CHAPTER 2
The recording process
LEARNING OBJECTIVES
Copyright © 2018. Wiley. All rights reserved.
After studying this chapter, you should be able to:
2.1 analyse the effect of accounting transactions and events on the basic accounting equation
2.2 explain what an account is and how it helps in the recording process
2.3 define debits and credits and explain how they are used to record accounting transactions
2.4 identify the basic steps in the recording process
2.5 explain what a journal is and how it helps in the recording process
2.6 explain what a general ledger is and how it helps in the recording process
2.7 explain what posting is and how it helps in the recording process
2.8 explain the purposes of a trial balance.
Carlon, Shirley. Financial Accounting: Reporting, Analysis And Decision Making, 6th Edition, Wiley, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/monash/detail.action?docID=5561261.
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Chapter preview
An effective accounting information system is a necessity for any entity. The purpose of this chapter is
to explain and illustrate the features of a recording information system. The organisation and content of
the chapter are as follows.
The recording process
Accounting
transactions
and events
Copyright © 2018. Wiley. All rights reserved.
• Analysing
transactions
• Summary of
accounting
transactions
The account
• Debits and credits
• Debit and credit
procedures
• Equity relationships
• Expansion of the
basic accounting
equation
Steps in the
recording process
The recording
process illustrated
• The journal
• Chart of accounts
• The general ledger
• Posting
• Summary
illustration of
journalising and
posting
The trial balance
• Limitations of a
trial balance
The system of collecting and processing transaction data and communicating financial information to
interested parties is known as the accounting information system. Accounting information systems vary
widely from one business to another. Factors that shape these systems include: the nature of the business,
the types of transactions in which the business engages, the size of the business, the volume of data to be
handled, and the information demands that management and others place on the system.
In reading this chapter, it is important to note that most businesses of any size today use computerised
accounting systems. These systems handle all the steps involved in the recording process, from initial data
entry to preparation of the financial statements. In order to remain competitive, companies like Domino’s
Pizza Enterprises Ltd, Freedom Foods Group Limited and Nike are continually updating and improving
their accounting systems to provide accurate and timely data for decision making. Continual developments in technology allow for greater speed and efficiency in sharing information between groups of
people. For example, the growth in the use of Bluetooth wireless technology means that people can work
anywhere and everywhere. This technology has completely revolutionised our ability to be connected and
share information. Bluetooth eliminates the need for cables and wires while providing connectivity on
a level we’ve never experienced before. This low-cost solution links computers, mobile phones and any
manner of other Bluetooth-enabled devices quickly and easily. We no longer need to be in our office to
stay in touch.
In this chapter we focus on a manual accounting system because the accounting concepts and principles
do not change whether a system is computerised or manual, and manual systems are easier to illustrate.
Note, however, that many of the problems in this and subsequent chapters can also be completed using a
computerised accounting package or even a simple spreadsheet program.
The transactions demonstrated in this chapter do not include the effects of the goods and services tax
(GST). GST is first introduced in chapter 4, section 4.6.
2.1 Accounting transactions and events
LEARNING OBJECTIVE 2.1 Analyse the effect of accounting transactions and events on the basic
accounting equation.
To use an accounting information system to develop financial statements, you need to know which economic transactions and events to record (recognise). Not all transactions and events are recorded and
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reported in the financial statements. A transaction is an external exchange of something of value between
two or more entities. Events include price increases in business assets during an accounting period or
the allocation of the cost of the long-lived assets of a business to different accounting periods. Events
like these will be discussed in later chapters. For example, suppose Freedom Foods Group hired a new
employee or purchased office equipment. Are these transactions and events entered in its accounting
records? The hiring of a new employee (event) would not be recorded, but the purchase of office equipment (transaction) would. How to account for these and many other events and transactions is explained
in detail in this chapter.
Helpful hint: Accountants often speak about ‘recognising’ the effects of transactions in the accounts.
In this sense, to ‘recognise’ simply means to record the effects of transactions in the financial statements.
Accounting transactions and events are those occurrences which must be recorded because they
have an effect on the assets, liabilities or equity items of a business. Recall from chapter 1 that the
Conceptual Framework outlines the definition and recognition criteria for assets, liabilities and equity
items. These help us to record transactions. The purchase of a computer, the payment of rent and the
sale of advertising space are examples of transactions that change an entity’s assets, liabilities or equity.
In this chapter we will focus on transaction analysis and in later chapters we will explore in more depth
the definition and recognition criteria for assets, liabilities and equity from the Conceptual Framework.
Figure 2.1 summarises the decision process used to decide whether or not to record transactions
and events.
FIGURE 2.1
Accounting transaction and event identification process
Transactions
and events
Purchase computer
Criterion
Copyright © 2018. Wiley. All rights reserved.
Record (recognise)/
don’t record
(don’t recognise)
Answer telephone
Pay rent
Has the financial position (assets, liabilities and equity) of the entity changed?
Yes
No
Yes
Record
Don’t
record
Record
Analysing transactions
In chapter 1 you were introduced to the basic accounting equation:
Assets
=
Liabilities
+
Equity
CHAPTER 2 The recording process 95
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In this chapter you will learn how to analyse transactions, in terms of their effect on assets, liabilities and equity, in order to decide whether or not to record the transactions. Transaction analysis is the
process of identifying the specific effects of transactions and events on the accounting equation. In subsequent chapters we will look at different events. Meanwhile, the focus of this chapter is on recording
accounting transactions.
The accounting equation must always balance. Therefore, each transaction has a dual (doublesided) effect on the equation. For example, if an individual asset is increased, there must be a
corresponding:
r decrease in another asset, or
r increase in a specific liability, or
r increase in equity.
It is quite possible that two or more items could be affected when an asset is increased. For example,
if an entity purchases office furniture for $10 000 by paying $6000 in cash and the remaining $4000 on
credit, one asset (office furniture) increases $10 000, another asset (cash) decreases $6000, and a liability
(accounts payable) increases $4000. The result is that the accounting equation remains in balance as
assets increased by a net $4000 and liabilities increased by $4000, as shown below:
Assets = Liabilities + Equity
+$10 000
+$4 000
−6 000
$ 4 000
$4 000
Chapter 1 presented the financial statements for Wong Pty Ltd for its first month. To illustrate how
transactions affect the accounting equation, we will examine a variety of transactions affecting Wong Pty
Ltd during its first month.
(1) Issues shares for cash
On 1 October Wong Pty Ltd issues shares in exchange for $10 000 cash. This is a transaction because
it involves an exchange which results in an increase in both assets and equity. There is an increase of
$10 000 in cash (an asset) and an increase of $10 000 in share capital in the records of Wong Pty Ltd.
The effect of this transaction on the basic equation is:
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(1)
Assets = Liabilities +
Equity
Cash =
Share capital
+$10 000 =
+$10 000
Issued shares
The equation is in balance. The source of each change to equity is noted to the right of the transaction.
In this case the source of the change was a share issue. Keeping track of the source of each change
in equity is essential for later accounting activities and, in particular, the calculation of profit. (Note:
An alternative term for share capital is contributed equity. In the United States, share capital is called
stock.)
(2) Borrows money from a bank
On 1 October Wong Pty Ltd borrows $5000 from the ANZ Bank. This transaction results in an equal
increase in assets and liabilities: cash (an asset) increases $5000, and bank loan (a liability) increases
$5000.
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The specific effect of this transaction and the cumulative effect of the first two transactions are
shown below.
Old balance
(2)
New balance
Assets = Liabilities + Equity
Bank
Share
Cash =
loan
+ capital
$10 000
$10 000
+5 000
+$5 000
$15 000 =
$5 000 + $10 000
$15 000
Note that total assets are now $15 000, and equity plus the new liability also total $15 000.
(3) Purchase of office equipment for cash
On 2 October Wong Pty Ltd acquires office equipment by paying $5000 cash to Superior Equipment
Sales Ltd. This transaction results in an equal increase and decrease in Wong’s assets. Office equipment
(an asset) increases $5000, and cash (an asset) decreases $5000.
Old balance
(3)
New balance
Assets
= Liabilities + Equity
Office
Bank
Share
Cash + equipment =
loan
+ capital
$15 000
$5 000
$10 000
−5 000
+$5 000
$10 000 +
$5 000 = $5 000 + $10 000
$15 000
$15 000
The total assets are now $15 000, and equity plus the liability also total $15 000.
(4) Receipt of cash in advance from customer
On 2 October Wong Pty Ltd receives a $1200 cash advance from R. Knox, a client. In this transaction,
cash (an asset) is received for advertising services that are expected to be completed by Wong Pty Ltd by
31 December. In the magazine and airline industries, customers are expected to prepay. These businesses
have a liability to the customer until the magazines are delivered or the flight is provided. As soon as
the product or service is provided, revenue can be recorded. Since Wong Pty Ltd received cash before
performing the service, Wong Pty Ltd has a liability for the work due. Determining when to record revenue
and when to record revenue received in advance (also called unearned revenue) is discussed further in
chapter 3. In this example, cash increases by $1200, and a liability, service revenue received in advance
(abbreviated as revenue received in advance), increases by an equal amount on 2 October:
Liabilities
+ Equity
Revenue
received in
Share
Office
Bank
Cash + equipment = loan + advance + capital
$10 000
$5 000
$5 000
$10 000
+1 200
+$1 200
$11 200 +
$5 000
= $5 000 +
$1 200 + $10 000
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Assets
Old balance
(4)
New balance
$16 200
=
$16 200
CHAPTER 2 The recording process 97
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(5) Renders services for cash
On 3 October Wong Pty Ltd receives $10 000 in cash from Copa & Co. for advertising services performed.
In this transaction Wong Pty Ltd receives cash (an asset) in exchange for services. Advertising services
is the principal revenue-producing activity of Wong Pty Ltd. Revenue increases equity. Both assets and
equity are, then, increased by this transaction. Cash is increased by $10 000, and retained earnings is
increased by $10 000. The new balances in the equation are:
Liabilities
+
Equity
Revenue
Office
Bank
received in
Share
Retained
Cash + equipment = loan +
advance + capital + earnings
$11 200
$5 000
$5 000
$1 200
$10 000
+10 000
+$10 000 Service revenue
$21 200 +
$5 000
= $5 000 +
$1 200
+ $10 000 + $10 000
Assets
Old balance
(5)
New balance
=
$26 200
$26 200
Helpful hint: Recall from chapter 1 that, although a capital contribution by owners increases equity,
it is not revenue.
Often businesses sell goods or provide services ‘on account’ (this can also be known as buying and
selling goods ‘on credit’). That is, they provide services or goods for which they are paid at a later
date. Instead of receiving cash, the business receives a different type of asset, an account receivable.
Accounts receivable represent the right to receive payment at a later date. Suppose that Wong Pty Ltd
had provided these services on account rather than for cash. This transaction would have been reported
using the accounting equation as:
Assets = Liabilities +
Equity
Accounts
Retained
receivable =
earnings
+$10 000
+$10 000 Service revenue
Later, when the $10 000 is collected from the customer, accounts receivable would decrease by $10 000,
and cash would increase by $10 000.
Assets
= Liabilities + Equity
Accounts
Cash
receivable
+$10 000 −$10 000
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Note that in this case, equity is not affected by the collection of cash. Instead we record an exchange
of one asset (accounts receivable) for a different asset (cash).
(6) Payment of rent in cash
On 3 October Wong Pty Ltd pays its office rent for the month of October in cash, $900. Rent is an
expense incurred by Wong Pty Ltd in its effort to generate revenues. Expenses decrease equity. This
transaction results in a decrease in cash and an increase in rent expense. It is recorded by decreasing cash
and decreasing equity (specifically, retained earnings) to maintain the balance of the accounting equation.
To record this transaction, cash is decreased by $900, and retained earnings is decreased by $900. The
effect of the payment on the accounting equation is:
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=
Liabilities
+
Equity
Revenue
received in
Share
Retained
Office
Bank
Cash + equipment = loan + advance + capital + earnings
$21 200
$5 000
$5 000
$1 200
$10 000
$10 000
−900
−900 Rent expense
$20 300 +
$5 000
= $5 000 +
$1 200
+ $10 000 + $ 9 100
Assets
Old balance
(6)
New balance
$25 300
$25 300
(7) Payment of insurance in cash
On 4 October Wong Pty Ltd pays $600 for a 1-year insurance policy that will expire next year on
30 September. In this transaction one asset is exchanged for another. The asset cash is decreased by $600.
The asset prepaid insurance is increased by $600. This is an asset because the insurance extends beyond
the current month. Payments for benefits that continue for more than the current accounting period are
identified as pre-paid expenses or prepayments. Note that the balance in total assets did not change; one
asset account decreased by the same amount that another increased.
Liabilities
+
Equity
Revenue
received in
Share
Retained
Prepaid
Office
Bank
Cash + insurance + equipment = loan + advance + capital + earnings
$20 300
$5 000
$5 000
$1 200
$10 000
$9 100
−600
+$600
$19 700 +
$600 +
$5 000 = $5 000 +
$1 200 + $10 000 + $9 100
Assets
Old balance
(7)
New balance
=
$25 300
$25 300
(8) Purchase of supplies on credit
On 5 October Wong Pty Ltd purchases an estimated 3-month supply of advertising materials on account
from Aero Supply for $2500. Assets are increased by this transaction because supplies represent a
resource that will be used in the process of providing services to customers. Liabilities are increased
by the amount owing to Aero Supply. The asset supplies is increased by $2500, and the liability accounts
payable is increased by the same amount. Accounts payable represent amounts owing to suppliers for
the purchase of goods or services on credit. The effect of the transaction on the accounting equation is:
+
Equity
Revenue
received
Prepaid
Office
Bank
Accounts
in
Share
Retained
Cash + Supplies + insurance + equipment = loan + payable + advance + capital + earnings
$19 700
$600
$5 000
$5 000
$1 200
$10 000
$9 100
+$2 500
+$2 500
$19 700 + $2 500 +
$600
+
$5 000
= $5 000 +
$2 500 + $1 200 + $10 000 + $9 100
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Assets
Old balance
(8)
New balance
$27 800
=
Liabilities
$27 800
Helpful hint: Recall that the term ‘on account’ means that the supplies will be provided now but the
payment will be made at a later date.
CHAPTER 2 The recording process 99
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(9) Hiring of new employees
On 9 October Wong Pty Ltd hires four new employees to begin work on 15 October. Each employee is
to receive a weekly salary of $500 for a 5-day working week, payable every 2 weeks. Employees are to
receive their first pay on 26 October. There is no effect on the accounting equation because the assets,
liabilities and equity of Wong Pty Ltd have not changed. A transaction has not occurred. At this point
there is only an agreement that the employees will begin work on 15 October. (See transaction (11) for
the first payment.)
(10) Payment of dividend
On 20 October Wong Pty Ltd pays a $500 dividend. Dividends are a distribution of profit and not an
expense. A dividend transaction affects assets and equity as cash and retained earnings are decreased
by $500.
+
Equity
Revenue
received
Prepaid
Office
Bank
Accounts
in
Share
Retained
Cash + Supplies + insurance + equipment = loan + payable + advance + capital + earnings
$19 700
$2 500
$600
$5 000
$5 000
$2 500
$1 200
$10 000
$9 100
−500
−500 Dividends
$19 200 + $2 500 + $600 + $5 000 = $5 000 + $2 500 + $1 200 + $10 000 + $8 600
Assets
Old balance
(10)
New balance
=
Liabilities
$27 300
$27 300
(11) Payment of cash for employee salaries
Employees have worked 2 weeks, earning $4000 in salaries, which are paid on 26 October. Like the costs
that were incurred for rent, salaries are an expense. They are a cost of generating revenues, and decrease
equity. Cash and retained earnings are each decreased by $4000.
+
Equity
Revenue
received
in
Share
Retained
Prepaid
Office
Bank
Accounts
Cash + Supplies + insurance + equipment = loan + payable + advance + capital + earnings
$19 200
$2 500
$600
$5 000
$5 000
$2 500
$1 200
$10 000
$8 600
−4 000
−4 000 Salaries
$15 200 + $2 500 + $600 + $5 000 = $5 000 + $2 500 + $1 200 + $10 000 + $4 600 expense
Assets
Old balance
(11)
New balance
=
Liabilities
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$23 300
$23 300
Summary of accounting transactions
The transactions of Wong Pty Ltd, which you analysed to decide if they are to be recognised in the
accounting records, are summarised in figure 2.2 to show their cumulative effect on the basic accounting
equation. The transaction number, the specific effects of the transaction, and the balances after each
transaction are indicated. Remember that (9) has no effect on the accounting equation, so no entry is
included. The illustration demonstrates three significant facts:
1. Each transaction is analysed in terms of its effect on assets, liabilities and equity.
2. The two sides of the equation must always be equal (assets must equal liabilities plus equity).
3. The cause of each change in equity must be indicated.
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FIGURE 2.2
Summary of transactions
Assets
=
+
Revenue
received
Accounts
in
+ payable + advance +
Liabilities
Equity
Prepaid
Office
Bank
Share
Retained
Cash + Supplies + insurance + equipment = loan
capital + earnings
(1) +$10 000
=
+$10 000
Issued shares
(2)
+5 000
+$5 000
15 000
=
5 000
+
10 000
(3)
−5 000
+$5 000
10 000
+
5 000 =
5 000
+
10 000
(4)
+1 200
+$1 200
11 200
+
5 000 =
5 000
+
1 200 +
10 000
(5) +10 000
+$10 000 Service revenue
21 200
+
5 000 =
5 000
+
1 200 +
10 000 +
10 000
(6)
−900
−900
Rent expense
20 300
+
5 000 =
5 000
+
1 200 +
10 000 +
9 100
(7)
−600
+$600
19 700
+
600 +
5 000 =
5 000
+
1 200 +
10 000 +
9 100
(8)
+$2 500
+$2 500
19 700 +
2 500 +
600 +
5 000 =
5 000 +
2 500 +
1 200 +
10 000 +
9 100
(10)
−500
−500
Dividends
19 200 +
2 500 +
600 +
5 000 =
5 000 +
2 500 +
1 200 +
10 000 +
8 600
(11) −4 000
−4 000 Salaries expense
$15 200 + $2 500 +
$600 +
$5 000 = $5 000 + $2 500 + $1 200 + $10 000 +
$4 600
$23 300
$23 300
DECISION-MAKING TOOLKIT
Decision/issue
Has an accounting
transaction occurred?
