11 Paid RM1,500 for the supplies purchased on 3 January.

20 20 Paid RM3,000 to purchase new office furniture. 29 29

The remaining balance for supplies purchased on 3 January was paid.

3030The bank has approved a loan to the business for RM100,000.

CapitalJan 1 50,000

CASH

CashJan 1 50,000

CAPITAL

BACK

A/C PayableJan 3 2,300

OFFICE SUPPLIES

Office Supplies

Jan 3 2,300

ACCOUNT PAYABLE

BACK

CapitalJan 10 5,000

OFFICE EQUIPMENT

Office Equipment

Jan 10

5,000

CAPITAL

CashJan 1 50,000

BACK

CashJan 11

1,500

ACCOUNTS PAYABLE

A/C Payable

Jan 11

1,500

CASH

Office Supplies

Jan 3 2,300

CapitalJan 1 50,000

BACK

CashJan 20

3,000

OFFICE FURNITURE

A/C Payable

Jan 11

1,500

CASH

CapitalJan 1 50,000

Office Furniture

Jan 20

3,000

BACK

CashJan 11

1,500

ACCOUNTS PAYABLE

Office Supplies

Jan 3 2,300

A/C Payable

Jan 11

1,500

CASH

CapitalJan 1 50,000

Office Furniture

Jan 20

3,000

CashJan 29

800

A/C Payable

Jan 29

800

BACK

Bank Loan

Jan 30

100,000

BANK

BankJan 30

100,000

BANK LOAN

A/C Payable

Jan 11

1,500

CASH

CapitalJan 1 50,000

Office Furniture

Jan 20

3,000

A/C Payable

Jan 29

800

Balance c/d

Jan 31

44,700

Balance b/d

Feb 1 44,700

50,000 50,000

Office Equipment

Jan 10 5,000

CAPITAL

CashJan 1 50,000

55,000 55,000

Balance c/d

Jan 31

55,000

Balance b/d

Feb 1 55,000

A/C PayableJan 3 2,300

OFFICE SUPPLIES

2,300 2,300

Balance c/d

Jan 31

2,300

Balance b/d

Feb 1 2,300

CashJan 11

1,500

ACCOUNTS PAYABLE

Office Supplies

Jan 3 2,300

CashJan 29

800

2,300 2,300

CapitalJan 10 5,000

OFFICE EQUIPMENT

5,000 5,000

Balance c/d

Jan 31

5,000

Balance b/d

Feb 1 5,000

CashJan 20

3,000

OFFICE FURNITURE

3,000 3,000

Balance c/d

Jan 31

3,000

Balance b/d

Feb 1 3,000

Bank Loan

Jan 30

100,000

BANK

BankJan 30

100,000

BANK LOAN

100,000

Balance b/d

Feb 1 100,000

100,000

Balance b/d

Feb 1 100,000

100,000

100,000

Balance c/d

Jan 31 100,000

Balance c/d

Jan 31 100,000

Revenue AccountsRevenue Accounts Revenue items generate profit that Revenue items generate profit that

belongs to the owner and which will belongs to the owner and which will increase the owner’s equity.increase the owner’s equity.

Increases are recorded as credits and Increases are recorded as credits and decreases as debits.decreases as debits.

Dr Revenue Account Cr


Expenses AccountsExpenses Accounts

Expenses include all items incurred in the process Expenses include all items incurred in the process of generating revenue.of generating revenue.

Such as: rent, transport, insurance, advertising Such as: rent, transport, insurance, advertising and wages.and wages.

Increase in expense recorded as debit entries. A Increase in expense recorded as debit entries. A reduction in expenses is recorded as credits.reduction in expenses is recorded as credits.

Dr Expenses Account Cr

Increase (+) Decrease (-)


(+)

Credit for decreases

(-)

Debit for increases

(+)

Debit for decreases

(-)

Expense Accounts Revenue Accounts

Rules of Debit / Credit Income Statement Accounts

Debits Credits

Revenue accounts…… Decrease (-) Increase (+)

Expense accounts…… Increase (+) Decrease (-)

Income Statement Accounts

Effects of this entry in the account.

