RBBM8112: FINANCIAL

ACCOUNTING
BY: GABRIEL KAMAU

gabkkamau@gmail.com

0789286605
 TOPIC TWO: RECORDING BUSINESS
TRANSACTIONS
2.1 Introduction
• Recording transactions must obey the double entry system
• It starts with analyzing the transactions and finding its effect
on the business assets, liabilities, capital and profitability.
• For Every transaction:
i) We must obey the double entry system
ii) The accounting equation must balance
 2.2 The Accounting Cycle

Analyzing Transactions

9. Reversing entries 1. Journalization

8. Post-closing trail balance 2. Posting

7. Closing entries 3. Trial balance

6. Financial Statements 4. Adjustments

5. Adjusted trial balance

 2.3 Analyzing Transactions
• Transaction analysis is the central component of the
financial accounting process.
• Remember that every transaction must keep the
accounting equation in balance by respecting the double
entry system.
1. Asset Source transaction: increase in asset and increase claim side
2. Asset exchange transaction: One asset increase and another asset
decrease
3. Asset Use transaction: use an asset to settle (pay) a claim. An asset
decreases and a claim (capital/liability) decreases
4. Claims exchange transaction: one claim increases and another
claim decreases e.g. took a loan to pay creditors
Assets=Capital+Liabilities
 Classification of transactions

• Classified according to their effects on the accounting

equation: every transaction will have an effect.
1. Asset Source transaction: Increases assets on one hand
and increases one side of the claim side. It increases both the
asset side and the liabilities and owners' equity side. E.g.
initial investment of capital.
2. Asset exchange transaction: It causes both an increase and
a decrease on the asset side. i.e one asset increase while
another decreases e.g. cash purchase of stock for resale.
 Cont…

3. Asset Use transaction: It leads to decrease in both the

asset side and the liabilities and owners' equity side. E.g.
cash payment of creditors
4. Claims exchange transaction: It causes both an increase
and a decrease on the liabilities and owners' equity side. e.g.
dividend declaration to shareholders.
 Note:
• Regardless of what transaction occurs, the accounting
equation must be in balance after the transaction is
analyzed.
Eg1. Analyze the following transactions indicating the type of transaction
involved.
1. Started business from personal savings
2. Acquired a loan from bank as additional capital
3. Paid rent by cash
4. Cash purchases
5. Credit purchases
6. Sold goods in cash
7. Credit sales
8. Performed services for cash
9. Collected cash from account receivables
10. Cleared payables by cash
11. Purchased equipment by cash
12. Paid salary to workers
Eg1. Analyze the following transactions indicating the type of transaction involved.
1. Started business from personal savings=Asset Source Transaction
2. Acquired a loan from bank as additional capital=Asset Source Transaction
3. Paid rent by cash=Asset Use Transaction
4. Cash purchases=cash decrease, stock increased= Asset Exchange Transaction
5. Credit purchases= stock increase, a/c payables increase= Asset Source
6. Sold goods in cash=cash increase, sales increase= Asset Source Transaction
7. Credit sales=A/c Receivables increase, Sales increase= Asset Source Transaction
8. Performed services for cash=Asset Source Transaction
9. Collected cash from account receivables=cash increase, a/c receivables decrease=
Asset Exchange Transaction
10. Cleared payables by cash=cash decrease, a/c payables decrease=Asset Use
Transaction
11. Purchased equipment by cash= Equipment increase, cash decrease=Asset
Exchange Transaction
12. Paid salary to workers=Asset Use Transaction
 2.4 Journalizing and Ledger Accounts