Info needed for
analysis
Tool or technique to
use for decision
How to evaluate results to
make decision
Details of the event
Accounting equation
Determine the effect, if any, on
assets, liabilities and equity.
A transaction has occurred if the
accounting equation is affected.
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2.2 The account
LEARNING OBJECTIVE 2.2 Explain what an account is and how it helps in the recording process.
Rather than using a tabular summary like the one in figure 2.2 for Wong Pty Ltd, an accounting information system uses accounts. An account is an individual accounting record of increases and decreases
in a specific asset, liability or equity item. For example, Wong Pty Ltd has separate accounts for cash,
accounts receivable, accounts payable, service revenue, salaries expense, and so on. (Note that whenever
we are referring to a specific account, we use title case for the name.)
In its simplest form, an account consists of three parts: (1) the name of the account, (2) a left, or debit,
side, and (3) a right, or credit, side. Because the alignment of these parts of an account resembles the
letter T, it is referred to as a T account. The basic form of an account is shown in figure 2.3.
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FIGURE 2.3
Basic or T form of account
Name of account
Left or debit side
Debit balance
Right or credit side
Credit balance
The T-account form is used often throughout this text to explain basic accounting relationships. However, another common form of account is the running balance account, illustrated in figure 2.4. The running balance form provides a balance for the account after each transaction.
FIGURE 2.4
Tabular summary and account forms for Wong Pty Ltd’s cash account
Tabular summary
Cash
Cash
$10 000
5 000
−5 000
1 200
10 000
−900
−600
−500
−4 000
$15 200
Running balance account form
T-account form
(Debits)
10 000
5 000
1 200
10 000
(Credits)
Cash
5 000
900
600
500
4 000
The balance of the T account is $15 200 Dr
as the debit side exceeds the credit side by
$15 200.
Debit
10 000
5 000
Credit
5 000
1 200
10 000
900
600
500
4 000
Balance
10 000
15 000
10 000
11 200
21 200
20 300
19 700
19 200
15 200 Dr
2.3 Debits and credits
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LEARNING OBJECTIVE 2.3 Define debits and credits and explain how they are used to record
accounting transactions.
The term debit refers to the left side and the term credit refers to the right side when recording accounting
transactions and events. They are commonly abbreviated as Dr for debit and Cr for credit. These terms
are directional signals; they do not mean increase or decrease or good or bad as is commonly thought.
The terms debit and credit are used repeatedly in the recording process to describe where entries are made
in accounts. For example, the act of entering an amount on the left side of an account is called debiting
the account. Making an entry on the right side is crediting the account. When the totals of the two sides
of the T account are compared, an account will have a debit balance if the total of the debit amounts
exceeds the total of the credits. Conversely, an account will have a credit balance if the total of the credit
amounts exceeds the total of the debits. Note the position of the debit or credit balances in figure 2.3.
The procedure for recording debits and credits in an account is shown in figure 2.4 for the transactions
affecting the cash account of Wong Pty Ltd. The data are taken from the cash column of the tabular
summary in figure 2.2.
Every positive item in the tabular summary represents a receipt of cash; every negative amount represents a payment of cash. Note that in the account forms the increases in cash are recorded as debits and
the decreases in cash are recorded as credits. In the T-account form, having increases on one side and
decreases on the other side reduces recording errors and helps in determining the totals of each side of
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the account as well as the balance in the account. The account balance, a debit of $15 200, indicates that
Wong Pty Ltd has $15 200 in its cash account. Since it started with a balance of zero, it has $15 200 more
increases than decreases in cash.
Debit and credit procedures
Each transaction must affect two or more accounts to keep the basic accounting equation in balance. In
other words, for each transaction, debits must equal credits. The equality of debits and credits provides
the basis for the double-entry accounting system.
Under the universally used double-entry system, the dual (two-sided) effect of each transaction is
recorded in appropriate accounts. This system provides a logical method for recording transactions. The
double-entry system also offers a means of ensuring the accuracy of the recorded amounts. If every
transaction is recorded with equal debits and credits, then the sum of all the debits to the accounts must
equal the sum of all the credits. The double-entry system for determining the equality of the accounting
equation is much more efficient than the plus/minus procedure used earlier. There, it was necessary after
each transaction to compare total assets with total liabilities and equity to determine the equality of the
two sides of the accounting equation.
Dr/Cr procedures for assets and liabilities
In figure 2.4 for Wong Pty Ltd, increases in cash (an asset) were entered on the left side of a T account,
and decreases in cash were entered on the right side. We know that both sides of the basic equation
(Assets = Liabilities + Equity) must be equal. Therefore, increases and decreases in liabilities will have
to be recorded opposite from increases and decreases in assets. Thus, increases in liabilities must be
entered on the right or credit side, and decreases in liabilities must be entered on the left or debit side.
The effects that debits and credits have on assets and liabilities are summarised in figure 2.5.
FIGURE 2.5
Debit and credit effects — assets and liabilities
Debits
Increase assets
Decrease liabilities
Credits
Decrease assets
Increase liabilities
Asset accounts normally show debit balances. That is, debits to a specific asset account should exceed
credits to that account. Likewise, liability accounts normally show credit balances. That is, credits to a
liability account should exceed debits to that account. The normal balances are illustrated in figure 2.6.
Copyright © 2018. Wiley. All rights reserved.
FIGURE 2.6
Normal balances — assets and liabilities
Assets
Increase Decrease
debit
credit
Normal
balance
Liabilities
Decrease Increase
debit
credit
Normal
balance
Knowing which is the normal balance in an account may help when you are trying to find errors. For
example, a credit balance in an asset account such as land or a debit balance in a liability account such
as wages payable usually indicates errors in recording. Occasionally, however, an abnormal balance may
be correct. The cash account, for example, will have a credit balance when an entity has overdrawn its
bank balance, i.e. when an entity has taken more money out of the bank account than it has put in. This
is discussed further in later chapters.
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Dr/Cr procedures for equity
Subdivisions of equity include share capital, retained earnings, dividends, revenues and expenses. In a
double-entry system, accounts are kept for each of these subdivisions.
Share capital
Share capital is issued in exchange for the owners’ investment. The share capital account is increased
by credits and decreased by debits. For example, when cash is invested in the business, cash is debited
and share capital is credited. The effects of debits and credits on the share capital account are shown in
figure 2.7.
FIGURE 2.7
Debit and credit effects — share capital
Debits
Decrease share capital
Credits
Increase share capital
The normal balance in the share capital account may be illustrated as in figure 2.8.
FIGURE 2.8
Normal balance — share capital
Share capital
Decrease Increase
debit
credit
Normal
balance
Retained earnings
Retained earnings is profit that is retained in the business. It represents the portion of equity that has been
accumulated through the profitable operation of the business. The retained earnings account is increased
by credits (e.g. profit) and decreased by debits (e.g. losses), as shown in figure 2.9.
FIGURE 2.9
Debit and credit effects — retained earnings
Debits
Decrease retained earnings
Credits
Increase retained earnings
The normal balance for retained earnings may be illustrated as in figure 2.10.
Copyright © 2018. Wiley. All rights reserved.
FIGURE 2.10
Normal balance — retained earnings
Retained earnings
Decrease Increase
debit
credit
Normal
balance
Dividends
A dividend is a distribution by a company to its shareholders in an amount proportional to each investor’s
percentage ownership. The most common form of distribution is a cash dividend. Dividends result in a
reduction of the shareholders’ claims on retained earnings. Because dividends reduce equity, increases in
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the dividends account are recorded with debits. As shown in figure 2.11, the dividends account normally
has a debit balance.
FIGURE 2.11
Normal balance — dividends
Dividends
Increase Decrease
debit
credit
Normal
balance
Revenues and expenses
When revenues are recognised, equity is increased. Accordingly, the effect of debits and credits on
revenue accounts is identical to their effect on equity. Revenue accounts are increased by credits and
decreased by debits.
On the other hand, expenses decrease equity. As a result, expenses are recorded by debits. Since
expenses are the negative factor in the calculation of profit and revenues are the positive factor, it is logical that the increase and decrease sides of expense accounts should be the reverse of revenue accounts.
Thus, expense accounts are increased by debits and decreased by credits. The effects of debits and credits
on revenues and expenses are shown in figure 2.12.
FIGURE 2.12
Debit and credit effects — revenues and expenses
Debits
Decrease revenues
Increase expenses
Credits
Increase revenues
Decrease expenses
Credits (increases) to revenue accounts normally exceed debits (decreases), and debits (increases) to
expense accounts should exceed credits (decreases). Thus, revenue accounts normally show credit balances, and expense accounts normally show debit balances. The normal balances may be illustrated as in
figure 2.13.
FIGURE 2.13
Normal balances — revenues and expenses
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Expenses
Increase Decrease
debit
credit
Normal
balance
Revenues
Decrease Increase
debit
credit
Normal
balance
Equity relationships
As indicated in chapter 1, share capital, dividends and retained earnings for Wong Pty Ltd are reported
in the equity section of the statement of financial position. Revenues and expenses are reported on the
statement of profit or loss. Dividends, revenues and expenses are eventually transferred to retained earnings at the end of the period. The balance in the retained earnings account at the end of the period is
calculated as follows: beginning balance in retained earnings plus profit (or minus loss) minus dividends.
The relationships of the accounts affecting equity are shown in figure 2.14.
CHAPTER 2 The recording process 105
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FIGURE 2.14
Equity relationships
Statement of financial position
Equity
Share capital
(investments by shareholders)
Beginning balance in
retained earnings
Retained earnings
(profit retained in business)
Profit (or minus loss)
Statement of
profit or loss
(revenues minus expenses)
+
Dividends
−
Calculation of retained earnings
Helpful hint: The revenue and expenses are used to calculate profit in the period. The resulting profit
is added to the retained earnings account. The retained earnings account is an equity account that is
increased by profit and decreased by dividends — that is, when profit is distributed to shareholders. This
will be expanded upon in chapter 10.
Expansion of the basic accounting equation
Copyright © 2018. Wiley. All rights reserved.
You have already learned the basic accounting equation. Figure 2.15 expands this equation to show the
accounts that make up equity. In addition, the debit/credit rules and effects on each type of account are
illustrated. Study this diagram carefully. It will help you understand the fundamentals of the double-entry
system. Like the basic equation, the expanded basic equation must be in balance; total debits must equal
total credits.
Helpful hint: The accounting equation Assets = Liabilities + Equity can be used to analyse transactions
for both a sole proprietor and a company.
FIGURE 2.15
Expansion of the basic accounting equation
Basic
accounting
equation
Assets
=
Expanded
basic
accounting
equation
Assets
= Liabilities +
Debit/credit
rules
106
Dr
+
Cr
−
Liabilities
Dr
−
Cr
+
+
Equity
Share
capital
Dr
−
Cr
+
+
Beginning
retained − Dividends + Revenues − Expenses
earnings
Dr
−
Cr
+
Dr
+
Cr
−
Dr
−
Cr
+
Dr
+
Cr
−
Financial accounting: Reporting, analysis and decision making
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LEARNING REFLECTION AND CONSOLIDATION
Review it
1. What do the terms debit and credit mean?
2. Explain the debit and credit effects on assets, liabilities and equity.
3. What are the debit and credit effects on revenues, expenses and dividends?
4. What are the normal balances for the following accounts of Giorgina’s Pizza Limited: trade and other
receivables, income tax expense, sales revenue, food and paper expenses? (The answer to this question is at the end of the chapter.)
Do it
Kate Brown, managing director of Hair Affair Pty Ltd, has just rented space in a Westfield shopping centre for the purpose of opening and operating a hairdressing salon. Long before opening day and before
purchasing equipment, hiring assistants and renovating the space, Kate was strongly advised to set up a
double-entry set of accounting records in which to record the business transactions.
Identify the accounts that Hair Affair Pty Ltd is likely to need to record the transactions necessary to
establish and open for business. Also, indicate whether the normal balance of each account is a debit or
a credit.
Reasoning
To start the business, Hair Affair Pty Ltd will need to have asset accounts for each different type of asset
invested in the business. In addition, the company will need liability accounts for debts incurred by the
business. Hair Affair Pty Ltd will need only one equity account for share capital when it begins the business.
The other equity accounts will be needed only after business has commenced.
Solution
Hair Affair Pty Ltd is likely to need the following accounts in which to record the transactions necessary to
establish and ready the salon for opening day: cash (debit balance); equipment (debit balance); supplies
(debit balance); accounts payable (credit balance); bank loan (credit balance), if the business borrows
money; and share capital (credit balance).
2.4 Steps in the recording process
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LEARNING OBJECTIVE 2.4 Identify the basic steps in the recording process.
Although it is possible to enter transaction information directly into the accounts, few businesses do so.
Practically every business uses these three basic steps in the recording process.
1. Analyse each transaction in terms of its effect on the accounts.
2. Enter the transaction information in a journal.
3. Transfer the journal information to the appropriate accounts in the ledger.
The actual sequence of events begins with the transaction. Evidence of the transaction comes in the
form of a source document, such as a purchase order (evidence of goods ordered from a supplier),
a purchase invoice (evidence from a supplier of a purchase of goods or services on credit), a cheque
(evidence of a payment), cash register tape (evidence of cash sales made through a cash register) or a
sales invoice (evidence of a credit sale). Figure 2.16 is an example of a sales invoice, which provides
evidence that the business has made a credit sale to a customer. The original sales invoice is sent to the
customer for the customer’s records, and the copy provides the evidence of a credit sale in the business’s
records. (Sales invoices are called tax invoices when the goods and services tax (GST) is payable. The
GST is first introduced in chapter 4, section 4.6.)
Each source document is analysed to determine the effect of the transaction on specific accounts. The
transaction is then entered in the journal. Finally, the journal entry is transferred to the designated accounts
in the ledger. The sequence of events in the recording process is shown in figure 2.17.
CHAPTER 2 The recording process 107
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FIGURE 2.16
A sales invoice
TAX INVOICE
No. 204403
M.BROWN & ASSOCIATES (i.e. name of entity)
ABN 33 123 689 701
Charge to:
Send to:
Smith & Retton
21 Edinburgh Street
BOOVAL QLD 4304
Smith & Retton
21 Edinburgh Street
BOOVAL QLD 4304
Account No.
Terms
Customer Order Ref.
210337
Net 30 days
25/8/2016
Stock No.
Quantity
63147
21003
20
40
FIGURE 2.17
Description
XC M-type gear boxes
XC Gear box brackets
Unit Price
TOTAL
$27.50
$ 1.10
$550.00
$ 44.00
Total amount payable
$594.00
Total includes GST of
$ 54.00
The recording process
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The recording process
Analyse each transaction
108
Enter transaction in a journal
Transfer journal information to
ledger accounts
Financial accounting: Reporting, analysis and decision making
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The basic steps in the recording process occur repeatedly in every business. The analysis of transactions
has already been illustrated, and more examples of this step are given in this and later chapters. The other
steps in the recording process are explained in the next sections.
2.5 The journal
LEARNING OBJECTIVE 2.5 Explain what a journal is and how it helps in the recording process.
Transactions are initially recorded in chronological order in a journal before they are transferred to the
accounts. For each transaction the journal shows the debit and credit effects on specific accounts. Businesses may use various kinds of journals to record transactions; these are explored in detail in chapter 6.
Every business has at least the most basic form of journal, a general journal. The general journal makes
two significant contributions to the recording process.
1. It provides a chronological record of all transactions.
2. It discloses in one place the complete effect of a transaction. This helps to prevent or locate errors.
Entering transaction data in the journal is known as journalising. To illustrate the technique of journalising, let’s look at the first three transactions of Wong Pty Ltd. These transactions were: 1 October,
shares were issued in exchange for $10 000 cash; 1 October, $5000 was borrowed from a bank; 2 October,
purchased office equipment costing $5000 for cash. In equation form, these transactions appeared in our
earlier discussion as follows:
Assets = Liabilities +
Cash =
+$10 000
Equity
Share
capital
+$10 000 Issued shares
Assets = Liabilities + Equity
Bank
Cash =
loan
+$5 000
+$5 000
Copyright © 2018. Wiley. All rights reserved.
