Topic 4: Bookkeeping Rule, Accounting Cycle Framework and Record Keeping (Part 2)

1. Topic 4: Bookkeeping Rule, Accounting Cycle Framework and Record Keeping(Part 2)

2. Outline Double entry rule (Duality concept) Steps in Accounting Cycle Source documents Journal Ledger

3. Transaction Analysis • A process of identifying the specific effects of transactions and events on the accounting equation

4. What is a transaction? • Any event that both affects thefinancial positionof the business entity and can be reliably measured and recorded • 5 categories of transactions: • Assets • Liabilities • Owner’s equity • Revenues • Expenses

5. Steps in analyzing a transaction • Identify the accountand the account type (classification) • Determine the effect of the transaction on the balance of account(s) identified • Record the transaction on the debit or credit side of the relevant account

6. Double Entry Rule • Format of Accounts • “T” account format; and • columnar account format. • Example of a “T” account format • Example of a columnar account format

7. DOUBLE ENTRY RULE

8. Double Entry Rule: Examples • The business received cash of RM1,000 for rent • Cash sales of RM10,000 • Sold goods to GDS for RM2,500 on credit • GDS returned defective goods worth RM200 • The business paid cheque RM1,000 for insurance • Purchased goods for RM5,000 by cheque • Purchased goods for RM3,000 from Big M on credit • Returned goods worth RM300 to Big M because of different brand name • Paid Big M RM1,000 in cash and earned discount received of RM50 • Received cash of RM1,500 from GDS and gave discount allowed of RM80 to GDS

9. Accounting Cycle Part 2 of Topic 4 LEDGER SOURCE DOCUMENTS JOURNAL CLOSING & REVERSING ENTRIES TRIAL BALANCE ADJUSTED TRIAL BALANCE (if required) ADJUSTING ENTRIES FINANCIAL STATEMENTS

11. Source Documents • A designed form which provides details of a transaction and the evidence that the transaction has occurred • It contains information like the date, the nature and types of transactions, the value of the transactions and the names of the buyers and sellers involved. • Source documents are important: • as evidence of transactions; • for recording transactions; • for auditing purposes.

12. Source Documents

13. Journal • Books of original entry which collates and summarizes information from source documents • Records business transactions in chronological order • Each transaction recorded must be supported by source documents • Types: • General journal • Special journals

14. Special Journals • Sales Journal • Records credit sales of goods • Purchases Journal • Records credit purchases of goods • Cash receipts journal • Records all cash received from any source • Cash payments Journal • Records all cash payments from the business • Sales return Journal • Records the returns of goods by the customers • Purchases return Journal • Records the returns of goods to the suppliers

15. General Journal • Records • Adjusting entries • Closing entries • Reversing entries • Other transactions that cannot be recorded in special journals

16. Journal • Functions: • Classifies or list like item together e.g all purchase of goods on credit • Acts as an aid for posting to the ledger by analysing the transaction into its debits and credits elements • Provides a record of transactions in date order • Enables easy reference forward to the ledger and back to source documents • Cuts down unnecessary details in the ledger

17. General Journal RM15,000

18. Sales Journal

19. Purchases Journal

20. Cash Receipts Journal Cash Payments Journal

21. Sales Return Journal

22. Purchase Return Journal

23. Ledger • Book ( file) of all the accounts • An account is a record where all changes (increase or decrease) to a particular item are shown • Types of ledgers • General (nominal) Ledger • Sales (Debtors) Ledger • For customers’ personal accounts • Purchases (Creditors) Ledger • For suppliers’ personal account

24. Dr Cash at Bank Cr T account Format