Recording in Accounting
Presenter: Vicki Baron
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AN OVERVIEW OF UNIT 3
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Accounting elements – definition and relationship between Assets, Liabilities, Owner’s
Equity, Revenue and Expenses
Two fold effect of transactions on the Accounting equation
Source documents – cash receipts, cheque butts, sales and purchase invoices,
statements of account and memos
Stock cards using FIFO – cash and credit purchases, cash and credit sales, drawings
and advertising
GST Clearing Account
Special journals – cash receipts (with discount expense) and cash payments (with
discount revenue), sales and purchases journals – all including GST
General Journal entries for
o Establishing double entry
o Correcting entries
o Contribution of non-current assets by the owner
o Drawings of stock by the owner
o Bad Debts
General Ledger using T-accounts, posting all journals to the general ledger at the end
of the reporting period
Control accounts for debtors, creditors and stock
Subsidiary ledgers and schedules for debtors and creditors (posted on date of the
transaction)
Pre-adjustment Trial balance
Recording Balance Day Adjustments
o Prepaid expenses (asset approach, GST recorded at time of payment)
o Accrued expenses (GST recorded at time of payment)
o Depreciation (straight line method)
o Stock Loss or stock gain
Treatment of accrued expenses in subsequent periods
Closing entries for revenue and expenses in general journal and general ledger
Preparation of the P/L Summary Account with transfer of profit to capital and transfer of
drawings to capital
Post-adjustment trial balance
Classified Accounting reports
o Cash Flow Statement
o Profit and Loss Statement
o Balance Sheet
Effect of transactions on the accounting reports and the accounting equation
Distinction between cash and profit
Qualitative characteristics:
o COMPARABILITY
o UNDERSTADABILITY
o RELEVANCE
o RELIABILITY
Accounting Principles:
o HISTORICAL COST
o ENTITY
o REPORTING PERIOD
o MONETARY
o CONSERVATISM
o CONSISTENCY
o GOING CONCERN
Pathways Education © 2010
Page 1
THE ACCOUNTING SYSTEM
DECISIONS
Made By
USERS
Based on
ACCOUNTING INFORMATION
Determined by the
ACCOUNTING SYSTEM
INPUT
Information relating to
transactions is taken from
SOURCE DOCUMENTS
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PROCESSING
OUTPUT
The input is summarised by recording in
JOURNALS
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Either manual or computer
generated following any
balance day adjustments
(Post Adjusted Trial
Balance)
REPORTS
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Information is then posted to LEDGERS
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TRIAL BALANCE
Used to check the accuracy of the double
entry recording
Summarises the general ledger accounts into
one report – ready for preparation of final
reports. Pre and post adjusted Trial balances
Based on CONVENTIONS and STANDARDS
The principles represent guidelines formulated to ensure
uniformity in the preparation and presentation of
accounting information.
As well as the accounting conventions, accounting is also
influenced by several underlying qualitative
characteristics.
H
C
ISTORICAL COST – original price
E
NTITY
R
EPORTING PERIOD – life of business is divided
M
OMPARABILITY – use consistent methods to
compare results
- personal transactions omitted
ONETARY – all transactions recorded in $ terms
C
ONSISTENCY – same methods used each period
C
ONSERVATISM – allow for possible losses
GPathways
OING CONCERN- business is ongoing
Education © 2010
U
NDERSTANDABILITY – prepare reports in an easy
to read manner
R
ELEVANCE – useful for decision making
R
ELIABILITY – verifiable by source documents
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Deans Bikes
Balance Sheet as at 30 June 2010
Current Assets
Cash at Bank
Debtors Control
Stock Control
Non-Current Assets
Shop Fittings (at cost)
Accumulated Depn
Land & Buildings
Accumulated Depn
Total Assets
6 500
15 700
37 300
59 500
50 000
(10 000)
370 000
(18 500)
391 500
451 000
Current Liabilities
Accrued Wages
Creditors Control
Loan - ABC
GST Clearing
Non-Current Liabilities
Loan - ABC
Mortgage
2 000
20 800
4 000
2 500
29 300
20 000
240 000
260 000
Owners Equity
Capital - L Dean
161 700
Total Equities
451 000
Using the Balance Sheet above, explain how the 4 Qualitative Characteristics and 7
Accounting Principles are utilized.
Relevance
Reliability
Comparability
Understandability
Entity
Historical Cost
Conservatism
Monetary Unit
Going Concern
Reporting Period
Consistency
Pathways Education © 2010
Page 3
Defining the Elements
Always try and provide the I-D-L (Ideal response) to theory questions
I – Identify
D – Define
L – Link back to question being asked
Assets:
• Resource controlled by
the entity
• Result of past events
• Future economic benefits
are expected to flow
Liabilities:
• Present obligation
• Arising from past events
• Which will result in an
outflow of resources
Current Assets
Current Liabilities
Non Current Assets
Non Current Liabilities
Revenue:
• Inflows of economic benefits OR
• Savings in outflows
•  A or  L that  OE
• Other than capital contributed
Owner’s Equity:
• Residual interest in the
assets of the business
after
deducting
the
liabilities
Expenses:
OR
• Reductions in inflows
•  A or  L that  OE
• Other than drawings
Balance sheet extract
Current Liability
Loan
6 000
Non Current Liability
Loan
24 000
Explain your treatment of the loan
Pathways Education © 2010
Page 4
Explain why discounts granted to debtors are reported as an expense
Discounts are reported as an expense because they represent a
economic benefits that decreases Assets (Debtors Control) and Decreases Owners Equity
(Net Profit)
Customising Definitions
REVENUES
Sales
Stock Gain
Discount Revenue
EXPENSES
Wages
Stock Loss/Bad Debts
Discount Expense
Depreciation Van
Financial Transactions
Transactions are the financial dealings of the business. Each transaction
has a two-fold effect on the Accounting Equation.
The accounting equation - Assets = Liabilities + Owner’s Equity is usually
presented as A=L+OE+(R-E) which shows the two-fold effect of each
transaction on the business.
Cash Sales of Stock $1,100 (includes $100 GST), Cost Price $500,
Assets
Account
Inc/Dec
Bank
$
Liabilities
Account Inc/Dec
GST
Clearing
$
Owners Equity
Account Inc/Dec
Capital
$
Debtors
Control
Stock
Control
OR
2008 Exam 1
Overstated/Understated/No Effect
Amount
Assets
Liabilities
Pathways Education © 2010
Page 5
Owner’s Equity
OR
2008 Exam 2
Assets
Liabilities
Owner’s Equity
Assets
Liabilities
Owner’s Equity
Cash Sales of Stock
$1,100 (includes $100
GST), Cost Price $500,
Sold 7 exercise bikes
for $1,200 each plus
$120 GST (cost price
$650) on credit to
Jason’s Gym
Paid $3,650 to P Park,
a creditor, and
received a discount
of $350
Murphy withdrew one
exercise bike (cost
price $650) and $500
cash from the
business for personal
use
Using Tables
Important Points to Remember:
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When asked for the effect of transactions on reports comment on whether it causes an
increase/decrease, what the elements are (A, L, OE, R or E) and the amount.
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Make sure that you always provide two effects for the report and that the accounting
equation remains in balance
Pathways Education © 2010
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