Module 2:

RECORDING BUSINESS
TRANSACTIONS

l'SYDNEY
Business School
Module 2: Recording Business Transactions

Reading: Textbook Chapter 2

Relevant Textbook Learning objectives

1.7 Review the accounting entity concept and identify three main
types of business organisation characteristics (from Chp.1, objective 7)
2.1 Explain accounts as they relate to the accounting equation, and
describe common/typical accounts (in each equation element)
2.2 Define debits, credits and normal account balances using double-entry
accounting and T-accounts
2.3 Record transactions in the journal
2.4 Post transactions from the journal to the ledger
2.5 Prepare the trial balance from the T-accounts

Slide 2
Review the Accounting entity principle and the
types of accounting and reporting entities
Accounting entity
• A business or organisation that, for accounting purposes,
is treated as a separate economic unit from its owner(s)
• Accounting focuses on processing transactions, and reporting the
financial status of the accounting entity, not of the owner/owners.

Smart Touch Learning

“The accounting entity”

Assets = Liabilities + Equity

Slide 4
Review the Accounting entity principle and the
types of accounting and reporting entities
Business Organisation Structures
• There are three main accounting entity organization structures.
– Sole Proprietorship – one owner of the business/organization.
– Partnership – more than one owner of the business/organization.
– Company – shareholders own a share of the shareholders equity.
• All are treated as accounting entities, but a company is a separate
_________that owns assets and is responsible for its own liabilities
• In ACCT5001 we focus on sole proprietorships in modules 1-9 then
we focus on the company form/structure.

Smart Touch Learning Qantas Airways Limited

Slide 5
1.7 Types of business organisation

Slide 6
The Birth of Double-entry accounting
Luca Pacioli (1445–1517)

• Invented the double-entry

accounting system around
1492

• Friend of Leonardo da
Vinci

Slide 7
The double–entry accounting system

Rather than use analysis charts, in practice we use the double-entry

accounting system of debits & credits to analyse, record, store and
summarise transactions in accounts, journals, ledger & trial balance

• An account is a detailed record of all the changes that have occurred

in a particular asset, liability or owners’ equity item during a period
• The journal is the chronological record of the analysed transactions

• The ledger is a holding place or record of all the individual accounts

• A trial balance is a list of all the ledger accounts and their balances.
It allows the user to check that debits equal credits in the ledger
accounts, and provides the source for items in the financial reports.

Slide 8
Three main types of accounts (or elements)

Assets (A)
Definition
(conceptual framework)
A present economic ________ controlled by the entity as a result of past
events. An economic resource is a right that has the potential to produce
economic benefits

Common assets include:

- Cash - Prepayments
- Accounts receivable - Bills/notes receivable
- Inventories - Supplies
- Land - Buildings
- Plant and equipment

Slide 10
Liabilities (L)
Definition
(conceptual framework)
A present ________of the entity to transfer an economic resource as
a result of past events. An obligation is a duty or responsibility that
the entity has no practical ability to avoid

Common liabilities include:

- Accounts payable
- Other payables – e.g. Salaries payable (expenses owing)
- Loans (interest bearing debt)
- Mortgages (secured loans over land or property)
- Debentures (Bonds)
- Bills/Notes payable

Slide 11
Owners’ equity (OE)

Owner’s equity is the _____________in the assets of an entity after

deducting all liabilities owed to others. It represents what has been invested
or retained from profits, after any withdrawals/drawings of owners.
Elements of owner’s equity include:
• Capital (share capital for a company)
• Drawings (dividends for a company)
• Income (or revenue) adds to profit and therefore owners’ equity
• Expenses reduces profit and therefore owner’s equity

Revenue: An increase in owner’s equity that is created by delivering goods or

services to customers or income from dividends, interest, royalties, and rent.

Expense: A decrease in owner’s equity that occurs from using up assets or

increasing liabilities in the course of operating a business.

Slide 12
The ledger

A ledger is a collection of individual _________________.

Each account stores the effects of financial transactions that

increase or decrease it, and can provide a summarised balance
when required for information or to use in financial reports.

Slide 13
Chart of accounts

An index (filing) system to be able to locate individual

accounts in a ledger or computer easily.

A typical system uses numbers based on the accounting

equation elements.

