CHAPTER 3

Recording transactions

LEARNING OBJECTIVES
1.
2.
3.
4.
5.

Identify the nature of, purpose of and evidence for transactions

Describe the accounting cycle used to record, classify and summarise transactions,
including the of ledger accounts and the general ledger
Outline the rules of debit and credit used in double-entry accounting and how to
apply these rules in analysing transactions
Explain the purpose and format of the general journal, record transactions in the
general journal and transfer the information to the general ledger
Discuss the purpose of the trial balance and how to prepare one.

TYPES OF TRANSACTIONS
External Transactions
Involve an outside party
Exchange of economic resources and/or obligations
SALE OF INVENTORY
PURCHASE OF SUPPLIES

Internal Transactions
Transformation of economic resources
USE OF OFFICE SUPPLIES

Non-Transactional Events
Not usually recorded, but may be in the future
RECEIVING AN ORDER FROM A CUSTOMER

SOURCE DOCUMENTS
Prepared for every external transaction
Support entries in accounting records
Important element in control system
Common source documents include:
Tax invoice (specific requirements as per ATO)
Purchase order
Cash register tape
Credit card slip

THE ACCOUNTING CYCLE

Steps in the
Cycle &
1. Recognise

record
Start of transactions
new
period

2.Prepare
financial
statements

Accounting
Records
Source documents
Source documents

Financial
statements

THE LEDGER ACCOUNT

Where effect of transactions is recorded
Three Basic Parts
Title
Place for recording increases
Place for recording decreases

e Explanation

Account Title
Amt
Date

Debit (Dr) side

Explanation

Credit (Cr) side

THE LEDGER ACCOUNT

Cash at Bank
Date

Explanation

Amount

2013
2/1
20/1

Explanation

Amount

2013
Darren Jones, Capital

35 000

Lawn and Garden

Income

31/1

Date

Accounts Receivable

3/1

Vehicle

3/1

Lawn and Garden

2 200
550

Equipment
22/1

21 000

9 000

Employee Wages
Expense

31/1

Accounts Payable

31/1

Darren Jones, Drawings

Balance c/d

450
2 500
200
4 600

ACCOUNT FORMATS
T-Accounts
Convenient way to show individual accounts
Illustrate effects of transactions on an account
Still used in practice for quick calculations

Running Balance Accounts

Used in formal accounting systems
Standard presentation for computerised systems
Familiar to most - format used in Bank Statements

ACCOUNT FORMATS
ACCOUNT
Date

Cash at Bank

Explanation

Account No. 100

Debit

Credit

Balance

2013
Jan. 2

Darren Jones, Capital

Vehicle

Lawn and Garden Equipment

20

Lawn and Garden Income

22

Wages Expense

31

Accounts Receivable

31

Accounts Payable

35 000

35 000
21 000

14 000

9 000

5 000

2 200

7 200
450

550

6 750
7 300

2 500

4 800

ACCOUNTS COMMONLY USED

An account is established for each type of
Asset
Liability
Equity
Income
Expense
Number and exact individual accounts varies depending
on size and type of organisation

ACCOUNTS: BALANCE SHEET

Asset Accounts
Cash at bank
Accounts receivable
Other receivables and debtors
Prepaid expenses
Land
Buildings
Plant and equipment

ACCOUNTS: BALANCE SHEET

Liability Accounts
Accounts payable
Unearned income
Other current liabilities
Mortgage payable

ACCOUNTS: BALANCE SHEET

Equity Accounts
Four main types of transactions
INVESTMENT OF ASSETS BY THE OWNER
WITHDRAWAL OF ASSETS BY THE OWNER
INCOME EARNED
EXPENSES INCURRED

Two account types

CAPITAL
DRAWINGS OR WITHDRAWALS

ACCOUNTS: INCOME STATEMENT

Income
Revenues
INCOME THAT ARISES IN THE COURSE OF ORDINARY
ACTIVITIES OF AN ENTITY
USUALLY THROUGH THE PROVISION OF SERVICES OR
SALE OF GOODS

Gains
INCOMES THAT DOES NOT USUALLY ARISE IN THE COURSE
OF ORDINARY ACTIVITIES OF AN ENTITY
USUALLY OF A NON-RECURRING OR SPORADIC NATURE

