1. Chara Charalambous MBA CDA COLLEGE
Financial Accounting
Lecture 2
Chara Charalambous MBA CDA COLLEGE

2. Chara Charalambous MBA CDA COLLEGE
Learning Objectives
What are accounts and what is the ledger?
Understand the principles of double entry.
Understand the use of journal (book of prime entry)
Be familiar with the recording of different transactions
Balancing off the ledger accounts.
Be familiar with the trial balance
Understand what is the Financial Information System
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3. Chara Charalambous MBA CDA COLLEGE
Accounts and Ledger
ACCOUNT is a table in T- shape which records chronologically the changes caused by the trade transactions that a business proceeds in an item of the assets, liabilities or capital.
All Accounts are kept in a book which is called GENERAL LEDGER (‘T’ accounts).
There is a ledger account for each asset, liability, revenue and expense item. Ledger accounts are pages in the ledger book with a separate page reserved for each one in order to record transactions.
Chara Charalambous MBA CDA COLLEGE

4. The duality concept and double entry bookkeeping
Each account has two sides - the debit (Dr) and credit (Cr) sides.
Dr Name of Account Cr
Date Description € Date Description €
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5. Chara Charalambous MBA CDA COLLEGE
The Account
Basic summary device
Detailed record of all changes that have occurred in a particular asset, liability, or stockholders’ equity
Grouped in three broad categories :
Assets
Liabilities
Stockholders’ Equity
Chara Charalambous MBA CDA COLLEGE

6. The duality concept and double entry bookkeeping
Each transaction that a business realize affects the financial statements in two ways.
These two effects are equal and opposite so as the accounting equation will be always satisfied.
Assets = Liabilities + Capital
Double Entry Rule:
For every debit there is a credit and for every credit there is a debit.
Each transaction will affect at least two accounts:
‘the one will be debited and the other will be credited’
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7. The duality concept and double entry bookkeeping
Whether an entry is to the debit or credit side of an account depends on the type of account and the transaction:
The Asset Accounts are debited when an increases of asset occurs and are credited when a diminish of asset occurs.
The Liability and Capital Accounts are credited when an increase of liability occurs and are debited when a reduce of liability occurs.
Debits are not good or bad Neither are credits
Chara Charalambous MBA CDA COLLEGE

8. The duality concept and double entry bookkeeping
ACCOUNTS
INCREASES
DECREASES
Asset Account
Debited
Credited
Liability Account
Capital Account
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9. Accounting Cycle During Period
Also known as “bookkeeping cycle ”, is the process of recording and processing the accounting events of a company. The series of steps begin when a transaction occurs and end with its inclusion in the financial statements.
The main steps of the accounting cycle are:  
Collecting and analyzing data from transactions and events.
Posting entries to the general ledger.
Adjusting entries appropriately.
Preparing an adjusted trial balance.
Organizing the accounts into the financial statements.
Closing the books.
Preparing a post-closing trial balance to check the accounts. . 
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10. Chara Charalambous MBA CDA COLLEGE
Post-Closing Trial Balance
A post-closing trial balance is a list of permanent accounts and their balances from the ledger after all closing entries have been journalized and posted. It lists the balances for all accounts not closed. These accounts comprise a company’s assets, liabilities and equity, which are identical to those in the balance sheet. The aim is to verify that (1) total debits equal total credits for permanent accounts, and (2) all temporary accounts have zero balances.
Chara Charalambous MBA CDA COLLEGE

11. Chara Charalambous MBA CDA COLLEGE
ACCOUNTING PROCESS AND RECORDS
▲ Accounting records are any listing or book which records the transactions of a business in a logical manner. This is achieved by the use of books of prime entry and the Ledger.
Journals ( Journal is one of the books of prime entry) is a detail diary in which the transactions of each day are recorded. They are used as an initial ‘store’ of information of the business transactions prior to storing the information in the ledger accounts.
Step 1
Step 2
Transactions
journals
Ledger
accounts
Trial Balance
Post Closing
Trial Balance
Make Adjusting
entries
Closing the
Accounts
Financial
statements
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12. The Accounting Process
Transaction Journal General Ledger (T-Accounts) Trial Balance Adjusting entries (adjust for the accruals , prepayments , not-earned revenue and prepaid revenue) Closing and Balancing the Accounts Financial Statements (Income Statement and Balance Sheet) Post Closing Trial Balance
Documents verifying a transaction:
Bank deposit documentation
Invoices
Cheques
Stock certificates
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13. Chara Charalambous MBA CDA COLLEGE
ACCOUNTING RECORDS ▲ The journal is called a book of prime entry meaning the ‘first book’. A Journal is prepared in a specific format as shown in the next slide.
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14. Chara Charalambous MBA CDA COLLEGE

