Session 2 Ma (9th May 2012)

On November 1,
2005, Chris
Clark begins a
business that will
be known as
NetSolutions.
a. Chris Clark deposits $25,000 in a bank
account in the name of NetSolutions.
Assets = Owner’s Equity

Cash Chris Clark, Capital
= 25,000 Investment
a. 25,000
by Chris
Clark
b. NetSolutions exchanged $20,000 for land.
Assets = Owner’s Equity

Cash + Land Chris Clark, Capital
Bal. 25,000 = 25,000
b. –20,000 +20,000
Bal. 5,000 20,000 25,000
c. During the month, NetSolutions purchased
supplies for $1,350 and agreed to pay the
supplier in the near future (on account).
Owner’s
Assets = Liabilities + Equity
Accounts Chris Clark,
Cash + Supplies + Land Payable Capital
=
Bal. 5,000 20,000 25,000
c. + 1,350 + 1,350
Bal. 5,000 1,350 20,000 1,350 25,000
d. NetSolutions provided services to
customers, earning fees of $7,500 and
received the amount in cash.
Owner’s
Bal. 5,000 1,350 20,000 = 1,350 25,000
d. + 7,500 + 7,500 Fees
earned
Bal. 12,500 1,350 20,000 1,350 32,500
e. NetSolutions paid the following
expenses: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous, $275.
Owner’s
Bal. 12,500 1,350 20,000 1,350 32,500
e. – 3,650 = –2,125 Wages
– 800 Rent
– 450 Util.
– 275 Misc.
Bal.8,850 1,350 20,000 1,350 28,850
f. NetSolutions paid $950 to
creditors during the month.
Owner’s
Bal. 8,850 1,350 20,000 = 1,350 28,850
f. – 950 – 950
Bal. 7,900 1,350 20,000 400 28,850
g. At the end of the month, the cost
of supplies on hand is $550, so
$800 of supplies were used.
Owner’s
Bal. 7,900 1,350 20,000 = 400 28,850
g. – 800 – 800 Supplies
expense
Bal. 7,900 550 20,000 400 28,050
h. At the end of the month, Chris
withdrew $2,000 in cash from the
business for personal use.
Owner’s
Bal. 7,900 550 20,000 = 400 28,050
h. –2,000 –2,000 With-
drawal
Bal. 5,900 550 20,000 400 26,050
Example of the effect of Accounting Equation
Transaction / Scenario Owners’ / Shareholder's
Equity
No. Assets Liabilities
Issue shares for cash or other assets R6 000

1 + R6, 000 + R6, 000
Buying assets by borrowing money (taking
2 a loan from a bank or simply buying on + R10, 000 + R10, 000
credit)
Selling assets for cash to pay off liabilities:
3 both assets and liabilities are reduced - R900 - R900
Buying assets by paying cash: Shareholder's

4 money (R600) and borrowed money (R400) + R1, 000 + R400 + R600
Earning revenues
5 + R700 + R700
Paying expenses (e.g. rent or professional

6
fees) or dividends - R200 - R200
Recording expenses, but not paying them at
7
the moment + R100 - R100
8 Paying a debt that you owe - R500 - R500

Accounting Cycle
Journal Entries In Accounting
A business entity enters into a lot of transactions daily in the course of its
business
e.g. Purchase of raw materials; sale of goods; payments of expenses like
salaries, wages, commissions, fees, rent taxes; receipt of many non operating
incomes like rent; interest on investments; royalty; apprenticeship premium;
commissions etc.
Each transaction influences the profits of the business.In business you have
to take into account all these transactions if you want to find out the results of
the business.
And hence you should record all the transactions properly on regular basis.
This purpose is achieved by the book called JOURNAL.

The word "Journal" means "Daily".
 Thus as is clear from the name itself,
Journal is a book in which you keep a record of all the transactions on a daily
basis.
All rthe transactions are entered into this book in a chronological order i.e. in
the order of time. For example the transaction taking place on 2nd march is
recorded before the transaction which took place on 5th march.
The process of recording the transaction in the Journal or making entry in the
journal is called Journalizing.
Since transactions are first of all recorded in this book,
Journal is also called "The Book Of Original Entry'. Entries in the Journal are
recorded on the basis of source Documents like Cash Memos, Vouchers etc
which serve as an evidence of a transaction. Entries in the Journal are made on
the basis of ' Rules Of Journalizing'.
As in accounting there are some specified formats for all types of accounting
statements or accounts etc ,
Journal also has a format of its own which is given as under.

Explanation of all the columns of Journal
1. Date --------------- Under this column we write the date on which the
transaction occurred.
2. Particulars---------- Under this column some brief explanation of the

accounts to be debited and credited is given.
3. L.F.------------------- L.F. means Ledger Folio. Ledger is book in which

we keep an account under a separate name for all types of accounts.
Folio means page number. So L.F. means the page
number in Ledger on which that particular account exists.
4. Debit Amount----- In this column we record the amount against the

account which has been debited.
5. Credit Amount---- In this column we record the amount against the

account which has been credited.
To record transactions, accounting system uses double-entry accounting.
Double-entry implies that transactions are always recorded using two sides,
debit and credit.
Debit refers to the left-hand side and credit refers to the right-hand side of the
journal entry or account.
The sum of debit side amounts should equal to the sum of credit side
amounts.
A journal entry is called "balanced" when the sum of debit side amounts
equals to the sum of credit side amounts.
All journal entries have two “sides”:
• Debit and Credit
– For every journal entry, the total debits must equal
the total credits
– This ensures that the fundamental accounting equation (A = L
+ OE) is always in balance.
The basic journal entry:

Debit Account name1 $amount
Credit Account name2 $amount
To record…
• The Basic Accounting Elements:
Asset Expense
Owners’
Liability Revenue
Equity
Balance
Sheet/
Balance Income
Sheet Statement Stmt of
Retained
Earnings
Debit Asset Expense
Owners’
Credit Liability Revenue
Equity
• To increase an Asset or Expense: Debit

• To increase a Liability, Revenue, or Owners’ Equity:
Credit
• To decrease an Asset or Expense: Credit
• To decrease a Liability, Revenue, or Owners’ Equity:
Debit
• Going back to the Fundamental Accounting

Equation:
Assets = Liabilities + Owners’ Equity
Debit Credit Credit
• Going back to the Fundamental Accounting Equation:
Assets = Liabilities + Owners’ Equity
Debit Credit Credit

Assets Liabilities Direct investment
Current assets Current liabilities Capital stock
Long-term assets Long-term liabilities Indirect investment
Dividends (debit)
Retained earnings
Revenue (credit)
Expense (debit)
Journal Entries
• Usually one side (the Debit or the Credit) will be
obvious from the transaction (e.g. when cash is
received, cash (an asset) increases. The Debit
has to be to cash).
• It is the determination of the other side of the
entry that requires thought and judgment.
• It is best to reason logically:
1. Which financial statement should be impacted?
• Balance sheet, Income statement, or Stmt of Retained Earnings?
2. Which element on that statement should be impacted?
3. Which specific account should be impacted?
Assets Liabilities Owners’ Equity

Current assets Current liabilities Direct investment
• Cash • Accts payable Capital stock
• Accts Long-term liabilities Indirect investment
receivable • Bank loan Dividends (debit)
Long-term assets Retained earnings
• Building Revenue (credit)
• Land Expense (debit)
Account Element
Accounts
Personal Impersonal
Natural Artificial Representative Real Nominal
Tangible Intangible
Classification of Accounts:-
• Personal Account:- when a transaction involved with a person known as
personal account such as Mr. Roy, Bose& sons ABC Ltd. co. etc.
• Nominal Account:- All recurring expenses/incomes are known as Nominal

Account, such as salary, Rent, Interest etc.
• Real Account:- Other than above two accounts all are fall under this
category, such as Machinery, Furniture etc
Golden Rule of Debit and Credit

· In case of Personal Account - Debit the receiver and Credit the giver.
· In case of Nominal Account- Debit all expenses and losses and Credit all
Income and liabilities.
· In case of Real Accounts - Debit what comes in and credit what goes out
Accounting Journal Entry Examples 01
* Cash payment transactions

1. Purchase of assets in cash
2. Repayment of liabilities in cash
3. Payment of expenses in cash
* Cash receipt transactions

4. Sale of assets in cash
5. Borrowing money
6. Issuance of stock
* Cash payment transactions

1. Purchase of assets in cash
1a. Purchased merchandise and paid $2,000 in cash
1b. Purchased an equipment and paid $15,000 in cash
2. Repayment of liabilities in cash

2a. Repaid $7,000 of bank loans
2b. Paid $3,000 accounts payable
3. Payment of expenses in cash

3a. Paid $3,500 rent expense
3b. Paid $6,000 salaries expense
* Cash receipt transactions

4. Sale of assets in cash
4a. Sold merchandise and received $6,500 in cash
The cost of merchandise sold was 5,100
4b. Sold an equipment and received $8,600 in cash
The book value of the equipment was $8,000
5. Borrowing money
5a. Borrowed $9,000 in cash
5b. Issued a promissory note and received $11,000 in cash
6. Issuance of stock
6a. Issued 500 shares of common stock, at $50 per share
6b. Issued 200 shares of preferred stock, at $80 per share
Presented by:
BHAVYA TANEJA
Corporate Professional, Freelancer Business

Educationist, Trainer & Consultant

Session 2 Ma (9th May 2012)

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Session 2 Ma (9th May 2012)

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On November 1,

Assets = Owner’s Equity

Assets = Owner’s Equity

Issue shares for cash or other assets R6 000

Buying assets by paying cash: Shareholder's

Paying expenses (e.g. rent or professional

8 Paying a debt that you owe - R500 - R500

This purpose is achieved by the book called JOURNAL.

Since transactions are first of all recorded in this book,

Journal also has a format of its own which is given as under.

2. Particulars---------- Under this column some brief explanation of the

3. L.F.------------------- L.F. means Ledger Folio. Ledger is book in which

4. Debit Amount----- In this column we record the amount against the

5. Credit Amount---- In this column we record the amount against the

The basic journal entry:

Debit Asset Expense

• To increase an Asset or Expense: Debit

• Going back to the Fundamental Accounting

• Going back to the Fundamental Accounting Equation:

Assets = Liabilities + Owners’ Equity

Debit Credit Credit

Assets Liabilities Owners’ Equity

• Nominal Account:- All recurring expenses/incomes are known as Nominal

Golden Rule of Debit and Credit

Accounting Journal Entry Examples 01

* Cash payment transactions

* Cash receipt transactions

* Cash payment transactions

2. Repayment of liabilities in cash

3. Payment of expenses in cash

* Cash receipt transactions

Corporate Professional, Freelancer Business

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