Assets
= Liabilities + Equity
Office
Cash
equipment
−$5 000
+$5 000
Separate journal entries are made for each transaction. A complete entry consists of: (1) the date of
the transaction, (2) the accounts and amounts to be debited and credited, and (3) a brief explanation
of the transaction, referred to as a narration. Wong Pty Ltd’s first three transactions are journalised in
figure 2.18.
Note the following features of the journal entries.
1. The date of the transaction is entered in the Date column.
2. The account to be debited is always entered first at the left. The account to be credited is then entered
on the next line, indented under the line above. The indentation differentiates debits from credits and
decreases the possibility of switching the debit and credit amounts.
3. The amounts for the debits are recorded in the debit (left) column, and the amounts for the credits are
recorded in the credit (right) column.
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4. A brief explanation of the transaction is given (narration). The narration is found directly below the
transaction.
5. The posting reference column (abbreviated to Post ref.) contains the account number as it appears in
the chart of accounts (discussed in the next section).
FIGURE 2.18
Recording transactions in journal form
General journal
Date
Account name (narration)
2019
Oct. 1
1
2
Post
ref.
Debit
Cash
Share capital
(Issued shares for cash)
100
300
10 000
Cash
Bank loan
(Borrowed money from a bank)
100
230
5 000
Office equipment
Cash
(Purchased office equipment for cash)
130
100
5 000
Credit
10 000
5 000
5 000
It is important to use correct and specific account names and numbers in journal entries. Since all
accounts are used in preparation of the financial statements, erroneous account names lead to incorrect
financial statements. Some flexibility exists initially in selecting account names. For example, a business
could use any of these account names for recording the cost of delivery trucks: delivery vehicles, delivery
trucks or trucks. The main criterion is that each name must appropriately describe the type of asset,
liability, revenue, expense or equity represented in the account. You would expect entities that have
similar business transactions, like Domino’s and Freedom Foods Group to have similar account names.
Once the business chooses the specific account name, all subsequent transactions involving the account
should be recorded under that account name. An entity’s chart of accounts facilitates the consistent
recording of transactions as it provides a list of all the account names used to record transactions for that
business.
LEARNING REFLECTION AND CONSOLIDATION
Review it
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1. What is the correct sequence of steps in the recording process?
2. What contribution does the journal make to the recording process?
3. What are the standard form and content of a journal entry made in the general journal?
Do it
The following events occurred during the first month of business of Hair Affair Pty Ltd, Kate Brown’s
hairdressing salon:
1. issued shares to shareholders in exchange for $20 000 cash
2. purchased $4800 of hair supplies inventory on account (to be paid in 30 days)
3. interviewed three people for the position of hairdresser.
In what form (type of record) should the entity initially record these three activities? Prepare the entries
to record the transactions.
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Reasoning
Kate should record the transactions in a journal, which is a chronological record of the transactions.
The record should be a complete and accurate representation of the transactions’ effects on the assets,
liabilities and equity of her business.
Solution
Each transaction that is recorded is entered in the general journal. The three activities are recorded as
follows:
1.
Cash
20 000
Share capital
(Issued shares for cash)
2.
3.
Inventory
Accounts payable
(Purchased hair supplies inventory on account)
20 000
4 800
4 800
No entry because no transaction occurred.
Helpful hint: If you are unsure of the solution to part 3 here, review transaction 9 in section 2.1 for
Wong Pty Ltd.
Copyright © 2018. Wiley. All rights reserved.
Chart of accounts
All transactions for a business are recorded in accounts set up in the general ledger. The chart of
accounts is a list of all these accounts. Account numbers as well as account names are often used for
each account. One of the most important decisions when setting up the recording system is ensuring the
information system is suitable to meet the needs of the users of the accounting information. In order to
ensure the data is ‘sorted and summarised’ so the accounting reports provide the relevant information,
you start with the required outputs and design the recording system to meet those needs. When you are
designing the numbering system it should be flexible to allow for additional accounts to be added when
required.
When establishing or modifying a chart of accounts, you should be careful to make sure that similar
names are not used for different accounts. For example, the account name Motor Vehicle does not indicate
whether a posting should be made to an asset account or an expense account, whereas including an
account number and using names, such as motor vehicle asset account and motor vehicle expense account,
leave no room for doubt. Using account numbers as well as account names is recommended, as it is easier
to make sure the correct account is selected if similar names are used and you are unable to change them
to make them more distinctive.
The number and type of accounts used differ for each business, depending on the size, complexity
and type of business. For example, the number of accounts depends on the amount of detail desired by
management. The management of one business may want one single account for all types of service
expense. Another may keep separate expense accounts for each type of service expense, such as gas,
electricity and water. Similarly, a small business like Wong Pty Ltd will not have many accounts compared
with a large company like Domino’s. Wong Pty Ltd may be able to manage and report its activities in
20 to 30 accounts, whereas companies such as Vodafone, Wesfarmers and Freedom Foods Group require
thousands of accounts to keep track of their worldwide activities.
The chart of accounts for Wong Pty Ltd is shown in figure 2.19. Accounts shown in red are used in
this chapter; accounts shown in black are explained in later chapters. New accounts may be created as
needed during the life of the business.
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FIGURE 2.19
Chart of accounts for Wong Pty Ltd
WONG PTY LTD — Chart of accounts
Revenues
Expenses
No.
Account name
No.
Account name
Liabilities
No.
Account name
No.
Account name No.
Account name
100
104
Cash
Accounts
receivable
Commissions
receivable
Advertising
supplies
Prepaid
insurance
Office
equipment
Acc.
depreciation—
office equipment
200
Accounts
payable
Interest payable
Revenue
received in
advance
Salaries payable
Bank loan
300
310
320
330
Share capital
Retained earnings
Dividends
Profit or loss
summary
400
Service
revenue
Commissions
revenue
Assets
105
110
112
130
131
210
213
215
230
Equity
405
500
505
510
515
518
520
Salaries expense
Supplies expense
Rent expense
Insurance expense
Interest expense
Depreciation
expense
2.6 The general ledger
LEARNING OBJECTIVE 2.6 Explain what a general ledger is and how it helps in the recording process.
The general journal provides a chronological list of all of the transactions for a business. A chronological
list on its own, however, is of limited use. Classifying and summarising data improves their usefulness
for decision making. For example, a business’s general journal could contain hundreds of purchases,
cash receipts and cash payments transactions in any given month. If a sales manager wants to know the
total sales revenue for any particular month, this information cannot be easily obtained from the general
journal, but it can be obtained from the sales revenue account in the ledger. The ledger accumulates all the
information about changes in specific account balances such as sales revenue, cash, and wages expense.
FIGURE 2.20
The general ledger
Copyright © 2018. Wiley. All rights reserved.
Individual
asset
accounts
Equipment
Land
Supplies
Individual
liability
accounts
Interest payable
Salaries payable
Accounts payable
Cash
Bank loan
Individual
equity
accounts
Salaries expense
Service revenue
Share capital
Retained earnings
The entire group of accounts maintained by a business is referred to collectively as the general ledger.
A general ledger contains all the assets, liabilities and equity accounts, as shown in figure 2.20. A business can use a loose-leaf binder or card file for the ledger, with each account kept on a separate sheet or
card. Most businesses today, however, use a computerised accounting system. Computerised accounting
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systems are illustrated in chapter 6. Whenever the term ledger is used in this text without additional
specification, it will mean the general ledger.
2.7 Posting
LEARNING OBJECTIVE 2.7 Explain what posting is and how it helps in the recording process.
The procedure of transferring journal entries to ledger accounts is called posting. This phase of the recording process accumulates the effects of journalised transactions in the individual asset, liability, equity,
revenue and expense accounts. Posting involves the following steps.
1. Using the account number in the posting reference column, locate in the ledger the account to be
debited and enter the date the transaction occurred.
2. To the right of the date, enter the name of the ledger account to which the credit entry will be posted.
This is called the cross-reference.
3. Enter the amount to be debited to the debit side of the ledger account. (If a running balance ledger
account is used, enter the amount in the debit column of the ledger account and calculate the new
balance in the balance column.)
4. In the general journal, place a tick beside the account number in the posting reference column. This
signifies that the entry has now been posted to the ledger.
5. Repeat steps 1–4 for the credit side of the entry.
These steps are illustrated in figures 2.22 to 2.32 in the next section.
A cross-reference in a ledger account is very useful as it provides additional information on each
amount recorded in an individual ledger account. For example, figure 2.4 illustrates the transactions affecting the cash account for Wong Pty Ltd for the month of October. In this very simple form of the cash
ledger account, cross-references are not given and so no details are available on what the amounts represent. This simple cash ledger T account is reproduced in figure 2.21. Also in figure 2.21 is the same
cash ledger account with cross-references included. The cross-references serve two important purposes:
(1) they indicate the corresponding ledger accounts to which the entries are posted, and (2) at a glance,
they provide information on the nature of each transaction in the ledger account. For example, in the cash
ledger account in figure 2.21 the cross-reference indicates the nature of each cash outlay (credit entries)
and the nature of the amount of incoming cash (debit entries). When you compare the cash ledger account
which includes cross-references with the account that does not include cross-references, it is easy to see
which is more useful and why cross-references are so important. In some chapters, where a very basic
form of the ledger account is used due to space constraints, ledger cross-references may not always be
shown. In practice, however, in businesses using computerised accounting packages, the cross-referencing
is usually complete.
FIGURE 2.21
Wong Pty Ltd’s cash account with and without dates and cross-references
Cross-references included
No cross-references
Copyright © 2018. Wiley. All rights reserved.
Cash
(Debits) 10 000
5 000
1 200
10 000
(Credits) 5 000
900
600
500
4 000
Cash
Oct. 1 Share capital
10 000
1 Bank loan
5 000
2 Revenue received
in advance
1 200
3 Service revenue 10 000
Oct. 2 Office equipment 5 000
3 Rent expense
900
4 Prepaid insurance
600
20 Dividends
500
26 Salaries expense 4 000
The recording process illustrated
Figures 2.22 to 2.32 show the basic steps in the recording process using the October transactions of
Wong Pty Ltd. Its accounting period is a month. A basic analysis and a debit–credit analysis precede the
CHAPTER 2 The recording process 113
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journalising and posting of each transaction. Study these transaction analyses carefully. The purpose of
transaction analysis is first to identify the type of account involved and then to determine whether a debit
or a credit to the account is required. You should always perform this type of analysis before preparing a
journal entry. Doing so will help you understand the journal entries discussed in this chapter as well as
more complex journal entries to be described in later chapters.
FIGURE 2.22
Shares issued for cash
Transaction
1 October, Wong Pty Ltd issued shares for $10 000 cash.
Basic
analysis
The asset cash is increased $10 000; equity (specifically
share capital) is increased $10 000.
Assets
(1)
Debit–credit
analysis
Journal
entry
=
Liabilities
=
Equation
analysis
Cash
+$10 000
+
Equity
Share
capital
+$10 000 Issued shares
Debits increase assets: debit cash $10 000.
Credits increase equity: credit share capital $10 000.
Date Account name (narration)
Oct. 1 Cash
Share capital
(Issued shares for cash)
Oct. 1 Share capital
Post
ref.
Debit Credit
100 ✓ 10 000
10 000
300 ✓
Cash
10 000
No. 100
Share capital
Oct. 1 Cash
No. 300
10 000
Copyright © 2018. Wiley. All rights reserved.
Posting
Helpful hint: Remember to place a ✓ beside the account number in the general journal once the entry
has been posted to the ledger. Note that the cross-references indicate the ledger account to which the
opposite side of the entry is posted.
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FIGURE 2.23
Bank loan
Transaction
1 October, borrowed $5000 from the ANZ Bank.
Basic
analysis
The asset cash is increased $5000; the liability bank loan is
increased $5000.
Assets
Equation
analysis
(2)
Debit–credit
analysis
Journal
entry
Posting
Cash
+$5 000
=
=
Liabilities
Bank
loan
+$5 000
+
Equity
Debits increase assets: debit cash $5000.
Credits increase liabilities: credit bank loan $5000.
Date Account name (narration)
Oct. 1 Cash
Bank loan
(Borrowed money from
a bank)
Oct. 1 Share capital
1 Bank loan
Post
ref.
Debit
100 ✓ 5 000
230 ✓
Cash
10 000
5 000
Bank loan
Oct. 1 Cash
Credit
5 000
No. 100
No. 230
5 000
Copyright © 2018. Wiley. All rights reserved.
Helpful hint: In the cash ledger account, note that the cross-references indicate the nature of the cash
received — $10 000 from a share issue and $5000 from a bank loan.
CHAPTER 2 The recording process 115
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FIGURE 2.24
Purchase of office equipment for cash
Transaction
2 October, paid $5000 cash to purchase office equipment.
Basic
analysis
The asset office equipment is increased $5000; the asset
cash is decreased $5000.
Equation
analysis
Debit–credit
analysis
Journal
entry
Posting
=
Assets
Office
+
equipment
Cash
+$5 000
(3) −$5 000
Liabilities
+
Equity
Debits increase assets: debit office equipment $5000.
Credits decrease assets: credit cash $5000.
Date Account name (narration)
Oct. 2 Office equipment
Cash
(Purchased office equipment
for cash)
Oct. 1 Share capital
2 Bank loan
Credit
5 000
Cash
No. 100
10 000 Oct. 2 Office equipment 5 000
5 000
Office equipment
5 000
No. 130
Copyright © 2018. Wiley. All rights reserved.
Oct. 2 Cash
Post
ref.
Debit
130 ✓ 5 000
100 ✓
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FIGURE 2.25
Receipt of cash in advance from customer
Transaction
Basic
analysis
2 October, a $1200 cash advance is received from R. Knox,
a client, for advertising services that are expected to be
completed by 31 December.
The asset cash is increased $1200; the liability revenue received
in advance is increased $1200. That is, when an advance
payment is received, a liability (revenue received in advance)
should be recorded in order to recognise the obligation that
exists. Note also that although many liabilities have the word
‘payable’ in their name, revenue received in advance is
considered a liability even though the word payable is not used.
Assets
Equation
analysis
(4)
Debit–credit
analysis
Journal
entry
Posting
Cash
+$1 200
=
=
Liabilities +
Revenue received
in advance
+$1 200
Debits increase assets: debit cash $1200.
Credits increase liabilities: credit revenue received in
advance $1200.
Date Account name (narration)
Oct. 2 Cash
Revenue received in advance
(Received advance from
R. Knox for future service)
Post
ref.
Debit
100 ✓ 1 200
213✓
Credit
1 200
Cash
No. 100
Oct. 1 Share capital
10 000 Oct. 2 Office equipment 5 000
1 Bank loan
5 000
2 Revenue received
in advance
1 200
Revenue received in advance
Oct. 2 Cash
Copyright © 2018. Wiley. All rights reserved.
Equity
No. 213
1 200
Helpful hint: Use the chart of accounts to help you analyse each transaction before you record it in
the general journal. The chart of accounts lists all the account names and numbers used in the business.
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FIGURE 2.26
Services rendered for cash
Transaction
3 October, received $10 000 in cash from Copa & Co. for
advertising services provided in October.
Basic
analysis
The asset cash is increased $10 000; the revenue service
revenue is increased $10 000.
Equation
analysis
(5)
Debit–credit
analysis
Journal
entry
Posting
Assets
=
Cash
+$10 000
=
Liabilities
+
Equity
Retained
earnings
+$10 000 Service revenue
Debits increase assets: debit cash $10 000.
Credits increase revenues: credit service revenue $10 000.
Date Account name (narration)
Oct. 3 Cash
Service revenue
(Received cash for services
provided)
Post
ref.
Debit Credit
100 ✓ 10 000
10 000
400✓
Cash
No. 100
Oct. 1 Share capital
10 000 Oct. 2 Office equipment 5 000
1 Bank loan
5 000
2 Revenue received
in advance
1 200
3 Service revenue 10 000
No. 400
10 000
Copyright © 2018. Wiley. All rights reserved.
Service revenue
Oct. 3 Cash
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FIGURE 2.27
Payment of rent in cash
Transaction
3 October, office rent for October is paid in cash, $900.
Basic
analysis
The expense rent is increased $900 because the payment
pertains only to the current month; the asset cash is
decreased $900.
Equation
analysis
(6)
Debit–credit
analysis
Journal
entry
Posting
Assets
=
Cash
−$900
=
Liabilities
+
Equity
Retained
earnings
−$900 Rent expense
Debits increase expenses: debit rent expense $900.
Credits decrease assets: credit cash $900.
Date Account name (narration)
Oct. 3 Rent expense
Cash
(Paid cash for October office
rent)
Post
ref.
Debit
510 ✓ 900
100 ✓
Credit
900
Cash
No. 100
Oct. 1 Share capital
10 000 Oct. 2 Office equipment 5 000
1 Bank loan
5 000
3 Rent expense
900
2 Revenue received
in advance
1 200
3 Service revenue 10 000
Oct. 3 Cash
Rent expense
900
No. 510
Copyright © 2018. Wiley. All rights reserved.
Helpful hint: The narration provides additional information about the transaction. In this case, it
indicates the period covered by the rent payment, i.e. the month of October.
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FIGURE 2.28
Payment of insurance in cash
Transaction
4 October, $600 is paid for a 1-year insurance policy that will
expire next year on 30 September.
