4. recording process

8/8/2019 4. Recording Process

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Recording Process


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Accounts

Accounting system include a separate record foreach item that appear in the balance sheet.

For example, a separate record is kept for the

asset Cash, showing all the increase anddecreases in cash which result in the manytransactions in which cash is received or paid.

The form of record used to record increases and

decreases in a single balance sheet item iscalled an account. The entire group of accountsis called a ledger


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Ledgers

Ledger account are a means of accumulatinginformation needed by management in directingthe business. For example by maintaining a

Cash account, management can keep track theamount of cash available.

In its simplest form, an acount has only threeelements: (1) a title the name of particularassets, liability or owners equity, (2) a left sidecalled the debit side; and (3) a right side , calledthe credit side. The form called a T Account


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Debit and Credit Entries

An amount recorded on the left side is called adebit, or a debit entry. An amount recorded onthe right side is called a credit, or a credit entry.

The act of recording a debit in an account iscalled debiting the account, the act of recordinga credit in an account is called crediting theaccount.

Debit is an entry on the left hand side, credit isan entry on the right hand side.


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Debit Balances

Debit balances in asset account. All assetsaccount normally have debit balances.

Any Asset Account

(Debit)

Increase

(Credit)

Decrease


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Credit Balances

Credit balances in liability and ownersequity account. All liability or owners

equity account normally have creditbalance.

Any Liability Account or

Owners Equity Account

(Debit)

Decrease

(Credit)

Increase


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Standard Form of the LedgerAccount

Title of Account

Account No.

Date Explanation Ref Amount Date Explanation Ref Amount

(Ref) Reference column record the page number of the Journal

Account are usually arranged in the ledger in financialstatement order, that is asset first, followed by liabilities andowners equity, revenue and expenses.

A chart of account is a listing of the title account titles andaccount numbers being used by a given business.


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Equality of debits and credits

Every transaction affect two or moreaccounts. The double entry system meansthat equal debit and credit entries aremade for every transaction.

The total of all debit entries in the ledger isequal to the total of all credit entries


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The Journal

It is more efficient and convenient to recordtransactions first in a journal and later to transferthe debit and credit to ledger account

A

transaction is an event causing a dollarchange in the assets, liabilities, and ownersequity in a business entity.

The journal shows all information about a

transaction in one place. Journal providechronological record of all events. The use of

journal help to prevent errors.


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Standard Form ofA Journal

General Journal

Page 1

Date Account title and

explanation

Ref Debit Credit

Ref: Reference column shows left blank at the time of

making journal entry. When the debits and credits latertransferred to ledger account the ladger account numberare listed in this column to provide convenient crossreference.


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Illustration

Transaction (a) the sum of $ 20.000 cash was investedin the business on September 1, and 200 shares ofcapital stock were issued.

Transaction (b) On Sept 3, Greenhill Real EstateCompany (GRE) purchased land for cash in the

amount of $ 7000.Transaction (c) On Sept 5, The GRE purchased a

building from X Company at a total price of $ 12.000.The term of purchase required a cash payment of $

5.000, the remainder of $ 7000 payable in 90 days.Transaction (d) On Sept 10, the GRE sold a portion ofits land on credit to Carters Drugstore for a price of $2000. The land was sold at cost, so there was nogain or loss.


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Illustration (2)

Transaction (e) On Sept 14, the GRE purchased officeequipment on credit from General Equipment, Inc. inthe amount of $ 1800

Transaction (f) On Sept 20, cash of $ 500 was

received as partial collection of the accountreceivable from Carters Drugstore

Transaction (g) A cash payment of $ 1000 was madeon Sept 30 in partial settlement of the amount owing

to General Equipment.