CashNov. 1 25,000 Nov. 5 25,000

Fees EarnedNov 18 Cash 7,500

18 Fees 7,500

(D)(D) On November 18, NetSolutions On November 18, NetSolutions received fees of RM7,500 from received fees of RM7,500 from customers for services provided .customers for services provided .

(D)(D) On November 18, NetSolutions On November 18, NetSolutions received fees of RM7,500 from received fees of RM7,500 from customers for services provided .customers for services provided .

Effects of this entry in the account.Cash

Nov. 1 25,000 Nov. 5 25,000Wages Expense

Nov 30 Cash 2,12518 7,500

Rent ExpenseNov 30 Cash 800

Utilities ExpenseNov 30 Cash 450

Miscellaneous ExpenseNov 30 Cash 275

30 3,650

(E)(E) Throughout the month, NetSolutions Throughout the month, NetSolutions incurred the following expenses: wages, incurred the following expenses: wages, RM2,125; rent, RM800; utilities, RM450; RM2,125; rent, RM800; utilities, RM450; and miscellaneous, RM275 .and miscellaneous, RM275 .

(E)(E) Throughout the month, NetSolutions Throughout the month, NetSolutions incurred the following expenses: wages, incurred the following expenses: wages, RM2,125; rent, RM800; utilities, RM450; RM2,125; rent, RM800; utilities, RM450; and miscellaneous, RM275 .and miscellaneous, RM275 .

Returns Inwards Account / Returns Inwards Account / Sales Returns AccountSales Returns Account

A customer may return goods sold to him A customer may return goods sold to him because they are defective, damaged, because they are defective, damaged, unsatisfactory, of the wrong brand or unsatisfactory, of the wrong brand or specification.specification.

Effect: reduce in the amount of revenue Effect: reduce in the amount of revenue earned by the business.earned by the business.

For better control and a clearer record of For better control and a clearer record of sales, a separate Return Inwards Account sales, a separate Return Inwards Account is opened and debited.is opened and debited.

Example: Example: 12 Jul 2005 Sold goods on credit to Chen for $4,000.

20 Jul 200520 Jul 2005 Chen returns defective goods worth $500. Chen returns defective goods worth $500.

Dr Chen (Debtor) Cr

Jul 12 Sales 4,000 Jul 20 Return Inwards 500

Dr Sales Account Cr

Jul 12 Chen 4,000

Dr Return Inwards Account Cr

Jul 20 Chen 500

Returns Outwards Account / Returns Outwards Account / Purchases Returns AccountPurchases Returns Account

A trader may return goods to his supplier A trader may return goods to his supplier for similar reasons as returns inwards.for similar reasons as returns inwards.

Any purchases that are returned are Any purchases that are returned are treated as decrease in expenses and are treated as decrease in expenses and are credited to a Returns Outwards Account credited to a Returns Outwards Account or Purchases Returns Account.or Purchases Returns Account.

Example: Example: 19 Nov19 Nov Trader returned goods previously Trader returned goods previously bought on credit worth RM250 to Li Brothers, his bought on credit worth RM250 to Li Brothers, his supplier, because they were of the wrong brand.supplier, because they were of the wrong brand.

Dr Li Brothers (Creditor) Cr

Nov 19 Returns Outwards 250

Dr Returns Outwards Account Cr

Nov 19 Li Brothers 250

Feb 1Feb 1Paris started her salon business with self cash capital of RM25,000 and furniture cost RM20,000.

1Bought some beauty supplies from Kent Bhd at cost RM3,000 on account..

1Paid one month rental of RM1,000 for the shop. 2Paid for advertising cost amounting to RM1,200..

15The salon started to serve many customers and generate revenues amounting RM3,100 cash and RM5,000 on credit.