Basic
analysis
The asset prepaid insurance is increased $600 because the
insurance extends beyond the current month; the asset cash is
decreased $600. Note that payments of expenses that will
benefit more than one accounting period are identified as
prepaid expenses or prepayments. When a payment is made,
an asset account is debited in order to show the service or
benefit that will be received in the future.
Equation
analysis
(7)
Debit–credit
analysis
Journal
entry
Posting
Assets
Prepaid
+
Cash
insurance
−$600
+$600
Liabilities
+
Equity
Debits increase assets: debit prepaid insurance $600.
Credits decrease assets: credit cash $600.
Date Account name (narration)
Oct. 4 Prepaid insurance
Cash
(Paid 1-year policy, effective
date 1 October)
Post
ref.
Debit
112 ✓ 600
100 ✓
Credit
600
Cash
No. 100
Oct. 1 Share capital
10 000 Oct. 2 Office equipment 5 000
1 Bank loan
5 000
3 Rent expense
900
4 Prepaid insurance 600
2 Revenue received
in advance
1 200
3 Service revenue 10 000
Oct. 4 Cash
Copyright © 2018. Wiley. All rights reserved.
=
Prepaid insurance
600
No. 112
Helpful hint: Prepayments are discussed and illustrated in more detail in the next chapter.
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FIGURE 2.29
Purchase of supplies on credit
Transaction
5 October, an estimated 3-month supply of advertising materials
is purchased on account from Aero Supply for $2500.
Basic
analysis
The asset advertising supplies is increased $2500; the liability
accounts payable is increased $2500.
Equation
analysis
(8)
Debit–credit
analysis
Journal
entry
=
Assets
Advertising =
supplies
+$2 500
Liabilities
Accounts
payable
+$2 500
+
Equity
Debits increase assets: debit advertising supplies $2500.
Credits increase liabilities: credit accounts payable $2500.
Date Account name (narration)
Oct. 5 Advertising supplies
Accounts payable
(Purchased supplies on
account from Aero supply)
Post
ref.
Debit
100 ✓ 2 500
200 ✓
Advertising supplies
Oct. 5 Accounts payable 2 500
Credit
2 500
No. 110
Posting
Accounts payable
Oct. 5 Advertising
supplies
Copyright © 2018. Wiley. All rights reserved.
FIGURE 2.30
No. 200
2 500
Hiring of new employees
Transaction/
event
9 October, hired four employees to begin work on 15 October.
Each employee is to receive a weekly salary of $500 for a 5-day
working week, payable every 2 weeks — first payment made on
26 October.
Basic
analysis
An accounting transaction has not occurred. There is only an
agreement that the employees will begin work on 15 October.
Thus, a debit–credit analysis is not needed because there is no
accounting entry. (See transaction of 26 October for first salaries
entry.)
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FIGURE 2.31
Payment of dividend
Transaction
Basic
analysis
20 October, Wong Pty Ltd paid a $500 cash dividend
to shareholders.
The dividends account is increased $500; the asset cash is
decreased $500.
Equation
analysis
(10)
Debit–credit
analysis
Journal
entry
Posting
Assets
=
Cash
−$500
=
Liabilities
+
Equity
Retained
earnings
−$500 Dividends
Debits increase dividends: debit dividends $500.
Credits decrease assets: credit cash $500.
Date
Account name (narration)
Oct. 20 Dividends
Cash
(Paid a cash dividend)
Post
ref.
Debit
320 ✓ 500
100 ✓
Credit
500
Cash
No. 100
Oct. 1 Share capital
10 000 Oct. 2 Office equipment 5 000
1 Bank loan
5 000
3 Rent expense
900
4 Prepaid insurance 600
2 Revenue received
20 Dividends
500
in advance
1 200
3 Service revenue 10 000
Dividends
500
No. 320
Copyright © 2018. Wiley. All rights reserved.
Oct. 20 Cash
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FIGURE 2.32
Payment of cash for employee salaries
Transaction
Basic
analysis
26 October, employee salaries of $4000 are paid in cash.
(See 9 October event.)
The expense account salaries expense is increased $4000; the
asset cash is decreased $4000.
Equation
analysis
(11)
Debit–credit
analysis
Journal
entry
Posting
Assets
=
Cash
−$4 000
=
Equity
Retained
earnings
−$4 000 Salaries expense
Debits increase expenses: debit salaries expense $4000.
Credits decrease assets: credit cash $4000.
Date
Account name (narration)
Oct. 26 Salaries expense
Cash
(Paid salaries to date)
Post
ref.
Debit
500 ✓ 4 000
1 00✓
Credit
4 000
Cash
No. 100
Oct. 1 Share capital
10 000 Oct. 2 Office equipment 5 000
1 Bank loan
5 000
3 Rent expense
900
4 Prepaid insurance 600
2 Revenue received
20 Dividends
500
in advance
1 200
26 Salaries expense 4 000
3 Service revenue 10 000
Oct. 26 Cash
Copyright © 2018. Wiley. All rights reserved.
+
Liabilities
Salaries expense
4 000
No. 500
Figures 2.22 to 2.32 illustrate the basic steps in the recording process using the October transactions
of Wong Pty Ltd. Once recording is complete, a trial balance is prepared. To facilitate this process,
the balance of each account in the general ledger must be calculated. The process of balancing
a T account is illustrated using the cash account from figure 2.32. Balancing involves the following
main steps.
1. For each account, add each side. Generally, the normal account balance side will be the side with the
greater amount. If you need to review the normal balances for each type of account, refer to figures 2.6,
2.8, 2.10, 2.11 and 2.13.
2. Leaving a blank line, rule lines as illustrated in figure 2.33 and write in the greater amount calculated
in step 1 on both the debit and credit sides of the account (between the ruled lines).
3. The closing balance for the account can now be determined by subtracting the amounts listed on the
lesser side from the total. The words ‘closing balance’ and the amount calculated in this step are
recorded on the lesser side (generally the side opposite to the normal balance side).
CHAPTER 2 The recording process 123
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4. The date (the first day of the next month), the words ‘opening balance’ and the balance calculated in
step 3 are written below the ruled-off lines on the greater account balance side (usually the normal
balance side).
Once these four steps have been completed, the account has been balanced. It is very important to
remember that the closing balance is only a balancing item, i.e. the amount needed to make the debit side
equal the credit side and have the totals in balance. It is not the correct account balance because it is on the
wrong side. The opening balance will be the correct account balance for the account. Understanding how
to balance ledger accounts is important as it is an essential part of many accounting processes covered in
this and later chapters and is used in later years of an accounting course. So take some time to understand
how to balance accounts as illustrated in the cash account example in figure 2.33 and the following
discussion.
For Wong Pty Ltd, the debit side of the cash account is the greater side and the normal account balance
of the cash account. Adding the debit side reveals a total of $26 200. This amount is written between the
ruled lines on both the debit and credit side of the account. All the amounts listed on the credit side of
the account are then subtracted from the total to reveal a closing balance of $15 200. This means that
the debit side of the account is $15 200 greater than the credit side. This amount is recorded on the debit
side of the cash account on 1 November as the opening balance. The November transactions can then be
recorded in the account.
FIGURE 2.33
Balancing the cash ledger account for Wong Pty Ltd
Cash
Oct.
1
1
2
3
Share capital
Bank loan
Revenue received in advance
Service revenue
Nov.
1 Opening balance
10 000
5 000
1 200
10 000
Oct.
No. 100
2
3
4
20
26
31
Office equipment
Rent expense
Prepaid insurance
Dividends
Salaries expense
Closing balance
5 000
900
600
500
4 000
15 200
26 200
26 200
15 200
Summary illustration of journalising and posting
The journal for Wong Pty Ltd for the month of October is summarised in figure 2.34. The ledger is shown
in figure 2.35, with all balances coloured in red.
FIGURE 2.34
General journal for Wong Pty Ltd
General journal
Copyright © 2018. Wiley. All rights reserved.
Date
Account name (narration)
2019
Oct. 1
1
2
124
Post
ref.
Debit
Cash
Share capital
(Issued shares for cash)
100
300
10 000
Cash
Bank loan
(Borrowed money from a bank)
100
230
5 000
Office equipment
Cash
(Purchased office equipment for cash)
130
100
5 000
Credit
10 000
5 000
5 000
Financial accounting: Reporting, analysis and decision making
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Created from monash on 2025-02-26 02:06:38.
Date
2019
Oct.
Post
ref.
Account name (narration)
2
3
3
4
5
20
26
Debit
Cash
Revenue received in advance
(Received advance from R. Knox for future service)
100
213
1 200
Cash
Service revenue
(Received cash for services rendered)
100
400
10 000
Rent expense
Cash
(Paid cash for October office rent)
510
100
900
Prepaid insurance
Cash
(Paid 1-year policy; effective date 1 October)
112
100
600
Advertising supplies
Accounts payable
(Purchased supplies on account from Aero Supply)
110
200
2 500
Dividends
Cash
(Declared and paid a cash dividend)
320
100
500
Salaries expense
Cash
(Paid salaries to date)
500
100
4 000
Credit
1 200
10 000
900
600
2 500
500
4 000
Helpful hint: Enter the account number in the posting reference column at the time you record the
general journal entry. Put the ✓ in the posting reference column once the amount has been posted to
the ledger.
FIGURE 2.35
General ledger for Wong Pty Ltd
General ledger
Copyright © 2018. Wiley. All rights reserved.
Cash
Oct.
1
1
2
3
Share capital
Bank loan
Revenue received in advance
Service revenue
Nov.
1
Opening balance
Oct.
5
Accounts payable
Nov.
1
Opening balance
Oct.
4
Cash
Nov.
1
Opening balance
Oct.
2
Cash
Nov.
1
Opening balance
10 000
5 000
1 200
10 000
Oct.
No. 100
2
3
4
20
26
31
26 200
15 200
Advertising supplies
2 500
Oct. 31
2 500
2 500
Prepaid insurance
600
Oct. 31
600
600
Office equipment
5 000
Oct. 31
5 000
5 000
Office equipment
Rent expense
Prepaid insurance
Dividends
Salaries expense
Closing balance
5 000
900
600
500
4 000
15 200
26 200
Closing balance
No. 110
2 500
2 500
Closing balance
No. 112
600
600
Closing balance
No. 130
5 000
5 000
CHAPTER 2 The recording process 125
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Accounts payable
Oct. 31
Closing balance
2 500
2 500
Oct.
No. 200
5
Advertising supplies
Nov. 1 Opening balance
Revenue received in advance
Oct.
1
Closing balance
1 200
1 200
Oct.
2
Cash
Nov.
1
Opening balance
Oct.
1
Cash
Nov.
Share capital
1
Opening balance
10 000
10 000
Oct.
1
Cash
Nov.
1
Opening balance
Bank loan
Oct. 31
Oct. 31
Closing balance
Closing balance
5 000
5 000
Cash
Nov.
1
Opening balance
Oct. 31
Closing balance
Cash
Nov.
1
Opening balance
Oct.
3
Cash
500
Oct. 31
500
500
Service revenue
Closing balance
10 000
10 000
Nov.
1
Opening balance
10 000
10 000
10 000
3
Cash
Nov.
1
Opening balance
4 000
Oct. 31
4 000
4 000
Rent expense
Closing balance
Oct. 31
500
500
No. 400
Oct.
900
900
900
5 000
5 000
5 000
No. 300
No. 320
Salaries expense
Oct. 26
1 200
1 200
1 200
No. 230
Dividends
Oct. 20
2 500
2 500
2 500
No. 213
10 000
10 000
10 000
No. 500
4 000
4 000
No. 510
Closing balance
900
900
Helpful hints:
1. Due to space constraints the ledger cross-references to the source journals are not shown. The journal
cross-references are demonstrated in chapters 3 and 6.
2. Post each of the entries from the general journal to the general ledger, then balance each of the
accounts before preparing a trial balance.
3. In this example, only the cash account needed to be balanced as all the other accounts had only one
transaction. However, all accounts were balanced to clearly demonstrate the procedure.
Copyright © 2018. Wiley. All rights reserved.
LEARNING REFLECTION AND CONSOLIDATION
Review it
1. How does journalising differ from posting?
2. What is the purpose of (a) the ledger and (b) a chart of accounts?
Do it
On 5 January, the day of her successful grand opening of Hair Affair Pty Ltd, Kate Brown collected $2280
in cash for hair styling services, and paid $400 in wages and $92 for rent. Kate recorded these transactions
in a general journal and posted the entries to the general ledger.
126
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1. Explain the purpose and process of journalising and posting these transactions.
2. Journalise the three transactions (ignore post references).
3. Balance the cash account.
Cash
Jan. 5
Service revenue
2 280
No. 100
Jan. 5 Salaries expense
5 Rent expense
400
92
Use the chart of accounts for Wong Pty Ltd (figure 2.19).
Reasoning
Every business must keep track of its financial activities (receipts, payments, receivables, payables, etc.);
journalising does this. However, just recording every transaction in chronological order does not make
the entries useful. To be useful, the entries need to be classified and summarised; posting the entries to
specific ledger accounts does this.
Solution
1. The purpose of journalising is to record every transaction in chronological order. Journalising involves
dating every transaction, measuring the dollar amount of each transaction, identifying or labelling each
amount with account names, and recording in a standard format equal debits and credits. Posting
involves transferring the journalised debits and credits to specific accounts in the ledger.
2.
Post
ref.
Date
Account name (narration)
Jan. 5
Cash
Service revenue
(Received cash for services provided)
100
400
2 280
Salaries expense
Cash
(Paid wages to date)
500
100
400
Rent expense
Cash
(Paid rent bill)
510
100
92
5
5
3.
Cash
Jan. 5
Service revenue
2 280
Feb. 1
Opening balance
2 280
1 788
Jan.
Debit
Credit
2 280
400
92
No. 100
5 Salaries expense
5 Rent expense
31 Closing balance
400
92
1 788
2 280
Copyright © 2018. Wiley. All rights reserved.
2.8 The trial balance
LEARNING OBJECTIVE 2.8 Explain the purposes of a trial balance.
A trial balance is a list of accounts and their balances at a given time. Customarily, a trial balance is
prepared at the end of an accounting period. The accounts are listed in the order in which they appear in
the ledger. Debit balances are listed in the left column and credit balances in the right column. The totals
of the two columns must be equal.
The main purpose of a trial balance is to prove the mathematical equality of debits and credits after
posting. Under the double-entry system, this equality will occur when the sum of the debit account balances equals the sum of the credit account balances. A trial balance also uncovers some types of errors in
journalising and posting, such as omitting one side of a journal entry and posting unequal amounts. The
CHAPTER 2 The recording process 127
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trial balance can facilitate the identification of a posting error that results in an account having a credit
balance when it would normally have a debit balance, or a debit balance when it would normally have a
credit balance. In addition, a trial balance is useful in the preparation of financial statements, as explained
in the next chapter.
These are the procedures for preparing a trial balance.
1. List the account numbers, names and their balances.
2. Total the debit and credit columns.
3. Verify the equality of the two columns.
The trial balance prepared from the ledger of Wong Pty Ltd is presented in figure 2.36. Note that the
total debits, $28 700, equal the total credits, $28 700.
FIGURE 2.36
Trial balance of Wong Pty Ltd
WONG PTY LTD
Trial balance
as at 31 October 2019
No.
Account name
Debit
100
110
112
130
200
213
230
300
320
400
500
510
Cash
Advertising supplies
Prepaid insurance
Office equipment
Accounts payable
Revenue received in advance
Bank loan
Share capital
Dividends
Service revenue
Salaries expense
Rent expense
$15 200
2 500
600
5 000
Credit
$ 2 500
1 200
5 000
10 000
500
10 000
4 000
900
$28 700
$28 700
Helpful hint: The trial balance for Wong Pty Ltd does not contain any end of period adjustments that
may need to be made to ensure the accuracy of accounting information. It is an ‘unadjusted’ trial balance.
Chapter 3 illustrates and explains end of period adjustments.
Copyright © 2018. Wiley. All rights reserved.
Limitations of a trial balance
A trial balance does not guarantee that all transactions have been recorded or that the ledger is correct.
Numerous errors may exist even though the trial balance columns agree. For example, the trial balance
may balance even when any of the following occurs: (1) a transaction is not journalised, (2) a correct
journal entry is not posted, (3) a journal entry is posted twice, (4) incorrect accounts are used in journalising or posting, or (5) offsetting errors are made in recording the amount of a transaction. In other words,
as long as equal debits and credits are posted, even to the wrong account or in the wrong amount, the
total debits will equal the total credits. Nevertheless, despite its limitations, the trial balance is a useful
screen for finding errors and is frequently used in practice.
Helpful hint: Extracting a trial balance is essential when a manual accounting system is used to ensure
debits equal credits. Companies like Domino’s employ sophisticated computerised accounting systems
where transactions are only processed when debits equal credits. These companies are less likely to
prepare a trial balance but instead prepare complex accounting reports.
128
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LEARNING REFLECTION AND CONSOLIDATION
Review it
1. What is a trial balance, and how is it prepared?
2. What is the main purpose of a trial balance?
3. What are the limitations of a trial balance?
DECISION-MAKING TOOLKIT
Decision/issue
How do you
determine that debits
equal credits?
