Unit-2Accounting System

Prepared byDr. Siraj Ahmad

College of Business Administration, Al-KharjAL-Kharj University

Kingdom of Saudi Arabia

1. Explain double-entry rules.

2. Identify steps in the accounting cycle.

3. Record transactions in journals, post to ledger accounts, and prepare a trial balance.

Learning ObjectivesLearning Objectives

Debits and CreditsDebits and Credits

An Account shows the effect of transactions on a given asset, liability, equity, revenue, or expense account.

Double-entry accounting system (two-sided effect).

Recording done by debiting at least one account and crediting another.

DEBITS must equal CREDITS.

Account Name

Debit / Dr. Credit / Cr.

Debits and CreditsDebits and Credits

An arrangement that shows the effect of transactions on an account.Debit = “Left”Credit = “Right”

Account

An Account can be illustrated in a T-Account form.

Account Name

Debit / Dr. Credit / Cr.

Debits and CreditsDebits and Credits

If Debit entries are greater than Credit entries, the account will have a debit balance.

SR.10,000 SR.3,000

SR.15,000

8,000

Balance

Account Name

Debit / Dr. Credit / Cr.

Debits and CreditsDebits and Credits

If Credit entries are greater than Debit entries, the account will have a credit balance.

SR.10,000 SR.3,000

SR.1,000

8,000

Balance

Chapter 3-23

AssetsAssets

Debit / Dr. Credit / Cr.

Normal BalanceNormal Balance

Chapter 3-27

Debit / Dr. Credit / Cr.

Normal BalanceNormal Balance

ExpenseExpense

Chapter 3-24

LiabilitiesLiabilities

Debit / Dr. Credit / Cr.

Normal BalanceNormal Balance

Chapter 3-25

Debit / Dr. Credit / Cr.

Normal BalanceNormal Balance

EquityEquity

Chapter 3-26

Debit / Dr. Credit / Cr.

Normal BalanceNormal Balance

RevenueRevenue

Normal Balance Credit

Normal Balance Credit

Normal Balance Debit

Normal Balance Debit

Debits and Credits SummaryDebits and Credits Summary

Balance Sheet Income Statement

= + =-Asset Liability Equity Revenue Expense

Debit

Credit

Debits and Credits SummaryDebits and Credits Summary

Basic Accounting EquationBasic Accounting Equation

Relationship among the assets, liabilities and stockholders’ equity of a business:

The equation must be in balance after every transaction. For every Debit there must be a Credit.

Double-Entry System ExerciseDouble-Entry System Exercise

AssetsAssets LiabilitiesLiabilities Stockholders’ Equity

Stockholders’ Equity

= +

1. Invested SR 32,000 cash and equipment valued at SR 14,000 in the business.

+ 32,000

+ 14,000

+ 46,000

Double-Entry System ExerciseDouble-Entry System Exercise

AssetsAssets LiabilitiesLiabilities Stockholders’ Equity

Stockholders’ Equity

= +

2. Paid office rent of SR 600 for the month.

- 600 - 600 (expense)

Double-Entry System ExerciseDouble-Entry System Exercise

AssetsAssets LiabilitiesLiabilities Stockholders’ Equity

Stockholders’ Equity

= +

3. Received SR 3,200 advance on a management consulting engagement.

+ 3,200 + 3,200

Double-Entry System ExerciseDouble-Entry System Exercise

AssetsAssets LiabilitiesLiabilities Stockholders’ Equity

Stockholders’ Equity

= +

4. Received cash of SR 2,300 for services completed for Shuler Co.

+ 2,300 + 2,300 (revenue)

Double-Entry System ExerciseDouble-Entry System Exercise

AssetsAssets LiabilitiesLiabilities Stockholders’ Equity

Stockholders’ Equity

= +

5. Purchased a computer for SR 6,100.

+ 6,100

- 6,100

Double-Entry System ExerciseDouble-Entry System Exercise

AssetsAssets LiabilitiesLiabilities Stockholders’ Equity

Stockholders’ Equity

= +

6. Paid off liabilities of SR 7,000.

- 7,000 - 7,000

AssetsAssets LiabilitiesLiabilities Stockholders’ Equity

Stockholders’ Equity

= +

7. Declared a cash dividend of SR 10,000.

+ 10,000 - 10,000

Note that the accounting equation equality is maintained after recording each transaction.