Slide 14
Debits, credits and double-entry accounting

Accounting is based on a double-entry system to record the

dual effects of a business transaction

Each transaction affects at least two accounts

A popular account format is called the T-account

Account Title

Left side Right side

Debit side Credit side

Slide 16
Debits, credits and double-entry accounting

The account category determines how increases and decreases in

the account are recorded as debits and credits

The pattern of recording debits and credits is based on the

accounting equation:

Assets = Liabilities + Owners’ Equity

Slide 17
 Debits, credits and double-entry accounting

Assets = Liabilities + Owners’ Equity

Debits (LHS) = Credits (RHS)

Increases to assets are recorded on their natural (_____)

debit side
Decreases are recorded on the opposite (_____)
credit side
credit side
Increases to liabilities or equity are recorded on their natural (____)
debit
Decreases are recorded on the opposite (______) side

Slide 18
Recording transactions in the journal

Enter the
Specify each Determine transaction in
Identify the account affected whether each the journal,
transaction from by the account is according to the
source transaction and increased or rules of debit
documents classify it by decreased by the and credit (may
type transaction include a brief
explanation)

For example
1) Paid $1,000 for Equipment by cheque on January 1
Journal entry:
Date Accounts Debit Credit

Jan 1 Equipment (Asset increase) 1000

Cash (Asset decrease)
1000
2) Received $5,000 from a loan on January 2
Journal entry:
Date Accounts Debit Credit
Cash (Asset increase) 5000
Jan 2
Loan (liability increase) 5000 Slide 19
Journalising transactions and posting to T-
Accounts

Kenneth Optical performed $16,000 of services for a client in July

who couldn’t pay immediately. The next month, August, the business
received $9 600 cash from the client.

July
Dr Accounts receivable 16 000
Cr Service revenue 16 000
Accounts Receivable Service Revenue

16 000 16 000

Slide 21
Journalising transactions and posting to T-
Accounts

Kenneth Optical performed $16,000 of services for a client in July

who couldn’t pay immediately. The next month, August, the business
received $9 600 cash from the client.

August
Dr Cash 9 600
Cr Accounts Receivable 9600
Accounts Receivable Service Revenue

16 000 9 600 16 000

Cash

9 600
Slide 22
Expansion of the accounting equation

Slide 23
Debit and credit rules for our accounting records
Assets Liabilities

Debit Credit Debit to Credit

increases decreases decreases increases

Owners’ Equity

Debit Credit
decreases increases

Expenses Revenue

Debit credit
increases increases
as it  OE as it  OE
decrease increase

The ______________appears
normal balance on the side, either debit or credit,
where we record an increase (+) in the account’s balance.
Slide 24
Flow of accounting information

Slide 26
Completed ledger (after posting from a journal)

Slide 29
Alternative layout to the T-account

This is called the four column ledger account format (or running
balance account format) and is typically used in computerised
accounting systems

In teaching accounting it is best to initially use the T account

format as this facilitates the underlying accounting rules of debit
and credit side based on the accounting equation
Slide 30
The trial balance
A trial balance summarises the ledger by listing all the accounts with
their balances
Throughout the accounting process, total debits should always
equal total credits. If not, there is an error
_____
Where the debit and credit columns are not balanced, errors can be
detected by calculating the difference between total debits and total
credits on the trial balance
If a trial balance is balanced, i.e. the debit column equals the credit
column, it doesn’t mean that there have been no errors
Why?
– We may have posted the debit entry to the credit side and the
credit entry to the debit side
– We may have posted the wrong amount to both sides
– We may have entered items on the correct side but wrong account
– We may have forgotten to post a journal entry
Slide 31
Trial balance

Slide 32
Summary: Ch.2 Recording Business Transactions
• The accounting equation must always balance after each
transaction is recorded. To achieve this balance, we record
transactions using a double-entry accounting system
• A transaction occurs and is recorded on a source document
• Then, we analyse the transaction by identifying
(1) the account names affected by the transaction,
(2) what types of accounts they are,
(3) whether the accounts increased or decreased, and
(4) what account to debit and what account to credit using the rules
of debit and credit
• We then record the transaction in the journal (listing debits first)
• We then post (transfer) all transactions to their ledger accounts
• Once the ledger balances are calculated, the ending balance for each
account is transferred to the trial balance. If the trial balance
doesn’t balance, we must locate any errors
• In the next module we will use the trial balance to prepare financial
reports Slide 33