Topic 2

• The accounting cycle

  1. Recognise and record transactions; to recognise and record transactions we need to have source documents. Source documentations can vary forms including invoices, bills, bank statements, etc.
  2. Journalise transactions; general journal is the mechanism by which we record individual transactions that affect our business. Event analysis table—> General journal (more formal mechanism).
  3. Post to ledger accounts; general ledger is every account we‘ve created or chosen to use in our accounting system has its own individual and unique general ledger account.
• The accounting cycle

  4.     prepare unadjusted trial balance of GL; trial balance (unadjusted) is a list of all of the ledger accounts in our accounting system and their respective balances. Unadjusted is like a rough draft of an essay.

  5.     determine adjusting entries and/ or journalise; general journal.

  6.     Post adjusting entries to general ledger; general ledger (accounts adjusted)
• The accounting cycle

  7.     Prepare adjusted trial balance of GL (adjusted); trial balance (adjusted)

  8.     prepare financial statements; financial statements -balance sheet, the statement of changes in equity and the income statement.
• In an accounting perspective, Debit means the left-hand side of the ledger account
• In an accounting perspective, Credit means the right-hand side of the ledger account
• 5 elements

  1. Assets
  2. Liabilities
  3. Equity
  4. Income
  5. Expenses
• Assets = Liabilities + Equity

  Another rule is: Total Debits = Total Credits
• Assets have a debit balance. Therefore, Liabilities and Equity must have a credit balance
• The basic rules of double entry accounting are that:

  1. All assets are debit in nature
  2. Credits are the opposite entry to debits
• As liabilities and equity are credit in nature they are increased by putting amounts on the right hand side of the ledger, the credit side
• As liabilities and equity are credit in nature they are decreased by putting the amounts on the left hand side of the ledger account, the debit side
• Recording 2.1

  Introduction
• Recording 2.2

  1. The Conceptual Framework – Objectives of Financial Reporting

  2. To provide information about the financial position, financial performance and cash flows of an entity that is useful to a wide range of users in making economic decisions

  3. Financial reports also show the results of the stewardship of management, or the accountability of management for the resources entrusted to it
• Recording 2.3


  The Accounting Cycle and its use in an entity
• Recording 2.4


  Chart of Accounts - a listing of the complete account titles and their related numbers
• Recording 2.5

  1. The Ledger Account

  2. Three basic parts: Title, Place for recording increases, Place for recording decreases
• Recording 2.6

  1. The basic rules of double entry accounting

  2. All assets are debit in nature

  3. Credits are the opposite entry to debits

  4. Total Debits = Total Credits

  5. Assets = Liabilities + Equity

  6. Liabilities and Equity must have a balance if the first two rules above are true

  7. Liabilities and Equity are Credit in nature they are increased by putting amounts on the right-hand side of the ledger account

  8. Liabilities and Equity are decreased by putting the amounts on the left-hand side of the ledger account

  9. Income increases Equity, and Equity is increased with a Credit, Income must have a Credit balance

  10. Expense accounts must be increased with a Debit and decreased with a Credit
• Assets = Liabilities + Equity


  Expressed in the Accounting Equation
• Expanded Accounting Equation

  • A = L + [ Eq + ( I - Ex ) ]
  • A = L + Eq. + I – Ex
  • A + Ex = L
• Equity is decreased with a Debit


  Expenses must have a Debit balance
• Expense accounts

  1. Increased with a Debit

  2. Decreased with a Credit
• Accounting Equation: Assets = Liabilities + Equity
• Expanded Accounting Equation: Assets = Liabilities + Equity + (Income - Expenses)
• Debits must equal credits
• Steps of the cycle

  1. Source Documents - Function of source documents

  2. Different forms of source documents

  3. Information from source documents: Which accounts would be affected, By how much, Are they increasing or decreasing, A, L, Eq, I, or Exp, Debit or Credit?

  4. Introduction to the General Journal
• Opening entries

  Often the "first" transaction, Can vary in complexity, Transfer between manual and computerised systems
• Accounts in Windsor Windows information

  • Cash at Bank
  • Accounts Receivable
  • Allow for Doubtful Debts
  • Prepaid Insurance
  • Office Supplies
  • Accrued Revenue
  • Factory Equipment
  • Accumulated Depreciation
  • Accounts Payable
  • Accrued Expenses
  • Unearned Sales Revenue
  • W. Windsor, Capital
• General Journal

  Preparation of journal entries, Definition of double-entry accounting, Rules of Debit & Credit, The Accounting Equation
• General Ledger Account


  A device used to record increases and decreases for each individual item that appears in a financial statement, Ledger - a collection of accounts relating to an entity, Format of ledger Accounts, Individual components of ledger accounts, Posting from the journal
• Components of General Ledger

  • Debit, Credit
• Posting from the journal to the General Ledger
• Errors that may cause the trial balance not to balance

  1. Transposition error, e.g. $627 was written as $672

  2. Only one side of a transaction has been recorded

  3. A credit entry has been wrongly entered as a debit, or vice-versa

  4. A mathematical mistake has been made in calculating the footings or in adding the Trial Balance
• Errors that may have occurred and would not affect the balancing of the trial balance

  1. A correct amount posted to the wrong account

  2. A journal entry omitted

  3. A journal entry posted twice

  4. Incorrect amounts posted to both correct accounts

  5. Compensating errors
• Errors affecting the trial balance

  • Transposition error
  • Only one side of a transaction recorded
  • Credit entry entered as a debit, or vice-versa
  • Mathematical mistake in calculating footings or adding the Trial Balance
• Errors not affecting the trial balance

  • Correct amount posted to the wrong account
  • Journal entry omitted
  • Journal entry posted twice
  • Incorrect amounts posted to correct accounts
  • Compensating errors
• Income statement for the week ended 7th September
• Statement of Changes in Equity for the week ended 7th September
• Balance Sheet (Statement of Financial Position) as at 7th September
• Assumptions underlying financial reporting

  • Accounting entity assumption
  • Accrual basis assumption
  • Accounting period assumption
  • Going concern assumption