Note that the accounting equation equality is maintained after recording each transaction.

Double-Entry System ExerciseDouble-Entry System Exercise

Practical Problems

1. Performing services on account will have the following effects on the components of the basic accounting equation: a. increase assets and decrease owner’s equity. b. increase assets and increase owner’s equity.c. increase assets and increase liabilities.d. increase liabilities and increase owner’s equity.

2. Which of the following statements about an account is true?a. In its simplest form, an account consists of two parts.b. An account is an individual accounting record of increases

and decreases in specific asset, liability, and owner’s equity items.

c. There are separate accounts for specific assets and liabilities but only one account for owner’s equity items.

d. The left side of an account is the credit or decrease side.

3. Debits:a. increase both assets and liabilities.b. decrease both assets and liabilities.c. increase assets and decrease liabilities.

d. decrease assets and increase liabilities.

4. A revenue account:a. is increased by debits.b. is decreased by credits.c. has a normal balance of a debit.d. is increased by credits.

5. Accounts that normally have debit balances are:a. assets, expenses, and revenues.b. assets, expenses, and owner’s capital.c. assets, liabilities, and owner’s drawings.e. assets, owner’s drawings, and expenses.

Q-6.Classify the following items as investment by owner (I), owner’s drawings (D), revenues (R), or expenses (E). Then indicate whether each item increases or decreases owner’s equity:(1) Rent Expense, (2) Service Revenue,(3)Drawings, (4) Salaries Expense.

Solution1. Rent Expense is an expense (E); it decreases owner’s equity.2. Service Revenue is revenue (R); it increases owner’s equity.3. Drawings is owner’s drawings (D); it decreases owner’s equity.4. Salaries Expense is an expense (E); it decreases owner’s equity.

Answers: 1-a 2-b 3- c 4- d 5-d

 

Q-7.Investment By Owner. Mr.Fahad decides to open a computer programming service which he names Soft byte. On September 1, 2008, he invests SR.15,000 cash in the business.. The effect of this transaction on the basic equation is:

Solution:

Assets Liabilities Owner’s Equity

Cash Fahad Capital

SR.15,000 SR.15,000 Investment

Q-8.Purchase of Equipment for Cash. Soft byte purchases computer equipment for SR.7,000 cash. What is specific effect of this transaction and the cumulative effect of the first two transactions are:

Solution: Assets Liabilities Owner’s Equity

Cash Equipment Fahad Capital

Old Balance SR.1500 SR.15000SR.7000 SR.7000

New Balance SR.8000 SR.7000 SR.15000.....................................

SR.15000

Q.9.Purchase of Supplies on Credit: Soft byte purchases for SR.1,600 from Acme Supply Company computer paper and other supplies expected to last several months. Acme agrees to allow Soft byte to pay this bill in October. What will be effect on accounting equation?Solution:

Assets Liabilities Owner’s Equity Cash Supplies Equipment Account Payable Fahad CapitalOld bal. 8000 -- 7000 ---- 15000

1600 1600

New Bal. SR.8000 SR.1600 SR.7000 SR.1600 SR.15000 SR.16600 SR.16600

Q.10.Services Provided for Cash. Soft byte receives SR.1,200 cash from customers for programming services it has provided. What will be new balances in the equation ?Solution:

Assets Liabilities Owner’s Equity Cash Supplies Equipment Account Payable Fahad CapitalOld bal. 8000 1600 7000 1600 15000

1200 1200 reven New Bal. SR.9200 SR.1600 SR.7000 SR.1600 SR.16200 SR.17800 SR.17800

1. What do you mean by double entry system?

2. State the accounting equation, and define assets, liabilities, and owner’s equity.

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