1. © PHI Learning, 2008. All rights reserved.1 Financial Accounting: A Managerial Perspective Third Edition Prepared by R. Narayanaswamy Indian Institute of Management Bangalore

2. © PHI Learning, 2008. All rights reserved.2 Processing Transactions Chapter 2

3. © PHI Learning, 2008. All rights reserved.3 Accounts  Account  An individual record of increases and decreases in an item that is likely to be of interest or importance  Ledger  Chart of accounts Examples: Cash, Office Equipment, Income Tax Payable, Sales, Salaries Expense Chapter 2

4. © PHI Learning, 2008. All rights reserved.4 Classification of Accounts  Asset accounts  Examples: Land; Buildings; Equipment; Debtors; Cash  Liability accounts  Examples: Creditors; Unearned Revenue; Wages Payable  Equity accounts  Examples: Share Capital; Retained Earnings; Sales; Salaries Expense; Drawings; Dividends Chapter 2

5. © PHI Learning, 2008. All rights reserved.5 The Double Entry System The T account Credit = Right Debits = Credits Chapter 2 Debit = Left

6. © PHI Learning, 2008. All rights reserved.6 The Accounting Equation Revisited Chapter 2 The equation, Assets = Liabilities + Equity can be rewritten as Assets = Liabilities + Capital + Revenues – Expenses – Drawings – Dividends which can be further rewritten as Assets + Expenses + Drawings + Dividends = Liabilities + Capital + Revenues

7. © PHI Learning, 2008. All rights reserved.7 Debit and Credit Rules Chapter 2

8. © PHI Learning, 2008. All rights reserved.8 Accounting Records  The Journal (or Day Book)  Chronological record  General journal and special journals  Ledger  Classification of transactions  Posting  T account and standard form Chapter 2

9. © PHI Learning, 2008. All rights reserved.9 Trial Balance Can I trust my trial balance? Do Debits = Credits ? Trial balance is not an accounting record Chapter 2  Locating errors  Correcting errors