CCMM517

Chapter 2:
The Account

Study Unit 2
 ALREADY KNOW
• 5 elements:
 assets, liabilities, equity
 income, expenses
• Financial performance:
 profit or loss for a specific financial period
 Statement of comprehensive income
• Financial position:
 state of affairs on a specific date
 Statement of financial position
 OUTCOMES
Explain the following concepts:
• Account
• Debit
• Credit
• Debiting
• Crediting
Understand how an account is used in the accounting process
Explain the composition of accounts into their main groups
Explain the format of an account
Explain the duality concept/double entry principle
ACCOUNTING PROCESS

Transactions take
place

Record transactions in
journal

Post to ledger and balance

accounts
 THE LEDGER ACCOUNT

• Formal record of entity’s transactions i.r.o. a specific item

• Asset
Liability Show increases and
Equity decreases in
Income ledger account
Expenses
• Management  responsible for:
- activities and assets
- scrutinise movements in individual accounts
 CLASSIFICATION OF ACCOUNTS

 Income & Expenses  nominal accounts

 Each entity determines which accounts are necessary for
its business
 CLASSIFICATION OF ACCOUNTS
• Assets
• Liabilities
• Equity:
– Capital (given by owner)
– Drawings (taken by owner)
– Income
– Expenses
• Income + expenses  nominal accounts
• General ledger  used in accounting records + financial statements
• Each entity determines which accounts are necessary for its business
 FORMAT OF ACCOUNTS

 T-account
Two formats
 3-column

Title of account Acc. No.

Debit (Dr) Credit (Cr)

Balance/Total
 FORMAT OF ACCOUNTS
Title Acc. No.
ABC DEALERS
GENERAL LEDGER
DR BANK B5 CR
Date Details Fol R c Date Details Fol R c

2012 2012

Feb 1 Capital J1 100 00 Feb 25 Salaries J3 50 00

28 Balance c/f 50 00

100 100
00 00
2012
Mar 1 Balance b/f 50 00

Debit entry Credit entry

Reference Balance
Dr + Cr Totals
 TRANSACTIONS

 Books of prime entry

Journals  Chronological order
 Reference number, e.g. J1

 Summary of journal transactions

 Place journal reference number in
Ledger folio column  cross-reference
 DEBIT + CREDIT
• Debit  left-hand side

• Credit  right-hand side

• Debit entry  on left-hand side

• Credit entry  on right-hand side

• Balance  difference between amounts on debit side

and amounts on credit side
 DEBIT + CREDIT (CONT.)

• Debit total > credit total = dr balance

• Credit total > debit total = cr balance
• General ledger accounts are balanced at end of each month: closing
balances
• Bring forward to 1st day of following month: opening balances
• No opening balances for new entity
• Opening balances: from 2nd month
 DEBIT & CREDIT

ABC DEALERS
GENERAL LEDGER
DR BANK B5 CR
Date Details Fol R c Date Details Fol R c

2012 2012

Feb 1 Capital J1 100 00 Feb 25 Salaries J3 50 00

28 Balance c/f 50
00

100 100
00 00
2012
Mar 1 Balance b/f 50
00
 LIST OF ACCOUNTS

 Asset
Separate account for  Liability
 Equity (capital + drawings)
EACH…  Income
 Expense

 Name, e.g. Vehicles

 Account number (code)
Each account has  Code is allocated according to Chart
of Accounts (Diagram 2.1)
 NAME OF ENTITY
LIST OF ACCOUNTS
Main groups of accounts: Account codes
Assets B1 – B100
Liabilities L1 – L100
Equity E1 – E100
Income I1 – I100
Expenses U1 – U100

Assets
Furniture B1
Equipment B2
Vehicles B3
Bank B7
Debtors control B8

Liabilities
Long-term loan L1
Creditors control L5

Equity
Capital E1
Drawings E2

Income
Services rendered I1
Rent received I2

Expenses
Stationery U1
 DUALITY CONCEPT
Duality concept  financial position is defined in terms of the accounting
equation

Each transaction has a dual effect  accounting equation must always balance

Another term  double entry principle

Each transaction influences at least two accounts

One account is debited and the other is credited

Debits = Credits
 DUALITY CONCEPT (CONT.)
DOUBLE ENTRY PRINCIPLE

INCREASE

If the left side of the accounting equation (assets) increases, we must debit the If the right side of the accounting equation (equity and liabilities) increases, we
relevant general ledger accounts. must credit the relevant general ledger accounts.

Assets  increase = debit Equity or Liabilities  increase = credit

DECREASE

If the left side of the accounting equation (assets) decreases, we must credit the If the right side of the accounting equation (equity and liabilities) decreases, we
relevant general ledger accounts. must debit the relevant general ledger accounts.

Assets  decrease = credit Equity or Liabilities  decrease = debit

THANK YOU

Do you have any questions?

johanna.manyaapelo@nwu.ac.za