CorporateFinancialReporting

Session3:IIMCPGP201719
AccountingMechanics
 Learning Goals

MeasurementIssues
TheAccount theTAccount
RulesofDebitsandCredits,NormalBalance
AccountingCycle
TransactionAnalysis
Journalising,LedgerPosting:PreparationofTrialBalance
AdjustmentEntries:Adjustedtrialbalance
PreparingFinancialStatements
ClosingEntries
Assignments
MariaCase:Revisit

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 MeasurementIssues

Recognitionmeanstherecordingofatransaction. WHENtorecord

Referstothedifficultyofdecidingwhen abusinesstransactionshould
berecorded
Pointofrecognitionisimportantbecauseitaffectsthefinancial
statements.
EventVsTransaction:HiringnewemployeesVsPayingwagesfor
workperformed
Valuation:Focusesonassigningamonetaryvaluetoatransaction
Practiceofrecordingtransactionsatcostfollowsthecostprinciple.
WHATVALUE

Classification: Istheprocessofassigningtransactionstotheappropriate
accounts HOWTOCATEGORIZE

Ethicalreportingrequires:
Recognition,valuation,andclassificationaretreatedproperly.
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 Account,TheTAccount

Account: Basic storage units for accounting data.

Used to accumulate amounts from similar transactions
Separate accounts used for: Assets, Liabilities, Components of
stockholders equity (includes revenues and expenses) Identifiesthe
asset,liability,or
stockholders
The T account TitleofAccount equityaccount
Three parts:
A title that describes the account
A left side, called the debit side Debit Credit
A right side, called the credit side (left)side (right)side

Chart of Accounts: List of accounts used by a company to record transactions

No standard set of accounts applicable to all companies
Every company specifies its own set of accounts based on its needs and
circumstances
a small co might need few accounts, an MNC might need thousands
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 Doubleentrysystem
Every transaction has two aspects that balance each other:
Effort & reward, Sacrifice & benefit
Each transaction must affect at least two accounts - In order to keep the
basic accounting equation in balance
One or more accounts must be debited & one or more accounts must be
credited
DEBITS must equal CREDITS: for each transaction, for whole system
If Debits are greater than Credits, If Credits are greater than Debits,
the account will have a debit the account will have a credit
balance balance.

Account Name
Account Name
Debit / Dr. Credit / Cr.
Debit / Dr. Credit / Cr.
$10,000 $3,000
$10,000 $3,000
$8,000
$8,000

$18,000 $3,000 $10,000 $11,000

Bal. $1,000
Bal. $15,000
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 RulesofDebitandCredit
Basic Acc Equation : Assets = Liabilities + Stockholders Equity

Assets + Dividends + Expenses

ForLHScomponents = Liabilities +Common Stock +Revenues
ForRHScomponents
CashA/C AccountsPayableA/C
Debit Credit
Debit Credit
for for
for for
Decreases Increases
Increases Decreases
() (+)
(+) ()

Assets, Dividends and Expenses:

Increases are Debited (Decreases are Credited) [CASH]
Liabilities, Common Stock and Revenues :
Increases are Credited (Decreases are Debited) [A/P]
Example: Cash paid to Accounts Payable (suppliers on credit)
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 Illustration
Ifadebit increasesassetsbyRs100,thenacredit mustincreasestockholders
equityorliabilitiesbyRs100fortheaccountingequationtostayinbalance.
Example:LoanReceivedfromBank

Assets = Liabilities + Stockholders Equity

700 200 500

100 100

800 = 300 + 500

Decide on the debits and credits for the following:

Insurancepremiumpaidinadvance,Salarypaid,Issueofbonds,
Dividendpaid,DividendIncomereceived,CollectionfromAccountsReceivable
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 NormalBalance
Normal Balance: The usual balance of an account
Is the side (debit or credit) where increases in the account are
recorded
Normal Balance for Asset, Normal Balance for Liability,
Dividend, and Expense Common Stock, Revenue, and
(ADE) accounts: Retained Earnings accounts:

Debit side (LHS) Credit side (RHS)

Basic
Assets = Liabilities + Stockholders Equity
Equation

Expanded
Basic
Equation

8
OpeningRE
 NormalBalanceDebit
Assets Dividends Expense
Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr.

Normal Balance Normal Balance Normal Balance

Chapter Chapter Chapter

3-23 3-23 3-27

Assets Debitsshouldexceedcredits.
Dividends andexpenses decreasestockholdersequity(debit).

NormalBalanceCredit
Liabilities Common Stock Revenue
Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr. Debit / Dr. Credit / Cr.