15. Chara Charalambous MBA CDA COLLEGE
Journal
Four parts:
a)Date of transaction
b)Title of account debited with dollar amount
c)Title of account credited with dollar amount
d)Brief explanation of transaction
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16. To sum up: the Journal and the Ledger
Chronological record of transactions
Organized by date
Ledger
The book holding all the accounts and their balances
Organized by account
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17. Other Books of Prime Entry
Book of Prime Entry
Transaction type
Sales Day Book
Credit Sales
Purchases Day Book
Credit Purchases
Sales Returns day Book
Returns of goods sold on credit
Purchases returns day book
Returns of goods bought on credit
Cash Book
All bank transactions
Petty Cash Book
All small cash transactions

18. TRADE TRANSACTIONS 1. Recording Cash Transactions
Cash transactions are those where payment is made or received immediately.
Double Entry in the bank ledger is as follow:
A debit entry is where funds are received.
A credit entry is where funds are paid out.
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19. Chara Charalambous MBA CDA COLLEGE
TRADE TRANSACTIONS 2. Recording Credit Sales and Purchases
Credit sales and purchases are transactions where goods or services change hands immediately, however payment is not made right away but in some time in the future.
Money that a business is owned is recorded in the receivables or Debtor ledger account.
Money that a business owes is recorded in the payables or Creditor ledger account.
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20. TRADE TRANSACTIONS 3. Recording Sales and Purchases Returns
Originally a credit transactions
Originally a cash transactions
Sales Returns (returns inwards)
Dr Sales (Returns)
Cr Receivables/ Debtors
Cr Cash
Purchases Returns
(returns outwards)
Dr Payables/ Creditors
Cr Purchases (Returns)
Dr Cash
It is normal for customers and a business to return unwanted goods to a business or the supplier respectively.
The double entries arising will depend upon whether the returned goods were initially purchased on credit or cash.
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21. TRADE TRANSACTIONS 4. Recording Discounts
Discounts may be given in the case of credit transactions in order to encourage quick payment. For example a cash discount of 3% is offered to any customers who pay within 14 days.
A business may give its customer a discount - known as Discount Allowed.
A business may receive a discount from a supplier – known as Discount Received.
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22. Chara Charalambous MBA CDA COLLEGE
Recording Discounts
Discount Allowed
Dr Discount Allowed (expense) X
Cr Debtors / Receivables X
Discount allowed is treated as all other expenses in Income Statement
Discount Received
Creditors / Payables X
Discount Received (income) X
The income is shown beneath gross profit in the Income
Statement.
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23. Balancing off a statement of financial position ledger account
cash
Capital Purchases 200
Sales Rent
B/ce c/d
B/ce b/d
3.Calculate the difference between the large side and the small side and set the figure in the small side naming it Balance c/d (carried down)
2.Put the larger in the total box on the debit and credit side.
1.Total both sides of the T account and find the larger total. In the example the larger total is in debit side.
4.Carry the balance down diagonally and call it “balance b/f” (brought forward)
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24. Lecturer: Chara Charalambous
ADJUSTMENTS
Accrued expenses
The expenses which have been used up in the current year, but have not yet been paid.
Prepaid expenses
those to be used in the following period but have been paid in advance this period.
added in the total expenses and goes in the Profit and Loss account also goes to Balance sheet in the Current liabilities side and is called Accrued Expenses.
we deduct it from the total expense so in Profit and Loss account goes the expense which is related to this year.Also goes in the Balance Sheet in the side of Current assets named Prepaid expenses.
Lecturer: Chara Charalambous

25. Chara Charalambous MBA CDA COLLEGE
ADJUSTMENTS - INCOME
In this case we mean the income from other sources than the clients for e.g. the bank interest, rents e.t.c)
Accrued income
The income which has been earned in the current period but has not yet been received.
Prepaid income
The income to be earned in the following period but has been received in advance.
We record the whole (paid + unpaid) income in the Profit and Loss Account. also goes in the Balance sheet in the side of current assets and is called accrued income.
we deduct the prepaid income from the total amount of the income which goes in the Profit and Loss account (because is not related to the year)
And also this amount goes to Balance sheet in the side of current liabilities and is called prepaid income.
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26. Lecturer: Chara Charalambous
Classes of Accounts
Personal Accounts: The accounts which represent persons, organizations, claims and liabilities examples are debtors, creditors, loans, prepayments, accruals, drawings, capital.
Real Accounts: The accounts which represent assets examples are cash , bank, stock, fixed assets.
Nominal Accounts: The accounts which represent expenses, losses, incomes, profits examples are purchases, sales, expenses. Also called Temporary Accounts because the are related to one year only and they are closed at the end of the year and next year they will not have balance they start from zero.
Personal Accounts and Real Accounts are Permanent accounts are not closed at the end of the year, they will have balance next year and all these accounts are Balance Sheet Accounts.
Lecturer: Chara Charalambous

