Financial Accounting
Lecture 2
Chara Charalambous MBA CDA COLLEGE
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Learning Objectives
• What are accounts and what is the ledger?
• Understand the principles of double entry.
• Understand the use of journal (book of prime
entry)
• Be familiar with the recording of different
transactions
• Balancing off the ledger accounts.
• Be familiar with the trial balance
• Understand what is the Financial Information
System
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Accounts and Ledger
• ACCOUNT is a table in T- shape which records
chronologically the changes caused by the trade
transactions that a business proceeds in an item of
the assets, liabilities or capital.
• All Accounts are kept in a book which is called
GENERAL LEDGER (‘T’ accounts).
• There is a ledger account for each asset, liability,
revenue and expense item. Ledger accounts are pages
in the ledger book with a separate page reserved for each
Chara transactions.
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one in order to record
The duality concept and double entry
bookkeeping
• Each account has two sides - the debit (Dr) and
credit (Cr) sides.
Dr
Name of Account
Date Description €
Cr
Date Description €
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The Account
• Basic summary device
• Detailed record of all changes that have occurred
in a particular asset, liability, or stockholders’
equity
• Grouped in three broad categories :
 Assets
 Liabilities
 Stockholders’ Equity
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The duality concept and double entry
bookkeeping
• Each transaction that a business realize affects the financial
statements in two ways.
• These two effects are equal and opposite so as the
accounting equation will be always satisfied.
Assets = Liabilities + Capital
• Double Entry Rule:
For every debit there is a credit and for every credit
there is a debit.
• Each transaction will affect at least two accounts:
‘the one will be debited and the other will be credited’
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The duality concept and double entry
bookkeeping
• Whether an entry is to the debit or credit side of an
account depends on the type of account and the
transaction:
The Asset Accounts are debited when an increases of asset occurs
and are credited when a diminish of asset occurs.
The Liability and Capital Accounts are credited when an increase of
liability occurs and are debited when a reduce of liability occurs.
Debits are not good or bad Neither are credits
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The duality concept and double entry
bookkeeping
ACCOUNTS
INCREASES
DECREASES
Asset Account
Debited
Credited
Liability Account
Credited
Debited
Capital Account
Credited
Debited
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Chara Charalambous MBA CDA COLLEGE
Accounting Cycle During Period
Also known as “bookkeeping cycle ”, is the process of recording and
processing the accounting events of a company. The series of steps
begin when a transaction occurs and end with its inclusion in the
financial statements.
The
main
steps
of
the
accounting
cycle
are:







Collecting and analyzing data from transactions and events.
Posting entries to the general ledger.
Adjusting entries appropriately.
Preparing an adjusted trial balance.
Organizing the accounts into the financial statements.
Closing the books.
Preparing a post-closing trial balance to check the accounts.
.
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Post-Closing Trial Balance
A post-closing trial balance is a list of
permanent accounts and their balances from
the ledger after all closing entries have been
journalized and posted. It lists the balances for
all accounts not closed. These accounts
comprise a company’s assets, liabilities and
equity, which are identical to those in the
balance sheet. The aim is to verify that (1)
total debits equal total credits for permanent
accounts, and (2) all temporary accounts have
zero balances.
Chara Charalambous MBA CDA COLLEGE
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ACCOUNTING PROCESS AND RECORDS
▲
Accounting records are any listing or book which records the
transactions of a business in a logical manner. This is achieved by the
use of books of prime entry and the Ledger.
Journals ( Journal is one of the books of prime entry) is a detail diary
in which the transactions of each day are recorded. They are used as
an initial ‘store’ of information of the business transactions prior to
storing the information in the ledger accounts.
Step 1
Transactions
Make Adjusting
entries
journals
Closing the
Accounts
Step 2
Ledger
accounts
Financial
statements
Chara Charalambous MBA CDA COLLEGE
Trial Balance
Post Closing
Trial Balance
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The Accounting Process
• Transaction
Journal
Trial Balance
General Ledger (TAdjusting entries
Accounts)
(adjust for the accruals , prepayments , not-earned revenue and
prepaid revenue)
Closing and Balancing the Accounts
Financial Statements (Income Statement and Balance
Sheet)
Post Closing Trial Balance
Documents verifying a transaction:
• Bank deposit documentation
• Invoices
• Cheques
• Stock certificates
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ACCOUNTING RECORDS
▲ The journal is called a book of prime entry
meaning the ‘first book’.
A Journal is prepared in a specific format as shown in
the next slide.