Info needed for
analysis
Tool or technique
to use for decision
How to evaluate results to make
decision
All account
balances
Trial balance
List the account names and their
balances; total the debit and credit
columns; verify equality. If not equal,
look for error.
USING THE DECISION-MAKING TOOLKIT
The Western Farmers’ Cooperative Ltd was formed in the late 1990s. Its purpose is to use raw materials,
mainly grain and meat products grown by its members, to process this material into consumer food products and to distribute the products nationally. Profits not needed for expansion or investment are returned
to the members annually, on a pro rata basis, according to the market value of the grain and meat products
received from each farmer.
Assume that the following information was prepared for the company’s trial balance.
WESTERN FARMERS’ COOPERATIVE LTD
Trial balance
as at 31 December 2019
Copyright © 2018. Wiley. All rights reserved.
Account name
Accounts receivable
Accounts payable
Advertising and promotion payable
Buildings
Cash
Cost of sales
Current portion of long-term debt
Freight expense
Inventories
Land
Long-term debt
Machinery and equipment
Retained earnings
Sales revenue
Salaries and wages payable
Selling and administrative expense
Debit
$’000
Credit
$’000
712 000
37 000
141 000
365 000
32 000
2 384 000
12 000
500 000
1 291 000
110 000
1 368 000
63 000
822 000
3 741 000
62 000
651 000
6 108 000
6 183 000
Helpful hint: The current portion of the long-term debt is the amount of the debt due to be paid within
12 months.
CHAPTER 2 The recording process 129
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Because the trial balance is not in balance, you have checked with various people responsible for
entering accounting data and have discovered the following.
1. The purchase of five new trucks, costing $7 million and paid for with cash, was not recorded.
2. A data entry clerk accidentally deleted the account name for an account with a credit balance of
$472 million, so the amount was added to the long-term debt account in the trial balance.
3. December cash sales revenue of $75 million was credited to the sales revenue account, but the other
half of the entry was not made.
4. $50 million of selling expenses were mistakenly charged to freight expense.
Required
Answer these questions:
(a) Which mistake or mistakes have caused the trial balance to be out of balance?
(b) Should all the items be corrected? Explain.
(c) What is the name of the account the data entry clerk deleted?
(d) Make the necessary corrections and balance the trial balance.
(e) On your trial balance, write SFP beside the accounts that should be shown on the statement of financial
position and P/L beside those that should be shown on the statement of profit or loss.
Solution
(a) Only mistake 3 (sales revenue of $75 million not posted) has caused the trial balance to be out of
balance.
(b) All the items should be corrected. The misclassification error (mistake 4) on the selling expense would
not affect bottom line profit, but it does affect the amounts reported in the two expense accounts, and
should, therefore, be corrected.
(c) There is no share capital account, so that must be the account that was deleted by the data entry
clerk.
(d) and (e):
WESTERN FARMERS’ COOPERATIVE LTD
Trial balance
as at 31 December 2019
Copyright © 2018. Wiley. All rights reserved.
Account name
Accounts receivable
Accounts payable
Advertising and promotion payable
Buildings
Cash ($32 000 − $7000 + $75 000)
Cost of sales
Current portion of long-term debt
Freight expense ($500 000 − $50 000)
Inventories
Land
Long-term debt ($1 368 000 − $472 000)
Machinery and equipment ($63 000 + $7000)
Retained earnings
Sales revenue
Salaries and wages payable
Selling and administrative expense ($651 000 + $50 000)
Share capital
Debit
$’000
Credit
$’000
712 000
37 000
141 000
365 000
100 000
2 384 000
12 000
450 000
1 291 000
110 000
896 000
70 000
822 000
3 741 000
62 000
701 000
6 183 000
472 000
6 183 000
SFP
SFP
SFP
SFP
SFP
P/L
SFP
P/L
SFP
SFP
SFP
SFP
SFP
P/L
SFP
P/L
SFP
Helpful hint: The effects of the mistakes on the original unadjusted account balances are given in
parentheses in the solution.
130
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Created from monash on 2025-02-26 02:06:38.
SUMMARY
2.1 Analyse the effect of accounting transactions and events on the basic accounting equation.
Each business transaction must have a dual effect on the accounting equation. For example, if an individual asset is increased, there must be a corresponding (a) decrease in another asset or (b) increase in
liabilities or (c) increase in equity.
2.2 Explain what an account is and how it helps in the recording process.
An account is an individual accounting record of increases and decreases in specific asset, liability, revenue, expense and equity items.
2.3 Define debits and credits and explain how they are used to record accounting transactions.
The terms debit and credit refer to the left and right sides of accounts. Assets, dividends and expenses
are increased by debits and decreased by credits. Liabilities, share capital, retained earnings and revenues
are increased by credits and decreased by debits.
2.4 Identify the basic steps in the recording process.
The basic steps in the recording process are: (a) analyse each transaction in terms of its effect on the
accounts, (b) enter the transaction information in a journal, and (c) transfer the journal information (post)
to the appropriate accounts in the ledger.
2.5 Explain what a journal is and how it helps in the recording process.
The initial accounting record of a transaction is entered in a journal before the data are entered in the
accounts. A journal provides a chronological record of all transactions. It records in one place the complete effect of a transaction, and this helps to prevent or locate errors.
2.6 Explain what a general ledger is and how it helps in the recording process.
The entire group of accounts maintained by an entity is referred to collectively as a general ledger. The
ledger keeps in one place all the information about changes in specific account balances.
2.7 Explain what posting is and how it helps in the recording process.
Posting is the procedure of transferring journal entries to the ledger accounts. This phase of the recording
process accumulates the effects of journalised transactions in the individual accounts.
2.8 Explain the purposes of a trial balance.
A trial balance is a list of accounts and their balances at a given time. The main purpose of the trial
balance is to prove the mathematical equality of debits and credits after posting. A trial balance also
uncovers some types of errors in journalising and posting and is useful in preparing financial statements.
DECISION-MAKING TOOLKIT — A SUMMARY
Copyright © 2018. Wiley. All rights reserved.
DECISION-MAKING TOOLKIT
Info needed
for analysis
Tool or technique
to use for decision
How to evaluate results to make
decision
Has an accounting
transaction
occurred?
Details of the
event
Accounting
equation
Determine the effect, if any, on assets,
liabilities and equity. A transaction has
occurred if the accounting equation is
affected.
How do you
determine that
debits equal
credits?
All account
balances
Trial balance
List the account names and their
balances; total the debit and credit
columns; verify equality. If not equal
look for error.
Decision/issue
CHAPTER 2 The recording process 131
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KEY TERMS
account An individual accounting record of increases and decreases in a specific asset, liability or
equity item.
accounting information system The system of collecting and processing transaction data and
communicating financial information to interested parties.
accounting transactions and events Occurrences which affect the assets, liabilities and equity items in
a business and must be recognised (recorded). A transaction is an external exchange of something of
value between two or more entities. The allocation of the cost of an entity’s long-lived assets over
different accounting periods is an example of an event.
accounts payable Amounts owed to suppliers for the purchase of goods or services on credit. Also
called creditors or trade creditors.
accounts receivable Amounts due from customers for the sale of goods or services on credit. Also
called debtors or trade debtors.
chart of accounts A list of all an entity’s ledger account names and account numbers.
credit The right side of an account.
debit The left side of an account.
dividend A distribution of profits by a company to its shareholders in an amount proportional to each
shareholder’s percentage ownership. The most common form is a cash distribution.
double-entry system A system that records the dual effect of each transaction in appropriate accounts.
general journal The most basic form of journal where the transactions are initially recorded in
chronological order.
general ledger A ledger that contains all asset, liability, and equity accounts maintained by each
individual business.
journal An accounting record in which transactions are initially recorded in chronological order.
journalising The procedure of entering transaction data in the journal.
narration A brief explanation of each transaction recorded in the general journal. The narration is
generally found directly below the transaction it relates to.
posting The procedure of transferring journal entries to the ledger accounts.
source document A form that provides written evidence that a transaction has occurred, e.g. sales
invoice, purchase order, cash register tape.
T account The basic form of an account.
transaction analysis The process of identifying the specific effects of transactions and events on the
accounting equation (Assets = Liabilities + Equity).
trial balance A list of accounts and their balances at a given time.
DEMONSTRATION PROBLEM
Copyright © 2018. Wiley. All rights reserved.
Nikola Subotic and his brothers opened Niky’s Dry Cleaning Pty Ltd on 1 September 2019. During the
first month of operations the following transactions occurred:
Sept.
1
2
3
4
10
15
20
30
132
The business issued shares and shareholders invested $20 000 cash in the business.
Paid $1000 cash for shop rent for the month of September.
Purchased industrial dry-cleaning equipment for $25 000, paying $10 000 in cash and $15 000
on credit.
Paid $1200 for 1-year accident insurance policy.
Received bill from the Daily Telegraph for advertising the opening of the cleaning service, $200.
Performed services on account for $6200.
Paid a $700 cash dividend to shareholders.
Received $5000 from customers invoiced on 15 September.
Financial accounting: Reporting, analysis and decision making
Carlon, Shirley. Financial Accounting: Reporting, Analysis And Decision Making, 6th Edition, Wiley, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/monash/detail.action?docID=5561261.
Created from monash on 2025-02-26 02:06:38.
The chart of accounts for the entity is the same as for Wong Pty Ltd except for the following: cleaning
equipment (account number 132) and advertising expense (account number 512).
Required
(a) Journalise the September transactions.
(b) Open ledger accounts and post the September transactions.
(c) Prepare a trial balance at 30 September 2019.
PROBLEM-SOLVING STRATEGIES
1. Make separate journal entries for each transaction.
2. Note that all debits precede all credit entries.
3. In journalising, make sure debits equal credits.
4. Use specific account names and numbers taken from the chart of accounts.
5. Provide a narration explaining each entry.
6. Arrange ledger in statement order beginning with the statement of financial position.
7. Post in chronological order, place a ✓ in the post reference column and balance each account.
8. Prepare a trial balance, which lists accounts in the order in which they appear in the ledger.
9. List debit balances in the left column and credit balances in the right column.
SOLUTION TO DEMONSTRATION PROBLEM
(a)
General journal
Date
2019
Sept.
Account name (narration)
1
2
3
4
10
Copyright © 2018. Wiley. All rights reserved.
15
20
30
Post
ref.
Debit
Cash
Share capital
(Issued shares)
100 ✓
300 ✓
20 000
Rent expense
Cash
(Paid September rent)
510 ✓
100 ✓
1 000
Cleaning equipment
Cash
Accounts payable
(Purchased cleaning equipment part paid for in cash and
part on account)
131 ✓
100 ✓
200 ✓
25 000
Prepaid insurance
Cash
(Paid 1-year insurance policy)
112 ✓
100 ✓
1 200
Advertising expense
Accounts payable
(Received invoice from Daily Telegraph for advertising)
512 ✓
200 ✓
200
Accounts receivable
Service revenue
(To record credit sale)
104 ✓
400 ✓
6 200
Dividends
Cash
(Paid a cash dividend)
320 ✓
100 ✓
700
Cash
Accounts receivable
(To record collection of accounts receivable)
100 ✓
104 ✓
5 000
Credit
20 000
1 000
10 000
15 000
1 200
200
6 200
700
5 000
CHAPTER 2 The recording process 133
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Helpful hint: Remember that a ✓ is placed in the post reference column after the journal entry
has been posted to the general ledger. The ✓indicates that the journal entry has been posted to the
general ledger.
(b)
General ledger
Cash
Sept.
1
30
Share capital
Accounts receivable
Oct.
1
Opening balance
20 000
5 000
Sept.
No. 100
2
3
4
20
30
Rent expense
Cleaning equipment
Prepaid insurance
Dividends
Closing balance
25 000
12 100
Accounts receivable
Sept.
15
Service revenue
6 200
Oct.
1
Opening balance
6 200
1 200
Sept.
No. 104
30
30
Cash
Closing balance
Prepaid insurance∗
Sept.
4
Cash
Oct.
1
Opening balance
Sept.
3
Cash/accounts payable
Oct.
1
Opening balance
Sept.
30
Closing balance
Closing balance
25 000
Sept. 30
25 000
25 000
Accounts payable
Closing balance
Copyright © 2018. Wiley. All rights reserved.
30
Closing balance
Sept.
20
Cash
Oct.
1
Opening balance
Sept.
30
Closing balance
20 000
20 000
3
10
Cleaning equipment
Advertising expense
Oct.
1
Opening balance
2
Cash
Oct.
1
Opening balance
Sept.
10
Accounts payable
1
Cash
Oct.
Dividends∗
1
Opening balance
700
Sept. 30
700
700
Service revenue∗
Closing balance
15
Accounts receivable
Oct.
1
Opening balance
1 000
Sept. 30
1 000
1 000
Advertising expense∗
Closing balance
Oct.
1
Opening balance
Sept.
20 000
20 000
20 000
No. 320
700
700
No. 400
Sept.
200
200
200
15 000
200
15 200
15 200
No. 300
Rent expense∗
Sept.
25 000
25 000
No. 200
Sept.
Sept.
6 200
6 200
1 200
1 200
No. 131
Share capital∗
Sept.
5 000
1 200
6 200
No. 112
1 200
Sept. 30
1 200
1 200
Cleaning equipment∗
15 200
15 200
1 000
10 000
1 200
700
12 100
25 000
6 200
6 200
6 200
No. 510
30
1 000
1 000
No. 512
Closing balance
200
200
∗ These accounts did not need to be balanced as there was only one transaction. However, all accounts were balanced to
show 1 Oct. balances more clearly.
134
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(c)
NIKY’S DRY CLEANING PTY LTD
Trial balance
as at 30 September 2019
No.
Account name
Debit
100
104
112
131
200
300
320
400
510
512
Cash
Accounts receivable
Prepaid insurance
Cleaning equipment
Accounts payable
Share capital
Dividends
Service revenue
Rent expense
Advertising expense
$12 100
1 200
1 200
25 000
Credit
$15 200
20 000
700
6 200
1 000
200
$41 400
$41 400
SELF-STUDY QUESTIONS
Copyright © 2018. Wiley. All rights reserved.
2.1 The effects on the basic accounting equation of performing services for cash are to:
LO1
(a) increase assets and decrease equity.
(b) increase assets and increase equity.
(c) increase assets and increase liabilities.
(d) increase liabilities and increase equity.
2.2 Which statement about an account is true?
LO2
(a) In its simplest form, an account consists of two parts.
(b) An account is an individual accounting record of increases and decreases in specific asset,
liability or equity items.
(c) There are separate accounts for specific assets and liabilities but only one account for equity items.
(d) The left side of an account is the credit or decrease side.
2.3 Debits:
LO3
(a) increase both assets and liabilities.
(b) decrease both assets and liabilities.
(c) increase assets and decrease liabilities.
(d) decrease assets and increase liabilities.
2.4 A revenue account:
LO3
(a) has a normal balance of a debit.
(b) is decreased by credits.
(c) is increased by debits.
(d) is increased by credits.
2.5 Which accounts normally have debit balances?
LO3
(a) Assets, expenses and revenues.
(b) Assets, expenses and retained earnings.
(c) Assets, liabilities and dividends.
(d) Assets, dividends and expenses.
2.6 Which of these statements about a journal is false?
LO5
(a) It contains only revenue and expense accounts.
(b) It provides a chronological record of transactions.
(c) It helps to prevent or locate errors because both debit and credit amounts for each entry are in
one place.
(d) It records in one place the complete effect of a transaction.
CHAPTER 2 The recording process 135
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2.7 A general ledger:
LO6
(a) contains only asset and liability accounts.
(b) should show accounts in alphabetical order.
(c) is a collection of the entire group of accounts maintained by an entity.
(d) provides a chronological record of transactions.
2.8 Posting:
LO7
(a) normally occurs before journalising.
(b) transfers ledger transaction data to the journal.
(c) is an optional step in the recording process.
(d) transfers journal entries to ledger accounts.
2.9 A trial balance:
LO8
(a) is a list of accounts with their balances at a given time.
(b) proves the accuracy of all journalised transactions in the ledger.
(c) will not balance if a correct journal entry is posted twice.
(d) proves that all transactions have been recorded.
2.10 A trial balance will not balance if:
LO8
(a) a correct journal entry is posted twice.
(b) the purchase of supplies on credit is debited to supplies and credited to cash.
(c) a $200 cash dividend is debited to dividends for $2000 and credited to cash for $200.
(d) a $450 payment on account is debited to accounts payable for $45 and credited to cash
for $45.
QUESTIONS
Copyright © 2018. Wiley. All rights reserved.
2.1 Describe the accounting information system and the steps in the recording process.
2.2 Are the following events recorded in the accounting records? Explain your answer in each case.
(a) A major shareholder of the company dies.
(b) Supplies are purchased on account.
(c) An employee is fired.
(d) The company pays a cash dividend to its shareholders.
2.3 Indicate how each business transaction affects the basic accounting equation.
(a) Paid cash for cleaning services.
(b) Purchased equipment for cash.
(c) Issued shares to investors in exchange for cash.
(d) Paid an account payable in full.
2.4 Charles Nguyen, a fellow student, contends that the double-entry system means each transaction
must be recorded twice. Is Charles correct? Explain.
2.5 Tanya Nikolic, an introductory accounting student, believes debit balances are favourable and credit
balances are unfavourable. Is Tanya correct? Discuss.
