1. Chapter 4 The Recording Focus
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
Prepared by Courtney Clowes

2. Chapter 4 Overview 4.1 Recording systems 4.2 Recording in the ledger
4.3 The trial balance
4.4 Preparing financial statements
4.5 Computer systems
4.6 Journal entries
4.7 Closing entries
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
Prepared by Courtney Clowes

3. Chapter 4 Objectives Understand the double-entry system
Apply the rules of debit and credit
Record transactions
Demonstrate the linkage between the accounting equation and debits and credits
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
Prepared by Courtney Clowes

4. Chapter 4 Objectives
Complete general ledger accounts using several methods
Prepare a trial balance and understand what causes errors in a trial balance
Produce financial statements using information from the trial balance
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
Prepared by Courtney Clowes

5. Chapter 4 Objectives Prepare general journal entries
Prepare closing entries
Produce interim reports
Introduce computerised accounting systems
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
Prepared by Courtney Clowes

6. Introduction This chapter introduces:
Designing a scheme which records our entries after they have been classified
Double-entry accounting
The mystery of debits and credits
Ledgers and trial balances
General journal entries
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
Prepared by Courtney Clowes

7. 4.1 Recording systems
Recording systems must satisfy 3 key requirements
Efficiency
Use the least amount of steps to process transactions
Control
Provide checks against routine errors
Accessibility
Easy to navigate and able to look deeper if required
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
Prepared by Courtney Clowes

8. Simple recording system
4.1 Recording systems
Simple recording system
1. Transaction occurs
2. Record in Ledger
3. List in Trial Balance
4. Prepare Financial Statements
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
Prepared by Courtney Clowes

9. 4.1 Recording systems Transactions
Evidence of the transaction is required
Invoices, receipts, bank records, cheque butts
Conduct transaction analysis
Determine items affected
Classify the items as elements (A, L, OE)
List the change to the item (increase/decrease)
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
Prepared by Courtney Clowes

10. 4.2 Recording in the ledger
General ledger (what is it?)
A group of accounts
Each account has information about transactions
Separate account for each item
Examples include
Cash
Motor Vehicles
Loan
Capital
Revenue
Expense accounts (wages, advertising, rent, etc.)
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
Prepared by Courtney Clowes

11. 4.2 Recording in the ledger
The Rules of Double-Entry
At least 2 items are always affected in a transaction
We must always maintain the accounting equation
To achieve this we use the following rules:
Assets = Liabilities + Owner’s Equity
Assets ↑ with a debit ↓ with a credit
Liabilities ↑ with a credit ↓ with a debit
Owner’s Equity ↑ with a credit ↓ with a debit
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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12. 4.2 Recording in the ledger
The Rules of Double-Entry
Remember that Owner’s Equity has 4 components
1. Capital
2. Drawings
3. Revenue
4. Expenses
Capital and Revenue increase Owner’s Equity
Drawings and Expenses decrease Owner’s Equity
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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13. 4.2 Recording in the ledger
The Rules of Double-Entry
Element Increase Decrease
Assets Debit Credit
Liabilities Credit Debit
Owner’s Equity Credit Debit
Capital (+OE) Credit Debit
Revenue (+OE) Credit Debit
Drawings (-OE) Debit Credit
Expenses (-OE) Debit Credit
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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14. 4.2 Recording in the ledger
T-Ledger
Account Name
Debit side
(DR)
Credit side
(CR)
Copyright  2004 McGraw-Hill Australia Pty Ltd.
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15. 4.2 Recording in the ledger
EXAMPLE 4.1
Owner contributes $ cash as capital
Transaction analysis
ITEM ELEMENT CHANGE ENTRY
Cash Asset Increase DEBIT
Capital Owner’s Equity Increase CREDIT
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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16. 4.2 Recording in the ledger
EXAMPLE 4.1
Owner contributes $ cash as capital
General ledger entries
Cash (A)
Capital (+OE)
Dr $10 000
Cr $10 000
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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17. 4.2 Recording in the ledger
EXAMPLE 4.2
Purchase supplies for a $1000 in cash
Supplies (A)
Cash (A)
Dr $1000
Cr $1000
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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18. 4.2 Recording in the ledger
EXAMPLE 4.3
Purchased equipment on credit worth $4000
Equipment (A)
Accounts Payable (L)
Dr $4000
Cr $4000
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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19. 4.2 Recording in the ledger
EXAMPLE 4.4
Receive a telephone bill for $600
Telephone expense (-OE)
Accounts Payable (L)
Dr $600
Cr $600
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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20. 4.3 The trial balance
The trial balance is a list of the final balance in each General Ledger Account
Preparing a trial balance is the first step towards producing financial statements
The trial balance provides a mechanism for finding any errors that may have occurred
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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21. 4.3 The trial balance Looking for errors Errors to look for include
Incorrect addition of totals
Incorrect recording of the total account balance
Listing an account as having a debit balance instead of a credit balance (or vice versa)
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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22. 4.3 The trial balance Looking for errors
Errors that may be harder to find are
Forgetting a transaction completely
Debit and credit entries being reversed when recorded
Recording a transaction twice
Transactions recorded in the wrong accounts
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
Prepared by Courtney Clowes