Normal Balance Normal Balance Normal Balance

Chapter Chapter Chapter

3-24 3-25 3-26

Liabilities Creditsshouldexceeddebits.
Investmentsbystockholders andrevenuesincreasestockholdersequity(credit).
29062017 9
AccountingCycle

10
 BusinessTransactionAnalysis
ForEverytransaction:
1. Statethetransaction.
SourceDocuments(SalesInvoice,Receipts,Chequesetc):
Evidenceoftransaction,Supportsdetailsofatransaction
2. BasicAnalysisandEquationAnalysis:Analyzethetransactionto
determinewhichaccountsareaffected
3. DebitCreditAnalysis:Applytherulesofdoubleentryaccounting
4. Journalize:Recordtheentryinjournalform.Provideacomment
thatwillhelpapplytherulesofdebitandcredit.
Journal:PrimaryBookwheretransactionsrecordedin
chronologicalorder BooksofOriginalEntry
Journalising:Process ofrecordingalltransactionsinajournal
chronologically
Contributionstotherecordingprocess:Disclosesthecompleteeffectsofa
transaction,Providesachronologicalrecord oftransactions,Helpsto
preventorlocateerrors 11
 Journalizing Illustration1

STATE Oct.1:Sierraissuedcommonstockinexchangefor$10,000cash

ANALYZE

Dr Cr. Increase in assets (Cash) Debited Cash -- Dr.

Increase stockholders' equity (Common Stock) Credited CS -- Cr.
JOURNALIZE
General Journal Page1
Date Description Post Ref. Debit Credit
Oct. 1 Cash 10,000
Common stock 10,000
(Issued stock for cash)

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 Journalizing Illustration2
STATE Oct.1:Sierraborrowed$5,000bysigninganote

ANALYZE

Dr Cr. Increase in assets (Cash) Debited Cash -- Dr.

Increase in Liabilities (Notes Payable) Credited Notes Payable -- Cr.
JOURNALIZE

General Journal Page1

Date Account Title Ref. Debit Credit
Oct. 1 Cash 5,000
Notes payable 5,000
(Borrowed by signing a note)

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 Journalizing Illustration3
STATE Oct.2:Sierrapurchasedequipmentfor$5,000
ANALYZE

Dr Cr.
Increase in assets (Equipment) Debited Equipment - Dr
Decrease in assets (Cash) Credited Cash - Cr.
JOURNALIZE
General Journal
Date Account Title Ref. Debit Credit
July 2 Equipment 5,000
Cash 5,000
(Purchased equipment for cash)

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 LedgerAccounts
TheGeneralLedgercontains:Allaccountsmaintainedbythecompany
groupedtogethermanuallyorelectronically

Assets Liabilities StockholdersEquity

100 Cash 200 NotesPayable 301 CommonStock
Chart of
Accounts 102 AccountsReceivable 201 AccountsPayable 305 RetainedEarnings
105 Supplies 204 InterestPayable 313 Dividends
Thefirst 106 PrepaidInsurance 205 UnearnedServiceRevenue
digitineach 107 Equipment 206 Sal&WagesPayable
account
108 AccDeprecn Equip
number
signifiesits Revenues Expenses
classification 401 ServiceA 501 Sal&WagesExpense 504 InsuranceExpense
402 ServiceB 502 SuppliesExpense 505 InterestExpense
403 ServiceC 503 RentExpense 506 DepreciationExp
 LedgerAccountForm
General Ledger

Accounts Payable Account No. 212

Post. Balance
Date Item Ref. Debit Credit Debit Credit

Accounttitleandnumberappearattopofaccountform
Thedateappearsinthefirsttwocolumns(asinthejournal)
Itemcolumnisrarelyusedbecauseexplanationsalreadyappearinthejournal
Post.Ref.columnusedtonotethejournalpageonwhichtheoriginalentryfor
thetransactioncanbefound
Dollar/RupeesamountisenteredinappropriateDebitorCreditcolumn
Newaccountbalanceiscomputedinthelasttwocolumns againsteachentry

Posting
Processoftransferringdebitandcreditamountsfromthejournalto
theledgeraccounts ingeneralledger
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 PostingaTransaction:Illustration
General Journal Page 2 1. Locate debit account in the
Post.
Date Description Ref. Debit Credit ledger
20xx 2. Enter date of transaction
July 30 Telephone Expense 513 140
Accounts Payable 140 and journal page number in
Received bill from telephone Post. Ref. column
company
General Ledger 3. Enter in Debit column
Accounts Payable Account No. 212
Post. Balance amount of debit from
Date Item Ref. Debit Credit Debit Credit journal
20xx
July 5 J1 1,500 1,500 4. Calculate account balance
6 J1 2,600 4,100
9 J1 1,000 3,100 and enter in appropriate
30 J2 140 3,240 Balance column
General Ledger 5. In journal Post. Ref.
Telephone Expense Account No. 513
Post. Balance Column, enter account
Date Item Ref. Debit Credit Debit Credit number to which amount
20xx
July 30 J2 140 140
was posted