2.6 State the rules of debit and credit as applied to (a) asset accounts, (b) liability accounts, (c) the share
capital account, (d) revenue accounts, (e) expense accounts and (f) dividend account.
2.7 What is the normal balance for each of these accounts?
(a) Equipment.
(b) Cash.
(c) Advertising expense.
(d) Accounts payable.
(e) Service revenue.
(f) Accounts receivable.
(g) Share capital.
136
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Created from monash on 2025-02-26 02:06:38.
2.8 (a) What is a ledger?
(b) Why is a chart of accounts important?
2.9 What is a trial balance and what are its purposes?
2.10 Two students are discussing the use of a trial balance. They wonder whether the following errors,
each considered separately, would prevent the trial balance from balancing. If the trial balance did
balance, does this mean the transactions were entered correctly? What would you tell them?
(a) The bookkeeper debited accounts receivable for $900 and credited cash for $900 for receipt of
monies from sales made on account, previously recorded.
(b) Cash collected on account was debited to cash for $900, and service revenue was credited
for $90.
BRIEF EXERCISES
BE2.1 Determine effect on basic accounting equation.
LO1
Presented here are three economic events. On a sheet of paper, list the letters (a), (b) and (c) with
columns for assets, liabilities and equity. In each column, indicate whether the event increased
(+), decreased (−) or had no effect (NE) on assets, liabilities and equity.
(a) Purchased equipment on account.
(b) Received cash for providing a service.
(c) Received cash from a customer who had purchased goods the previous week on account.
BE2.2 Indicate debit and credit effects.
LO3
For each of the following accounts indicate the effect of a debit or a credit on the account and
the normal balance.
(a) Accounts payable.
(b) Advertising expense.
(c) Service revenue.
(d) Accounts receivable.
(e) Retained earnings.
(f) Dividends.
BE2.3 Indicate basic debit–credit analysis.
LO4
Dudley Advertising Ltd had the following transactions during August of the current year. Indicate
(a) the basic analysis and (b) the debit–credit analysis.
Aug.
1
4
16
27
Issued shares to investors in exchange for $15 000 cash.
Paid insurance in advance for 6 months, $1800.
Received $9000 from clients for services rendered.
Paid secretary $500 salary.
BE2.4 Journalise transactions.
LO5
Use the data in BE2.3 and journalise the transactions. (Include narrations.)
Copyright © 2018. Wiley. All rights reserved.
BE2.5 Post journal entries to T accounts.
LO7
Selected transactions for Gonzales Ltd are presented in journal form (without narrations). Post
the transactions to T accounts.
Date
May
5
12
15
Account name
Debit
Accounts receivable
Service revenue
Cash
Accounts receivable
Cash
Service revenue
13 200
Credit
13 200
12 400
12 400
12 000
12 000
CHAPTER 2 The recording process 137
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BE2.6 Prepare a trial balance.
LO8
From the ledger balances below, prepare a trial balance for Evans Ltd at 30 June 2019. All
account balances are normal.
Accounts payable
Cash
Share capital
Dividends
Equipment
$ 8 650
6 400
30 000
2 200
23 000
Service revenue
Accounts receivable
Salaries expense
Rent expense
$11 500
5 600
9 000
3 950
BE2.7 Prepare a corrected trial balance.
LO8
An inexperienced bookkeeper prepared the following trial balance that does not balance. Prepare
a correct trial balance, assuming all account balances are normal.
TIMARU LTD
Trial balance
as at 31 December 2019
Debit
Cash
Prepaid insurance
Accounts payable
Revenue received in advance
Share capital
Retained earnings
Dividends
Service revenue
Insurance expense
Salaries expense
Rent expense
Credit
$32 100
$ 1 500
8 700
3 500
25 000
9 000
4 500
34 800
8 700
18 900
$63 200
15 300
$98 800
EXERCISES
Copyright © 2018. Wiley. All rights reserved.
E2.1 Analyse the effect of transactions.
LO1
Selected transactions for Speedy Lawn Care Pty Ltd are listed here:
1. Issued shares to investors in exchange for cash.
2. Paid monthly rent.
3. Received cash from customers when service was rendered.
4. Invoiced customers for services performed.
5. Paid dividend to shareholders.
6. Incurred advertising expense on account.
7. Received cash from customers invoiced in (4).
8. Purchased additional equipment for cash.
9. Purchased equipment on account.
Required
Describe the effect of each transaction on assets, liabilities and equity. For example, the first
answer is: (1) Increase in assets and increase in equity.
E2.2 Analyse transactions and calculate profit.
LO1
An analysis of transactions for Foxes Ltd in August 2019, its first month of operations, is shown
as follows. Each change in equity is explained.
138
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Cash
+
1. +$34 000
2.
−4 000
3.
−1 100
4. +21 800
5.
−3 000
6.
−1 000
7.
−2 750
8.
+3 200
9.
−5 700
10.
Accounts
receivable
Office
Accounts
+ Supplies + equipment = payable +
+$10 000
Equity
+$34 000 Issued share capital
+$6 000
+$1 100
+$5 600
+27 400 Service revenue
−3 000
−1 000 Dividends
−2 750 Rent expense
−3 200
+1 500
−5 700 Salaries expense
−1 500 Electricity expense
Required
(a) Describe each transaction.
(b) Determine how much equity increased for the month.
(c) Calculate the profit for the month.
(d) Explain the relationship between profit and equity which is shown in the statement of financial
position.
E2.3 Prepare financial statements.
LO1
The analysis of transactions for Foxes Ltd is presented in E2.2.
Required
Prepare a statement of profit or loss for August, a statement of financial position as at 31 August
2019 and a calculation of retained earnings.
E2.4 Identify debits, credits and normal balances.
LO3
Selected transactions for Expensive Designs Pty Ltd, an interior decorator in its first month of
business, are as follows:
1. Issued shares to investors for $10 000 in cash.
2. Purchased used car for $5000 cash for use in business.
3. Purchased supplies on account for $500.
4. Invoiced customers $1800 for services performed.
5. Paid $200 cash for advertising start of business.
6. Received $700 cash from customers invoiced in transaction (4).
7. Paid creditor $300 cash on account.
8. Paid dividends of $400 cash to shareholders.
Required
Copyright © 2018. Wiley. All rights reserved.
For each transaction, indicate (a) the basic type of account debited and credited (asset, liability,
equity), (b) the specific account debited and credited (cash, rent expense, service revenue etc.),
(c) whether the specific account is increased or decreased, and (d) the normal balance of the
specific account. Use the following format, in which transaction 1 is given as an example:
Transaction
1
(a)
Basic
type
Asset
Account debited
(b)
(c)
Specific
account
Effect
Cash
Increase
(d)
Normal
balance
Debit
(a)
Basic
type
Equity
Account credited
(b)
(c)
Specific
account
Effect
Share
Increase
capital
E2.5 Journalise transactions.
(d)
Normal
balance
Credit
LO5
Data for Expensive Designs Pty Ltd, interior decorator, are presented in E2.4.
CHAPTER 2 The recording process 139
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Created from monash on 2025-02-26 02:06:38.
Required
Journalise the transactions. Narrations are required.
E2.6 Identify debits, credits and normal balances.
LO3
Selected transactions for Bookit Pty Ltd, a bookkeeping service in its first month of business, are
as follows:
1. Issued shares to investors for $10 000 in cash.
2. Purchased used photocopier for $3000 on account, for use in business.
3. Purchased supplies on account for $400.
4. Invoiced customers $1800 for services performed.
5. Paid $300 cash for advertising start of business.
6. Received $1500 cash from customers invoiced in transaction (4).
7. Paid creditor $3400 cash on account.
8. Paid rent for month, $600 cash.
Required
For each transaction, indicate (a) the basic type of account debited and credited (asset, liability,
equity), (b) the specific account debited and credited (cash, rent expense, service revenue etc.),
(c) whether the specific account is increased or decreased, and (d) the normal balance of the
specific account. Use the following format, in which transaction (1) is given as an example:
Transaction
1
(a)
Basic
type
Asset
Account debited
(b)
(c)
Specific
account
Effect
Cash
Increase
(d)
Normal
balance
Debit
(a)
Basic
type
Equity
Account credited
(b)
(c)
Specific
account
Effect
Share
Increase
capital
E2.7 Journalise transactions.
(d)
Normal
balance
Credit
LO5
Data for Bookit Pty Ltd, a bookkeeping service, are presented in E2.6.
Required
Journalise the transactions. Narrations are required.
E2.8 Post journal entries and prepare a trial balance.
LO7, 8
Selected transactions from the journal of Ink Pad Printers Ltd during its first month of operations
are presented here:
Date
Aug.
1
10
12
Copyright © 2018. Wiley. All rights reserved.
25
31
Account name
Debit
Cash
Share capital
Cash
Service revenue
Office equipment
Cash
Bank loan
Accounts receivable
Service revenue
Cash
Accounts receivable
17 000
Credit
17 000
12 400
12 400
4 000
1 000
3 000
1 500
1 500
600
600
Required
(a) Post the transactions to T accounts.
(b) Prepare a trial balance as at 31 August 2020.
140
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Created from monash on 2025-02-26 02:06:38.
E2.9 Journalise transactions from T accounts and prepare a trial balance.
LO5, 8
These simple T accounts summarise the ledger of Zebra Tours Ltd at the end of the first month of
operations:
Cash
Apr.
1
12
29
30
10 000
1 900
200
700
Apr.
7
2 400
Apr.
4
4 800
Revenue received in advance
Apr. 15
25
750
3 500
Apr. 30
Accounts receivable
Apr. 29
Share capital
200
Apr.
Supplies
3 500
Apr.
Apr.
1
10 000
Service revenue
Accounts payable
Apr. 25
700
4
7
12
2 400
1 900
Salaries expense
4 800
Apr. 15
750
Required
(a) Prepare in the order they occurred in the journal entries (including narrations) that resulted in
the amounts posted to the account.
(b) Prepare a trial balance as at 30 April 2019.
E2.10 Analyse transactions, prepare journal entries, and post transactions to T accounts.
LO1, 5, 7
Selected transactions for Ranch Ltd during its first month in business are presented below:
Sept.
1
5
25
30
Issued shares in exchange for $45 000 cash received from investors.
Purchased equipment for $25 000, paying $10 000 in cash and the balance on account.
Paid $7500 cash on balance owed for equipment.
Paid $1000 cash dividend.
Ranch Ltd’s chart of accounts shows: Cash (no. 100), Equipment (no. 120), Accounts payable
(no. 200), Share capital (no. 300), and Dividends (no. 320).
Required
(a) Prepare an analysis of the September transactions. The column headings should be: Cash +
Equipment = Accounts payable + Equity. For transactions affecting equity, provide explanations at the side, as shown in figure 2.2.
(b) Journalise the transactions. Narrations are required.
(c) Post the transactions to T accounts.
Copyright © 2018. Wiley. All rights reserved.
E2.11 Analyse errors and their effects on trial balance.
LO8
The bookkeeper for Equipment Repair Pty Ltd made these errors in journalising and posting:
1. A credit posting of $600 to accounts payable was omitted.
2. A debit posting of $750 for prepaid insurance was debited to insurance expense.
3. A collection on account of $100 was journalised and posted as a debit to cash $100 and a credit
to service revenue $100.
4. A credit posting of $300 to rates and taxes payable was made twice.
5. A cash purchase of supplies for $250 was journalised and posted as a debit to supplies $25 and
a credit to cash $25.
6. A debit of $465 to advertising expense was posted as $456.
Required
(a) For each error, indicate (a) whether the trial balance will balance; if the trial balance will not
balance, indicate (b) the amount of the difference and (c) the trial balance column that will
CHAPTER 2 The recording process 141
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Created from monash on 2025-02-26 02:06:38.
have the greater total. Consider each error separately. Use the following form, in which error 1
is given as an example:
Error
1
(a)
In balance
No
(b)
Difference
$600
(c)
Column with larger total
Debit
(b) Describe the types of errors a trial balance will not detect.
E2.12 Prepare a trial balance.
LO8
The accounts in the ledger of Sushi To Go Ltd contain the following balances on 31 July 2019:
Accounts receivable
Accounts payable
Cash
Delivery equipment
Fuel expense
Insurance expense
Bank loan
$ 27 184
14 692
?
118 620
1 416
946
56 800
Prepaid insurance
Repair expense
Service revenue
Dividends
Share capital
Salaries expense
Salaries payable
Retained earnings
$
3 836
1 822
31 220
1 300
79 900
8 756
1 530
9 172
Required
Prepare a trial balance with the accounts arranged as illustrated in this chapter, and fill in the
missing amount for cash.
E2.13 Prepare a trial balance.
LO8
The accounts in the ledger of Boxer Ltd contain the following balances on 31 March 2020:
Accounts receivable
Accounts payable
Cash
Delivery equipment
Fuel expense
Insurance expense
Bank loan
$ 13 450
23 774
76 526
165 000
7 890
4 568
75 000
Prepaid insurance
Repair expense
Service revenue
Dividends
Share capital
Salaries expense
Salaries payable
Retained earnings
$
6 345
3 421
67 589
2 700
112 000
23 700
3 460
?
Required
Prepare a trial balance with the accounts arranged as illustrated in the chapter, and fill in the
missing amount for retained earnings.
PROBLEM SET A
Copyright © 2018. Wiley. All rights reserved.
PSA2.1 Analyse transactions and calculate profit.
LO1
On 1 April, Let’s Go Travel Agency Ltd was established. These transactions were completed
during the month:
1. Shareholders invested $40 000 cash in the company in exchange for shares.
2. Paid $800 cash for April office rent.
3. Purchased office equipment for $5000 cash.
4. Incurred $600 of advertising costs in The Australian, on account.
5. Paid $1200 for office supplies.
6. $18 000 of services was provided: cash of $2000 was received from customers, and the
balance of $16 000 was invoiced to customers on account.
142
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Created from monash on 2025-02-26 02:06:38.
7. Paid $400 cash dividends.
8. Paid The Australian amount due in transaction (4).
9. Paid employees’ salaries, $2400.
10. Received $16 000 in cash from customers who had previously been invoiced in
transaction (6).
Required
(a) Prepare a transaction analysis using these column headings: Cash, Accounts receivable,
Supplies, Office equipment, Accounts payable, Share capital, and Retained earnings.
Include in the margin all explanations for any changes in retained earnings.
(b) From an analysis of the column Retained earnings, calculate profit or loss for April.
PSA2.2 Analyse transactions and prepare financial statements.
LO1
Aurora Goodwin started her own consulting firm, Best Consulting Pty Ltd, on 1 May 2019.
The following transactions occurred during the month of May:
May
1
2
3
5
9
12
15
17
20
23
26
29
30
Shareholders invested $10 000 cash in the business.
Paid $1050 for office rent for the month.
Purchased $250 of supplies on account.
Paid $75 to advertise in the Auckland News.
Received $1250 cash for services provided.
Paid $100 for telephone.
Performed $3500 of services on account.
Paid $2000 for employee salaries.
Paid for the supplies purchased on account on 3 May.
Received a cash payment of $2250 for services provided on account on 15 May.
Borrowed $2500 from the bank.
Purchased office equipment for $1200 on account.
Paid $125 for electricity.
Required
(a) Show the effects of the previous transactions on the accounting equation using the following
format:
Assets
Liabilities
Accounts
Office
Bank
Accounts
Date Cash + receivable + Supplies + equipment = loan + payable +
Share
capital
Equity
Retained
+ earnings
Include margin explanations for any changes in retained earnings.
(b) Prepare a statement of profit or loss for the month of May.
(c) Prepare a statement of financial position as at 31 May 2019.
Copyright © 2018. Wiley. All rights reserved.
PSA2.3 Analyse transactions and prepare financial statements.
LO1
Ivan Izo started a business providing legal services, Ivan Izo Pty Ltd, on 1 July 2019. On
31 July the statement of financial position showed: cash $4000; accounts receivable $1500;
supplies $500; office equipment $5000; accounts payable $4200; share capital $6500; and
retained earnings $300. During August the following transactions occurred:
1. Collected $1400 of amounts owing from accounts receivable.
2. Paid $2700 cash of the balance of accounts payable.
3. Recorded revenue of $6400, of which $3000 was collected in cash and the balance is due in
September.
4. Purchased additional office equipment for $1000, paying $400 in cash and the balance on
account.
5. Paid salaries $1500, rent for August $900, and advertising expenses $350.
CHAPTER 2 The recording process 143
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6. Declared and paid a cash dividend of $550.
7. Borrowed $2000 from Kati Kati Bank.
8. Incurred electricity expense for the month of $250 on account.
Required
(a) Prepare a transaction analysis of the August transactions beginning with 31 July balances.
The column headings should be: Cash + Accounts receivable + Supplies + Office equipment = Bank loan + Accounts payable + Share capital + Retained earnings. Include in the
margin explanations for any changes in retained earnings.
(b) Prepare a statement of profit or loss for August, and a classified statement of financial
position as at 31 August.
PSA2.4 Journalise a series of transactions.
LO3, 5
Fantasy Miniature Golf and Driving Range Pty Ltd was opened on 1 March by Jim Zarle. These
selected events and transactions occurred during March:
Mar.
1
Shareholders invested $60 000 cash in the business in exchange for shares in the
company.