ACCOUNTS: INCOME STATEMENT

Expenses
The cost of services and economic benefits
consumed or lost or liabilities incurred during
the period

Profit
When total income exceeds total expenses

Loss
When total expenses exceeds total income

GENERAL LEDGER
Collection of all the individual accounts
of an entity
Organised in the order they appear in
the balance sheet and income statement
Each account has a specific identification
number
Can vary from simple two digit number to complex
alphanumeric system

DOUBLE-ENTRY ACCOUNTING
Each transaction must be analysed to
determine:
What type of accounts are affected
ASSETS; LIABILITIES; EQUITY; INCOME; EXPENSE

By how much each item must be increased or

decreased

The accounting equation must always

remain in balance

DEBITS AND CREDITS

Often cause confusion, mainly due to previous exposure to the terms
(bank statements)
In accounting, instructions detailing where in the ledger the balance
needs to be recorded
Debit = on the left
Credit = on the right
No meaning beyond that instruction

DEBITS AND CREDITS

Rules
Assets are debit in nature
Debits = Credits
Accounting equation: A = L + Eq
Therefore, Liabilities and Equity must be credit in nature

Income increases Equity; credit increases Equity

Therefore Income must be credit in nature

Expenses decreases Equity; debit decreases Equity

Therefore Expenses must be debit in nature

DEBIT AND CREDIT RULES

Accounts: Balance Sheet
Assets
= Liabilities +
Debit to
Credit to Debit toCredit to Debit toCredit to
Equity
increase
decrease decrease
increase decrease
increase
Normal
balance

Normal
balance

Normal
balance

DEBIT AND CREDIT RULES

Accounts: Income Statement
Income (incl. revenues)
Expenses
Debit to Credit to
Debit to Credit to
decreaseincrease
increase decrease
Normal
balance

Normal
balance

DEBIT AND CREDIT RULES

All assets accounts = All liability accounts +
All equity accounts
CreditCr
to
Debit to
to Credit
DrCredit
Cr to Debit Dr
Cr to Debit toDr
increase decrease decreaseincrease decreaseincrease
Normal
Normal
Normal
balance
balance
balance
Expense
Income
accounts
accounts
to Credit to
Debit
Drto Credit to DebitDr
increase decrease decreaseincrease
Cr
Cr
Normal
Normal
balance
balance

NORMAL ACCOUNT BALANCES

Increases
Normal
Recorded On
Balance
Debit side
Debit
Credit side
Credit

Account
Assets
Liabilities
Equity
Investment in entity
Credit side
Credit
Drawings from entity Debit side
Debit
Income: Revenues Credit side
Credit
Expenses
Debit side
Debit

EXPANDED ACCOUNTING CYCLE

1. Recognise & record
transactions
2. Journalise transaction

Source documents
General journal

3. Post to ledger accounts

General ledger

4. Prepare trial balance of

GL
5. Prepare financial
statements

Trial balance
Financial
statements

GENERAL JOURNAL
Once analysed a transaction is recorded
first in the general journal
A journal has the following advantages:
Complete record of all transactions
Presented in chronological order
Useful for locating and reducing errors as debits and
credits shown together

RECORDING TRANSACTIONS
IN A JOURNAL
Two or more accounts are affected by each transaction
The debits must always equal the credits
The accounting equation remains in balance
General Journal
Date

Particulars

Post
Ref

Cash at Bank

100

Debit

Credit

2013
Jul 5

15 400

Marketing Services Revenue

402

14 000

GST Collections

250

1 400

(Marketing services rendered)

POSTING FROM JOURNAL

TO LEDGER
General journal records each transaction
General ledger records effect transactions on each
individual account
Think of journal as an instruction which accounts are
changing, which direction and by how much?
In a computerised system
Posting is automated
Therefore it is important that the initial entries are correct
Debits and credit automatically checked for equality

TRIAL BALANCE
Lists all ledger accounts and their balances
Debits in one column, credits in another
The totals of both columns must be equal
If this is the case, the ledger balances
Limitations of the trial balance
May balance but still contain errors
If it doesnt balance there is definitely an error but it
doesnt tell you what the error is

Thank you
END