1. A CCOUNTING Lecture-4 19-Jan-2013 10/22/2015 1

2. D ISCUSSION OF A SSIGNMENT 10/22/2015 2

3. W HAT WE DISCUSSED IN LAST CLASS ? Bookkeeping process Source documents/vouchers => Journal => Posting => Trial Balance => Financial Reports(BS, IS, CFS) Debit/Credit AID Debit = Credit (Rational Balance Sheet Equation) Journalizing Process Data from source documents/vouchers to Journals. Chart of Accounts Coded (numbered) list of all account titles Varies across firms depending on sectors and complexity and size of organization. 10/22/2015 3

4. T ERMS W E L EARNT IN L AST C LASS Transaction documents Vouchers Journal / Book of original entry Day book General Journal Specialized Journal Debit Credit Journalizing Chart of Accounts 10/22/2015 4

5. O BJECTIVES Posting process Subsidiary Ledgers Bookkeeping process in computerized system Trial Balance Closing the books 10/22/2015 5

6. B OOKKEEPING PROCESS IN DOUBLE - ENTRY ACCOUNTING SYSTEM 10/22/2015 6 Journal/ Day Books Ledger Trial Balance Financial Statements (One Set) Transaction Documents

7. S TEP 3: P OSTING INTO G ENERAL L EDGER What is general ledger? Traditionally, the general ledger was a bound or loose-leaf book of ledger accounts. The general ledger is a collection of all ledger accounts that support the organization’s financial statements. What is a ledger account? A ledger account is a listing of all the increases and decreases in a particular account. 10/22/2015 7

8. L EDGER A CCOUNTS Ledger accounts are also called T-accounts because they take the form of the capital letter T. The vertical line in the T divides the account into left and right sides for recording increasing and decreases in the account. (Not necessarily in that order) The account title is on the horizontal line of the T. 10/22/2015 8

9. L EDGER A CCOUNTS C ONTINUED … How do we place an entry on left(debit) or right(credit) side of the T accounts? Transferring entries into ledger T accounts from general journal or special journals is a mechanical process. Since every entry in the journal is already classified as either a debit or credit entry, the data is simply copied to T account. 10/22/2015 9

10. B ALANCE OF A L EDGER A CCOUNT A balance is the difference between the total left-side(debit) and right-side(credit) amounts in an account at any particular time. Asset accounts have left-side(debit) balances. Liability and owners’ equity accounts have right-side(credit) balances. Concept Check: Expense accounts have ------------- balances. (Hint: Think expense accounts as negative OE accounts.) 10/22/2015 10

11. P OSTING P ROCESS The transferring of amounts from the general journal (daily listing) to the appropriate T- accounts in general ledger is called posting. 10/22/2015 11

12. P OSTING P ROCESS C ONTINUED … Cross-referencing is the process of using numbering, dating, and/or some other form of identification to relate each general ledger posting to the appropriate journal entry. Note that a single transaction from the journal might be posted to several ledger accounts. A popular format is shown below with an extra column containing running balance. 10/22/2015 12

13. E XAMPLE : P OSTING P ROCESS General Journal DateEntry No.Accounts and Explanation Posting ReferenceDebitCredit 2-Jan-13 1 Cash100400,000 Paid-in-capital300 400,000 Capital stock issued to Sandeep 2-Jan-13 2 Cash100100,000 Notes Payable202 100,000 Borrowed at 10% interest on a one year note 3-Jan-13 3 Store equipment17015,000 Cash100 15,000 Bought store equipment for cash 10/22/2015 13 General Ledger CASH Account No. 100 DateExplanation Journal Ref.DebitDateExplanation Journal Ref.Credit 2-Jan-13 Capital stock issued to Sandeep 1400,000.003-Jan-13 Bought Store Equipment315,000.00 2-Jan-13 Borrowed at 10% int. 2100,000.00

14. BOOKKEEPING PROCESS IN Computerized System 10/22/2015 14 Journal/ Day Books Trial Balance Financial Statements (One Set) Transaction Documents Ledgers Transaction Entry Screens

15. N EED FOR S PECIAL J OURNALS For small business, one can enter entries into only one book that is general journal. But as the business expands and the number of transactions becomes large, it may become cumbersome to enter all transactions into a single journal. For quick, efficient and accurate recording of business transactions, Journal is sub- divided into special journals. 10/22/2015 15

16. S PECIAL J OURNALS Basis for special Journals: Similar nature of transactions. Repetitiveness of a type of transaction. For example, All cash transactions can be recorded in one book. All credit sales transactions in another book. Similarly, all credit purchases in yet another book. These special journals are also called daybooks or subsidiary books. Advantage of Special Journals : Division of labor Economical Ease of managerial reporting 10/22/2015 16

17. C OMMON J OURNALS 10/22/2015 17 Special JournalPurpose (Record Transactions related to ) Cash BookCash receipts and cash payments Purchases BookCredit purchases of goods Purchases Return (Return Outwards) Book Purchase return of goods Sales BookCredit sales of merchandise Sales Return (Return Inwards) Book Return of goods by customer. Sales to these customer were on credit. Journal Proper or Journal Residual or General Journal Record all transactions that do not find place in special journals

18. C ENTRAL T HEME OF S PECIAL J OURNALS Since the nature of transaction in a special journal is known, either debit or credit side journalizing is done in the special journal. The other side of entry is implicit. When data is posted from journal to the ledger, both debit and credit sides of transaction are posted. Examples to illustrate it. 10/22/2015 18

19. S PECIAL J OURNAL : E XAMPLE 10/22/2015 19

20. S UBSIDIARY L EDGERS A subsidiary ledger is a group of similar accounts whose combined balances equal the balance in a specific general ledger account. The general ledger account that summarizes a subsidiary ledger's account balances is called a control account or master account. Example: an accounts receivable subsidiary ledger (customers' subsidiary ledger) includes a separate account for each customer who makes credit purchases. The combined balance of every account in this subsidiary ledger equals the balance of accounts receivable in the general ledger. 10/22/2015 20

21. S UBSIDIARY L EDGER CONTINUED …. Posting a debit or credit to a subsidiary ledger account and also to a general ledger control account does not violate the rule that total debit and credit entries must balance because subsidiary ledger accounts are not part of the general ledger ; they are supplemental accounts that provide the detail to support the balance in a control account. Example: In our sales book example, we could have a control account-Accounts Receivable account. On periodic basis, balance from all customer subsidiary accounts will be added and recorded into control account. Note: Subsidiary ledger itself can contain control ledger account. 10/22/2015 21

22. A NY DOUBTS ? 10/22/2015 22

23. T HANK Y OU. 10/22/2015 23