accounting introduction p20

8/12/2019 Accounting Introduction p20

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The Double Entry System of RecordingTransactionsRecording transactions in accounting is based on the double-

entry system. The transaction has a dual effect which means

that every transaction affects at least two accounts. For every

debit there is a corresponding credit. The total amount of the

accounts debited must equal the total amount of the accounts

credited.

The Accounting CycleThe Life of a business is divided into accounting periods ofequal length. A standard sequence of accounting procedures is

repeated for each period. These uniform procedures done to

accomplish the accounting process are referred to as the

accounting cycle.


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1. I denti fying and analyzing the events table recorded

This is the process of identifying and analyzing the

transactions to be recorded through the business documents.

Business documents are forms containing evidence to support abusiness transactions.

2. Recording transactions in the journal

This is known asjournalizing. It is the process of recordingthe transaction in the first book of account known as the

journal.

3. Posting journal entr ies to the ledger

This is known asposting. It is the process of transferring

the information found in the journal into the book of final entry

known as the ledger. This summarizes the increase or decrease

of individual accounts.


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4. Preparing the tr ial balance

The trial balance is a list of accounts found in the ledger

together with the accounts balance or total.

5. Preparing the worksheet and adjusting entr ies

The worksheet is a common tool used by accountants to

assemble on a sheet of a paper al the information needed to prepare

the financial statements, adjusting entries, closing entries, and the

post-closing trial balance.

6. Preparing the financial statements

A balance sheet , income statement, statement of changes in

equity, and cash flow statement are prepared to provide usefulinformation to parties interested in the financial information of the

business.


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7. Journal izing and posting of adjusting journal entr ies

Adjusting entries are prepared at the end of the accounting

period to update the accounts for internal transactions because they

affect more than one accounting period.

8. Journal izing and posting of closing journal entr ies

Closing entries are prepared at the end of the accounting

period to update the owners capital account.

9. Prepar ing the post closing trial balance

After the closing entries have been posted, the post closing

trial balance is prepared from the general ledger accounts.

10. Journalizing and posting of reversing journal entr ies

Reversing entries are prepared to simplify the accounting

process. The adjusting entries are simply reversed on the first day of

the accounting period.


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The Analysis of Transaction

Following are the steps involved to analyze transactions:

1. From the business document, determine the kind of transactionor exchange made.

2. Analyze the transaction to determine the accounts affected. They

can either affect the assets, liabilities, owners equity, revenue or

expenses accounts.

3. Determine the effect of the transaction on the accounts affected.

The transaction can either increase or decrease the accounts.

4. Apply the rules of debit and credit to identify whether the

accounts affected should be debited or credited to show the

corresponding increase or decrease.

The Journal

The Journal is a chronological record of events or business

transaction showing all the effects of each transaction in terms


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of debits and credits. Because transactions are initially

recorded in the journal, it is called the book of original entry. The

simplest journal is the general journal.

A Journal entry should contain the following:

1. Date . Write a month on the first transaction unless there is a

change in month for the succeeding transactions or a new page isused.

2. Account Titles and Explanation. Write the debit account at the

extreme left of the first line while the credit account is indented

half-inch on the next line. The explanation describing the

transaction is written on the extreme left of the next line below

the credit. Remember to skip on line before proceeding to the

next transaction.


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3. P.R. (Posting Reference) Write the corresponding account

number here once the entry is posted. Meanwhile, it is left blank

until the posting has been done.

4. Debit. Under this column, write the debit amount for each debit

account.

5. Credit. Under this column, write the credit amount for each debit

account.

The Simple and Compound Entry

When only two accounts are affected, we call this a simple

entry where there is only one debit account and one credit

account. The previous example where the owner Niko Ong,made an initial investment is a simple entry. In some cases, a

transaction would require the use of three or more accounts

in which case the entry is called a compound entry.


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Journalizing the Transactions

Journalizing is the process of recording transaction in the

journal after it has been recognized and measured.

In journalizing transactions the double entry system is used.In this case, two or more accounts are affected by each transaction. It

follows that for every debit, a corresponding credit is made. The total

debits should equal total credits for every transaction. IN this way,

the equality of the accounting equation is maintained.

Rules for debit and credit

You debit to show: You credit to show:

1. Increase in assets 1. Decrease in assets

2. Decrease in liabilities 2. Increase in liabilities3. Decrease in owners equity 3. Increase in owners equity

-Owners withdrawal -Initial investment

-Expenses -Additional investment

-Revenue/income


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Use of T-Accounts

An account is a form of record that summarizes the increases

or decreases of any specific accounting value. The simplest form of

an account is the T-Account because the accounting equation isrepresented by a big T. it is an informal tool used to analyze the effect

of a transaction in the assets, liabilities, owners equity, revenue, and

expenses.

The three elements of an account are:

1. Account Title

2. Debit

3. Credit


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The Ledger

The ledger is a group of the accounts used by the company. It is

the book of final entry. An account is an accounting device or

form of record that summarizes the increases or decreases of anyspecific accounting value. The accounts in the general ledger are

classified into two general groups.

1. Balance sheet or real account (assets, liabilities, and owners

equity)

2. Income statement or nominal accounts (revenue and expenses)

Chart of Accounts

Chart of accounts is a list of all account titles used by thecompany with their corresponding account number. Account titles

are arrange in financial statement order. Balanced sheet accounts

which include assets, liabilities, and owners equity come first.

Account titles in the income statement which include revenue and


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expenses follow. The accounts are so numbered for purposes of

indexing and cross-referencing.

The Normal Balance of an AccountThe side of an account where increases and recorded is

referred to as the normal balance or an account. This can be the left

side (debit) or the right side (credit). The reason for this is account

increases usually exceed account decreases. The following are the

normal balances or accounts:

Normal Debit Balance Normal Credit Balance

Asset Liability

Owners Drawing Owners Equity

Expense Income


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Posting to the Ledger

Postingis the process of transferring information from the

journal to the ledger. Debits in the journal are correspondingly posted

as debits in the ledger, and credits in the journal are likewise posted ascredits in the ledger. The steps in posting are as follows:

1. From the journal, copy the date of the transaction to the ledger.

2. Under the journal reference (J.R) column of the ledger, copy the

page number of the journal.

3. Under the debit credit ledger, transfer the credit amount from the

journal.

4. After posting the amount to the ledger, write the account number

in the posting reference (P.R) column of the journal.

The Ledger Accounts After Posting

The Debit or Credit balance of each account is determined at the

end of the accounting period in order to prepare the trial balance.


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The debit column and the credit column of each account are

added to get the balance of each account. If an accounts total debit

exceeds total credit, account has a debit balance. If the total credit

exceeds total debit, the account has a credit balance.

The Trial Balanced

The trial balanced is the schedule of all balances to prove the

equality of the debit and credit it is a listing of all account title with

their respective debit or credit balances taken from the ledger.However it does not check or vouch the accuracy of the report.

The following are the steps in the preparation of the trial balance:

1. In their proper numerical order, make a listing of all account

titles.

2. Get the account balance of each ledger account and write them

under their corresponding debit or credit column.


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3. Foot or add the debit and the credit columns of the trial balance.

4. Check whether the debit totals and credit totals are equal. They

must be equal, otherwise your trial balance has error.

accounting introduction p20

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