8/02/2018

BUSS 1030 Accounting, Business and

Society
Chapter 4 Pages 162-179; 183-187; 195-203; Skim Read Pages 179-183;
(PLEASE PRINT LECTURE EXAMPLE MS WORD DOCUMENT
AS WELL AND BRING IT WITH YOU TO LECTURES THIS WEEK)

Lectures 3 and 4 : Business Transactions

Abdul Razeed

BUSINESS SCHOOL

Quick recap

KEY ACCOUNTING CONCEPTS

Chapter 2 (read Pages 47 – 52, Exclude the effect of trading operations on
the statement of financial position, read Pages 55-58)
1. Explain the accounting equation (LO2)
2. Classify assets and claims (LO1/LO2/LO3)

Chapter 4 (Pages 162-177)

1. Provide an overview of the recording processes (LO1)
2. Explain how the use of double-entry bookkeeping mirrors the first
principles appaorach (LO2)
** For this lecture, refine your review of the textbook material by focusing on
what is being covered in lectures.

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Learning Objectives

Business Transactions
Chapter 4 Pages 162-179; 183-187; 195-203; Skim Read Pages 179-183
- Provide an overview of the recording process (LO1)
- Explain how the use of double-entry bookkeeping mirrors the first-
principles approach (LO2)
- Explain the importance of a trial balance (LO3)
- (Skim Read Only) Close off a simple set of accounts (LO4)
- Record a series of period-end adjustments in the accounts (LO5) – Only
up to an including depreciation
- Use an adjusted trial balance and a worksheet to complete a final set of
accounts (LO7)
- Describe a chart of accounts and its importance (LO8)

Rio Tinto
The US sharemarket regulator has charged Anglo-Australian mining giant Rio Tinto and
two of its former top executives with fraud for allegedly inflating the value of Mozambique
coal assets acquired in 2011 for $US3.7 billion ($4.65 billion) and sold just three years later
for only $US50 million.

"As alleged in our complaint, Rio Tinto's top executives allegedly breached their disclosure
obligations and corporate duties by hiding from their board, auditor, and investors the
crucial fact that a multi-billion dollar transaction was a failure," said Stephanie Avakian,
another co-director of the SEC's enforcement division.

In Australia, the Australian Securities and Investments Commission is also conducting a

review of the impairment of Rio's Mozambique coal assets. Rio said it would update the
market as required.

So instead, the SEC alleges, "they concealed the adverse developments, allowing Rio
Tinto to release misleading financial statements days before a series of US debt offerings."

Read more: http://www.smh.com.au/business/mining-and-resources/former-rio-tinto-ceo-

tom-albanese-excfo-guy-elliott-charged-with-fraud-by-sec-20171017-gz2zhi.html
(Accessed 8th Feb 2018)

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The Accounting Equation

Economic Claims to
Resources Economic Resources

Accounting Processes

Business Transactions Weeks 2/3

Journal Week 3

Ledger Weeks 3/4

Trial Balance Weeks 3/4

Financial Statements Week 6/7/8/9

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Business Transactions and

Source Documents (Ch2-LO1/2/3)

What do we need to know:

a) Has a transaction occurred ?
 Check source documents. They provide documentary
evidence that a transaction occurred and internal control over
the firm’s resources
 Examples of source documents include cash receipts,
invoices, credit card receipts, cash register tapes, cancelled
checks, customer invoices, supplier invoices, purchase
orders, deposit slips, bank statements, notes for loans,
payment stubs
 They provide documentary evidence that a transaction
occurred and internal control over the firm’s resources

Business Transactions and

Source Documents (Ch2-LO1/2/3)

b) If so, is the transaction a business transaction ?

 External business transactions:
 Internal business transactions:
 Non-business transactions:

c) How does the transaction affect the accounting equation?

d) What specific accounts are affected by the transaction?

