Accounting Mechanics

Journal, Ledger and Trial balance

 Sally’s Fish & Chips Brina’s Bar & Grill Ely’s Tanning Salon
ASSETS (in
millions)
Current assets 3,000 2,500 4,500
Long-term
45,500 40,500 60,000
investments
Fixed assets 125,750 100,000 150,000
Intangible assets 32,250 55,250 15,000
Other assets — 35,500 6,500
Total assets 220,000 225,750 —

LIABILITIES (in
millions)
Current liabilities 15,500 7,000 —
Long-term liabilities 45,000 — 65,500
Total liabilities — 75,000 —

STOCKHOLDERS’
EQUITY (in
millions)
Capital stock 55,000 — 67,500
Retained earnings 105,000 105,000 —
• Identify and Correct Balance Sheet Errors
Bizilia’s Inc. was organized on January 1. At the end of the
year, an employee with a mathematics degree prepared the
following balance sheet:
• Bizilia’s Inc. Balance Sheet For the Year Ending
December 31
• Resources:
• Cash ₹3,00,000
• Stuff we can sell ₹4,00,000
• Land ₹5,30,000
• Retained earnings ₹1,70,000
• Grand total ₹14,60,000
• Debts:
• Money we owe to vendors ₹4,30,000
• Contributed capital ₹6,30,000
• Grand total ₹10,60,000
• Required:
List all of the deficiencies that you can identify in this balance
sheet and prepare a proper balance sheet.
 • Financial Statements
Listed below are questions posed by various users of a
company’s financial statements.
1. Stockholder: “How did this year’s sales figures compare with
last year’s sales figures?”
2. Banker: “How much in borrowings does the company currently
owe?”
3. Supplier: “How much does the company owe its suppliers in
total?”
4. Stockholder: “Did the company have any dividends in the prior
year?”
5. Advertising Agent: “How much advertising did the company
incur in order to generate sales?”
6. Banker: “What was the company’s total interest cost last year?”
• Required:
Fill in the blank with the financial statement(s) (Income
Statement, Balance Sheet, Statement of Retained Earnings, or
Statement of Cash Flows) the user would most likely use to find
this information.
•Accounting Terms
The following items were taken from the
financial statements of Tiger Inc.:
a. Income tax expense
b. Interest expense
c. Service revenue
d. Accounts receivable
e. Retained earnings
f. Inventory
g. Accounts payable
h. Contributed capital
Required:
Identify whether each item would appear on the
balance sheet, the income statement, or the
statement of retained earnings.
 •Identify Accounting Assumptions and
Qualitative Characteristics
Consider the following independent scenarios:
1.Luigi’s Pizza has been in business for 25 years.
All of its operations are profitable, and the
accountants believe that the company will
operate into the foreseeable future.
2.A bank used the information presented in Tiger
Auto’s financial statements to determine if it
should extend a ₹3,00,000 loan to Tiger. The
information in the financial statements made a
difference in the bank’s lending decision.
•Required:
Identify which accounting assumption or
qualitative characteristic each scenario
illustrates.
Commonly Used Accounts

• Assets

• Liabilities

• Equity
Reporting of Assets on Balance Sheet

•Grouped into categories.

•Decreasing order of liquidity (i.e., in US).
•Current assets (almost) always shown
separately.

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Current Assets

•Cash.
•Funds available for disbursement.
•Other assets expected to be realized in cash, or
sold, or consumed, within one year.
•Or normal operating cycle, if longer.

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Current Assets:
Marketable Securities
•Investments that are:
•Readily marketable, AND,
•Expected to be converted to cash within one
year.

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Current Assets:
Accounts (and Notes) Receivable
•Accounts Receivable:
•Owed by customers.
•Reported at amount owed less an estimated
uncollectible amount.
•Notes (Other) receivables:
•Owed by other than customers.
•Evidence by written promises to pay (notes).

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Current Assets:
Inventories
•Items that are:
•Held for sale in ordinary course of business,
•In process of production for sale, or
•To be consumed in production of goods or
services to be sold.

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Current Assets:
Prepaid Expenses
•Usefulness will expire in near future.
•Examples:
•Prepaid rent expense.
•Prepaid insurance expense.

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Property, Plant, and Equipment

•Also, called fixed assets.

•Tangible, long-lived.
•Used to produce goods and services to
generate cash inflows.
•Land is not depreciated.
•Building and equipment shown at:
•Cost less accumulated depreciation.

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Other Assets

•Investments (not expected to be sold within a

year).
•Intangible assets.
•Goodwill, patents, trademarks, copyrights.
•Longer life than prepaid expenses.

