HI5001

TOPIC 3
Accounting Systems & Processes
 Introduction
Welcome to Session 3, where the following are
discussed:
• Transactions & Source Documents
• Ledgers
• Types of Accounts
• Rules of Dr/Cr
• General Journal
• Intro to Trial Balance
• GST
 Transactions
Types of transactions
External transactions with outside parties
Internal transactions based on economic events that
do not involve external transactions
Non-transaction events are not usually recorded
because there has been no exchange of goods or
services
 Source Documents
•Provide new financial information that would
trigger an action.
•Provide written evidence of transactions
•Serve to control the entity’s resources
tax invoice
purchase order
cash register tapes
credit card slips
What could some others?
 The Accounting Cycle
Steps in the cycle Accounting records

1. Recognise & record

Source documents
transactions
Start of
new
period
2. Prepare financial
Financial statements
statements
 The Ledger Account
Three basic parts
Title
Place for recording increases
Place for recording decreases

Account Title
Date Explanation Amount Date Explanation Amount

Debit (Dr) side Credit (Cr) side

 The Ledger Account (cont.)
Cash at bank

Date Explanation Amount Date Explanation Amount

2015 2015
2/1 Darren Jones, Capital 35,000 3/1 Vehicle 21,000
20/1 Lawn & Garden revenue 2,200 3/1 Lawn & Garden equipment 9,000
31/1 Accounts Receivable 550 22/1 Employee wages expense 450
31/1 Accounts payable 2,500
31/1 Darren Jones, Drawings 200
Balance c/d 4,600
37,750 37,550
Balance b/d 4,600
 Account Formats
•T-accounts are a convenient way of showing the
effects of transactions on individual accounts
•Running balance accounts are generally used in
practice

•Ledgers record activities that during a period at

the end of the period. So the sum of all accounts
receivable, payables, etc. Why do some then,
have specific dates?
 Account Formats (cont.)

ACCOUNT Cash at bank Account No. 100

Post
Date Explanation Ref. Debit Credit Balance
2014
Jan. 2 D. Jones, Capital 1 35,000 35,000
3 Vehicle 1 21,000
14,000
3 Garden equipment 1 9,000 5,000
20 Garden revenue 1 2,200
7,200
22 Wages expense 1 450
6,750
31 Accounts receivable 1 550 7,300
31 Accounts payable 1 2,500 4,800
31 D. Jones, Drawings 1 200 4,600
 Accounts Commonly Used
•Balance Sheet
• Asset accounts
• Liability accounts
• Equity accounts
•Income Statement
• Income
• Expenses
 Accounts: Balance Sheet
•Asset accounts
Cash at bank
Accounts receivable
Bills receivable
Other receivables or debtors
Prepaid expenses
Land
Buildings
Plant & equipment
 Accounts: Balance Sheet (cont.)
•Liability accounts
Accounts payable
Bills payable
Unearned income
Other current liabilities
GST collections and outlays
Mortgage payable
 Accounts: Balance Sheet (cont.)
•Equity accounts
Four main types of transactions
• Investment of assets by owner
• Withdrawal of assets by owner
• Income derived
• Expenses incurred
Types of accounts
• Capital
• Drawings or withdrawals
 Accounts: Income Statement
•Income
Revenues
• Income which arises from ordinary activities
Gains
• Income which does not arise from ordinary
activities
•Expenses
Cost of services and economic benefits
consumed or lost or liabilities incurred during
the period
 General Ledger
•Collection of all the individual accounts of an
entity
•Organised in the order of appearance on
balance sheet
•Each account has a specific ID number which is
drawn from the Chart of Accounts (refer next
slide)
 Chart of Accounts
•Complete listing of ledger account titles and
ID numbers
•Used as reference point when analysing
transactions
•A good chart will reveal
Nature of the organisation
Nature of activity
Types of income and expenses
 Double-Entry Accounting
•In analysing transactions, must determine
Which assets, liabilities or equity items are
affected
By how much each items must be increased or
decreased
•At least two accounts are affected by each
transaction
 Debit & Credit Rules
Accounts: Balance Sheet

Assets = Liabilities + Equity

Debit to Credit to Debit to Credit to Debit to Credit to
increase decrease decrease increase decrease increase

Normal Normal Normal

balance balance balance

 Debit & Credit Rules (cont.)
Accounts: Income Statement

Income (including revenues) Expenses

Debit to Credit to Debit to Credit to
decrease increase increase decrease

Normal Normal
balance balance
 Debit & Credit Rules (cont.)
All assets accounts = All liability accounts + All equity accounts
Dr Cr Dr Cr Dr Cr

