BACT1013 Financial Accounting 1 Topic 5

TOPIC 5 THE RECORDING PROCESS

Learning Objectives
 Identify the basic steps in the recording process
 Explain what a journal is and how it helps in the recording process
 Explain what a ledger is and how it helps in the recording process
 Explain what posting is and how it helps in the recording process
 Prepare a trial balance and understand its purposes
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1 Steps in the recording process
 Practically, every business uses these four basic steps in the recording process:

 The sequence of events in the recording process begins with the transaction.
 Evidence of transaction is typically provided by a business document, such as a
receipt, a cheque butt and etc.
 Source documents provide written evidence of a transaction and are used by the
accountants as support for entries recorded.
 The transaction is then entered in the journal.

2 The Journal
 Transactions are initially recorded in chronological order in journal before being
transferred to accounts.
 Therefore, journal is referred to as the book of original entry. For each transaction, the
journal shows the debit and credit effects on specific accounts.
 Journal is important for the following reasons:-
1. It discloses in one place the complete effects of a transaction.
2. It provides a chronological record of transactions that cross references to both
the source document and the ledger entry.
3. It helps to prevent or locate errors because the debit and credit amounts for
each entry can be readily compared.

Journalising
 Entering transaction data in the journal is known as journalising.
 Separate journal entries are made for each transaction.
 Businesses may use various kinds of journals, but every business has the most basic
form of journal, a general journal. A complete general journal entry consists of:
1. The date of the transaction (Include the year, month and day)

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BACT1013 Financial Accounting 1 Topic 5

2. The accounts and amounts to be debited and credit

3. A brief explanation or narration of the transaction
General Journal
Dr Cr
Date Details
RM RM
The name of the account to be debited
The name of the account to be credited
The narrative

Exercise 1: Journalise the transaction.

Jane invested RM90,000 cash in the business on the 2 January 2018.

Dr Cr
Date Details
RM RM
Cash 90,000
2018
Capital 90,000
Jan 2
Owner invested cash in the business.

Exercise 2: Journalise the transaction.

On July 20, 2016, Intel Co purchased computer equipment for RM5,500 cash.

Dr Cr
Date Details
RM RM
Computer equipment 5,500
2016
Cash 5,500
July 20
Purchased computer equipment for cash.

Compound general journal entries

 When a business transaction involves more than 2 accounts, the journal entry is called
a compound journal entry.

Exercise 3: Enter transaction in the journal.

On May 5, 2017, Marvel Co purchases van from DC Co at a cost of RM10,000, for which RM2,000
was paid with a cheque, and the remainder to be paid at a later date.

Dr Cr
Date Details
RM RM
Motor vehicle 10,000
2017
Cash 2,000
May 5
Accounts payable (DC Co) 8,000

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Exercise 4: Enter transaction in the journal.

Sky is commencing a landscape gardening business.

Record the following transactions using a general journal. Narrations are not required.

2018
Jan 1 Sky invested RM50,000 into the business bank account.
Business purchased two lawn movers and gardening tools for RM5,000 on credit from
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XYZ Sdn Bhd.
7 Business performed services for customers and received cash of RM1,500.
8 Business paid for an advertisement in the local newspaper for a fee of RM50 by cash.
Business purchased a van valued at RM20,000 from Kah Motors Sdn Bhd, paying
15
RM5,000 by cheque with the balance to be paid within 3 months.
18 Business received cash RM600 for service performed to customers.
Business performed service valued at RM6,000 for customers. Business received
22
RM3,500 cheque from customers and the balance on credit.
26 Business paid for the amount owed in Jan 5 by cheque.
28 Customers paid for the balance owed in Jan 22 by cheque.
30 Business paid salary RM6,000, utilities RM890 and rental RM2,500 by cheque.
31 Sky withdrew RM50 cash from the business for his personal use.

Exercise 5: Enter transaction in the journal.

Daniel opened a laundry shop on 1 September 2018. During the first month of operation the
following transactions occurred.

Record the following transactions using a general journal. Narrations are not required.

2018
Sep 1 Invested RM20,000 cash in the business.
2 Paid RM1,000 cash for store rent for the month of September.
Purchased washers and dryers from ABC Trading for RM25,000, paying RM10,000 in
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cash and RM15,000 on credit.
4 Paid RM1,200 in cash for insurance.
10 Received bill from Daily News for advertising the opening of the laundry shop RM200.
20 Withdrew RM700 cash for personal use.
30 Received RM6,200 cash for services performed for customers.

3 The Ledger
 The entire groups of accounts maintained by a business is called the ledger.
 Businesses may use various kinds of ledgers, but every business has a general
ledger.

Posting
 The procedure of transferring journal entries to the ledger accounts is called posting.
 Posting involves the following steps:
1. In the ledger, enter in the appropriate columns of the account debited the date,
explanation, and debit amount shown in the journal.
2. In the ledger, enter in the appropriate columns of the account credited the date,
explanation, and credit amount shown in the journal.
 Posting should be performed in chronological order. That is, all the debits and credits
of one journal entry should be posted before proceeding to the next journal entry.

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Exercise 6:
Further to Exercise 4, open ledger accounts and post the transactions.
Exercise 7:
Further to Exercise 5, open ledger accounts and post the transactions.

Balancing off Ledger account

 Example of balancing off T-account:

Cash
Date Particulars Amount (RM) Date Particulars Amount (RM)
2017 2017
Jan 1 Capital 10,000 Jan 2 Equipment 1,000
5 Sales 9,000 31 Van 12,000
20 Sales 11,000 Balance c/d 17,000
30,000 30,000
Feb 1 Balance b/d 17,000
Balance b/d = Balance brought down
Balance c/d = Balance carried down
The total debits > total credits by RM17,000, therefore the account has a debit balance
of RM17,000.
 Balance in a T-account can be determined as follows:
o If total debit side > total credit side, then the account will have a debit
balance.
o If total debit side < total credit side, then the account will have a credit
balance.
o If total debit side = total credit side, then the account will have zero balance.