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Journals

What is a journal?
 It is a list in chronological order of all the transactions for a
business.
 The effect of business transactions on assets, liabilities, equities,
revenues and expenses are first recorded in a Journal
 Referred to as journal entries
 Are prepared in chronological order (ie date order, oldest first)
 Show the “debit” or “credit” entry to be made to the accounts

To record in a Journal
1. Identify transaction from source documents.
2. Undertake transaction analysis.
3. Specify accounts affected.
4. Apply debit / credit rules.
5. Record transaction (with description).

Lecture Example

› Provide the following transaction analysis.

› (Adapted from Atrill et al. 2018, Pg 205)

Jan 1 A. Dele invests $100,000 in a business

Jan 1 It buys a machine for cash for $10,000
Jan 1 Obtained a bank loan of $100,000 (Interest 5% p.a.)
Jan 2 The business buys inventory for $40,000 cash
Jan 3 It buys further inventory on credit for $20,000
Jan 5 It pays rent of $5,000 for the current month
Jan 6 It sells inventory that cost $4,000 for $7,000 credit
Jan 7 It pays wages of $1,000
Jan 8 It pays some of its suppliers $5,000
Jan 9 A. Dele withdraws cash of $2,000

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Journals
. Record Journal Entries for transactions in January
General Journal Pg 1

Date Description Account Debit ($) Credit ($)

Number

Journals

Each general journal entry must contain the following

information:
The date that the business transaction occurred
Details of the accounts to be debited (Name, a/c number and
amount)
Details of the accounts to be credited (Name, a/c number and
amount)
A narration or description of the transaction
(Note: A/C Numbers are typically found in an organisation’s
Chart of Accounts)

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Posting

What is posting? (note the illustration here does not

relate to the lecture example)
Posting is the procedure where information is transferred
from the general journal entries to the general ledger
accounts
Steps in the process:
1. Find the account to be debited
2. Enter the transaction date in the account
3. Enter name of account that will be credited
4. Enter amount of the debit
5. Go back to the journal and enter the account number to
show that part of the entry has been posted and place a
tick next to the line in the journal
6. Repeat steps 1-5 for the account to be credited

Posting-Journals

T-Accounts

Opening Bal 0

Date Description Account Debit ($) Credit ($)

General
Number
Journal

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Posting-Journals

T-Accounts

Date Description Account Debit ($) Credit ($)

General
Number
Journal Sep 1 Cash 42 000
Stewart, capital 42 000
(Owner invested money into
business)

Posting-Journals

T-Accounts Cash Stewart,Capital

Date Description Account Debit ($) Credit ($)

General
Number
Journal Sep 1 Cash 42 000
Stewart, capital 42 000
(Owner invested money into
business)

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Posting-Journals

T-Accounts Cash Stewart,Capital

Opening Bal 0

Stewart, Capital 42,000 Closing Bal 42,000

42,000 42,000

Opening Bal 42,000

Date Description Account Debit ($) Credit ($)

General
Number
Journal Sep 1 Cash 42 000
Stewart, capital 42 000
(Owner invested money into
business)

Posting-Journals

T-Accounts Cash Stewart,Capital

Opening Bal 0 Opening Bal 0

Closing Bal 42,000 Closing Bal 42,000 Stewart, Capital 42,000

Stewart, Capital 42,000

42,000 42,000 42,000 42,000

Opening Bal 42,000

Opening Bal 42,000

Date Description Account Debit ($) Credit ($)

General
Number
Journal Sep 1 Cash 42 000
Stewart, capital 42 000
(Owner invested money into
business)

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Posting-Journals

T-Accounts Cash Stewart,Capital

Opening Bal 0 Opening Bal 0

Closing Bal 42,000 Closing Bal 42,000 Stewart, Capital 42,000

Stewart, Capital 42,000

42,000 42,000 42,000 42,000

Opening Bal 42,000

Opening Bal 42,000

Date Description Account Debit ($) Credit ($)

General
Number
Journal Sep 1 Cash 42 000
Stewart, capital 42 000
(Owner invested money into
business)

Posting – Journal to Ledgers

General Journal Page 1
General Date Description Account Debit ($) Credit ($)
Journal Number

Running Account : Account No.:

Balance
(also referred to Date Explanation Post Ref Debit Credit Balance
as 4 Column
Ledger) GJ1

GJ1

Account Account No.:

Date Explanation Post Ref Debit Credit Balance

GJ1

GJ1

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Posting – Journal to Ledgers

General Journal Page 1
General Date Description Account Debit ($) Credit ($)
Journal Number
Sep 1 Cash 42 000 ,
Stewart, 42 000
✔
capital
(Owner invested money ,
into business)

Running Account : Cash Account No.: 101

Balance
(also referred to Date Explanation Post Ref Debit Credit Balance
as 4 Column
Ledger) Sep 1 GJ1

Account : Stewart, Capital Account No.:

Date Explanation Post Ref Debit Credit Balance

Sep 1 Cash GJ1 42,000 42,000 CR

Posting – Journal to Ledgers

General Journal Page 1
General Date Description Account Debit ($) Credit ($)
Journal Number
Sep 1 Cash 42 000 ✔
,
Stewart, 42 000 ✔
capital
(Owner invested money
into business)

Running Account : Cash Account No.: 101

Balance
(also referred to Date Explanation Post Ref Debit Credit Balance
as 4 Column
Ledger) Sep 1 Stewart, GJ1 42,000 42,000 DR
Capital

Account : Stewart, Capital Account No.:

Date Explanation Post Ref Debit Credit Balance

Sep 1 Cash GJ1 42,000 42,000 CR

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Posting – Journal to Ledgers

› Post Journal Entries for transactions in September
Account : Account No.:

Date Explanation Post Ref Debit Credit Balance

Opening Bal 0

Account : Account No.:

Date Explanation Post Ref Debit Credit Balance

Opening Bal 0

Account : Account No.:

Date Explanation Post Ref Debit Credit Balance

Opening Bal 0

Posting – Journal to Ledgers

› Post Journal Entries for transactions in September
Account : Account No.:

Date Explanation Post Ref Debit Credit Balance

Opening Bal 0

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Expanding the Accounting Equation to

Account for Revenues and Expenses

Assets = Liabilities + Owners’ Equity

Capital contributions and Revenues increase Owners’ Equity.
Drawings and Expenses decrease Owners’ Equity.
So:
 Assets = Liabilities + Capital – Drawings+ Revenue –
Expenses
What are the ‘normal’ balances of the above accounts?

Trial Balance

What is a trial balance?

After posting journals to the ledger a trial balance is prepared to
check that the GL “balances” ie. to check that: DR = CR
It is an internal document.
It is a listing of all the accounts with their related balances.
Before computers, it provided a check on accuracy by showing
whether total debits equal total credits.
Computerised accounting programs usually prohibit out-of-
balance entries.
The trial balance…
is a report (so it needs a heading)
can be prepared as often as you like
must show totals to prove that total DR balances of accounts in
the GL equals total CR balances of accounts in the GL
can help identify some types of posting errors

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E.g. Paula Lee eTravel

Trial balance

Credit

Trial balance

XXX
Trial Balance
30 June 20XX
Account Title Debit Credit

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Locating Trial Balance Errors

› Are the additions correct?
› Are all accounts listed?
› Are the balances listed correctly?
› Review accounts for ‘reasonableness’.
› Check that you have not omitted the balance of an account by mistake
Dr bal – Cr bal = Missing value
› Check that you have not recorded an amount on the wrong side (eg recorded a
debit instead of a credit)
(Dr bal – Cr bal)/2 = Amount on wrong side
› Check that you have not made a transposition error (eg recording 210 as 120 or
78 as 87)
(Dr bal – Cr bal)/9 = a whole number
› If these steps can not identify the error then you may have more than one mistake
and so will need to go back and recheck all your entries

Limitations of a Trial Balance

› Errors that a trial balance will not detect:

- A missing transaction (not journalised)
- Posting on an incorrect journal entry
- A journal entry posted twice
- An incorrect amount used in the journal
- Offsetting errors made in recording the amount of a transaction

