Topic 4 - Record-Keeping

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This article is a topic within the subject Accounting 1A.

Contents

Required Reading

Trotman, K. & Gibbins, M., 2009 Financial Accounting: An Integrated Approach, 4th edition, Melbourne: Thomson Nelson ITP pp. 153-186.

The Accounting Cycle

This is the accounting cycle that you will follow in the course over the next few weeks. The key points to emphasis (especially for the final exam) is to know your journal entries (and adjusting entries), Ledgers and T accounts as well as the trial balance format really well in order to present a correct financial statement.

  1. Source Documents - show occurrence of transactions
    • Purchase order form, invoices (sales), cheques/EFT (payment), collecting $ customer-day collections
  2. Journal Entries - record acct. transactions chronologically, Firms often use special journals e.g. sales
    • Note: a posting reference is used to indicates which ledger account
  3. Post to Ledgers - Use T Accounts, including debits & credits of the account e.g. Cash, Receivables Loans etc.
    • General Ledger – complete set of all accounts
    • Subsidiary Ledgers (e.g. receivable accounts for each customer)
  4. Trial Balance
  5. Adjusting Journal Entries
    • Deferred/Accrued Revenues & Expenses
  6. Adjusted Trial Balance
  7. Closing Journal Entries
    • Transfer R & E to income statement & then to Retained earnings
      • Revenues are debited & credited to P/L Summary/ Expenses are credited & debited to P/L
      • If Profit (Credit Balance), than Debit P/L Summary & Credit Retained Earnings
      • If Loss (Debit Balance), than credit P/L summary & debit R.E
  8. Post-Closing Trial Balance
  9. Financial Statements

T Account Example

To make the T account balance, a closing balance figure must be entered (it will be the opening balance of the next period). "Trotman, K. and M. Gibbins. Financial Accounting: An Integrated Approach" [1] has a good example of this on page 183. The final T account looks like this:

Reval.jpg

Prescribed Textbook Accounting Cycle Example

"Trotman, K. and M. Gibbins. Financial Accounting: An Integrated Approach" [2] provides a comprehensive example showcasing the entire accounting cycle. Here I have summarised the main points and created the required material for each step. Please refer to the material for further and more detailed guidance if necessary.

  1. Background
    • Formed 1st Nov 2008, with $2500 was put up by 5 actors, but not until the $ was needed
    • Applied for the Aug 2009 Festival in Dec 2008, paying $400, $90 per actor [extra $50 deposited)
    • Accepted & Allocated 7 Performances
    • Company agreed to pay royalty to the play’s author in Mar 2009
    • Bought $470 props (Each actors puts up $100)
    • $290 of petrol expenses, (Each actors puts up $100)
    • Bought $610 of props on credit, $190 shareholder loan
    • $897 Cash Revenue, banked
    • $525 was paid for amounts owing
    • Total revenue for remaining performances = $4840
  1. Step 1: Sourcing Documents
    • Bank Account Agreement Signed / Agreement to issue 5000 shares (20% each)
    • Bank Statement (Deposit) $450, Cheque Paid $400, Receipt from Festival
    • Notification of acceptance
    • A note about the phone call made for royalty agreement
    • Bank Statement showing $500 deposit & $470 of cheques
    • Bank Statement showing $500 deposit & 290$ of cheque + bills supporting expense
    • Bills/invoice for the props & $190 of expenses
    • Receipt for the deposit of $897 & $4840 & festival report showing these amounts
    • Cheque Butt indicating payment of $525
  1. Step 2: General Journal Entries
    • No Transaction
    • Dec 08, DR Cash, CR Share Capital ($450) / DR Expense, CR Cash $400
    • No Transaction
    • No Transaction
    • Mar 09, DR Cash, CR Share Capital ($500) / DR Props Expense, CR Cash ($470)
    • Jul 09, DR Cash, CR Share Capital ($500) / DR Travel Expense, CR Cash ($290)
    • Aug 09, DR Travel Expense, CR Accounts Payable ($190) / DR Props Expense, CR Account Payables ($610)
    • Aug 09, DR Cash, CR Sales ($897)
    • Aug 09, DR Accounts Payable, CR Cash ($525)
    • Sep 09, DR Cash, CR Sales ($4840)

Step 3: Posting To Ledgers (Below)

Ledgers.jpg

Step 4: Trial Balance (Below)

Trial Balance.jpg Step 5: Adjusting Journal Entries

Accruals & Adjustments

  1. Play writer is owed $450 Royalty
  2. A group member spent $215 on travel expenses, but had not claimed reimbursement yet
  3. $660 of props were reusable for 4 more times
  4. $20 in interest earned

Adjustment Journal Entries (All Sep 2009)

  1. DR Royal Expense, CR Accrued Expenses $450
  2. DR Travel Expenses, CR Accrued Expenses $215
  3. DR Props Asset, CR Props Expenses $660
    • DR Depreciation $132, CR Accumulated Depreciation $132
  4. DR Interest Receivable, CR Interest Revenue $20

Step 6: Adjusted Ledger (See Below)

Adjusted Ledger.jpg


Step 7 and 8: Adjusted Trial Balance and Closing Entries(See Below)


ATB & CE.jpg


Step 9: Financial Statements (See Below)


FS.jpg

End

This is the end of this topic. Click Accounting 1A to go back to the main subject page for Accounting 1A

References

Textbook refers to Trotman, K. & Gibbins, M., 2009 Financial Accounting: An Integrated Approach, 4th edition, Melbourne: Thomson Nelson ITP

  1. Trotman, K. and M. Gibbins. Financial Accounting: An Integrated Approach, Thomas Nelson, Fourth Edition 2009
  2. Trotman, K. and M. Gibbins. Financial Accounting: An Integrated Approach, Thomas Nelson, Fourth Edition 2009
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