27. Chara Charalambous MBA CDA COLLEGE
At the year end, the ledger accounts must be closed off (concerns accounts that closes – temporary accounts) or balanced (concerns accounts that their balance is transferred to next year- permanent accounts) and transfer the balances in the next accounting period.
Balancing the account will result in:
A balance c/f (being the asset / liability at the end of the accounting period).
equals
A balance b/f (being the asset / liability at the start of the next accounting period).
Balance c/d = Balance b/d
Chara Charalambous MBA CDA COLLEGE

28. Chara Charalambous MBA CDA COLLEGE
The following accounts are closing off and they are not transferring a balance to the next accounting period:
1. Expenses accounts and Purchases account
2. Income accounts (e.g. sales, discounts received)
Instead they are transferring the balancing figure on the
smallest side at the Income statement (depending if it goes
to trading a/c or profit & loss a/c)
LEDGER ACCOUNTS THAT ARE TRANSFERING AT THE
INCOME STATEMENT DO NOT HAVE AN OPENING BALANCE
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29. Chara Charalambous MBA CDA COLLEGE
CAPITAL ACCOUNT
At the start of the next accounting period the capital account will have an opening balance, i.e. A balance b/f equal to the amount that is owed to the owner at the start of that period.
This amount is equal to what was owed to the owner at the start of the previous period, plus any capital that the owner introduced in the period, plus any profits earned in the period less any drawings taken out in the period.
Therefore we transfer the balance of the Income Statement -profit or loss- and the balance on the drawings account to the capital account at the end of the period so that it will have the correct opening balance at the start of the next.
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30. Chara Charalambous MBA CDA COLLEGE
Capital Account
Loss for the year x B/ce b/d x
Drawings x Net Profit x
B/ce c/d x Cash injections x
x x
B/ce b/d x
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31. Chart of Accounts: List of all accounts used by a company
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32. Chara Charalambous MBA CDA COLLEGE
Example of Journal: Ned Brown opened a medical practice in San Diego, California. 1 Record the preceding transactions in the journal of Ned Brown, M.D., P.C. Include an explanation.
Jan 1: The business received $29,000 cash and issued common stock.
Jan 2 Purchased medical supplies on account, $14,000.
Jan 2 Paid monthly office rent of $2,600.
Jan 3 Recorded $8,000 revenue for service rendered to patients on account.
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33. Chara Charalambous MBA CDA COLLEGE
Jan 1: The business received $29,000 cash and issued common stock
Cash received indicates cash increases Cash is an Asset; Assets increase
with debits .Issued common stock; indicates equity is increasing Increase
equity with credits
DATE
DESCRIPTION
DEBIT
CREDIT
JAN 1
Cash
29000
Common Stock
Issued stock
Jan. 2: Purchased medical supplies on credit, $14,000.
Medical Supplies, an asset, is increasing .Assets increase with debits. On credit increases accounts payable, a liability Increase liabilities with credits
DATE
DESCRIPTION
DEBIT
CREDIT
JAN 2
Medical supplies
14000
Accounts payable
Purchased supplies on account
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34. Chara Charalambous MBA CDA COLLEGE
Jan. 2: Paid monthly office rent of $2,600 .Paid rent, an expense, expense is increasing .Expenses increase with debits .Paid cash, cash is an asset ,decrease assets with credits
DATE
DESCRIPTION
DEBIT
CREDIT
JAN 2
Rent Expense
2600
Cash
Paid Office Rent
Jan. 3: Recorded $8,000 revenue for service rendered to patients on credit. On credit indicates Accounts receivable increase .Accounts receivable is an Asset, Assets increase with debits .Rendered services, services are revenues, indicates revenues are increasing
Increase revenues with credits
DATE
DESCRIPTION
DEBIT
CREDIT
JAN 3
Accounts receivable
8000
Service Revenue
Performed service on account
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35. Chara Charalambous MBA CDA COLLEGE
Copying amounts from the journal to the ledger
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36. Chara Charalambous MBA CDA COLLEGE
Prepare the Trial Balance
Trial Balance of Ned Brown, M.D., P.C. DR CR
Cash
26400
Accounts receivable
8000
Medical supplies
14000
Accounts payable
Common stock
29000
Service revenue
Rent expense
2600
Total
51000
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37. Chara Charalambous MBA CDA COLLEGE
THE TRIAL BALANCE
Once all ledger accounts have been balanced off a trial balance is prepared.
A trial balance is a list of the “balance b/f” of the ledger accounts according to whether they are on the debit or credit side.
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38. The purpose of a trial balance is:
To check that for every debit entry made, an equal credit entry has been made since the total amount of the two columns must be equal.
As a first step in preparing the financial statements.
Note that a number of adjustments will be made after the
trial balance is extracted. These adjustments do not
therefore appear in the trial balance.
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