unit-2 acct - 103 college of business administration, al-kharj salman bin abdulaziz university...

UNIT-2Acct - 103

College of Business Administration, Al-Kharj

Salman Bin Abdulaziz UniversitySalman Bin Abdulaziz University

KINGDOM OF SAUDI ARABIA

Unit – II (Acct-103)

Accounting System:

Classifications of accounts, Double Entry system, Accounting Equations.

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Understand Classification of Accounts

Analyze the effect of business transactions on the basic double entry system .

State the basic accounting equation and explain the meaning of assets, liabilities, and owner’s equity.

AFTER THIS CHAPTER, YOU WOULD BE ABLE TO KNOW:

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CLASSIFICATION OF ACCOUNTS

Identify steps in classifications of account:

An Account shows the effect of transactions on a An Account shows the effect of transactions on a given asset, liability, equity, revenue, or expense given asset, liability, equity, revenue, or expense account. Therefore, it is necessary to classify the account. Therefore, it is necessary to classify the transactions in to their respective accounts.transactions in to their respective accounts.

Real Account

(Permanent)

Nominal Accounts

(Temporary)

Accounts

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Accounts: A systematic arrangement that shows the effect of transactionsand other event on a specific element, i.e., assets, liabilities and so

The companies keep a separate account for each assets, liabilities,revenue, and expenses, and for capital (owners, equity).

Real Account:Real accounts or permanent Accounts are assets, liability an d equity

accounts; They appear on the balance sheet.

Nominal Accounts:Nominal account or temporary accounts are revenue, expenses, and

the dividend account; except for the dividends they appears on the income statement.

Difference Real / Nominal Nominal; Companies periodically close nominal account.Companies periodically close nominal account. Real; While, Companies do not close real accounts.While, Companies do not close real accounts.

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Double Entry system

Meaning:

Every business transaction causes at least two changes in the financial position of a business concern at the same time - hence, both the changes must be recorded in the books of accounts. Otherwise, the books of Otherwise, the books of accounts will remain incomplete and the result ascertained therefore will be accounts will remain incomplete and the result ascertained therefore will be inaccurate.inaccurate.

For Example; If we buy / purchase machinery for $1,000,000. Obviously, it is a business transaction. It has brought two changes - machinery increases by $1,000,000 and cash decreases by an equal amount.In accounting language these two changes are termed as "a debit change" and "a credit change“

Other words: each transaction was entered twice (hence "double-entry"), with one side of the transaction being called a DEBIT and the other a CREDIT.

http://en.wikipedia.org/wiki/Debits_and_credits

http://en.wikipedia.org/wiki/Debits_and_credits

Debits and CreditsDebits and CreditsDebits and CreditsDebits and Credits

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

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

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

DEBITS must equalmust equal CREDITS.

Account Name

Debit / Dr. Credit / Cr.


An arrangement that shows the effect of transactions on an account.

Debit = “Left”

Credit = “Right”

AccountAccount

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

Account Name



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

SR.10,000

SR.3,000

SR.15,000SR.15,000

8,000

Balance

Account Name



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

SR.10,000

SR.3,000

SR.1,000SR.1,000

8,000

Balance

Chapter 3-23

AssetsAssets


Normal BalanceNormal Balance

Chapter 3-27



ExpenseExpense

Chapter 3-24

LiabilitiesLiabilities



Chapter 3-25



EquityEquity

Chapter 3-26



RevenueRevenue

Normal Balance Credit

Normal Balance Credit

Normal Balance Debit

Normal Balance Debit

Debits and Credits SummaryDebits and Credits SummaryDebits and Credits SummaryDebits and Credits Summary

Double-Entry System ExerciseDouble-Entry System ExerciseDouble-Entry System ExerciseDouble-Entry System Exercise

AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilities StockholdeStockholders’ Equityrs’ EquityStockholdeStockholders’ Equityrs’ Equity

= +

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

+ 32,000

+ 14,000

+ 46,000



= +

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

- 600 - 600 (expense)



= +

3. 3. Wages paid SR 3,200 to labor.Wages paid SR 3,200 to labor.

- 3,200 - 3,200


AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilities StockholdeStockholdersrs’ ’ EquityEquityStockholdeStockholdersrs’ ’ EquityEquity

= +

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

+ 2,300 + 2,300 (revenue)


AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilities StockholdeStockholdersrs’ ’ EquityEquityStockholdeStockholdersrs’ ’ EquityEquity

= +

5. 5. Purchased a computer for Purchased a computer for SR 6,100.SR 6,100.

+ 6,100

- 6,100

ExerciseQuestions.

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

BASIC ACCOUNTING BASIC ACCOUNTING EQUATIONEQUATION

Assets Liabilities Owner’s Equity /

Capital= +

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ASSETS FOR A BUILDING ASSETS FOR A BUILDING BLOCKBLOCK

• Assets are resources owned by a business.

• They are used in carrying out such activities as production, consumption and exchange.