Debit to Credit to Debit to Credit to Debit to Credit to

increase decrease decrease increase decrease increase

Normal Normal Normal

balance balance balance

Expense accounts Income accounts
Dr Cr Dr Cr
Debit to Credit to Debit to Credit to
increase decrease decrease increase
Normal Normal
balance balance
 Normal Account Balances
Increases
Account recorded on Normal balance

Assets Debit Debit

Liabilities Credit Credit
Equity:
Investment in entity Credit Credit
Drawings from entity Debit Debit
Income: Revenues Credit Credit
Expenses Debit Debit

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 DR CR

Assets (BS)
▲ ▼
Expenses (P/L)
▲ ▼

Liabilities (BS)
▼ ▲
Proprietorship
(Equity) (BS)
▼ ▲
Revenue (P/L)
▼ ▲
 In-class Exercise
From the following information, create the
accounts that are necessary (ignore GST):

1/6 David invested $10,000 to set up own business

4/6 paid rent for 6 months $1,800 to RE Estate P/L
5/6 Bought computer for $1,500 (cash)
Bought stock $8,000 from AB P/L, payable in 30 days
14/6 Sold stock for $2,000 (cash), cost $1,200
19/6 Sold sock for 3,500 (credit), cost $1,900
30/6 Paid $3,000 to AB P/L

How many accounts will you need?

 Solution
Capital
Cash at bank
Prepaid rent
Computer (Equipment)
Stock
Accounts payable
Revenue
Accounts receivable
Rent expense

With GST, you would also need GST Payable and GST
Outlay accounts.
 Expanded Accounting Cycle

1. Recognise & record transactions Source documents

2. Journalise transaction General journal

3. Post to ledger accounts General ledger

4. Prepare trial balance of GL Trial balance

5. Prepare financial statements Financial statements

 General Journal
•Recording transactions in a journal
Analyse transaction
• determine ledger accounts affected
• determine effect on each account
At least 2 accounts are always affected
Debits must always equal credits (note: does
not mean equal number of accounts, just the
amount)!
Equality of accounting equation maintained
 General Journal (cont.)
•Posting from journal to ledger
Aim is to classify effects of all transactions on
each individual asset, liability, equity, income
and expense account
In computerised accounting systems, posting
process is carried out automatically by the
computer
Essential initial data entry is accurate
Running balance formats are used for ledger
accounts in computerised systems
 Trial Balance
•Lists all ledger accounts and their balances
•Debits in one column, credits in another
•Can be prepared at any time to test equality
of debits and credits
•Limitations
May balance and still contain errors
 Correcting Errors
•Error detected before posting
Cross out with single line and insert correct
amount. Correcting person should also sign
next to error to show who did the amendment.
•Error detected after posting
Must be corrected with another entry
•Never erase! There must be an auditable
trail that is clear and ensure integrity.
 Introduction to GST
GST rate is 10%
All supplies of goods and services are subject
to GST unless they are non-taxable
Two types of non-taxable supplies
• GST-free supplies
• e.g., basic food, education, health services, exports
• Input-taxed supplies
• e.g., financial services and residential rents
 GST in AUSTRALIA
•If gross revenues < $1 M per annum can
account for GST on either cash or accrual
basis
•If gross revenues > $1M per annum, must use
accruals
•Cash accounting system
• GST collections recorded at time cash is
received for supply of services and goods
• GST outlays recorded when cash is paid
•Accrual accounting system
• Collections/outlays recorded when tax invoice
issued/received or cash is received/paid
(whichever occurs first)
Flow of GST among Entities & ATO
 Accounts for Recording GST
•Must complete Business Activity Statement
(BAS) for each tax period
•Need at least 2 new accounts
• GST Collections account
• GST Outlays account
•Since amount of GST collected usually exceeds
GST paid each tax period,
• GST Collections normally classified as current
liability
• GST Outlays normally classified as current asset
 In-class Exercise
•Who actually pays GST?

•If a manufacturer sells stock to a wholesaler

for $1,000 and the wholesaler sells for $1,500
to a retailer and the retailer sell for $2,200
(assuming that these are excluding GST, How
much does each party pay and what is the
total GST paid?
 Solution
Manufacturer would charge Wholesaler $1,000 plus
10% so $100
Wholesaler would charge retailer $1,500 plus 10% so
$150. But $100 already paid so they pay $50
Retailer would charge $2,200 plus 10% so $220 but
they already paid $150 so only $70 paid.
In total $100+$50+$70 = $220 (the total payable on
the final transaction)
The manufacturer would get GST credits too from
their purchasing, etc.
As such, it is the final end-user who pays GST
 Tutorial
Topic 3
Accounting Systems & Processes

Reading:
Hoggett & Edwards Chapter Three

Questions:
Hoggett & Edwards Chapter 3
Discussion Questions 2 & 10
Exercise 3.8
Problems 3.1, 3.5 & 3.8
Ethical Issue: Health warnings on cigarette packets

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The END