1. Unit-2 Accounting System Prepared by Dr. Siraj Ahmad College of Business Administration, Al-Kharj AL-Kharj University Kingdom of Saudi Arabia

2. 1.Explain double-entry rules. 2.Identify steps in the accounting cycle. 3.Record transactions in journals, post to ledger accounts, and prepare a trial balance. Learning Objectives

3. Debits and Credits Account An Account shows the effect of transactions on a given asset, liability, equity, revenue, or expense account. Double-entry Double-entry accounting system (two-sided effect). Recording done by debiting at least one account and crediting another. must equal DEBITS must equal CREDITS.

4. Debits and Credits An arrangement that shows the effect of transactions on an account. Debit = “Left” Credit = “Right” Account An Account can be illustrated in a T- Account form.

5. Account Name Debit / Dr. Credit / Cr. Debits and Credits greater than If Debit entries are greater than Credit entries, the account will have a debit balance. SR.10,000SR.3,0 00 SR.15,000 8,000 Balance

6. Debits and Credits greater than If Credit entries are greater than Debit entries, the account will have a credit balance. SR.10,000SR.3,000 SR.1,000 8,000 Balance

7. Normal Balance Credit Normal Balance Debit Debits and Credits Summary

8. Balance Sheet Income Statement Balance Sheet Income Statement = + = - AssetLiabilityEquityRevenueExpense Debit Credit Debits and Credits Summary

9. Basic Accounting Equation Relationship among the assets, liabilities and stockholders’ equity of a business: The equation must be in balance after every transaction. For every Debit there must be a Credit.

10. Double-Entry System Exercise AssetsAssetsLiabilitiesLiabilities Stockholders’ Equity = + 1. Invested SR 32,000 cash and equipment valued at SR 14,000 in the business. + 32,000 + 14,000 + 46,000

11. Double-Entry System Exercise AssetsAssetsLiabilitiesLiabilities Stockholders’ Equity = + 2. Paid office rent of SR 600 for the month. - 600 - 600 (expense)

12. Double-Entry System Exercise AssetsAssetsLiabilitiesLiabilities Stockholders’ Equity = + 3. Received SR 3,200 advance on a management consulting engagement. + 3,200

13. Double-Entry System Exercise AssetsAssetsLiabilitiesLiabilities Stockholders’ Equity = + 4. Received cash of SR 2,300 for services completed for Shuler Co. + 2,300 + 2,300 (revenue)

14. Double-Entry System Exercise AssetsAssetsLiabilitiesLiabilities Stockholders’ Equity = + 5. Purchased a computer for SR 6,100. + 6,100 - 6,100

15. Double-Entry System Exercise AssetsAssetsLiabilitiesLiabilities Stockholders’ Equity = + 6. Paid off liabilities of SR 7,000. - 7,000

16. AssetsAssetsLiabilitiesLiabilities Stockholders’ Equity = + 7. Declared a cash dividend of SR 10,000. + 10,000 - 10,000 Note that the accounting equation equality is maintained after recording each transaction. Double-Entry System Exercise

17. 1. Performing services on account will have the following effects on the components of the basic accounting equation: a.increase assets and decrease owner’s equity. b.increase assets and increase owner’s equity. c.increase assets and increase liabilities. d.increase liabilities and increase owner’s equity. 2. Which of the following statements about an account is true? a.In its simplest form, an account consists of two parts. b.An account is an individual accounting record of increases and decreases in specific asset, liability, and owner’s equity items. c.There are separate accounts for specific assets and liabilities but only one account for owner’s equity items. d.The left side of an account is the credit or decrease side.

18. 3. Debits: a. increase both assets and liabilities. b. decrease both assets and liabilities. c. increase assets and decrease liabilities. d.decrease assets and increase liabilities. 4. A revenue account: a. is increased by debits. b. is decreased by credits. c. has a normal balance of a debit. d. is increased by credits. 5. Accounts that normally have debit balances are: a. assets, expenses, and revenues. b. assets, expenses, and owner’s capital. c. assets, liabilities, and owner’s drawings. d.assets, owner’s drawings, and expenses.

19. Q-6. Classify the following items as investment by owner (I), owner’s drawings (D), revenues (R), or expenses (E). Then indicate whether each item increases or decreases owner’s equity: (1) Rent Expense, (2) Service Revenue, (3)Drawings, (4) Salaries Expense. Solution 1. Rent Expense is an expense (E); it decreases owner’s equity. 2. Service Revenue is revenue (R); it increases owner’s equity. 3. Drawings is owner’s drawings (D); it decreases owner’s equity. 4. Salaries Expense is an expense (E); it decreases owner’s equity. Answers: 1-a 2-b 3- c 4- d 5-d

20. Q-7. Investment By Owner. Mr.Fahad decides to open a computer programming service which he names Soft byte. On September 1, 2008, he invests SR.15,000 cash in the business.. The effect of this transaction on the basic equation is: Solution: Assets Liabilities Owner’s Equity CashFahad Capital SR.15,000 SR.15,000Investment

21. Q-8. Purchase of Equipment for Cash. Soft byte purchases computer equipment for SR.7,000 cash. What is specific effect of this transaction and the cumulative effect of the first two transactions are: Solution: Assets Liabilities Owner’s Equity Cash EquipmentFahad Capital Old BalanceSR.1500SR.15000 SR.7000 New Balance SR.8000 SR.7000 SR.15000..................................... SR.15000

22. Q.9. Purchase of Supplies on Credit: Soft byte purchases for SR.1,600 from Acme Supply Company computer paper and other supplies expected to last several months. Acme agrees to allow Soft byte to pay this bill in October. What will be effect on accounting equation? Solution: Assets Liabilities Owner’s Equity Cash Supplies EquipmentAccount Payable Fahad Capital Old bal. 8000 --7000 ---- 15000 1600 1600 New Bal. SR.8000 SR.1600 SR.7000 SR.1600 SR.15000 SR.16600 SR.16600

23. Q.10. Services Provided for Cash. Soft byte receives SR.1,200 cash from customers for programming services it has provided. What will be new balances in the equation ? Solution: Assets Liabilities Owner’s Equity Cash Supplies EquipmentAccount Payable Fahad Capital Old bal. 8000 16007000 1600 15000 1200 1200 reven New Bal. SR.9200 SR.1600 SR.7000 SR.1600 SR.16200 SR.17800 SR.17800

24. 1. What do you mean by double entry system? 2. State the accounting equation, and define assets, liabilities, and owner’s equity.