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General JournalPage 1


explanation

Ref Debit Credit

Sep1

Cash

Capital Stock

Issued 2000 shares of capital

stock in exchange for cashinvested in business

1

50

20.000

20.000

Sep3

Land

Cash

Purchased land for office site

7.000

7.000

Sep5

BuildingCash

Account payable

Purchased building. Paid partcash, balance payable within 90days

12.0005.000

7.000


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General JournalPage 1


expla

na

tion

Ref Debit Credit

Sep10

Account Receivable

Land

Sold unused part of land toCarter. Due in three months

2.000

2.000

Sep14

Office equipment

Account payable

Purchased off equipment oncredit from General Eq Inc

1.800

1.800

Sep20

Cash

Account Receivable

Collected part of receivable

500

500

Sep30

Account Payable

Cash

Made partial payment toGeneral Equipment Inc

1.000

1.000


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Posting

The process of transferring the debits andcredits from the general journal to theproper ledger accounts.

Each amount listed in the debt column ofthe journal is posted by entering it on thedebit side of the acount in the ledger

Each amount listed in the credit column ofthe journal is posted by entering it on thecredit side of the acount in the ledger


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Cash

Account No. 1

Sep 1 1 20.000 Sep 3 1 7000

Sep 20 1 500 Sep 5 1 5000

Sep 30 1 1000

20.500 13,000

7.500


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Account ReceivableAccount No.2

Sep 10 1 2000 Sep 20 1 500

1.500

Land

Account No 20

Sep 3 1 7000 Sep 10 1 2000

5.000


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BuildingAccount No. 22

Sept 5 1 12000

Office Equipment

Account No. 25

Sept 14 1 1800


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Account PayableAccount No. 30

Sep 30 1 1000 Sep 5 1 7000

Sep 14 1 1800

1.000 8.800

7.800

Capital StockAccount No. 50

Sept 1 1 20000


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The Trial Balance

Before using the account balances to preparethe balance sheet, it is desirable to prove thatthe total of accounts with debit balances is equalto the total of accounts with credit balances.

A trial balance is a two column schedule listingthe names and balances of the accounts in theorder in which they appear in the ledger; the

debit balance is listed in the left hand columnand the credit balances in the right-hand column

The total of each column should agree.


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Measuring Business Income


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Concepts

Earning of profits is a major goal of a business.Operating profitably increases both total assetsand total stockholders equity

Increase in equity recorded in account calledRetained Earning (Laba Ditahan atau SaldoLaba).

Distribution of profits to stockholders calledDividends, decrease both cash and equity.Balance of retained Earning represent earningwhich have not been distributed.


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Concept

Economist define profit as the amount by whichthe entity become better-off during a period.Need more objective measurement.

Accountant provide objective evidence, term isNet Income

Net income is the excess of the price of goodssold and services rendered over the cost of

goods and services used up during a given timeperiod.

Net income equals revenue minus expenses.


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Revenue

Revenue is the price of goods sold and servicesrendered during a given time period.

A business receive immediate payment in cash

or acquire an account receivable which will becollected and become cash.

Not all receipt of cash represent revenue (i.eloans, collection of receivable)

Revenue cause an increase in owners equity.Not all increase in equity come from revenue.


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Expenses

Expenses are all the cost of goods and servicesused up in the process of obtaining revenue.Example: employee salaries, telephone

services, depreciation of building etc. Referred also as cost of doing business.

Expenses in a given month are incurred in orderto generate revenue in the same period

Expenses cause the owners equity to decrease.Expenses and cash payments are not the same.


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Dividends

Dividends is a distribution of assets(usually cash) by a corporation to itsstockholders. Dividend is not an expense.

Dividends recorded by debiting theRetained Earning account. Or by debitingan account called Dividends.


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Relating Revenue and Expense toTime Period

A balance sheet shows the financial position ofthe business at a given date. An incomestatement shows the result of operations over aperiod of time.

The accounting period: the span of time coveredby an income statement ( a month, a quarter, ahalf year, or a year).

Fiscal year: any 12 months period adopted by a

business. Transactions affecting two or more accpuntingperiod.


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Rules ofDebit and Credit forRevenue and Expenses

Revenue increases owners equity, thereforerecorded by credit

Expenses decreases owners equity, thereforerecorded by debit.

A separate ledger account is maintained foreach major type of revenue and expenses.

Example Greenhill Real Estate (GRE) has tworevenue account: Sales Commissions Earned

and Rental Commissions Earned. Expense account usually more numerous than

revenue accounts.


