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!ST Sem Notes Accounting

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17 views17 pages

!ST Sem Notes Accounting

Uploaded by

junie6205
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Accounting Equation

An Accounting Equation is also called the Balance Sheet Equation.


We all know that we record all the business transactions using the
Dual Aspect concept. This means that each debit has an equal
credit and vice-versa.

This approach classifies the accounts as follows:

1. Assets Accounts: Assets are the properties, possessions or


economic resources of a business which help
in business operations and in earning revenues. These are
measurable in terms of money. However, assets of a firm may
be tangible or intangible. Also, we can classify the assets
as Fixed Assets and Current Assets. For example, land,
building, furniture and fixtures, plant and machinery,
vehicles, debtors, bills receivable, bank balance, cash,
stock, etc.

2. Liabilities Accounts: Liabilities are the amounts that an


entity owes to the outsiders or the obligations or the debts
payable by the entity. We can also classify the liabilities
as Long-term and Current. For example, debentures, bank
loans, creditors, bills payable, rent outstanding, short-term
loans, bank overdraft, etc.

3. Capital Accounts: Capital or Owner’s Equity is the money that


the owner brings into the business. The owner can bring
Capital in the form of cash or assets. It is an obligation of
the business and the business has to pay back this amount to
the owner as business is a separate entity from its owner.
Therefore, we show the Capital on the liabilities side of the
Balance Sheet. Also, we show Capital account after deducting
the Drawings by the owner. Drawings are the amount of cash,
goods or assets that the owner takes for personal use from
the business. Also, the profits increase the Capital and
losses decrease it.
The Accounting Equation is:
Assets = Liabilities + Capital (Owner’s Equity)

Or
Capital = Assets – Liabilities

It is to be noted here that the Accounting Equation shall remain


balanced every time. As we know that each transaction has a Dual
aspect. Thus, each debit has an equal credit.

Journal entries act as the building blocks of financial


accounting, providing a chronological record of all transactions
made by a business. They enable companies to keep track of all
financial transactions and ensure that the accounts are balanced.

Whether you’re a seasoned accountant or a small business owner


acquiring accounting acumen, comprehending the mechanics of
journal entries paves the way for coherent, accurate, and
insightful financial recording and reporting, thereby
contributing to the overall financial health and sustainability
of the business.

This article will delve into the essentials of journal entries,


discussing their purpose, their components, and how they are
crafted, offering easy-to-understand examples along the way.

1. What Is a Journal Entry in Accounting?

The heartbeat of financial accounting is encapsulated in journal


entries, ensuring every financial transaction is recorded
systematically. A journal entry in accounting refers to the
logging of transactions into accounting journal items.

The entry has a left-hand side (debit) and a right-hand side


(credit) to maintain the accounting equation balance, which is:

Assets = Liabilities + Equity

These entries provide a comprehensive chronological record,


itemizing the date of a transaction, the accounts affected, the
amounts, and a brief description.

Example:
If a business takes a loan of $5,000 from a bank:
 Debit: Cash $5,000
 Credit: Loans Payable $5,000
What Are Debits and Credits?
Debits and Credits are the terminologies that guide the directionality of journal entries, with
debits indicating an increase in assets or expenses and a decrease in liabilities or equity.
Conversely, credits signify an increase in liabilities or equity and a decrease in assets or
expenses. It’s pivotal to remember:

 Debit:
o Increases an asset or expense account.
o Decreases a liability or equity account.

 Credit:
o Increases a liability or equity account.
o Decreases an asset or expense account.

Every journal entry must have at least one debit and one credit entry, ensuring the accounting
equation stays balanced.

What Is the Purpose of A Journal Entry?


Journal entries are indispensable to maintaining financial coherence and
enabling accurate financial reporting.

The primary purposes include:


 Recording Transactions: Every financial transaction is
systematically logged, ensuring no event goes unnoticed.
 Tracking Activity: Journal entries provide a chronological
record of all economic events impacting a business.
 Facilitating Audit Trails: They enable auditors to trace any
discrepancies or anomalies back to their origin, ensuring
financial integrity.
 Preparing Financial Statements: By ensuring accurate and
consistent record-keeping, journal entries directly inform the
generation of the income statement, balance sheet, and cash
flow statement.

What Is Included in a Journal Entry?

An accounting journal entry contains the following components:

 Date of the Transaction: Ensuring chronological order and


period accuracy.
 Account Names/Numbers: Clearly identifying which accounts
are impacted by the transaction.
 Debit and Credit Amounts: Indicating the financial value of
the transaction, maintaining the equilibrium of the accounting
equation.
 Description or Narrative: Offering a brief explanation of the
transaction for clarity and context.

Example:
Consider a business takes out a loan of P10,000. The journal entry would
be:
 Date: [Date of Transaction]
 Debit: Cash P10,000
 Credit: Loans Payable P10,000
 Description: To record the borrowing of a P10,000 loan.

The above entry ensures that the increase in the company’s cash (an
asset, hence debited) is counterbalanced by recognizing a liability (loan
payable, hence credited) of an equal amount, adhering to the accounting
equation.

Creating a journal entry, while systematically structured, is a straightforward process.

Here’s a simplified step-by-step guide:


1. Identify Transactions: Recognize and authenticate the financial
transaction to be recorded.
2. Understand Accounts: Determine the accounts affected and whether
they will be debited or credited.
3. Journalizing: Record the entry in the journal, ensuring adherence to
the debit and credit system.

Each entry should consist of:


 The date of the transaction.
 The accounts impacted.
 The amount to be debited and credited.
 A brief descriptive note.

Examples of Journal Entries


Example 1: Purchasing Inventory on Credit P 5,000
Debit: Inventory P 5,000
Credit: Accounts Payable P 5,000
 Description: Recorded inventory purchase on credit.
Example 2: Recording Depreciation
 Debit: Depreciation Expense $1,000
 Credit: Accumulated Depreciation $1,000
 Description: To record monthly depreciation on machinery.

Example 3: Service Revenue Earned and Received in Cash

 Date: [Date]
 Debit: Cash P2,000
 Credit: Service Revenue P2,000
 Description: Cash received for services rendered.

When sales are made on credit, the journal entry for accounts receivable is
debited, and the sales account is credited.


Allowance for Doubtful Accounts Entry:

At times customers are unable to pay. For such scenarios, setting up or


adjustment for bad debt expenses is made. Bad debt expense is debited for
such entry, and allowance for doubtful accounts is credited.

Example #2 -
Expense
Journal Entry for Accounts Payable:

In this case, the related asset or expense account is debited, and


the journal entry for the payable account is credited.

When payment is to account payable, accounts payable is debited,


and the cash account is credited.
Purchased Equipment for $600,000 in Cash;


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