WEEK 2 & 3: THE ACCOUNTING EQUATIONS AND JOURNAL ENTRIES

Accounts payable

Short-term liabilities,

Or amounts owing to suppliers.

Sometimes known as creditors or trade payables.

Accounts receivable

Amounts owing by customers.

Sometimes known as debtors or trade receivables.

Accrual convention

Income and expenses are brought to account in the period in which they are incurred, regardless of when the related cash transactions take place.

Books of account

Books used to record financial transactions.

Chart of accounts

A list of ledger account numbers.

Journal

The primary book of account where financial transactions are first entered.

Ledger

The secondary book of account where entries are posted from the journal.

Income

Increases in economic benefits during the accounting period in the form of:

• Inflows or enhancements of assets, OR
• Decreases of liabilities

Resulting in increases in equity other than contributions from owners.

Expenses

Decreases in economic benefits during the accounting period in the form of:

• Outflows or depletions of assets
• Utilisation

Resulting in decreases in equity other than distributions to owners.

Double Entry Principle

Every transaction has:

• A debit aspect
• A credit aspect

Debit amount must equal credit amount.

Journal

Shows:

• Debit amount
• Credit amount
• Narration describing the transaction

Debit and credit amounts must be equal.

FORMAT : Date | Details | Debit | Credit

The Ledger (T-Accounts)

• Separate accounts for each asset, liability, income, expense and capital.

Structure of Ledger

T-shape:

Left side = Debit
Right side = Credit

Fundamental Rule

Every financial transaction must conform to the accounting equation.

Every transaction has:

• Debit aspect
• Credit aspect
• Equal amounts

Entries from journal are transferred to

Ledger accounts.

Accounting equation then

subsidiary journals

Subsidiary journal then

General ledger

general ledger then

post adjustment trial balance

post adjustment trial balance then

Close all income and expense accounts to-

▪ Trading account

▪ Profit and loss account

Close all income and expense accounts to-

▪ Trading account

▪ Profit and loss account then

post closing trial balance

post closing trial balance then

Statement of comprehensive income

Statement of

comprehensive

income then

Statement of

Financial Position

Statement of

Financial Position then

Statement of

changes in Owner’s

equity

Statement of

changes in Owner’s

equity then

Cash flow statement