Purchased Lee’s Golf Land for $38 000 cash. The price consists of land $23 000,
building $9000, and equipment $6000.
Advertised the opening of the driving range and miniature golf course, paying
advertising expenses of $1600 cash.
Paid cash $1480 for a 1-year insurance policy.
Purchased golf clubs and other equipment for $1600 from Golf Australia, payable in
30 days.
Received golf fees of $800 in cash for games played in March.
Sold 100 voucher books for $15.00 each in cash. Each book contains 10 vouchers
that enable the holder to play one round of miniature golf or to hit one bucket of golf
balls. (Hint: The revenue is recorded as revenue received in advance until the
customers use the vouchers.)
Paid a $500 cash dividend.
Paid salaries of $600.
Paid Golf Australia in full.
Received $800 of fees in cash.
3
5
6
10
18
19
25
30
30
31
The company uses these accounts: Cash (no. 100), Prepaid insurance (no. 112), Land
(no. 130), Buildings (no. 135), Equipment (no. 138), Accounts payable (no. 200), Golf revenue received in advance (no. 213), Share capital (no. 300), Retained earnings (no. 310),
Dividends (no. 320), Golf revenue (no. 400), Advertising expense (no. 500) and Salaries
expense (no. 510).
Required
Journalise the March transactions. Include narrations.
PSA2.5 Journalise transactions, post, and prepare a trial balance.
LO3, 5, 6, 7, 8
Copyright © 2018. Wiley. All rights reserved.
Mahon Consultants Pty Ltd opened as licensed architects on 1 April 2019. During the first
month of the operation of the business, these events and transactions occurred:
Apr.
144
1
1
2
3
10
11
20
30
30
Shareholders invested $76 500 cash in exchange for shares.
Hired a personal assistant at a salary of $5850 per month, payable monthly.
Paid office rent for the month, $2850.
Purchased drawing supplies on account from Speedy Supplies Ltd, $7650.
Completed a contract and invoiced client $4050 for services.
Received $1650 cash advance from R. Welk for the design of an extension.
Received $9450 cash for services completed for P. Donahue.
Paid assistant for the month, $5850.
Paid $3450 owed to Speedy Supplies Ltd.
Financial accounting: Reporting, analysis and decision making
Carlon, Shirley. Financial Accounting: Reporting, Analysis And Decision Making, 6th Edition, Wiley, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/monash/detail.action?docID=5561261.
Created from monash on 2025-02-26 02:06:38.
Mahon Consultants Pty Ltd uses these accounts: Cash (no. 100), Accounts receivable
(no. 110), Supplies (no. 115), Accounts payable (no. 200), Revenue received in advance
(no. 209), Share capital (no. 300), Service revenue (no. 400), Salaries expense (no. 500), and
Rent expense (no. 510).
Required
(a) Journalise the transactions. Include narrations.
(b) Post to the ledger T accounts.
(c) Prepare a trial balance on 30 April 2019.
PSA2.6 Journalise transactions, post and prepare a trial balance.
LO3, 5, 6, 7, 8
This is the trial balance of Lou Lou’s Beauty Centre Pty Ltd on 30 September:
LOU LOU’S BEAUTY CENTRE PTY LTD
Trial balance
as at 30 September 2019
No.
Account name
Debit
100
115
120
130
200
210
300
Cash
Accounts receivable
Supplies
Equipment
Accounts payable
Revenue received in advance
Share capital
$32 800
7 600
5 600
30 800
$76 800
Credit
$18 800
1 600
56 400
$76 800
The October transactions were as follows:
Oct.
5
10
15
17
20
29
31
Received $2400 cash from customers on account.
Invoiced customers for services performed, $12 800.
Paid employee salaries, $3600.
Performed $1200 of services for customers who paid in advance
in September for suntanning sessions to be used in October.
Paid $5200 to creditors on account.
Paid a $800 cash dividend.
Paid electricity, $1600.
Required
(a) Prepare a general ledger using T accounts. Enter the opening balances in the ledger
accounts as of 1 October. Provision should be made for these additional accounts: Dividends (no. 310), Service revenue (no. 400), Salaries expense (no. 500), and Electricity
expense (no. 510).
(b) Journalise the transactions, including narrations.
(c) Post to the ledger accounts, which you prepared in part (a).
(d) Prepare a trial balance as at 31 October 2019.
Copyright © 2018. Wiley. All rights reserved.
PSA2.7 Journalise transactions, post, and prepare a trial balance.
LO3, 5, 6, 7, 8
This is the trial balance of Western Laundry Services Pty Ltd on 30 April:
WESTERN LAUNDRY SERVICES PTY LTD
Trial balance
as at 30 April 2019
No.
Account name
Debit
100
115
Cash
Accounts receivable
$ 4 250
1 100
Credit
CHAPTER 2 The recording process 145
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No.
Account name
Debit
120
130
200
210
300
Supplies
Equipment
Accounts payable
Revenue received in advance
Share capital
850
4 000
$10 200
Credit
$ 2 500
350
7 350
$10 200
The May transactions were as follows:
May
2
8
12
15
18
25
31
Received $450 cash from customers on account.
Invoiced customers for services performed, $1750.
Paid employee salaries, $600.
Performed $300 of services for customers who paid in advance
in April for services to be performed in May.
Paid $800 to creditors on account.
Paid a $250 cash dividend.
Paid electricity, $350.
Required
(a) Prepare a general ledger using T accounts. Enter the opening balances in the ledger
accounts as of 1 May. Provision should be made for these additional accounts: Dividends
(no. 310), Service revenue (no. 400), Salaries expense (no. 500), and Electricity expense
(no. 510).
(b) Journalise the transactions, including narrations.
(c) Post to the ledger accounts, which you prepared in part (a).
(d) Prepare a trial balance as at 31 May 2019.
PSA2.8 Journalise transactions, post, and prepare a trial balance.
LO3, 5, 6, 7, 8
The Drive-in Movie Palace Ltd was recently formed. It began operations in March 2019. The
Movie Palace is unique in that it is a drive-in theatre and will show only triple features of
sequential theme movies. As of 28 February, the ledger of The Drive-in Movie Palace Ltd
showed: (100) Cash $19 100; (110) Equipment $19 100; (120) Land $45 100; (130) Buildings
$21 100; (200) Accounts payable $15 100; and (300) Share capital $89 300. During the month
of March the following events and transactions occurred:
Mar.
2
3
Copyright © 2018. Wiley. All rights reserved.
9
10
11
12
20
20
31
31
31
146
Acquired the first three Bourne movies (The Bourne Identity, The Bourne Supremacy and
The Bourne Ultimatum) to be shown for the first 3 weeks of March. The film rental was
$15 100; $8000 was paid in cash and $7100 will be paid on 10 March.
Ordered the Iron Man trilogy to be shown on the last 10 days of March. It will cost
$500 per night.
Received $11 600 cash from admissions.
Paid balance due on the Bourne movies rental and $7100 on 28 February accounts
payable.
Hired B. Barista to operate a coffee cart. Barista agrees to pay The Drive-in Movie
Palace Ltd 20% of gross receipts, payable monthly.
Paid advertising expenses, $3900.
Received $10 300 cash from admissions.
Received the Iron Man movies and paid rental fee of $5000.
Paid salaries of $6900.
Received statement from B. Barista showing gross receipts from coffee cart sales of
$11 100 and the balance due to The Drive-in Movie Palace Ltd of $2220 for March.
B. Barista paid half the balance due and will remit the remainder on 5 April.
Received $21 600 cash from admissions.
Financial accounting: Reporting, analysis and decision making
Carlon, Shirley. Financial Accounting: Reporting, Analysis And Decision Making, 6th Edition, Wiley, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/monash/detail.action?docID=5561261.
Created from monash on 2025-02-26 02:06:38.
In addition to the accounts identified above, the chart of accounts includes: (105) Accounts
receivable, (400) Admission revenue, (410) Coffee cart revenue, (500) Advertising expense,
(510) Film rental expense, and (520) Salaries expense.
Required
(a) Using T accounts, enter the beginning balances in the ledger.
(b) Journalise the March transactions, including narrations.
(c) Post the March journal entries to the ledger accounts you prepared in part (a).
(d) Prepare a trial balance as at 31 March 2019.
PSA2.9 Prepare a correct trial balance.
LO8
This trial balance of Queenstown Ltd does not balance.
QUEENSTOWN LTD
Trial balance
as at 30 June 2020
Account name
Debit
Cash
Accounts receivable
Supplies
Equipment
Accounts payable
Revenue received in advance
Share capital
Dividends
Service revenue
Salaries expense
Office expense
Credit
$ 17 940
$21 093
5 700
18 900
16 896
8 100
60 000
5 700
15 180
21 300
6 360
$87 153
$110 016
Each of the listed accounts has a normal balance. An examination of the ledger and journal
reveals the following errors:
1. Cash received from a customer on account was debited to cash for $3420, and accounts
receivable was credited for the same amount. The actual collection was for $4320.
2. The purchase of a scientific calculator on account for $500 was recorded as a debit to supplies for $500 and a credit to accounts payable for $500.
3. Services were performed on account for a client for $6240. Accounts receivable was debited
for $6240 and service revenue was credited for $624.
4. A debit posting to salaries expense of $4500 was omitted.
5. A payment on account for $2136 was credited to cash for $2136 and credited to accounts
payable for $2163.
6. Payment of a $3300 cash dividend to Queenstown Ltd’s shareholders was debited to salaries
expense for $3300 and credited to cash for $3300.
Copyright © 2018. Wiley. All rights reserved.
Required
(a) Prepare the correct trial balance.
(b) Explain what adjustments were made and why they were necessary.
CHAPTER 2 The recording process 147
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Created from monash on 2025-02-26 02:06:38.
PSA2.10 Prepare a correct trial balance.
LO8
This trial balance of Helpful Services Ltd does not balance.
HELPFUL SERVICES LTD
Trial balance
as at 30 June 2019
Account name
Cash
Accounts receivable
Supplies
Equipment
Accounts payable
Revenue received in advance
Share capital
Dividends
Rental revenue
Salaries expense
Office expense
Debit
Credit
$ 5 680
$ 6 462
1 600
6 000
5 332
2 400
18 000
1 600
4 760
6 800
1 820
$26 682
$33 772
Each of the listed accounts has a normal balance. An examination of the ledger and journal
reveals the following errors:
1. Cash received from a customer on account was debited to cash for $1140, and accounts
receivable was credited for the same amount. The actual collection was for $1500.
2. The purchase of a printer on account for $680 was recorded as a debit to supplies for $680
and a credit to accounts payable for $680.
3. Services were performed on account for a client for $1780. Accounts receivable was debited
for $1780 and service revenue was credited for $178.
4. A debit posting to salaries expense of $1200 was omitted.
5. A payment on account for $412 was credited to cash for $412 and credited to accounts
payable for $520.
6. Payment of an $800 cash dividend to shareholders was debited to salaries expense for $800
and credited to cash for $800.
Required
(a) Prepare the correct trial balance.
(b) Explain what adjustments were made and why they were necessary.
PROBLEM SET B
PSB2.1 Analyse transactions and calculate profit.
LO1
Copyright © 2018. Wiley. All rights reserved.
Crazy Bob’s Repair Shop Ltd was started on 1 May. Here is a summary of the May transactions:
1. Shareholders invested $16 000 cash in the company in exchange for shares.
2. Purchased equipment for $5000 cash.
3. Paid $400 cash for May office rent.
4. Paid $500 cash for supplies.
5. Incurred $550 of advertising costs in the North Shore Times on account.
6. Received $4100 in cash from customers for repair service.
7. Declared and paid a $500 cash dividend.
8. Paid part-time employee salaries, $1200.
9. Paid electricity bill, $140.
10. Provided repair service on account to customers, $400.
11. Collected cash of $120 for services invoiced in transaction (10).
148
Financial accounting: Reporting, analysis and decision making
Carlon, Shirley. Financial Accounting: Reporting, Analysis And Decision Making, 6th Edition, Wiley, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/monash/detail.action?docID=5561261.
Created from monash on 2025-02-26 02:06:38.
Required
(a) Prepare a transaction analysis using these column headings: Cash, Accounts receivable,
Supplies, Equipment, Accounts payable, Share capital, and Retained earnings. Revenue
is called service revenue. Include in the margin explanations for any changes in retained
earnings.
(b) From an analysis of the column retained earnings, calculate the profit or loss for May.
PSB2.2 Analyse transactions and prepare financial statements.
LO1
Alex Rogers started his own delivery service, Rogers Deliveries Ltd, on 1 June 2019. The
following transactions occurred during the month of June:
June
1
2
3
5
9
12
15
17
20
23
26
29
30
Shareholders invested $30 000 cash in the business in exchange for shares.
Purchased a used van for deliveries for $20 000. Rogers paid $4000 cash
and the remaining balance was on account.
Paid $1000 for office rent for the month.
Performed $2000 of services on account.
Paid $400 in cash dividends.
Purchased supplies for $300 on account.
Received a cash payment of $1500 for services provided on 5 June.
Purchased petrol for $200 on account.
Received a cash payment of $3000 for services provided.
Made a cash payment of $1000 on the amount owing for the delivery van
purchased on 2 June.
Paid $500 for electricity.
Paid for the petrol purchased on account on 17 June.
Paid $1000 for employee salaries.
Required
(a) Show the effects of the previous transactions on the accounting equation using the following
format:
Assets
Date
Cash
+
Accounts
receivable
+
Supplies
+
Delivery
van
=
Liabilities
Accounts
payable
+
Share
capital
Equity
Retained
+ earnings
Include in the margin explanations for any changes in retained earnings.
(b) Prepare a statement of profit or loss for the month of June.
(c) Prepare a statement of financial position at 30 June 2019.
Copyright © 2018. Wiley. All rights reserved.
PSB2.3 Analyse transactions and prepare a statement of profit or loss and a statement of financial
position.
LO1
Donna Corso opened Healthy Paws Ltd, a veterinary business, on 1 August 2019. On 31 August
the statement of financial position showed: Cash $9000; Accounts receivable $1700; Supplies
$600; Office equipment $6000; Accounts payable $3600; Share capital $13 000; and Retained
earnings $700. During September the following transactions occurred:
1. Paid $3100 cash on accounts payable.
2. Collected $1300 of accounts receivable.
3. Purchased additional office equipment for $4100, paying $800 in cash and the balance on
account.
4. Earned a revenue of $8900, of which $2500 was paid in cash and the balance is due in
October.
5. Declared and paid a $600 cash dividend.
6. Paid salaries $700, rent for September $900, and advertising expense $300.
7. Incurred electricity expense for month on account, $170.
8. Borrowed $7000 from Westpac Bank.
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Required
(a) Prepare a transaction analysis of the September transactions beginning with 31 August
balances. The column headings should be: Cash + Accounts receivable + Supplies + Office
equipment = Bank loan + Accounts payable + Share capital + Retained earnings. Include
in the margin explanations for any changes in retained earnings.
(b) Prepare a statement of profit or loss for September, a calculation of retained earnings for
September, and a classified statement of financial position at 30 September 2019.
PSB2.4 Journalise a series of transactions.
LO3, 5
Just for Fun Park was started on 1 April by Greg Winters. These selected events and transactions
occurred during April:
Apr.
1
4
8
11
12
13
17
20
25
Shareholders invested $90 000 cash in the business in exchange for shares.
Purchased land costing $45 000 for cash.
Incurred advertising expense of $2700 on account.
Paid salaries to employees, $2550.
Hired park manager at a salary of $6000 per month, effective 1 May.
Paid $4500 for a 1-year insurance policy.
Paid $900 cash dividends.
Received $8550 in cash for admission fees.
Sold 150 voucher books for $25 each. Each book contains 10 vouchers that entitle
the holder to one admission to the park. (Hint: The revenue is recorded as revenue
received in advance until the vouchers are used.)
Received $11 850 in cash admission fees.
Paid $1050 on account for advertising incurred on 8 April.
30
30
Just for Fun Park uses the following accounts: Cash, Prepaid insurance, Land, Accounts
payable, Revenue received in advance, Share capital, Dividends, Admission revenue, Advertising expense, and Salaries expense.
Required
Journalise the April transactions, including narrations.
PSB2.5 Journalise transactions, post, prepare a trial balance and financial statements.
LO3, 5, 6, 7, 8
Diane Smith incorporated Accurate Accountants, an accounting practice, on 1 May 2019.
During the first month of operations of her business, these events and transactions occurred:
Copyright © 2018. Wiley. All rights reserved.
May
1
2
3
7
11
12
17
31
31
Shareholders invested $156 000 cash in exchange for shares in the company.
Hired a receptionist at a salary of $3000 per month.
Purchased $3600 of supplies on account from Read Supply Ltd.
Paid office rent of $2700 for the month.
Completed a tax return and invoiced the client $3300 for services provided.
Received $13 500 advance on a management consulting engagement.
Received cash of $3600 for services completed for H. Arnold Ltd.
Paid receptionist $3000 salary for the month.
Paid 40% of balance owing to Read Supply Ltd.
The following chart of accounts is used: (100) Cash, (110) Accounts receivable, (115) Supplies, (200) Accounts payable, (210) Revenue received in advance, (300) Share capital, (400)
Service revenue, (500) Salaries expense, and (510) Rent expense.
Required
(a) Journalise the transactions, including narrations.