23. 4.4 Preparing financial statements
From the ledger to the financial reports
The trial balance lists all the different accounts for an entity
These are separated into two reports
Income Statement
Balance Sheet
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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24. 4.4 Preparing financial statements
From the ledger to the financial reports
The income statement must be created first
WHY?
Because the final result (Net Profit) becomes part of the balance sheet
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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25. 4.4 Preparing financial statements
From the ledger to the financial reports
1. Create the income statement
List all revenues, then subtract all expenses
The final result is the Net Profit (or loss)
This result is listed in the balance sheet
2. Create the balance sheet
List all the Asset accounts
List all Liabilities and Owner’s Equity accounts (including Profit)
The Accounting Equation must balance: A = L+OE
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
Prepared by Courtney Clowes

26. 4.5 Computer systems Computer systems follow 3 stages 1. Inputs (data)
2. Processing
3. Outputs (financial reports)
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
Prepared by Courtney Clowes

27. 4.6 Journal entries
The recording system introduced earlier records transactions directly into the ledger
We now introduce an extra stage
Journal Entries
This provides a summary list of transactions before ‘posting’ the items to the ledger
This ensures all entries are kept together to provide a sequential and complete record
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
Prepared by Courtney Clowes

28. 4.6 Journal entries Enhanced recording system
1. Transaction occurs
2. Record in General Journal
3. Post to the Ledger
4. Prepare the Trial Balance
5. Prepare Financial Statements
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
Prepared by Courtney Clowes

29. 4.6 Journal entries Owner contributes $10 000 cash as capital
The Debit entry is presented first
The Credit entry is slightly indented
The entry is then posted to the ledger accounts
Date Account Debit Credit
30/6/X5 Cash
Capital
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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30. 4.7 Closing entries
Prior to completing final reports at the end of a period, various adjustments are made
Revenue and Expense accounts are closed off to determine the profit (or loss)
Hence the title: Closing entries
Accrual adjustments are also made
These are discussed in Chapter 7
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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31. 4.7 Closing entries
Revenue and Expense accounts report on the ‘performance’ of a single period
This means they must start at zero for each new period
Assets, Liabilities and other Owner’s Equity accounts report on ‘financial position’ so they do not need to be reset to zero
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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32. 4.7 Closing entries Four steps to closing entries
1. Close Revenue to the Profit/Loss Summary Account
2. Close Expenses to the Profit/Loss Summary Account
3. Close Profit/Loss Summary Account to Capital Account
4. Close Drawings to the Capital Account
‘Close’ means to reduce the account balance to zero by transfering the balance to another account
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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33. 4.7 Closing entries Four steps to closing entries
1. Revenue accounts usually have a credit balance
Debit each Revenue account (bring balances to zero)
Credit the P/L Summary Account
Date Account Debit Credit
30/6/X5 Revenue xxx
P/L Summary xxx
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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34. 4.7 Closing entries Four steps to closing entries
2. Expense accounts usually have a debit balance
Debit the P/L Summary Account
Credit each Expense account (bring balances to zero)
Date Account Debit Credit
30/6/X5 P/L Summary xxx
Expenses xxx
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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35. 4.7 Closing entries Four steps to closing entries
3. The P/L Summary Account will have a
Credit balance if a Profit was made
Debit balance if a Loss was made
We transfer the balance to the Capital Account
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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36. 4.7 Closing entries Four steps to closing entries
3. Closing the P/L Summary Account
With a profit
Debit the P/L Summary Account (balance = 0)
Credit the Capital Account (↑OE)
Date Account Debit Credit
30/6/X5 P/L Summary xxx
Capital xxx
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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37. 4.7 Closing entries Four steps to closing entries
3. Closing the P/L Summary Account
With a loss
Debit the Capital Account (↓OE)
Credit the P/L Summary Account (balance = 0)
Date Account Debit Credit
30/6/X5 Capital xxx
P/L Summary xxx
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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38. 4.7 Closing entries Four steps to closing entries
4. Closing drawings to the Capital Account
Debit the Capital Account (↓OE)
Credit the Drawings Account (balance = 0)
Date Account Debit Credit
30/6/X5 Capital xxx
Drawings xxx
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
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39. Summary Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
Prepared by Courtney Clowes

40. Summary Double-entry is used as an effective recording system
Transactions lead to journal entries, which are posted to ledgers
The ledger is summed up in the trial balance
The trial balance is then used to create final reports
Copyright  2004 McGraw-Hill Australia Pty Ltd.
PPTs t/a Accounting by Jackling et al
Prepared by Courtney Clowes