6. Repeat for credit entry

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 TheRecordingProcessIllustrated

Follow these steps:

1. Determine what
type of account is
involved.
2. Determine what
items increased or
decreased and by
how much.
3. Translate the
increases and
decreases into
debits and credits.
 TheRecordingProcessIllustrated

Follow these steps:

1. Determine what
type of account is
involved.
2. Determine what
items increased or
decreased and by
how much.
3. Translate the
increases and
decreases into
debits and credits.
 TheRecordingProcessIllustrated

Follow these steps:

1. Determine what
type of account is
involved.
2. Determine what
items increased or
decreased and by
how much.
3. Translate the
increases and
decreases into
debits and credits.
 The
Recording
Process
Illustrated

Additional
Transactions
 The
Recording
Process
Illustrated

Additional
Transactions
 The
Recording
Process
Illustrated

Additional
Transactions
 The
Recording
Process
Illustrated

Additional
Transactions
 The
Recording
Process
Illustrated

Additional
Transactions
 TheRecordingProcessIllustrated

Additional Transactions
 The
Recording
Process
Illustrated

Additional
Transactions
 The
Recording
Process
Illustrated

Additional
Transactions
SummaryIllustrationofJournalizing
SummaryIllustrationofJournalizing
 Summary
Illustrationof
Posting

Assets=Liabilities+ShareholdersEquity
23,300=8,700+14,600
 TrialBalance
Recorddebit
STEPSofPreparation: Recordcredit
balancesinleft
1. ListeachTaccountthat balancesin
column
hasabalance rightcolumn
Listaccountsintheorder
thattheyappearinthe
ledger
Recorddebitbalancesin
theleftcolumn
Recordcreditbalancesin
therightcolumn
2. Addeachofthecolumns
(LeftDebitColumnand
RightCreditColumn)
3. Comparethecolumntotals
toVERIFY
Totaldebits=Totalcredits Totaleachcolumn

Mayalsouncovererrorsinjournalizingandposting.
Usefulinthepreparationoffinancialstatements. 32
 TheTrialBalance
TrialBalance:Alistofaccountsandtheirbalancesonaspecificdate

Foreveryamountdebited,anequalamountmustbecredited
Result:ThetotalofdebitsandcreditsforalltheTaccountsmustbe
equal.
Trialbalanceispreparedtotestthis
Usuallypreparedattheendofamonthoraccountingperiod
Canbepreparedanytime
Purpose:
Thetrialbalanceproveswhethertheledgerisinbalance
Totalofalldebitsrecorded=Totalofallcreditsrecorded
Whatitdoesnotdo(Limitations)
DoesntProvethatalltransactionswereanalyzedcorrectly
Doesntdeterminethatamountswererecordedintheproperaccounts
DoesntDetectwhethertransactionshavebeenomittedfrom
journalizing/posting,orajournalentrypostedtwice
DoesntDetecterrorsofsameamountmadeinbothadebit&acredit
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 Page117: BRIEFEXERCISE38
Aug1:IssuessharesofCStoinvestorsfor$10,000
(a) BasicAnalysis
TheassetCashisincreased;thestockholdersequityaccountCommonStockisincreased.
(b)DebitCreditAnalysis
Debitsincreaseassets:debitCash$10,000.
Creditsincreasestockholdersequity:creditCommonStock$10,000.
Aug4:Paysinsuranceinadvancefor3months,$1,500
(a) BasicAnalysis
TheassetPrepaidInsuranceisincreased;theassetCashisdecreased.
(b)DebitCreditAnalysis
Debitsincreaseassets:debitPrepaidInsurance$1,500.
Creditsdecreaseassets:creditCash$1,500.
Aug16:Receives$900fromclientsforservicesrendered
(a) BasicAnalysis
TheassetCashisincreased;therevenueServiceRevenueisincreased.
(b)DebitCreditAnalysis
Debitsincreaseassets:debitCash$900.
Creditsincreaserevenues:creditServiceRevenue$900. PROBLEM35A(Page125)
Aug27:Paysthesecretary$620salary
(a) BasicAnalysis
TheexpenseSalariesandWagesExpenseisincreased;theassetCashisdecreased.
(b)DebitCreditAnalysis
Debitsincreaseexpenses:debitSalariesandWagesExpense$620.
Creditsdecreaseassets:creditCash$620.
 Selected transactions from the journal of Faital Inc. during its first
month of operations are presented below. Post these transactions to T-accounts.
 SummaryoftheAccountingCycle

1. Analyze business transactions

9. Prepare a post-closing trial

2. Journalize the transactions
balance

8. Journalize and post closing

3. Post to ledger accounts
entries

7. Prepare financial statements 4. Prepare a trial balance

6. Prepare an adjusted trial 5. Journalize and post

balance adjusting entries:
Deferrals/Accruals

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ThankYou

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