(b) Post to the ledger T accounts.
(c) Prepare a trial balance on 31 May 2019.
(d) Prepare a statement of profit or loss for the month of May and a classified statement of
financial position as at 31 May 2019.
150
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PSB2.6 Journalise transactions, post, prepare a trial balance and financial statements. LO3, 5, 6, 7, 8
The trial balance of Wellington Dry Cleaners on 30 June is given here:
WELLINGTON DRY CLEANERS
Trial balance
as at 30 June 2019
No.
Account name
Debit
100
110
120
130
200
210
300
Cash
Accounts receivable
Supplies
Equipment
Accounts payable
Revenue received in advance
Share capital
$25 064
21 072
9 688
51 900
Credit
$107 724
$31 756
3 460
72 508
$107 724
The July transactions were as follows:
July
8
9
11
14
17
22
30
31
Collected $9872 in cash for previous month’s credit sales.
Paid employee salaries, $4200.
Received $9850 in cash for services provided.
Paid 30 June creditors $21 500 on account.
Purchased supplies on account, $1108.
Invoiced customers for services provided, $9400.
Paid employee salaries $6228, electricity $3168, and repairs $984.
Paid $1000 cash dividend.
Required
(a) Prepare a general ledger using T accounts. Enter the opening balances in the ledger
accounts as of 1 July. Provision should be made for the following additional accounts: (310)
Dividends, (400) Dry cleaning revenue, (500) Repair expense, (510) Salaries expense, and
(520) Electricity expense.
(b) Journalise the transactions.
(c) Post to the ledger accounts, which you prepared in part (a).
(d) Prepare a trial balance on 31 July 2019.
(e) Prepare a statement of profit or loss for July and a classified statement of financial position
as at 31 July 2019.
PSB2.7 Journalise transactions, post, prepare a trial balance and financial statements.
LO3, 5, 6, 7, 8
Copyright © 2018. Wiley. All rights reserved.
Maria George incorporated Busy Bookkeepers Pty Ltd, a bookkeeping practice, on 1 January
2019. During the first month of operations, these events and transactions occurred:
Jan.
2
3
4
7
11
12
17
31
31
Shareholders invested $88 000 cash in exchange for shares in the company.
Hired a receptionist at a salary of $2000 per month.
Purchased $1600 of supplies on account from Abbey Supply Ltd.
Paid office rent of $2400 for the month.
Invoiced clients $3800 for services provided.
Received $3000 advance on a management consulting engagement.
Received cash of $1600 for services completed for Pete’s Plumbing. (These
services were not included in the 11 January transaction.)
Paid receptionist $2000 salary for the month.
Paid 40% of balance owing to Abbey Supply Ltd.
CHAPTER 2 The recording process 151
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The following chart of accounts is used: (100) Cash, (110) Accounts receivable, (115) Supplies, (200) Accounts payable, (210) Revenue received in advance, (300) Share capital,
(400) Service revenue, (500) Salaries expense, and (510) Rent expense.
Required
(a) Journalise the transactions, including narrations.
(b) Post to the ledger T accounts.
(c) Prepare a trial balance as at 31 January 2019.
(d) Prepare a statement of profit or loss for the month of January and a classified statement of
financial position as at 31 January 2019.
PSB2.8 Journalise transactions, post, prepare a trial balance and financial statements.
LO3, 5, 6, 7, 8
Lights Out Theatre Ltd was recently formed. All facilities were completed on 31 March 2019.
On 1 April, the ledger showed: (100) Cash $6000; (120) Land $10 000; (130) Buildings $8000;
(140) Equipment $6000; (200) Accounts payable $2000; (210) Mortgage payable $8000; and
(300) Share capital $20 000. During April, the following events and transactions occurred:
Apr.
2
3
9
10
11
12
20
25
29
30
30
Paid film rental of $800 on first movie.
Ordered two additional films at $700 each.
Received $3800 cash from admissions.
Made $2000 payment on mortgage and $1000 on accounts payable.
Hired R. Thoms to operate a candy bar. Thoms agreed to pay Lights Out
Theatre 17% of gross receipts, payable monthly.
Paid advertising expenses, $300.
Received one of the films ordered on 3 April and was invoiced $500. The film
will be shown in April.
Received $3200 cash from admissions.
Paid salaries, $1600.
Received statement from R. Thoms showing gross receipts of $1000 and the
balance due to Lights Out Theatre of $170 for April. Thoms paid half of the
balance due and will remit the remainder on 5 May.
Prepaid $700 rental on special film to be run in May.
In addition to the accounts identified above, the chart of accounts shows: (105) Accounts
receivable, (107) Prepaid rentals, (400) Admission revenue, (410) Candy bar revenue,
(510) Advertising expense, (520) Film rental expense, (530) Salaries expense.
Required
(a) Enter the beginning balances in the ledger T accounts as of 1 April.
(b) Journalise the April transactions, including narrations.
(c) Post the April journal entries to the ledger T accounts prepared in part (a).
(d) Prepare a trial balance on 30 April 2019.
(e) Prepare a statement of profit or loss for April and a classified statement of financial position
as at 30 April 2019.
PSB2.9 Prepare a correct trial balance.
LO8
Copyright © 2018. Wiley. All rights reserved.
This trial balance for Theatre Adelaide Ltd does not balance.
THEATRE ADELAIDE LTD
Trial balance
as at 31 May 2019
152
Account name
Debit
Cash
Accounts receivable
Prepaid insurance
Equipment
$ 5 850
Credit
$ 2 750
700
8 000
Financial accounting: Reporting, analysis and decision making
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Account name
Debit
Accounts payable
Rates and taxes payable
Share capital
Retained earnings
Service revenue
Salaries expense
Advertising expense
Rates and taxes expense
Credit
4 500
560
5 700
6 000
6 690
4 200
1 100
800
$26 800
$20 050
Your review of the ledger reveals that each account has a normal balance. You also discover
the following errors:
1. The totals of the debit sides of prepaid insurance, accounts payable, and rates and taxes
expense were each understated $100.
2. Transposition errors were made in accounts receivable and service revenue. Based on postings made, the correct balances were $2570 and $6960, respectively.
3. A debit posting to salaries expense of $200 was omitted.
4. A $700 cash dividend was debited to share capital for $700 and credited to cash for $700.
5. A $420 purchase of supplies on account was debited to equipment for $420 and credited to
cash for $420.
6. A cash payment of $250 for advertising was debited to advertising expense for $25 and
credited to cash for $25.
7. A collection from a customer for $210 was debited to cash for $210 and credited to accounts
payable for $210.
Required
(a) Prepare the correct trial balance. (Note: The chart of accounts also includes the following:
Dividends, Supplies, and Supplies expense.)
(b) Explain what adjustments were made and why they were necessary.
PSB2.10 Prepare a correct trial balance.
LO8
This trial balance for Glasgow Pty Ltd does not balance.
GLASGOW PTY LTD
Trial balance
as at 31 December 2019
Copyright © 2018. Wiley. All rights reserved.
Account name
Cash
Accounts receivable
Supplies
Equipment
Accounts payable
Revenue received in advance
Share capital
Dividends
Service revenue
Salaries expense
Office expense
Debit
Credit
$ 7 804
$ 9 736
3 640
9 560
10 798
3 200
18 000
1 200
19 808
12 600
4 820
$44 756
$56 410
CHAPTER 2 The recording process 153
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Each of the listed accounts has a normal balance. An examination of the ledger and journal
reveals the following errors:
1. Cash received from a customer on account was debited to cash for $1680 and accounts
receivable was credited for the same amount. The actual collection was for $960.
2. The purchase of a printer on account for $440 was recorded as a debit to supplies for $440
and a credit to accounts payable for $440.
3. Services were performed on account for a client for $1280. Accounts receivable was debited
$1280 and service revenue was credited $128.
4. A debit posting to salaries expense of $1800 was omitted.
5. A payment made on account for $818 was credited to cash for $818 and credited to accounts
payable for $980.
6. Payment of a $1200 cash dividend to shareholders was debited to salaries expense for $1200
and credited to cash for $1200.
Required
(a) Prepare the correct trial balance.
(b) Explain what adjustments were made and why they were necessary.
BUILDING BUSINESS SKILLS
FINANCIAL REPORTING AND ANALYSIS
Financial reporting problem: Giorgina’s Pizza Limited
BBS2.1 The financial statements of Giorgina’s (found in chapter 1, figures 1.13 and 1.15) contain the
following selected accounts, all in thousands of dollars:
Issued capital
Trade and other payables (accounts payable)
Trade and other receivables (accounts receivable)
Marketing expenses
Inventories
Property, plant and equipment (net book value)
Sales revenue
2019
$’000
30 640
28 541
19 809
8 573
5 014
37 270
141 473
Copyright © 2018. Wiley. All rights reserved.
Required
(a) What is the increase and decrease side for each account? What is the normal balance for
each account?
(b) Identify the probable other account in the transaction and the effect on that account when:
1. Accounts receivable is decreased.
2. Accounts payable is decreased.
3. Prepaid expenses (prepayments) is increased.
(c) Identify the other account(s) that ordinarily would be involved when:
1. Marketing expense is increased.
2. Property, plant and equipment is increased.
Comparative analysis problem: Giorgina’s Pizza Limited vs. Freedom Foods Group Limited
BBS2.2 Refer to the financial statements for Giorgina’s Pizza Limited from chapter 1 and to the financial
statements of Freedom Foods Group (www.freedomfoods.com.au).
Required
(a) Determine the normal balance for each of the accounts listed as follows for Giorgina’s Pizza
Limited and Freedom Foods Group Limited.
154
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Giorgina’s Pizza Limited
Freedom Foods Group Limited
1. Cash
2. Goodwill
3. Borrowings
4. Retained earnings
5. Sales revenue
1. Inventories
2. Current tax liabilities
3. Provisions
4. Issued capital
5. Administrative expenses
(b) Identify the other account ordinarily involved when:
1. Accounts receivable is decreased.
2. Bank loan is increased.
3. Equipment is increased.
4. Sales revenue is increased.
Interpreting financial statements
BBS2.3 Obtain the latest annual report of a public company.
Address: www.asx.com.au or www.nzx.com
Steps:
1. On the Australian Securities Exchange home page, you will notice a blue banner across the
top of the page. Click on the Prices and research button and a drop down menu will appear.
Click on Company information which will take you to a page where you can search for
individual companies.
There is also a heading for New Zealand-based companies dual listed in Australia and
New Zealand.
2. You are now at the index for listed companies. Choose a letter and select a particular company
(don’t just choose the first company) by clicking on the ASX code.
3. From this page browse down to the internet address and click on the address which will take
you to the company’s web site.
4. From the web site, search around and find the latest annual report.
OR
For the New Zealand Stock Exchange:
1. Go to the home page and click on MARKETS on the top menu and select NZX Main Board.
2. This will take you to a side menu. Click on All Securities. You are now at the index for listed
entities.
3. Scroll down the names and click on a company. This will take you to its page, click on the
company name at the right and under Contact information you will see the company’s web
site address.
Copyright © 2018. Wiley. All rights reserved.
Required
Answer the following questions:
(a) What company did you select? Please also provide the web address and date you accessed
the web site.
(b) Search the annual report you selected and provide the following information and reference in
the annual report where you found the information; for example, trade and other receivables
in the statement of financial position, page 31.
1. Principal activities.
2. The number of controlled entities/subsidiaries and the countries in which they operate.
3. The percentage ownership in the company of the 20 largest shareholders.
4. The number of directors.
5. The accounting policy for depreciation.
6. The amount of income tax expense and the profit for the year.
7. Name of its auditors.
8. List the business segments.
CHAPTER 2 The recording process 155
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9. The amount of current assets.
10. The amount of net cash flows from operating activities.
11. The amount of dividends paid.
12. Describe any related party transactions.
CRITICAL THINKING
Group decision case
BBS2.4 Mark Dingo operates Supreme Riding School Pty Ltd. The riding school’s main sources of rev-
enue are riding fees and lesson fees, which are provided on a cash basis. Mark also boards horses
for owners, who are invoiced monthly for boarding fees. In a few cases, boarders pay in advance
of expected use. For its revenue transactions, the riding school maintains these accounts: Cash,
Accounts receivable, Revenue received in advance, Riding revenue, Lesson revenue, and Boarding revenue.
The riding school owns 20 horses, a stable, a riding field, riding equipment and office
equipment. These assets are accounted for in accounts: Horses, Building, Riding field, Riding
equipment, and Office equipment.
The riding school employs stable helpers and an office worker, who receive weekly salaries.
At the end of each month, the mail usually brings invoices for advertising, electricity and veterinary services. Other expenses include feed for the horses and insurance. The riding school also
maintains the following accounts: Hay and feed supplies, Prepaid insurance, Accounts payable,
Salaries payable, Salaries expense, Advertising expense, Electricity expense, Veterinary expense,
Hay and feed expense, and Insurance expense.
Mark Dingo’s sole source of personal income is dividends from the riding school. Thus, the
business declares and pays periodic dividends. To record equity in the business and dividends,
two accounts are maintained: Share capital and Dividends.
During the first month of operations an inexperienced bookkeeper was employed. Mark asks
you to review the following nine general journal entries of the 50 entries made during the month.
In each case, the explanation for the entry is correct.
May
1
2
5
7
Copyright © 2018. Wiley. All rights reserved.
9
14
15
156
Cash
Share capital
(Issued shares in exchange for $200 000 cash)
200 000
Salaries expense
Salaries payable
(Hired employees’ services for the month)
10 000
Cash
Accounts receivable
(Received $5000 cash for lesson fees)
5 000
Cash
Boarding revenue
(Received $5000 for boarding of horses beginning 1 June)
5 000
Hay and feed expense
Cash
(Purchased estimated 5 months’ supply of feed and hay
for $10 000 on account)
10 000
Riding equipment
Cash
(Purchased desk and other office equipment for $2500 cash)
2 500
Salaries expense
Cash
(Issued cheque to Mark Dingo for personal use)
6 000
200 000
10 000
5 000
5 000
10 000
2 500
6 000
Financial accounting: Reporting, analysis and decision making
Carlon, Shirley. Financial Accounting: Reporting, Analysis And Decision Making, 6th Edition, Wiley, 2018. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/monash/detail.action?docID=5561261.
Created from monash on 2025-02-26 02:06:38.
May 20
31
Cash
Riding revenue
(Received $13 500 cash for riding fees)
13 500
Veterinary expense
Accounts receivable
(Received invoice of $6750 from veterinarian for services provided)
6 750
13 500
6 750
Required
With the class divided into groups, answer the following:
(a) State which journal entries are correct. For each journal entry that is incorrect, prepare the
entry that should have been made by the bookkeeper.
(b) Which of the incorrect entries would prevent the trial balance from balancing?
(c) What was the correct profit for May, assuming the bookkeeper originally reported profit of
$15 100 after posting all 50 entries? (Hint: Assume errors occurred only in the nine entries
reported, i.e. the remaining 41 entries were recorded correctly.)
(d) What was the correct cash balance at 31 May, assuming the bookkeeper reported a balance
of only $20 650 after posting all 50 entries?
Communication activity
BBS2.5 Fancy Flowers Ltd provides a flower delivery service. Two recurring transactions for the business
are invoicing customers for services provided and paying employee salaries. For example, on
15 March invoices totalling $8500 were sent to customers, and $3200 was paid in salaries to
employees.
Required
Write a memorandum to the new assistant accountant at Fancy Flowers that explains and
illustrates the steps in the recording process for each of the 15 March transactions. Use the
format demonstrated in this text under the heading ‘The recording process illustrated’ (in
section 2.7).
BBS2.6 John Jones, a new university graduate, has just been appointed as an assistant accountant in the
small business division of a public accounting practice. One of John’s first tasks is to verify
the balances in the ledger of a new client. A trial balance listing was completed but it did not
balance.
Required
Write a memorandum to John Jones explaining the purpose of the trial balance, outlining the
types of recording errors a trial balance will and will not detect.
Copyright © 2018. Wiley. All rights reserved.
Ethics case
BBS2.7 Answer the following questions on ethics by conducting research using the library and/or internet
and reflecting on your knowledge of ethics, your life experiences and beliefs.
(a) What does the word ‘ethics’ mean and what is its origin (e.g. does the word come from a
Latin or Greek word)?
(b) Now that you have a definition of ethics, explain in your own words what is considered
‘ethical behaviour’.
(c) List five criteria you feel would indicate that an accountant was behaving ethically. Two
examples of criteria are (i) the accountant has respect for the law and (ii) the accountant acts
with discretion, i.e. not revealing private business affairs to outside parties.
(d) What are the ‘costs’, both personal and financial, of unethical behaviour?
(e) Provide an example from your own life experiences to illustrate how someone has behaved
unethically in relation to you or with someone you know.
ANSWERS
Answers to self-study questions
2.1 (b) 2.2 (b) 2.3 (c) 2.4 (d) 2.5 (d) 2.6 (a) 2.7 (c) 2.8 (d) 2.9 (a) 2.10 (c)
CHAPTER 2 The recording process 157
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Answer to review it questions
Question 4, section 2.3: Trade and other receivables debit; Income tax expense debit; Revenue credit;
Food and paper expenses debit.
ACKNOWLEDGEMENT
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Photo: © Andrey_Popov / Shutterstock.com
158
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