topic two: measuring and recording business transactions
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1.0 Introduction
- Recap of topic one:- We learnt about the accounting equation;Assets = Capital + Liabilities
- We noted the importance of accounting information to various users and the importance of credible information
In this topic, we learn more on measuring and recording accounting transactions
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Learning objectives
After this topic you should be able to;
Describe the accounting equation Describe the double entry system Draw T Accounts Record transactions in the T Accounts Balance off T AccountsDescribe the various steps in the accounting
cycle Identify books of original entry
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No Term Definition
1 T Account A an account with a debit and credit side where transactions are recorded as called a ledger
2 Technical insolvency
A situation where an organisation’s capital (equity) is negative
3 Double entry system
A system of recording where each accounting transaction has both a debit and credit entry
4 Debit The left hand side of a T Account
5 Credit The right hand side of a T Account6 Balancing off Determining totals in a T Account. The difference
between the side with the higher amounts and that with lower amounts is added as a balance to ensure that totals in the two sides are equal.
7 Posting Recording an accounting transaction
Financial position and accounting equation
Organisations with high levels of debt are said to have high financial risks
Investors will be apprehensive to inject their capital into such
Negative reserves is an indication of technical insolvency
See examples in the notes
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Double entry system: T Accounts
A T account has a credit and debit sideCredit side is the right hand sideDebit side is the right hand side
see next slide for an illustration
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Title of the account
Period covered
Debit Credit
Reference Date Amount Reference Date Amount
Increase Increase
Decreases Decreases
Double entry system: T Accounts (Cont’d)
Impact of transactions is recorded differently in the accounts as learnt in topic one.
Please see the summary presented in the next slide.
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Account Increase Decrease
Assets Debit Credit
Capital Credit Debit
Liabilities Credit Debit
Important lesson
Accounting equation
Liabilities + Capital
= Assets
Posting of transactions should always leave the equation balanced
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Balancing off accounts
- At the end of the period, T accounts are closed
- Please see illustration in the notes
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Balancing off accounts (Cont’d)
Key lessons;Increase in an expense item debit, decrease
creditIncrease in a liability account credit, decrease
debitIncrease in an income credit, decrease debitIncrease in an asset account debit, for a
decrease credit
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Accounting cycle
◦A number of activities involved in generation of an accounting entry all the way to reporting
◦Completion of once cycle marks beginning of another
◦The cycle forms the basis of our course◦We shall summarize the cycle in 8 steps
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Accounting cycle (Cont’d)1.Initiation of a transaction2.Record the transaction3.Prepare a trial balance4.Prepare adjusting entries5.Prepare an adjusted trial balance6.Prepare financial statements7.Prepare closing entries8.Prepare a post closing trial balance
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1. Initiation of a transaction- Transactions are initiated through posting in the
original books of entry or adjusting journals
2. Recording- Details in the original books of entry are
transferred to the T Accounts
3. Prepare trial balance- Balances in T Accounts are transferred to the trial balance
4. Adjusting entries- journal entries are posted to adjust accounts at year end. We shall learn more on Topic 5
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5. Prepare adjusted trial balance- The trial balance prepared in step 3 is adjusted for the effects of journal entries passed in step 4
6. Prepare financial statements- Financial reports prepared based on the adjusted trial balance
7. Prepare closing entries- Income statement items are closed off to the income summary and added to the balance added to retained earnings
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8. Prepare a post closing trial balance- The adjusted trial balance is further adjusted with closing entries-Post closing trial balance is opening trial balance for the ensuing period
Note1. These steps are sequential with output
from one being input in the other.2. The cycle is continuous. An end of one
financial period marks beginning of another
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Books of original entryTransactions are initiated from these
booksMarks the start of the accounting cycleThey include
Cash bookPetty cashSales ledgerPurchase books Purchase returnsjournals
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Cash book◦Is a record of all receipts and payments◦Helps to determine cash position of an entity
Sales ledger◦Is a record of all sales generated
Sales returns◦Records returns by customers
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Purchase returns◦Records returns to suppliers
Petty cash◦Record payments for minor expenses
Journals◦Records transactions initiated outside the original books of entry
Note: control should be maintained over these books to ensure assets are not misappropriated
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