Exercise 8:
Further to Exercise 6, balance the ledger account.
Exercise 9:
Further to Exercise 7, balance the ledger account.

4 The Trial Balance

 A trial balance is a list of accounts and their balances at a given time.
 A trial balance is prepared at the end of an accounting period.
 Debit balances in the accounts are listed in the left column; credit balances in the
accounts are listed in the right column.
 The purpose of a trial balance is to:
1. Check that the debits equal the credits after posting. The sum of the debit
account balances in the trial balance should equal to the sum of the credit
account balances.
2. If the debits and credits do not agree, the trial balance can be used to
correct errors in journalising and posting.
3. Useful in preparation of financial statements.

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 The steps for preparing a trial balance are as follows:

1. List the account titles and their balances.
2. Total the debit and credit columns.
3. Prove the equality of the two columns.

Exercise 10:
Further to Exercise 8, prepare a trial balance as at 31 January 2018.
Exercise 11:
Further to Exercise 9, prepare a trial balance as at 30 September 2018.

Exercise 12:
The following accounts come from the ledger of SnowGo Company at December 31, 2017.
Equipment RM88,000 Owner’s Capital RM20,000
Drawings RM8,000 Bank RM2,000
Accounts Payable RM22,000 Utilities RM3,000
Wages RM42,000 Cash RM7,000
Accounts Receivable RM4,000 Machinery RM6,000
Sales RM95,000 Bank loan RM23,000
Prepare a trial balance.

Exercise 13:
The following balances were extracted from Satay Delights as at 31 January 2018.
Cash RM25,000 Utilities RM300
Miscellaneous expenses RM2,000 Sales RM120,000
Accounts payable RM3,000 Accounts receivable RM400
Equipment RM3,500 Business premises RM215,000
Salary RM12,000 Insurance RM2,700
Capital ? Long-term bank loan RM50,000
Prepare a completed trial balance.

Exercise 14:
Peter, an interior decorator started his business on 1 January 2019. The transactions for first month
are as follows:
2019
Jan 1 Invested RM30,000 cash in business.
3 Bought car for RM8,000 cash for use in the business.
8 Bought equipment RM5,500 on credit from Nova Wood Ltd.
10 Billed customers for RM360 for services performed.
15 Paid RM400 cash for advertising.
18 Received RM200 cash from customers billed on 10 January.
20 Paid Nova Wood Ltd RM2,500 cash for the amount owed.
25 Peter withdrew RM400 cash for personal use.
Required:
a) Journalise the January transactions.
b) Open ledger accounts and post the January transactions.
c) Prepare a trial balance as at 31 January 2019.

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5 Period End Adjustments

 To be discussed in the later topics.

6 Closing The Books

 At the end of a financial year, after the period end adjustments, the books need to be
closed. This is to prepare the book for the next financial year.
 Procedure in closing the book depends on the types of account:-

Nominal accounts
o These refer to the income-type and expenses-type of accounts.
o Nominal accounts are to be closed. Thus, any balance in these accounts is to
be transferred to Profit and Loss A/c.

Real accounts
o These refer to the asset-type, liability-type and equity-type accounts.
o Real accounts are not closed, except for Drawings A/c. Thus, any balance in
real accounts is to be carried down to the following FY.
o Meanwhile, Drawings A/c is to be closed. Thus, any balance is to be
transferred to Capital account.

Post-Closing Trial Balance

o Post-Closing Trial Balance is a list of all accounts and their balances after the
closing entries have been journalised and posted to the ledger.
o In simple words, post-closing trial balance is a list of accounts (real accounts)
that still have balances after the closing entries have been made.

Exercise 15:
Further to Exercise 6, open a Profit and Loss A/c and proceed to close the book for the month of
January 2018.
Exercise 16:
Further to Exercise 15, prepare a Post-Closing Trial Balance for the month of January 2018.

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7 Financial Statements
 After transactions are identified, recorded and summarised, the entity can prepare a
complete set of financial statements from the summarised accounting date:
1. Statement of Profit or Loss
2. Statement of Financial Position
 Financial statements are the final product of accounting process. There are prepared
at least annually by accountants. Financial statements are usually prepared at the
end of the business accounting period.

7.1 Statement of Profit or Loss (SOPL)

 SOPL is also known as:-
o Income Statement
o Statement of Comprehensive Income
 SOPL reports financial performance of a business for a period of time.
 Financial performance refers to how much profit (or loss) the business made for a
period of time.
 Therefore, SOPL reports the revenue and expenses for a specific period of time as
well as resulting net profit or net loss of a business.
 A period of time normally covers a period of year (12 months) ending on the last day
of the month. The period is known as the accounting period or the Financial Year (FY).

7.2 Statement of Financial Position (SOFP)

 SOFP is also known as:-
o Balance Sheet
 SOFP reports financial position of a business at a particular date.
 Financial position refers to how much assets, liabilities and equities of the business at
a particular date.
 A particular date is normally at the last day of the financial year. This is known as the
Financial Year End (FYE).
o If financial year covers from 1 January 2018 to 31 December 2018, financial
year end will be at 31 December 2018.

Exercise 17:
Further to Exercise 15, prepare Statement of Profit or Loss for the year ended 31 January 2018
and Statement of Financial Position as at 31 January 2018.

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Accounting Cycle

Transaction

Financial
Journal
Statements

Closing the
Ledger
books

Period End Trial

Adjustment Balance