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Journal
Four parts:
• a)Date of transaction
• b)Title of account debited with dollar amount
• c)Title of account credited with dollar amount
• d)Brief explanation of transaction
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To sum up: the Journal and the Ledger
Journal
• Chronological record of transactions
• Organized by date
Ledger
• The book holding all the accounts and their
balances
• Organized by account
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Other Books of Prime Entry
Book of Prime Entry
Transaction type
Sales Day Book
Purchases Day Book
Sales Returns day Book
Credit Sales
Credit Purchases
Returns of goods sold on
credit
Returns of goods bought on
credit
Purchases returns day book
Cash Book
Petty Cash Book
All bank transactions
All small cash transactions
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TRADE TRANSACTIONS
1. Recording Cash Transactions
• Cash transactions are those where payment is
made or received immediately.
• Double Entry in the bank ledger is as follow:
– A debit entry is where funds are received.
– A credit entry is where funds are paid out.
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TRADE TRANSACTIONS
2. Recording Credit Sales and Purchases
• Credit sales and purchases are transactions
where goods or services change hands
immediately, however payment is not made right
away but in some time in the future.
• Money that a business is owned is recorded in
the receivables or Debtor ledger account.
• Money that a business owes is recorded in the
payables or Creditor ledger account.
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TRADE TRANSACTIONS
3. Recording Sales and Purchases Returns
• It is normal for customers and a
business to return unwanted
goods to a business or the
supplier respectively.
• The double entries arising will
depend upon whether the
returned goods were initially
purchased on credit or cash
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.
Originally a
credit
transactions
Originally a
cash
transactions
Sales
Returns
(returns
inwards)
Dr Sales
(Returns)
Cr
Receivables/
Debtors
Dr Sales
(Returns)
Cr Cash
Purchases
Returns
(returns
outwards)
Dr Payables/
Creditors
Cr Purchases
(Returns)
Dr Cash
Cr Purchases
(Returns)
Chara Charalambous MBA CDA COLLEGE
TRADE TRANSACTIONS
4. Recording Discounts
• Discounts may be given in the case of credit
transactions in order to encourage quick
payment. For example a cash discount of 3% is
offered to any customers who pay within 14
days.
– A business may give its customer a discount
- known as Discount Allowed.
– A business may receive a discount from a
supplier – known as Discount Received.
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Recording Discounts
Discount Allowed
• Dr Discount Allowed (expense)
• Cr Debtors / Receivables
X
X
Discount allowed is treated as all other expenses in Income
Statement
Discount Received
• Creditors / Payables
• Discount Received (income)
X
X
The income is shown beneath gross profit in the Income
Statement.
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Balancing off a statement of financial position
ledger account
cash
Capital 10000
Sales
250
Purchases 200
Rent
150
B/ce c/d 9900
10250
10250
B/ce b/d 9900
3.Calculate the difference between the large
side and the small side and set the figure in
the small side naming it Balance c/d (carried
down)
2.Put the larger in the total box on the
debit and credit side.
1.Total both sides of the T account and
find the larger total. In the example the
larger total is in debit side.
4.Carry the balance down diagonally and call it
“balance b/f” (brought forward)
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ADJUSTMENTS
 Accrued expenses
added in the total expenses and goes in the Profit and
Loss account also goes to Balance sheet in the
Current liabilities side and is called Accrued Expenses.
– The expenses which have been used up in the current year, but
have not yet been paid.
 Prepaid expenses
we deduct it from the total expense so in Profit
and Loss account goes the expense which is
related to this year.Also goes in the Balance Sheet
in the side of Current assets named Prepaid
expenses.
– those to be used in the following period but have been paid in
advance this period.
Lecturer: Chara Charalambous
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ADJUSTMENTS - INCOME
In this case we mean the income from other sources
than the clients for e.g. the bank interest, rents e.t.c)
• Accrued income
We record the whole (paid + unpaid) income in the
Profit and Loss Account. also goes in the Balance
sheet in the side of current assets and is called
accrued income.
– The income which has been earned in the current period
but has not yet been received.
• Prepaid income
we deduct the prepaid income from the total amount
of the income which goes in the Profit and Loss
account (because is not related to the year)
And also this amount goes to Balance sheet in the side
of current liabilities and is called prepaid income.
– The income to be earned in the following period but has been
received in advance.
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Classes of Accounts
• Personal Accounts: The accounts which represent persons,
organizations, claims and liabilities examples are debtors,
creditors, loans, prepayments, accruals, drawings, capital.
• Real Accounts: The accounts which represent assets
examples are cash , bank, stock, fixed assets.
Personal Accounts and Real Accounts are Permanent
accounts are not closed at the end of the year, they will
have balance next year and all these accounts are Balance
Sheet Accounts.