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Liabilities

•Obligations to transfer assets or provide

services to outside parties.
•Arising from past transactions or events.
•Claims against entity’s assets.
•But not against specific assets, unless
indicated.
•Reported at amount that would satisfy
obligations on Balance Sheet date.
•Principal + unpaid interest.

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Current Liabilities

•Satisfied or extinguished within one year

•or normal operating cycle, if longer.

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Current Liabilities:
Accounts (and Notes) Payable
•Accounts Payable:
•Suppliers (i.e. vendors) claims for goods or
services furnished, but not yet paid.
•Unsecured.
•Notes payable:
•Short-term loans.
•Formal written note.
•Includes amounts owed to financial
institutions.

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Current Liabilities:
Taxes Payable
•Owed to government agencies for taxes.
•Income taxes often shown separately because
of size.

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Current Liabilities:
Accrued Expenses
•Earned by outside parties but not yet paid (i.e.,
unpaid expenses).
•Usually no invoice.
•Includes interest payable, wages payable.

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Current Liabilities:
Deferred Revenues
•Also called unearned revenues or pre-collected
revenues.
•Advance payment received, but company has
not yet performed service or delivered product.

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Current Liabilities:
Current Portion of Long-Term Debt

•Portion due within upcoming year.

•Gives complete picture of entity’s short-term
obligations.

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Long-Term Liabilities

•Also called:
•Long-term debt.
•Non-current liabilities.
•Due beyond upcoming year.

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Owners’ Equity

•Amount owners have invested in entity.

•Also know as “Net assets” (i.e., Assets minus
Liabilities).
•For a corporation:
•Shareholders’ or stockholders’ equity .
•Shares of stock evidence ownership interest.

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Two Categories of
Shareholders’ Equity
•Paid-in or contributed capital.
•Retained earnings.

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Shareholders’ Equity:
Paid-in Capital
•Amount owners have paid in to purchase
shares of stock.
•Classified as:
•Par value.
•Additional paid-in capital.

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Shareholders’ Equity:
Retained Earnings
•Reinvested earnings from inception to date less
dividends to date.
•If negative, amount labeled as deficit.

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 11. Classified Balance Sheet
The following is a list of accounts:
•Mortgage payable, due in 15 years
•Short-term investments
•Cash
•Prepaid rent
•Patents
•Common stock
•Accounts payable
•Buildings
•Notes payable, due in 6 months
Required
Identify each account as a Current asset, Long-term investment, Fixed
asset, Intangible asset, Other asset, Current liability, Long-term liability,
Contributed capital, or Retained earnings.
• A company reports the following accounts on its classified
balance sheet:
• Additional paid‐in capital
• Land
• Treasury stock
• Income taxes payable
• Long‐term investments
• Accounts receivable
• Bonds payable, due in 10 years
• Copyrights
• Dividends payable
• Notes payable, due in 20 months
• Required
Identify each account as a Current asset, Long‐term
investment, Fixed asset, Intangible asset, Other asset, Current
liability, Long‐term liability, Contributed capital, or Retained
earnings.
Short quiz

• 1. If “AAA Ltd." invests ₹50,000 in purchasing equipment,

how will it affect the accounting equation?
a) Increase assets and equity
b) Decrease cash but increase assets with no change in equity
c) Increase liabilities and decrease cash
d) Increase cash and decrease equity

• 2. Trade Payables has a balance of ₹20,000. This amount

represents which of the following?
a) Money the company owes to suppliers
b) Money the company will receive from customers
c) Prepaid expense by the company
d) Interest earned but not received
Short quiz

• 3. When AAA Ltd. makes an advance payment for rent,

which of the following statements is true?
a) The advance payment is recorded as an expense
immediately
b) The payment is initially recorded as an asset
c) The company's liabilities increase
d) The payment is deducted from retained earnings

• 4. Unearned Revenue received ₹1,00,000 for a service it

has yet to provide. How should this be classified?
a) Asset
b) Equity
c) Liability
d) Expense
Short Quiz

• If AAA Ltd. declares dividends, what happens to the

financial position?
a) Decrease in liabilities and increase in assets
b) Decrease in retained earnings and decrease in assets
c) Increase in liabilities and decrease in assets
d) No impact on the balance sheet

• Goodwill
A. Current Asset
B. Non-Current Asset
C. Expense
D. Equity
Accounting Procedures

• This module describes some of the accounting procedures that

are used in practice.

