Topic two: Measuring and recording Business Transactions

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 Topic two: measuring and recording transactions2015/10/052

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 Accounts  Describe the various steps in the accounting cycle  Identify books of original entry 2015/10/05 Topic two: measuring and recording transactions3

2015/10/05 Topic two: measuring and recording transactions4 NoTermDefinition 1T 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 4DebitThe left hand side of a T Account 5CreditThe right hand side of a T Account 6Balancing 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. 7PostingRecording 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 Topic two: measuring and recording transactions2015/10/055

Double entry system: T Accounts A T account has a credit and debit side Credit side is the right hand side Debit side is the right hand side see next slide for an illustration Topic two: measuring and recording transactions2015/10/056

Topic two: measuring and recording transactions2015/10/057 Title of the account Period covered Debit Credit ReferenceDateAmountReferenceDateAmount Increase 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. Topic two: measuring and recording transactions2015/10/058

Topic two: measuring and recording transactions9 AccountIncreaseDecrease AssetsDebitCredit CapitalCreditDebit LiabilitiesCreditDebit

Important lesson Accounting equation Liabilities + Capital =Assets Posting of transactions should always leave the equation balanced 2015/10/05 Topic two: measuring and recording transactions10

Balancing off accounts - At the end of the period, T accounts are closed - Please see illustration in the notes Topic two: measuring and recording transactions2015/10/0511

Balancing off accounts (Cont’d) Key lessons; Increase in an expense item debit, decrease credit Increase in a liability account credit, decrease debit Increase in an income credit, decrease debit Increase in an asset account debit, for a decrease credit 2015/10/05 Topic two: measuring and recording transactions12

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 Topic two: measuring and recording transactions2015/10/0513

Accounting cycle (Cont’d) 1. Initiation of a transaction 2. Record the transaction 3. Prepare a trial balance 4. Prepare adjusting entries 5. Prepare an adjusted trial balance 6. Prepare financial statements 7. Prepare closing entries 8. Prepare a post closing trial balance Topic two: measuring and recording transactions2015/10/0514

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 /10/05 Topic two: measuring and recording transactions15

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 2015/10/05 Topic two: measuring and recording transactions16

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 Note 1. 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 2015/10/05 Topic two: measuring and recording transactions17

Books of original entry  Transactions are initiated from these books  Marks the start of the accounting cycle  They include  Cash book  Petty cash  Sales ledger  Purchase books  Purchase returns  journals 2015/10/05 Topic two: measuring and recording transactions18

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 2015/10/05 Topic two: measuring and recording transactions19

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 2015/10/05 Topic two: measuring and recording transactions20

Practice Quiz See notes 2015/10/05 Topic two: measuring and recording transactions21

Questions Topic two: measuring and recording transactions2015/10/0522