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LIABILITIES FOR A LIABILITIES FOR A BUILDING BLOCKBUILDING BLOCK

• Liabilities

• are creditor claims against assets

• are existing debts and obligations

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• Owner’s Equity = total assets minus total liabilities. (A - L = O.E.)

• Owner’s Equity represents the ownership claim to total assets.

• Subdivisions of Owner’s Equity:1 Capital or Investments by Owner (+)

2 Drawing (-)

3 Revenues (+)

4 Expenses (-)

OWNER’S EQUITY FOR A OWNER’S EQUITY FOR A BUILDING BLOCKBUILDING BLOCK

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INVESTMENTS BY OWNERS FOR INVESTMENTS BY OWNERS FOR A BUILDING BLOCKA BUILDING BLOCK

• Investments

• are the assets the owner puts in the business

• increase owner’s equity

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• Drawings• are withdrawals of cash or other

assets by the owner for personal use

• decrease owner’s equity

DRAWINGS FOR A BUILDING DRAWINGS FOR A BUILDING BLOCKBLOCK

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REVENUES FOR A REVENUES FOR A BUILDING BLOCKBUILDING BLOCK

• Revenues

• gross increases in owner’s equity from business activities entered into for the purpose of earning income

• may result from sale of merchandise, services, rental of property, or lending money

• usually result in an increase in an asset04/21/23

EXPENSES FOR A EXPENSES FOR A BUILDING BLOCKBUILDING BLOCK

Expenses

• decreases in owner’s equity that result from operating the business

• cost of assets consumed or services used in the process of earning revenue

• examples: utility expense, rent expense, supplies expense, and tax expense

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INCREASES AND INCREASES AND DECREASES IN OWNER’S DECREASES IN OWNER’S

EQUITYEQUITY•INCREASES DECREASES

Investments by Owner

Revenues

Owner’s Equity

Withdrawals by Owner

Expenses

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TRANSACTION ANALYSISTRANSACTION ANALYSIS TRANSACTION TRANSACTION 11

• Mr.Ray decides to open a computer programming service.

• On September 1, he invests SR.15,000 cash in the business, which he names Soft touch.

Soft touch

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TRANSACTION ANALYSISTRANSACTION 1 SOLUTION

Assets = Liabilities + Owner’s Equity

Cash R. Neal, Capital

+ 15,000 Investment + 15,000

SR.15,000 = SR.15,000

There is an increase in the asset Cash, SR.15,000, and an equal increase in the owner’s equity, R. Neal, Capital, SR.15,000.

There is an increase in the asset Cash, SR.15,000, and an equal increase in the owner’s equity, R. Neal, Capital, SR.15,000.

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TRANSACTION ANALYSISTRANSACTION ANALYSIS TRANSACTIONTRANSACTION 22

• Soft touch purchases computer equipment for SR.7,000 cash.

• Soft touch purchases computer equipment for SR.7,000 cash.

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• Assets = Liabilities + Owner’s Equity

• Cash + Equipment = + R. Neal, Capital

• Old

• SR.15,000 = SR.15,000

• (2) - 7,000 + 7,000______________________________

• New

• SR. 8,000 + SR.7,000 = SR.15,000

Cash is decreased by SR.7,000 and the asset Equipment is increased by SR. 7,000.

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• Softtouch purchases supplies expected to last for several months for SR.1,600 from Acme Supply Company.

• Acme agrees to allow Softtouch to pay this bill next month, in October.

• This transaction is referred to as a purchase on account or a credit purchase.

Softtouch

Acme Supply Company


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• Cash + Supplies + Equip. = Accts. Pay. + R. Neal, Capital

• Old SR.8,000 + SR.7,000 = SR.15,000

• (3) _____ + SR.1,600 _______ + SR.1,600 ________

• New SR.8,000 + SR.1,600 + SR.7,000 = +SR. 1,600 + SR.15,000

•

• SR.16,600 SR.16,600

The asset Supplies is increased by SR.1,600, and the liability Accounts Payable is increased by the same amount.

The asset Supplies is increased by SR.1,600, and the liability Accounts Payable is increased by the same amount.

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• Softbyte receives SR.1,200 cash from customers for programming services it has provided.

• This transaction represents the Softtouch’s principal revenue-producing activity.

Softtouch


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• Old SR.8,000 + SR.1,600 + SR.7,000 = SR.1,600 + SR.15,000

• (4) + 1,200 _____ _____ _______________ + 1,200

• New SR.9,200 + SR.1,600 + SR.7,000 = SR.1,600 SR.16,200

• SR.17,800 SR.17,800

Cash is increased by SR.1,200 and Ray, Capital is increased by SR.1,200.

Cash is increased by SR.1,200 and Ray, Capital is increased by SR.1,200.