24Billed the Royal Dance Club for services rendered by the salon for RM2,200. No payment received yet..

26A credit note was sent for over-charging a customer on account amounting RM500.

28Paid salaries for the month, RM10,000. 28Paid Kent Bhd the full amount owed.

Lecture Exercise 2Lecture Exercise 2Record the following transactions in the T account.Record the following transactions in the T account.

CapitalFeb 1 25,000

CASH

Shop rental expenses

Feb 1 1,000

Advertising expenses

Feb 2 1,200

RevenueFeb 15 3,100

Salary expenses

Feb 28

10,000

A/C Payable

Feb 28

3,000

28,100 28,100

Balance c/d

Feb 28

12,900

Balance b/d

Mar 1 12,900

20,000

FURNITURE

CapitalFeb 1 20,000

20,000

Balance c/d

Feb 28

20,000

CashFeb 1 25,000

CAPITAL

FurnitureFeb 1 20,000

45,00045,000

Balance c/d

Feb 28

45,000

Balance b/d

Mar 1 20,000

Balance b/d

Mar 1 45,000

A/C PayableFeb 1 3,000

BEAUTY SUPPLIES

Beauty Supplies

Feb 1 3,000

ACCOUNT PAYABLE -- KENT

CashFeb 28

3,000

3,0003,000

3,0003,000

Balance c/d

Feb 28

3,000

Balance b/d

Mar 1 3,000

Balance c/d

Feb 28

1,000

Balance b/d

Mar 1 1,000

CashFeb 1 1,000

SHOP RENTAL EXPENSES

CashFeb 2 1,200

ADVERTISING EXPENSES

1,0001,000

1,2001,200

Balance c/d

Feb 28

1,200

Balance b/d

Mar 1 1,200

10,30010,300

Balance c/d

Feb 28

10,300

RevenueFeb 15 5,000

ACCOUNT RECEIVABLE

Return Inwards

Feb 26 500

RevenueFeb 24 2,200

7,200 7,200

Balance c/d

Feb 28

6,700

Balance b/d

Mar 1 6,700

Balance b/d

Mar 1 10,300

A/C Receivable

Feb 24 2,200

Feb 15 A/C Receivable

5,000

CashFeb 1 3,100

REVENUE

RETURN INWARDS

Account Receivable

Feb 26 500

CashFeb 28

10,000

SALARY EXPENSES

500500

10,00010,000

Balance c/d

Feb 28

10,000

Balance c/d

Feb 28

500

Balance b/d

Mar 1 500

Balance b/d

Mar 110,000

Withdrawals by the Owner

Withdrawals by the Owner

30 95030 Drawings 2,000

CashNov. 1 25,000 Nov. 5 25,000

18 7,500 30 3,650

Effects of this entry in the LedgerChris, Drawing

Nov. 10 1,350Nov 30 Cash 2,000

(G)(G) On November 30, Chris withdrew On November 30, Chris withdrew RM2,000 in cash from NetSolutions RM2,000 in cash from NetSolutions for personal use.for personal use.

(G)(G) On November 30, Chris withdrew On November 30, Chris withdrew RM2,000 in cash from NetSolutions RM2,000 in cash from NetSolutions for personal use.for personal use.

Increase(Normal Balances) Decreases

Balance sheet accounts:AssetDebit CreditLiability Credit DebitOwner’s Equity:

Capital Credit DebitDrawing Debit Credit

Income statement accounts:Revenue Credit DebitExpense Debit Credit

Normal Balances of Accounts

Flow of Business TransactionsFlow of Business TransactionsFlow of Business TransactionsFlow of Business Transactions

1 Transaction authorized 2 Transaction

takes place 3 Document prepared

4Entry recorded in journal 5

Entry posted to ledger

Lecture Exercise 3Lecture Exercise 3The account balances as at the end of April 06 for The account balances as at the end of April 06 for

Sean Enterprise are as follows:Sean Enterprise are as follows:

AccountsAccounts RMRM

CashCash 48,50048,500

Accounts ReceivableAccounts Receivable 76,70076,700

StockStock 750750

Accounts PayableAccounts Payable 26,00026,000

Sean, CapitalSean, Capital 113,050113,050

Sean, DrawingSean, Drawing 19,50019,500

CASHCASH

Balance b/d

May 1 48,500

ACCOUNTS RECEIVABLE

Balance b/d

May 1 76,700

STOCK

Balance b/d

May 1 750

ACCOUNTS PAYABLE

Balance b/d

May 1 26,000

SEAN, CAPITAL

Balance b/d

May 1 113,050

SEAN, DRAWING

Balance b/d

May 1 19,500

May 1Purchase goods on account RM1,700.

3Received cash from clients on account, RM67,900.

5Paid insurance premiums for May, RM350.

11Returned a portion of the goods purchased on 1 May. The cost was RM500.

15Paid advertising expense, RM3,800.

17Paid creditors, RM14,800.

21Paid monthly office rent, RM4,500

23 Recorded sales made during the month RM91,900.23 Recorded sales made during the month RM91,900.

2727 Withdrew cash for personal use, RM4,500.Withdrew cash for personal use, RM4,500.

31 31 Paid salaries and commissions for the month, Paid salaries and commissions for the month, RM61,200.RM61,200.

Lecture Exercise 3Lecture Exercise 3Record the opening balances and the following Record the opening balances and the following

transactions in the T account of Sean Enterprise.transactions in the T account of Sean Enterprise.

STOCK

Balance b/d

May 1 750

ACCOUNTS PAYABLE

Balance b/d

May 1 26,000

A/C Payable

May 1 1,700

StockMay 1 1,700

Back

CASH

Balance b/d

May 1 48,500

ACCOUNTS RECEIVABLE

Balance b/d

May 1 76,700

A/C Receivable

May 3 67,900

CashMay 3 67,900

Back

CashMay 5

350

INSURANCE EXPENSES

CASH

Balance b/d

May 1 48,500

A/C Receivable

May 3 67,900

Insurance expenses

May 5 350

Back

ACCOUNTS PAYABLE

Balance b/d

May 1 26,000

StockMay 1 1,700

A/C Payable

May 11 500

RETURN OUTWARDS

Return Outwards

May 11 500

Back

CashMay 15 3,800

ADVERTISING EXPENSES

CASH

Balance b/d

May 1 48,500

A/C Receivable

May 3 67,900

Insurance expenses

May 5 350


May 15 3,800

Back

CASH

Balance b/d

May 1 48,500

A/C Receivable

May 3 67,900

Insurance expenses

May 5 350


May 15 3,800

ACCOUNTS PAYABLE

Balance b/d

May 1 26,000

StockMay 1 1,700

Return Outwards

May 11 500

A/C PayableMay 17 14,800

CashMay 17 14,800

Back

CASH

Balance b/d

May 1 48,500

A/C Receivable

May 3 67,900

Insurance expenses

May 5 350


May 15 3,800


CashMay 21 4,500

OFFICE RENT EXPENSES

Rent expenses

May 21 4,500

Back

ACCOUNTS RECEIVABLE

Balance b/d

May 1 76,700 CashMay 3 67,900

SALES

A/C Receivable

May 23 91,900

SalesMay 23 91,900

Back

SEAN, DRAWING

Balance b/d

May 1 19,500

CASH

Balance b/d

May 1 48,500

A/C Receivable

May 3 67,900

Insurance expenses

May 5 350


May 15 3,800


Rent expenses

May 21 4,500

DrawingMay 27 4,500

CashMay 27 4,500Back

CashMay 31 61,200

SALARIES AND COMMISSION EXPENSES

CASH

Balance b/d

May 1 48,500

A/C Receivable

May 3 67,900

Insurance expenses

May 5 350


May 15 3,800


Rent expenses

May 21 4,500

DrawingMay 27 4,500

Salaries & Commissions

May 31 61,200

Back