Basics of Accounting Accounting cycle (I): Journalizing posting and preparing Trial Balance, Final Accounts
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Basics of Accounting
Accounting cycle (I): Journalizing
posting and preparing Trial Balance,
Final Accounts
Accounting Meaning & Cycle
An accounting system is a means of collecting, summarizing, analyzing and reporting in monetary terms, information about the business.
Accounting period /fiscal period: any span of time covering a complete accounting cycle
E.g. a month ,a quarter or half a year, a year
Fiscal year/accounting year: twelve consecutive months
Basic Accounting Terms
Capital = Assets – Liabilities
Capital Expenditure
Revenue Expenditure
Debtors
Creditors
The Accounting Cycle
Journalize
transactions.Post entries to
the ledger
accounts.
Prepare trial
balance.
Complete a
work sheet.
Prepare
financial
statements.
Communication the
results.
Analysis and
Intrepretation.
Journalize and
post adjusting
entries.
Classification of Accounts
Personal Accounts
(Dr the Receiver,
Cr the Giver)
Natural Personal Accounts
Artificial Person Accounts
Representative Person Accounts
Impersonal Accounts
Real Accounts
(Dr . What comes in, Cr what goes
out)
Nominal Accounts
(Dr all expenses and losses, Cr all
income and gains)
Double Entry Book Keeping
Newton’ third law of Motion for every action there is an equal and opposite reaction.
Accounting rules
For every debit there is an equal and opposite credit in the accounting records
Double Entry Book Keeping
T- account format:
Debit Side Credit Side
Assets = Liabilities + Owner’s Equity
Assets = +Dr –Cr
Liabilities= -Dr +Cr
Owner’s Equity = -Dr +Cr
Equipment
(3) 26,000
GENERAL JOURNAL Page 123
Date Description
Post.
Ref. Debit Credit
Step 3: Record
transactions in a
journal.
Steps in Journalizing
Step 1: Examine
source documents.
Equipment
(3) 26,000
Liabilities EquityAssets = +
Step 2: Analyze
transactions.
The Journal
In an actual accounting system, transactions
are initially recorded in the journal.( handout)
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
2013
Jan 1 Cash 10,00,000
Li, Capital 10,00,000
Owner invested cash in the business.
Posting Journal Entries to the Ledger Accounts
Posting involves copying
information from the journal to
the ledger accounts.
The Ledger
The entire group of
accounts is kept
together in an
accounting record
called a general
ledger
Cash
Accounts
Payable
Capital
Accounts are
individual records
showing increases
and decreases.
Posting
Sorting out and copying the information from the journal to the ledger account.
Posting Journal Entries to the Ledger Accounts
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
1998
Jan 1 Cash 1,000,000
li, Capital 1,000,000
Owner invested cash in the business.General Ledger
Cash
Date Debit Credit Balance
1998
Jan 1 1,000,000 1,000,000
Posting Journal Entries to the Ledger Accounts
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
1998
Jan 1 Cash 1,000,000
LI, Capital 1,000,000
Owner invested cash in the business.General Ledger
li, Capital
Date Debit Credit Balance
1998
Jan 1 1,000,000 1,000,000
Cross –reference
3) Insert the page number of the journal in the posting reference column of the ledger account
4) Insert the ledger account number in the posting reference column of the journal
ACCOUNT NAME: ACCOUNT No.
Date Description PR Debit Credit Balance
Step 4: Record the
journal information in a
ledger.
GENERAL JOURNAL Page 123
Date Description
Post.
Ref. Debit Credit
Step 3: Record
transactions in a
journal.
Step 5: Prepare a
trial balance.
Steps in Processing Transactions
Step 1: Examine
source documents.
Equipment
(3) 26,000
Liabilities EquityAssets = +
Step 2: Analyze
transactions.
TRIAL BALANCE
DEFINITION
IT IS A STATEMENT SHOWING CREDIT AND DEBIT
BALANCES FROM THE LEDGER.
HELPS ARITHMETICAL ACCURACY AND FACILITATES
FINAL ACCOUNTS.
TRIAL BALANCE
BASIC PRINCIPLE :
SINCE IT IS DOUBLE ENTRY BOOK-KEEPING, HENCE,
ASSETS AND EXPENSES ARE DEBIT BALANCES
LIABILITIES AND INCOMES ARE CREDIT BALANCES
. IN CASE OF ARITHMETICAL INACCURACY IDENTIFY
CLERICAL/PRINCIPLE ERRORS AND RECTIFY
TRIAL BALANCE
TYPES OF ERRORS:
A) CLERICAL ERRORS
-- ERRORS OF OMISSION
--- OMISSION OF TRANSACTION FROM BOOKS
--- COMPLETE OMISSION NOT AFFECTING TRIAL
BALANCE
--- PARTIAL OMISSION AFFECTING TRIAL
BALANCE
TRIAL BALANCE
-- ERRORS OF COMMISSION
--- FIGURE POSTED ON THE WRONG SIDE OR WITH
WRONG AMOUNT
-- COMPENSATING ERRORS
--- ONE ERROR BALANCES ANOTHER ERROR
. B) ERRORS OF PRINCIPLE
-- ERRORS IN CONTRAVENTION OF ACCOUNTING
PRINCIPLES
TRIAL BALANCE
RECTIFICATION OF ERRORS IS A SERIES OF STEPS:
PASS THE CORRECT ENTRY
COMPARE THE WRONG ENTRY WITH THE CORRECT
ONE
PASS THE RECTIFICATION ENTRY
IF TRIAL BALANCE DOES NOT TALLY THEN
DIFFERENCE IS TRANSFERRED TO SUSPENCE
ACCOUNT
TRIAL BALANCE
TYPICAL TRIAL BALANCE
N A M E DEBIT CREDIT
CAPITAL X
DRAWINGS X
PURCHASES X
SALES X
EXPENSES X
DEBTORS(CUSTOMRES) X
CREDITORS(SUPPLIERS) X
CASH X
SALES RETURN X
TRIAL BALANCE
TYPICAL ERRORS:
-- CLERICAL:
A) SALARY PAID 1000/- BUT POSTED AS 10, 000/-.
RECTIFICATION: CREDIT SALARY WITH 9000/-.
B) SALARY PAID 1000/- BUT POSTED IN RENT A/C.
RECTIFICATION: DEBIT SALARY AND CREDIT RENT WITH
1000/-.
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