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Adjusting Entries

› At the end of the period, the accountant prepares the financial statements
› The unadjusted trial balance lists the revenues and expenses of an entity.
However, these amounts omit various transactions.
› Accrual Accounting requires adjusting entries at the end of the period
› What are adjusting entries?
- Adjusting entries assign revenues to the period when they are earned and
expenses to the period when they are incurred
- Adjusting entries also update the asset and liability accounts
- E.g. Wages incurred but not paid (Accruals); Supplies purchased but not used
(Prepayments); Interest incurred but not paid (Accruals); Rent paid but not used
(Prepayments)
- Depreciation is another group of adjusting entries

Preparing Financial Statements

 A worksheet…
- Is a tool which is used to help assemble all the information
required to adjust the accounts and prepare interim financial
statements
- A worksheet is not …A substitute for journals and ledgers AND does not
form part of the financial statements
› A worksheet involves the following steps:
- Using the adjusted trial balance, enter all account titles and unadjusted
general ledger balances in the appropriate columns (columns 1-3).
- Enter the amounts of the end-of-period adjusting entries in the
adjustments columns
- Prepare the adjusted trial balance (col. 6-7) by adding the adjustments
(col. 4&5) to the unadjusted trial balance (col. 2&3). (Confirm by
comparing to the GL)
- Extend adjusted balances of revenue & expense accounts to the Income
columns and the remaining items to the Balance Sheet columns

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Preparing Financial Statements

› Step 1. Preparing the worksheet

› Step 2. Adjusting entries:
- E.g. Prepaid insurance expired $100,
- E.g. Depreciation on building $5000
› Step 3. Calculating the adjusted GL balances
› Step 4. Identifying the items to show on each financial statement
› - Income statement
› - Balance Sheet
› Step 5. Don’t forget to calculate profit

Additional Information (Adjusting Entries)

› On 30th June, additional information:

› 1) Depreciation of machine (20% on cost)
› 2) Interest not paid
› 3) Wages of $2,500 not paid

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Preparing Financial Statements

Account Unadjusted Trial Adjustments Adjusted trial Income Statement Balance Sheet
Title Balance balance
DR CR DR CR DR CR DR CR DR CR

Preparing Financial Statements

› While a worksheet can help you organise the end of month adjustments
and prepare financial statements…
- The worksheet is just a tool to organise data.
- It is not part of your accounting information system so you will still need to:
- prepare and post the adjusting entries
- if you don’t, the worksheet will not balance with the amounts shown in your
general ledger

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Preparing Financial Statements

STEPS COMPLETED EACH MONTH STEPS COMPLETED AT END OF

EACH FINANCIAL PERIOD/HALF
YEARLY
Identify (new) Transactions Prepare end-of-period Adjustments
Record transactions in Journal(s) Prepare an Adjusted Trial Balance
Post to the General Ledger Prepare Financial Statements
Prepare a Trial Balance
Prepare internal management reports
if needed – after doing the necessary
adjustments)

The chart of accounts

› The chart of accounts is a list of all of the accounts within an organisation’s

accounting system organised so that the accounts link to the profit and loss
statement and the balance sheet.
› Must include all accounts needed to complete the final accounts.
› Chart of account varies depending on the size and scope of the organisation.
- May be dependent upon reporting requirements
- Needs to be consistent for comparability
- Needs to be reviewed periodically for redundancy
› Separated by assets, liabilities, equity, revenues and expenses.

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Learning Objectives

Business Transactions
Chapter 4 Pages 162-179; 183-187; 195-203; Skim Read Pages 179-183
- Provide an overview of the recording process (LO1)
- Explain how the use of double-entry bookkeeping mirrors the first-
principles approach (LO2)
- Explain the importance of a trial balance (LO3)
- (Skim Read Only) Close off a simple set of accounts (LO4)
- Record a series of period-end adjustments in the accounts (LO5) – Only
up to an including depreciation
- Use an adjusted trial balance and a worksheet to complete a final set of
accounts (LO7)
- Describe a chart of accounts and its importance (LO8)

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