• Transactions are initially recorded in chronological order in a

journal before being transferred to the accounts.
• Entering transaction data in the journal is known as
journalizing.
• Every company has a general journal which contains
1. spaces for dates,
2. account titles and explanations,
3. references, and
4. two money columns(Debit and Credit)
• Separate journal entries are made for each transaction.
• The journal makes several significant contributions to the recording
process:
1. It discloses, in one place, the complete effect of a
transaction.
2. It provides a chronological record of transactions.
3. It helps to prevent or locate errors because the debit and credit
amounts for each entry can be readily compared.
• Posting is the act of recoding journal entries to their individual ledger
accounts.
• An account (or Ledger account) is an individual accounting record of
increases and decreases in a specific asset, liability, or owner’s equity item.
• A company will have separate accounts for such items as cash, salaries
expense, accounts payable, and so on.
• The terms debit and credit are used to mean left and right sides of the
account, respectively.
• The act of entering an amount on the left side of an account is called
debiting the account and making an entry on the right side is crediting the
account.
• When the debit amounts exceed the credits, an account has a debit balance;
when the reverse is true, the account has a credit balance.
• In its simplest form, an account consists of
1. the title of the account,
2. a left or debit side, and
3. a right or credit side.
• The alignment of these parts resembles the letter T, and therefore the
account form is called a T account.
• In preparing the ledgers, the double entry system must be maintained.
• In a double-entry system, equal debits and credits are made in the
accounts for each transaction.
• Thus, the total debits will always equal the total credits and the
accounting equation should always stay in balance.
Eg2. Journalize the following transactions and post to their relevant ledgers.
1. On 1st Jan 2024, Jean started a business injecting capital of 1,880,000Rwf from
his own savings.
2. On 2nd Jan, he took a loan of 3,200,000Rwf from BPR as additional capital.
3. On 3rd Jan, he paid rent of 1,440,000 for his premises for a full year.
4. On 3rd Jan, he bought furniture and fittings of 1,800,000Rwf by cash
5. On 3rd Jan, he purchased stock worth 600,000Rwf on credit.
6. On 5th Jan, he sold goods at 250,000Rwf in cash
7. On 9th Jan, he made credit sales of 100,000Rwf.
8. On 11th Jan, he settled ¾ of the payables made on 3rd Jan.
9. On 18th Jan, received cash for the credit sales made on 9th Jan.
10. On 19th Jan, sold goods at 300,000Rwf receiving 225,000Rwf in cash while the
balance remained as credit sales.
11. On 23rd Jan, he purchased a delivery van at 1,560,000Rwf paying 1M Rwf by
cash and promising to settle the balance in two weeks time.
 The Trial Balance

• A trial balance is a list of accounts and their balances at a given time.

• Collection of all balances from the ledgers
• The primary purpose of a trial balance is to prove the mathematical equality
of debits and credits after posting.
• A trial balance also uncovers errors in journalizing and posting.
• The procedures for preparing a trial balance consist of
1. listing the account titles and their balances,
2. totaling the debit and credit columns, and
3. proving the equality of the two columns.
Eg3. Murungi sets up a new business. Before he actually sells anything he
has bought motor vehicles of 5,103,000Rwf, premises of 2,267,000Rwf,
stock of goods 452,000Rwf. He still owes 71,800Rwf in respect of them.
He had borrowed 124,000 from his bank. After the events just described
and before trading starts, he had 78,300Rwf cash in hand and 35,600Rwf
cash at bank.
Required: calculate the amount of his capital.
Eg4. As at 25th January 2024, Jackline Traders had the following balances.
000Rwf
Sales 45,000
Purchases 10,400
Stock, 1/01/2024 4,000
Rent expenses 13,000
Salaries 26,200
Accrued salaries 10,500
Insurance 5,200
Prepaid Insurance 1,200
Capital 78,200
Retained Profit 15,700
Advertising expenses 19,100
Furniture and Equipment
38,300
Accounts Receivables 10,300
Drawings 1,700
Cash at hand 4,300
Accounts Payables 22,100
Delivery Van 18,400
Cash at Bank 10,500
Other admin epenses 8,900
Required. Prepare a trial balance as at 25th Jan 2024.
Eg5. Write up the assets, capital and liabilities accounts in the books of M
Crash to record the following transactions:
2023
June 1 Started business with 3,250,000Rwf in the bank.
― 2 Bought motor van paying by cheque 812,000Rwf.
― 5 Bought Fixtures 354,000Rwf on credit from Office Masters Ltd.
― 8 Bought a van on credit from Motor Cars Ltd 908,000Rwf.
― 12 Took 50,000Rwf out of the bank and put it into the cash till.
― 15 Bought Fixtures paying by cash 260,000Rwf.
― 19 Paid Motor Cars Ltd by cheque 658,000Rwf.
― 21 A loan of 320,000Rwf cash is received from his bank.
― 25 Paid 38,000Rwf of the cash in hand into the bank account.
― 30 Bought more Fixtures paying by cheque 33,000Rwf.
Eg6. Irakozi has the following assets and liabilities as on 30 November 2023:
Creditors 395,000Rwf; Equipment 1,150,000Rwf; Motor vehicle 629,000Rwf;
Stock 615,000Rwf; Debtors 577,000Rwf;Cash at bank 728,000Rwf and Cash in
hand 4,000Rwf.

a) Compute the balance on the capital account as at 30 November 2023.

• During the first week of December 2023, Irakozi:
Bought extra equipment on credit for 138,000Rwf.
Bought extra stock by cheque 57,000Rwf.
Paid creditors by cheque 79,000Rwf.
Received from debtors 84,000Rwf by cheque and 6,000Rwf by cash
Put in an extra 25,000Rwf cash as capital.
b) Record the above transactions in their respective accounts.