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5 Lecture New

The document outlines the fundamentals of accounting, focusing on the recording process, accounts, and the double-entry system. It explains the roles of debits and credits, the steps involved in recording transactions, and the preparation of trial balances. Additionally, it provides examples and activities to illustrate the concepts discussed.

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abdulmananahmad339
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11 views27 pages

5 Lecture New

The document outlines the fundamentals of accounting, focusing on the recording process, accounts, and the double-entry system. It explains the roles of debits and credits, the steps involved in recording transactions, and the preparation of trial balances. Additionally, it provides examples and activities to illustrate the concepts discussed.

Uploaded by

abdulmananahmad339
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Department of Intelligent Systems

• Course Name
• Management and Accounting
• Resource Person
• Shumaila Noreen
• Lahore Business School
• [email protected]
Recording Process, Account, Recoding, Steps, Journal, Ledger,
Posting Trial Balance
The Account
• An account is an accounting record of increases and decreases
in a specific asset, liability, or owner’s equity item.
• In its simplest form, an account consists of three parts:
• (1) a title,
• (2) a left or debit side, and
• (3) a right or credit side. Because the format of an account resembles the letter T,
we refer to it as a T account.
Debits and Credits
• The terms debit and credit are directional signals: Debit indicates left, and credit
indicates right. Entering an amount on the left side of an account is called
debiting the account. Making an entry on the right side is crediting the account.
We commonly abbreviate debit as Dr. and credit as Cr.
DEBIT AND CREDIT PROCEDURE
• The equality of debits and credits provides the basis for the double-entry system
of recording transactions.
• In the double-entry system the dual (two-sided) effect of each transaction is
recorded in appropriate accounts. This system provides a logical method for
recording transactions.
• It also helps ensure the accuracy of the recorded amounts. The sum of all the
debits to the accounts must equal the sum of all the credits.
• Assets and Liabilities
• Both sides of the accounting equation (Assets Owner’s equity) must be equal.
Continue

• The normal balance of an account is on the side where an increase in


the account is recorded. Thus, asset accounts normally show debit
balances, and liability accounts normally show credit balances.
Owner’s Equity
• Owner’s Capital. Investments by owners are credited to the Owner’s
Capital account. Credits increase this account, and debits decrease it.
When an owner invests cash in the business, the company debits
(increases) Cash and cred its (increases) Owner’s Capital. When the
owner’s investment in the business is reduced, Owner’s Capital is
debited (decreased).
Owner’s Drawing.
• An owner may withdraw cash or other assets for per sonal use.
Withdrawals could be debited directly to Owner’s Capital to indicate a
decrease in owner’s equity.
Revenues and Expenses
• The purpose of earning revenues is to benefit the owner(s) of the
business. When a company earns revenues, owner’s equity increases.
Therefore, the effect of debits and credits on revenue accounts is the
same as their effect on Owner’s Capital. That is, revenue accounts are
increased by cred its and decreased by debits.
Revenues and Expenses

• Revenue accounts normally show credit balances, and expense


accounts normally show debit balances.
Summary of Debit/Credit Rules

• Study this diagram carefully. It will help you understand the


fundamentals of the double-entry system.
Steps in the Recording Process
• In practically every business, there are three basic steps in the
recording process:
• 1. Analyze each transaction for its effects on the accounts.
• 2. Enter the transaction information in a journal.
• 3. Transfer the journal information to the appropriate accounts in the
ledger.
• The recording process begins with the transaction. Business
documents, such as a sales slip, a check, a bill, or a cash register,
provide evidence of the transaction
Steps in the Recording Process
The Journal
• Companies initially record transactions in chronological order (the order
in which they occur). Thus, the journal is referred to as the book of
original entry. For each transaction the journal shows the debit and
credit effects on specific accounts.
• Companies may use various kinds of journals, but every company has
the most basic form of journal, a general journal. Typically, a general
journal has spaces for dates, account titles and explanations, references,
and two amount columns.
• JOURNALIZING Entering transaction data in the journal is known as
journalizing. Companies make separate journal entries for each
transaction. A complete entry consists of: (1) the date of the
transaction, (2) the accounts and amounts to be debited and credited,
and (3) a brief explanation of the transaction.
Journalizing
• Entering transaction data in the journal is known as journalizing. Companies make
separate journal entries for each transaction.
• A complete entry consists of:
• (1) the date of the transaction,
• (2) the accounts and amounts to be debited and credited, and
• (3) a brief explanation of the transaction.
Example
• On September 1, Ray Neal invested $15,000 cash in the
business, and Softbyte purchased computer equipment for
$7,000 cash.
Journalizing

• 1 The date of the transaction is entered in the Date column.


• 2 The debit account title
• 3 The credit account title
• 4 A brief explanation of the transaction
• 5 The column titled Ref.
The Ledger
• The entire group of accounts maintained by a company is the ledger.
The ledger keeps in one place all the information about changes in
specific account balances.
• A general ledger contains all the asset, liability, and owner’s equity
accounts.
Posting
• Transferring journal entries to the ledger accounts is called posting.
The Recording Process
Example: Payment of Monthly rent
The Trial Balance
• A trial balance is a list of accounts and their balances at a given time.
• Customarily, companies prepare a trial balance at the end of an accounting
• period. They list accounts in the order in which they appear in the
• ledger.
• Debit balances appear in the left column and credit balances in the
• right column.
• The primary purpose of a trial balance is to prove (check) that the debits
equal the credits after posting.
• The sum of the debit balances in the trial balance should equal
the sum of the credit balances.
Steps to prepare Trial Balance
• The steps for preparing a trial balance are:
• 1. List the account titles and their balances in the appropriate debit or credit
• column.
• 2. Total the debit and credit columns.
• 3. Prove the equality of the two columns.
Performa of Trial balance
Class Activity
Numerical
• Frontier Park was started on April 1 by C. J. Mendez. The following selected
events and
• transactions occurred during April.
• Apr. 1 Mendez invested $40,000 cash in the business.
• 4 Purchased land costing $30,000 for cash.
• 8 Incurred advertising expense of $1,800 on account.
• 11 Paid salaries to employees $1,500.
• 12 Hired park manager at a salary of $4,000 per month, effective May 1.
• 13 Paid $1,500 cash for a one-year insurance policy.
• 17 Withdrew $1,000 cash for personal use.
• 20 Received $5,700 in cash for admission fees.
• 30 Received $8,900 in cash admission fees.

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