• Nominal Accounts: The accounts which represent expenses,
losses, incomes, profits examples are purchases, sales, expenses.
Also called Temporary Accounts because the are related to one
year only and they are closed at the end of the year and next year
they will not have balanceLecturer:
theyChara
start
from zero.
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• At the year end, the ledger accounts must be
closed off (concerns accounts that closes –
temporary accounts) or balanced (concerns
accounts that their balance is transferred to next
year- permanent accounts) and transfer the
balances in the next accounting period.
• Balancing the account will result in:
– A balance c/f (being the asset / liability at the
end of the accounting period).
equals
– A balance b/f (being the asset / liability at the
start of the next accounting period).
Balance c/d = Balance b/d
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The following accounts are closing off and they are not
transferring a balance to the next accounting period:
1. Expenses accounts and Purchases account
2. Income accounts (e.g. sales, discounts received)
Instead they are transferring the balancing figure on the
smallest side at the Income statement (depending if it goes
to trading a/c or profit & loss a/c)
LEDGER ACCOUNTS THAT ARE TRANSFERING AT THE
INCOME STATEMENT DO NOT HAVE AN OPENING BALANCE
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CAPITAL ACCOUNT
• At the start of the next accounting period the capital account will
have an opening balance, i.e. A balance b/f equal to the amount
that is owed to the owner at the start of that period.
• This amount is equal to what was owed to the owner at the start
of the previous period, plus any capital that the owner
introduced in the period, plus any profits earned in the period
less any drawings taken out in the period.
• Therefore we transfer the balance of the Income Statement profit or loss- and the balance on the drawings account to the
capital account at the end of the period so that it will have the
correct opening balance at the start of the next.
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Capital Account
Loss for the year x
Drawings
x
B/ce c/d
x
x
B/ce b/d
Net Profit
Cash injections
B/ce b/d
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x
x
x
x
x
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Chart of Accounts: List of all accounts
used by a company
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•
•
•
•
Example of Journal: Ned Brown opened a medical practice in
San Diego, California. 1 Record the preceding transactions in
the journal of Ned Brown, M.D., P.C. Include an explanation.
Jan 1: The business received $29,000 cash and issued common
stock.
Jan 2 Purchased medical supplies on account, $14,000.
Jan 2 Paid monthly office rent of $2,600.
Jan 3 Recorded $8,000 revenue for service rendered to patients
on account.
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Jan 1: The business received $29,000 cash and issued common stock
Cash received indicates cash increases Cash is an Asset; Assets increase
with debits .Issued common stock; indicates equity is increasing Increase
equity with credits
DATE
JAN 1
DESCRIPTION
Cash
DEBIT
CREDIT
29000
Common Stock
29000
Issued stock
Jan. 2: Purchased medical supplies on credit, $14,000.
Medical Supplies, an asset, is increasing .Assets increase with debits. On
credit increases accounts payable, a liability Increase liabilities with credits
DATE
JAN 2
DESCRIPTION
Medical supplies
DEBIT
CREDIT
14000
Accounts payable
14000
Purchased supplies on account
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Jan. 2: Paid monthly office rent of $2,600 .Paid rent, an expense, expense is
increasing .Expenses increase with debits .Paid cash, cash is an asset ,decrease
assets with credits
DATE
JAN 2
DESCRIPTION
Rent Expense
DEBIT
CREDIT
2600
Cash
2600
Paid Office Rent
Jan. 3: Recorded $8,000 revenue for service rendered to patients on credit. On credit
indicates Accounts receivable increase .Accounts receivable is an Asset, Assets increase
with debits .Rendered services, services are revenues, indicates revenues are increasing
Increase revenues with credits
DATE
JAN 3
DESCRIPTION
Accounts receivable
DEBIT
CREDIT
8000
Service Revenue
8000
Performed service on account
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Copying amounts from the journal to the ledger
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Prepare the Trial Balance
Trial Balance of Ned Brown, M.D., P.C.
DR
Cash
26400
Accounts receivable
8000
Medical supplies
14000
CR
Accounts payable
14000
Common stock
29000
Service revenue
8000
Rent expense
2600
Total
51000
Chara Charalambous MBA CDA COLLEGE
51000
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THE TRIAL BALANCE
• Once all ledger accounts have been balanced off a
trial balance is prepared.
• A trial balance is a list of the “balance b/f” of the
ledger accounts according to whether they are on
the debit or credit side.
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The purpose of a trial balance is:
– To check that for every debit entry made, an equal
credit entry has been made since the total amount
of the two columns must be equal.
– As a first step in preparing the financial statements.
Note that a number of adjustments will be made after the
trial balance is extracted. These adjustments do not
therefore appear in the trial balance.
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