• Mechanical means that makes it easier to record and

summarize transactions.

• Manual and computer-based systems.

• Basic steps are the same.

Account

•Account is a device used of calculating the net change

of an item

•Record of increases and decreases in an item of

interest

•Example: Cash Account

•The cash account records all cash receipts and

payments.
T account
•A ledger is a collection of accounts.
•A chart of accounts is a complete list of the account
titles used in an organization.
 Debit Credit rules

Debit = Credit
Assets = Liabilities + Equity
Assets=Liabilities+(Capital-Withdrawals+Revenue-Expenses
)
Assets+Withdrawals+Expenses=
Liabilities+Capital+Revenue
Normal balance

Debit Credit
Assets Liabilities
Expenses Equity
Withdrawals Capital
Revenues

Increases – same as normal balance

Decreases – Opposite of normal balance
Rules of debit and credit

•Debit [dr.] and Credit [cr.] denote entry on

left side and right side of an account.
•No value connotations.
Quiz: Debit & Credit Practice

• 1. When a company purchases office supplies for cash,

which of the following is correct?
a) Debit Office Supplies, Credit Cash
b) Credit Office Supplies, Debit Cash
c) Debit Cash, Credit Office Supplies
d) Credit Office Supplies, Credit Cash

• 2. If a business receives a loan from the bank, how should

it be recorded?
a) Debit Cash, Credit Loan Payable
b) Debit Loan Payable, Credit Cash
c) Debit Cash, Debit Loan Payable
d) Credit Cash, Credit Loan Payable
• 3. Paying off an outstanding liability will result in which
journal entry?
a) Debit Accounts Payable, Credit Cash
b) Debit Cash, Credit Accounts Payable
c) Credit Cash, Credit Accounts Payable
d) Debit Accounts Payable, Debit Cash

• 4. If a company issues shares for cash, what is the correct

entry?
a) Debit Share Capital, Credit Cash
b) Debit Cash, Credit Share Capital
c) Debit Cash, Debit Share Capital
d) Credit Cash, Credit Share Capital
• 5. Recording depreciation on machinery will include which
of the following?
a) Debit Depreciation Expense, Credit Accumulated
Depreciation
b) Debit Accumulated Depreciation, Credit Depreciation
Expense
c) Credit Depreciation Expense, Debit Machinery
d) Debit Machinery, Credit Depreciation Expense

• 6. When rent is paid in advance, what happens to the

accounts?
a) Debit Rent Expense, Credit Cash
b) Debit Prepaid Rent, Credit Cash
c) Debit Cash, Credit Prepaid Rent
d) Debit Cash, Credit Rent Expense
• 7. If the business earns revenue but has not yet received
payment, what is the correct entry?
a) Debit Accounts Receivable, Credit Revenue
b) Debit Revenue, Credit Accounts Receivable
c) Debit Cash, Credit Revenue
d) Credit Revenue, Credit Accounts Receivable

• 8. The purchase of equipment on credit will result in:

a) Debit Equipment, Credit Accounts Payable
b) Debit Cash, Credit Equipment
c) Debit Accounts Payable, Credit Equipment
d) Debit Equipment, Credit Cash
• 9. If an owner withdraws cash for personal use, which is
the correct journal entry?
a) Debit Drawings, Credit Cash
b) Debit Cash, Credit Drawings
c) Debit Drawings, Credit Owner’s Equity
d) Debit Owner’s Equity, Credit Drawings

• 10. When a customer pays an outstanding amount, what is

the impact on accounts?
a) Debit Cash, Credit Accounts Receivable
b) Debit Accounts Receivable, Credit Cash
c) Debit Revenue, Credit Accounts Receivable
d) Debit Accounts Receivable, Credit Revenue
Summary of
Accounting Process (Cycle)
1. Analyze transactions.
2. Journalize original entries.
• Record chronologically in journal.
3. Post journal entries to ledger.
• Organize by account.
4. Identify, journalize, and post adjusting
entries.
• Per matching concept.
5. Journalize and post closing entries.
• Close out temporary accounts.
6. Prepare financial statements.

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Journal - Transaction Analysis

•Determine dual effect on accounts.

•Assets = Liabilities + Owners’ Equity.
•dr. (debit) = cr. (credit).
•Advice: Record half of entry that is more
obvious.

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General Ledger

•General ledger contains all accounts.

•Some accounts may be in summary form.
•E.g., accounts receivable, inventory,
fixed assets.
•Detail or subsidiary ledgers kept for
above.

