ACF110C2B: Financial Accounting Lecture 2

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ACF110C2B Financial AccountingLecture 2

• Miss Syamarlah Rasaratnam

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Ledger entries

• Double entry is a systematic method of recording
  an enterprises transaction
• Leger page is divided into two sections
• Debit
• Credit

Credit
Debit
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The functions of double entry system

• Obtain income and expenditure for a given
  accounting period
• Value of assets owned by the company
• Identify the equity and debt of the company
• Ascertain profit or loss for the accounting period

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Debit and credit balances

• Debit gt Credit gt debit balance
• Credit gt Debit gt credit balance
• Debit balance
• Asset
• Cash
• An expense
• loss

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Debit and credit balances

• Credit balance
• Capital
• Liability
• Income
• gain

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Example of cash transaction

• On 1 February 2002, Mr Bell bought a computer
  valued 2,000 for cash from PC World.

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Payment Cash Transaction
Computer Account
Debit Credit
Cash Account
2,000
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Example of bank transaction

• On 1 February 2002, Mr Bell bought a computer
  valued 2,000 by writing a bank cheque from PC
  World.

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Payment Bank Transaction
Computer Account
Debit Credit
Bank Account
2,000
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Example of cash transaction

• On 1 February 2002, PC World sold a computer
  valued 2,000 for cash to Mr. Bell.

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Receipt Cash Transaction
Stock Account - Computers
Debit Credit
Cash
Account 2,000
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Example of cash transaction

• On 1 February 2002, PC World sold a computer
  valued 2,000 to Mr. Bell. Mr. Bell paid for the
  computer by writing a bank cheque.

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Receipt - Cheque Transaction
Stock Account - Computers
Debit Credit
Bank
Account 2,000
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Capital introduced

• Mr. Ball invited a partner, Miss Brown on 1 May
  2002. Miss Brown invest 10,000 in the business

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Capital introduced
Capital Account Miss Brown
Debit Credit
Bank
Account 10,000
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Drawings

• Miss Brown withdraw 1,000 from the business on 1
  June 2002

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Drawings
Drawing Account Miss Brown
Debit Credit
Bank
Account 1,000
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Money borrowed

• Mr Ball borrowed 5,000 from the bank on 1 July
  2002

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Borrowings
Loan Account
Debit Credit
Bank
Acccount 5,000
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Balancing off

• At the end of each accounting period, the
  accounts are balanced off. The balance of each
  account is then included in the balance sheet
  PL a/c, and carried forward into the next
  accounting period.

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Example of balancing off
The total debit entries 1,010 The total
credit entries 600
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• Therefore by inserting 410 on the credit side the
  account will balance.
• This balance is often referred to as the balance
  carried forward (because it is carried forward
  into the next period).
• When it appears as the opening balance at the
  start of the next accounting period, it is often
  referred to as the balance brought down (because
  it has been brought down from the last period).

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• Once this procedure is completed the account will
  look like this
• Because this balance is carried down onto the
  debit side of the account, it is known as a debit
  balance.

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Example

• On 1 February 2002, Mr bell bought a computer
  valued 2,000 from PC world. He wrote a bank
  cheque for this transaction.
• Mr. Ball invited a partner, miss brown on 1 may
  2002. Miss brown invest 10,000 in the business.
• Miss brown withdraw 1,000 from the business on 1
  June 2002.
• Mr ball borrowed 5,000 from the bank on 1 July
  2002.
• Opening bank account on 1 February 2002 was
  1,000 (dr).

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Balance Sheet
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Ledger entries for credit transaction

• On 01/01/02 Mr.Smith sold 100 worth of goods to
  Mr.Black for credit
• On 02/01/02 Mr. Smith bought 1,000 worth of
  goods from a major supplier Makro
• On 03/01/02 Mr. Black returned 30 worth of goods
  for refund
• On 04/01/02 Mr. Smith returned 200 worth of
  goods to Makro
• On 31/01/02 Mr. Black settle his account.
• On 03/02/1 Mr Smith settle his account with Makro

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Ledger entries for credit transaction

• On 01/01/02 Mr.Smith sold 100 worth of goods to
  Mr.Black for credit

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Ledger entries for credit transaction

• On 02/01/02 Mr. Smith bought 1,000 worth of
  goods from a major supplier Makro

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Ledger entries for credit transaction

• On 03/01/02 Mr. Black returned 30 worth of goods
  for refund

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Ledger entries for credit transaction

• On 04/01/02 Mr. Smith returned 200 worth of
  goods to Makro

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Ledger entries for credit transaction

• On 31/01/02 Mr. Black settle his account.

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Ledger entries for credit transaction

• On 03/02/1 Mr Smith settle his account with Makro

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Cash paid or withdrawn from bank

• On 1/2/02 Mr.West withdraw 200 from the bank for
  petty cash
• On 1/3/02 Mr. West lodge 100 in the bank from
  petty cash

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Next week plan

• Monday Lecture Preparing Trial Balance
• Class test double entry (similar to the class
  examples)
• Tomorrow class Test
• Basic Accounting Rules AND classification of
  accounting items (i.e. FA, CA, LTL, CL, Equity)