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Cash

Account No. 1

Sept 1 1 20000 Sept 3 1 7000

20 1 500 5 1 5000

7500 20500 30 1 1000

13000

Oct 6 2 2750 Oct 1 2 120

7830 23250 30 2 1700

30 2 600

15420


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Account ReceivableAccount No.2

Sept 10 1500 1 2000 Sept 20 1 500

Oct 20 2 1130 Oct

2630 3130

Land

Account No 20

Sept 3 5000 1 7000 Sept 10 1 2000


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BuildingAccount No. 22

Sept 5 1 12000 Sept

Office Equipment

Account No. 25

Sept 14 1 1800


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Account PayableAccount No. 30

Sept 30 1 1000 Sept 5 1 7000

14 1 1800

7800 8800

Oct 16 2 90

30 2 48

7938 8938

Capital StockAccount No. 50

Sept 1 1 20000


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DividendsAccount No. 50

Oct 30 2 600

Sales Commission Earned

Account No. 61

Oct 6 2 2750

20 2 1130

3880


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Advertising ExpenseAccount No. 70

Oct 1 2 120

16 2 90

210

Oct 30 2 1700

Office Salaries Expense

Account No. 72

Telephone Expense

Account No. 74

Oct 30 2 48


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GRE CompanyTrial BalanceOctober 31, ..

Cash $ 7830

Account Receivable 2630

Land 5000

Building 12000

Office Equipment 1800

Account Payable $ 7938

Capital Stock 20000

Dividends 600

Sales commission earned 3880

Advertising expense 210

Office Salaries expense 1700

Telephone expense 48

$ 31818 $ 31818


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Depreciation

Expense is cost of goods and services used upin the process of obtaining revenue.

Some of the goods are purchased in advanceand used up gradually over a long period oftime.

Cost should recognize Depreciation Expense,portion of assts that expires.

Example in GRE are: Building and Office

Equipment. Building estimated to have useful lifa of 20 years

(240 months), office equipment 10 years (120months)


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Adjusted Trial Balance October 31, ..

Cash $ 7830

Account Receivable 2630

Land 5000

Building 12000

Accumulated depreciation bldg $ 50

Office Equipment 1800

Accumulated depreciation off eqmnt 15

Account Payable $ 7938

Capital Stock 20000

Dividends 600

Sales commission earned 3880

Advertising expense 210

Office Salaries expense 1700


Depreciation expense: building 50

Depreciation expense: offce eqmnt 15

$ 31883 $ 31883


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GRE CompanyIncome Statement

for The Month Ending October 31,

Sales commission earned $ 3880

Expenses

Advertising expense $ 210

Office salaries expense 1700


Depreciation expense: building 50

Depreciation expense: offc eqmnt 15 2023

Net Income $ 1857


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GRE CompanyStatement of Retained Earning

for the month ended Oct 31, ..

Retained earning Oct 1 $ 0

Net Income for the month 1857

Subtotal 1857

Dividends 600

Retained earning Oct 31 $ 1257


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GRE Company Balance Sheet - October 31,

Assets

Cash $ 7830Account receivable 2630

Land 5000

Building $ 12000

Less: Accumulated depreciation 50 11950

Office equipment 1800Less: accumulated depreciation 15 1785

Total assets $ 29195

Liabilities & Stockholders Equity

Liabilities

Account payable $ 7938

Stockholders equity

Capital stock $ 20000

Retained earning 1257 21257

Total liabilities & stockholders equity $ 29195


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Closing the Accounts

Revenue and expense account are closed at theend of each accounting period by transferringtheir balances to a summary account calledIncome Summary.

The balance of the Income Summary will be thenet income or nat loss for the period.

Closing of the account has the effect of wiping

the slate clean and preparing the account forthe recording of revenue and expenses duringthe succeeding accounting period.


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Adjusting Entries

Transactions need adjustment:

1. Recorded cost which must be apportionedbetween two or more accounting periods

2. Recorded revenue which must be apportionedbetween two or more accounting periods

3. Unrecorded expense Ex: wages earned byemployees after the last payday after accounting

period4. Unrecorded revenue. Ex: commissions earned but

not yet collected or billed to customers.

4. recording process

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