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Trial Balance
•Prepare after original entries are
journalized and then posted to ledger.
•List of all accounts and their ending
balance.
•Assets (debit balance).
•Liabilities (credit balance).
•Owners’ equity (credit balance).
•Revenues (credit balance).
•Expenses (debit balance).

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Journal Entry Practice

Objective: Identify the correct accounts to

be debited and credited for each
transaction.
•Instructions:
•Analyze each transaction carefully.
•Identify whether the account increases
(debit) or decreases (credit).
• Transactions:
(a) Paid telephone bill in cash
(b) Purchased equipment by taking a loan
(c) Owner invested additional cash into the business
(d) Purchased office supplies on credit
(e) Received cash from a customer for services provided
(f) Paid wages to employees
(g) Received an advance payment for future services
(h) Purchased insurance policy for the year in advance
(i) Paid previous month's electricity bill
(j) Sold goods to a customer on credit
(k) Declared and paid dividends to shareholders
(m) Paid interest on an outstanding loan
(a) Telephone Expense / Cash
(b) Equipment / Loan Payable
(c) Cash / Owner’s Capital
(d) Office Supplies / Accounts Payable
(e) Cash / Service Revenue
(f) Wages Expense / Cash
(g) Cash / Unearned Revenue
(h) Prepaid Insurance / Cash
(i) Electricity Expense / Cash
(j) Accounts Receivable / Sales Revenue
(k) Dividends / Cash
(l) Interest Expense / Cash
• Identify Debit and Credit Accounts for the following:
(a) Paid interest on bank loan
(b) Used supplies
(c) Proprietor withdrew cash for personal purposes
(d) Paid for supplies bought on credit last month
(e) Paid rent for the current month
(f) Paid rent for the next month
(g) Issued additional share capital for cash
(h) Paid income tax
(i) Received cash for services to be provided next month
(j) Collected payment for services provided last month
(k) Provided services for cash
(l) Paid a security deposit to the port trust
(m) Paid rent for the proprietor’s home
(a) Paid interest on bank loan – Interest Expense / Cash
(b) Used supplies – Supplies Expense / Supplies
(c) Proprietor withdrew cash for personal purposes – Drawings / Cash
(d) Paid for supplies bought on credit last month – Accounts Payable /
Cash
(e) Paid rent for the current month – Rent Expense / Cash
(f) Paid rent for the next month – Prepaid Rent / Cash
(g) Issued additional share capital for cash – Cash / Share Capital
(h) Paid income tax – Income Tax Expense / Cash
(i) Received cash for services to be provided next month – Cash /
Unearned Revenue
(j) Collected payment for services provided last month – Cash /
Accounts Receivable
(k) Provided services for cash – Cash / Service Revenue
(l) Paid a security deposit to the port trust – Security Deposit / Cash
(m) Paid rent for the proprietor’s home – Drawings / Cash
•On March 1, 20XX, Suresh Nair started SteerSafe Company,
a driving school. The business engaged in several
transactions during the first month.
March 1: Invested cash in share capital – ₹25,000
March 2: Bought a car for cash – ₹15,000
March 4: Bought car supplies for cash – ₹800
March 5: Paid subscription for six months for a magazine – ₹2,400
March 9: Provided services for cash – ₹8,100
March 14: Took a bank loan – ₹1,000
March 15: Paid car insurance premium for the month – ₹100
March 17: Billed customers for services – ₹1,700
March 19: Received advance from a customer – ₹730
March 20: Collected receivables – ₹800
March 25: Used car supplies – ₹390
March 26: Paid petrol bill for the month – ₹1,280
March 28: Bought office supplies on credit – ₹800
March 30: Paid instructor's salary – ₹1,800
March 31: Paid dividend – ₹500
 Task 1: Record Journal Entries
•Use the double-entry bookkeeping system.
•Identify the correct accounts for debit and credit.
Task 2: Post to the Ledger
•Transfer journal entries to their respective ledger
accounts.
Task 3: Prepare Trial Balance
•Ensure total debits equal total credits.
Temporary or Nominal Accounts

• Revenue and expenses increases and decreases retained

earnings respectively.
• Though they can be directly entered in the retained earnings
account , this is not done in practice.
• To avoid cluttering/ intermingling of various items, a temporary
account is maintained for each revenue and expense item that
will appear in the income statement.
• These accounts are closed every year
Permanent or Real Accounts

• The accounts maintained for the various items on the balance

sheet.
• Balances in these accounts are reported in the balance sheet
as of the end of the period.
• The year end balances in the permanent account are carried
forward into the next accounting period as the beginning
balance.