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Old SR.9,200 + SR.1,600 +SR.7,000 = SR.1,600 + SR.16,200

• (5) ___Advertising Expense__ + 250 _- 250

• New SR.9,200 +SR.1,600 +SR.7,000 = SR.1,850 + SR.15,950

• SR.17,800 SR.17,800

Accounts Payable is increased by SR.250 and R. Neal, Capital is decreased by SR.250.

Accounts Payable is increased by SR.250 and R. Neal, Capital is decreased by SR.250.

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• Softbyte provides SR.3,500 of programming services for customers.

• Cash of SR.1,500 is received from customers, and the balance of SR.2,000 is billed on account.

SofttouchBill


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• Cash + Accts. Rec. + Supplies + Equip. = Accts. Pay. + R. Neal, Capital

• Old

• SR.9,200 +SR.1,600 +SR.7,000 = SR.1,850 + SR.15,950

• (6)

• + 1,500 + 2,000 + 3,500

• New

• SR.10,700 + SR.2,000 + SR.1,600 + SR.7,000 = SR.1,850 + SR.19,450

• SR.21,300 SR.21,300

Cash is increased by SR.1,500; Accounts Receivable is increased by SR.2,000, and R. Neal, Capital is increased by SR.3,500.

Cash is increased by SR.1,500; Accounts Receivable is increased by SR.2,000, and R. Neal, Capital is increased by SR.3,500.

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•Expenses paid in cash for September are store rent, SR.600; employees’ salaries, SR.900; and utilities, SR.200.

•Expenses paid in cash for September are store rent, SR.600; employees’ salaries, SR.900; and utilities, SR.200.

Softtouch

SR.600SR.600

SR.900SR.900

SR.200SR.200


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• Assets = Liabilities + Owner’s Equity • Cash + Accts. Rec. + Supplies + Equip. = Accts. Pay. + R. Neal, Capital

• Old

• SR.10,700 + SR.2,000 + SR.1,600 + SR.7,000 = SR.1,850 + SR.19,450

• (7)

• - 1,700 Rent Expense - 600

• Salaries Expense - 900

• Utilities Expense - 200

• New

• SR. 9,000 + SR.2,000 + SR.1,600 +SR.7,000 = SR.1,850 + SR.17,750

• SR.19,600 SR.19,600

Cash is decreased by SR.1,700 and R. Neal, Capital is decreased by the same amount.

Cash is decreased by SR.1,700 and R. Neal, Capital is decreased by the same amount.04/21/23

• Softtouch pays its SR.250 Daily News advertising bill in cash.

• Softtouch pays its SR.250 Daily News advertising bill in cash.


Softtouch

Daily News

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• Old

• SR.9,000 + SR.2,000 +SR.1,600 + SR.7,000 = SR.1,850 + SR.17,750

• (8)- 250 - 250 .

• New

• SR.8,750 +SR.2,000 + SR.1,600 +SR. 7,000 = SR.1,600 + SR.17,750

• SR.19,350 SR.19,350

Both Cash and Accounts Payable are decreased by SR.250. Since the expense was previously recorded, it is not recorded now.

Both Cash and Accounts Payable are decreased by SR.250. Since the expense was previously recorded, it is not recorded now.04/21/23

•The sum of SR.600 in cash is received from customers who have previously been billed for services (in Transaction 6).

•The sum of SR.600 in cash is received from customers who have previously been billed for services (in Transaction 6).


Softtouch

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• Old

• SR.8,750 + SR.2,000 + SR.1,600 + SR.7,000 = SR.1,600 + SR.17,750

• (9) + 600 - 600 .

• New

• SR.9,350 + SR.1,400 + SR.1,600 + SR.7,000 = SR.1,600 + SR.17,750

•

• SR.19,350 SR.19,350

Cash is increased by SR.600 and Accounts Receivable is decreased by the same amount. R. Neal, Capital is not increased because the revenue was already recorded.

Cash is increased by SR.600 and Accounts Receivable is decreased by the same amount. R. Neal, Capital is not increased because the revenue was already recorded.

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•Ray Neal withdraws SR.1,300 in cash from the business for his personal use.

•Ray Neal withdraws SR.1,300 in cash from the business for his personal use.

SR.1,300SR.1,300Softbyte


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• Assets = Liabilities + Owner’s Equity • Cash + Accts. Rec. + Supplies + Equip = Accts. Pay. + R. Neal, Capital

• Old

• SR.9,350 + SR.1,400 + SR.1,600 + SR.7,000 = SR.1,600 + SR.17,750

• (10)

• - 1,300 Drawing - 1,300

• New

• SR.8,050 + SR.1,400 + SR.1,600 + SR.7,000 = SR.1,600 + SR.16,450

• SR.18,050 SR.18,050

Cash is decreased by SR.1,300 and R. Neal, Capital is decreased by the same amount. This is not an expense, but rather a withdrawal of owner’s equity.

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unit-2 acct - 103 college of business administration, al-kharj salman bin abdulaziz university...

Documents

creditsan account

expense account

dividend account

rightaccountan account

close nominal account

taccount form

classifications of accounts

books of accounts