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Journal entries and T- Ledgers

Debit and Credit
Rules
Debit Nature: To Increase – You need to Debit the item
To Decrease – You need to Credit the item
Credit Nature:To Increase – You need to Credit the item (Opposite to the Dr Nature Rule)
To Decrease – You need to Debit the item (Opposite to the Dr Nature Rule)
CREDIT
NATURE
A. L. O. R. E.
DEBIT
NATURE
Assets
Cash Amount of cash available to the entity. Can be in a bank account, or in hand.
Account receivable The amount owed by customers are goods or services are sold on credit.
Inventory The goods held by a retail store for sale to customers.
Supplies Items (pen, paper, stationery) held for internal use. The amount of supplies used is an expense.
Land Land controlled by the entity. Land is not subjected to depreciation.
Buildings Buildings controlled by the entity. Buildings are separately recorded from the land they are situated
on.
Vehicles The motor vehicles controlled by the entity. Vehicles (if more than one held) can either be recorded
separately or combined.
Prepaid expenses The amount of expenses that have been paid in advance (for instance paying for June’s rent in May).
Once the service for which the money has been paid is used, the expense is recognised.
Accumulated depn The total amount of depreciation recorded against a specific asset. Since it reduces the carrying
amount of the asset, it is a contra-asset account. Compare with depreciation expense which is the
depreciation for a single period.
GST Outlays The amount of GST that has been paid by the entity when goods and services were bought. This will
be refunded by the tax office.
Liabilities
Bank overdraft The amount owing to the bank because the business has overdrawn their bank account. This can be
thought as a negative cash balance.
Accounts payable The amount owed to supplier after the goods or services are bought on credit.
Loan payable The amount owed to lenders after money is borrowed. Usually loan payable records the principal
owing whilst interest payable records the interest owing.
Mortgage payable The amount owed to lenders after money is borrowed, secured by a mortgage. Usually mortgage
payable records the principal owing whilst interest payable records the interest owing.
Interest payable The amount of interest still unpaid to creditors.
Unearned revenue The amount of money taken from customers for goods and services which have not yet been provided
to the customer. Only once the goods or services are provided can the revenue be recognised.
GST Collections The amount of GST that has been collected by the entity when goods or services were sold. This
amount will be paid to the tax office.
Accrued expenses The amount owing for expenses which have been incurred but not yet paid. This account is effectively
an expense payable. For ease of understanding, it is best (and required for this unit) to use the actual
account name payable i.e. wages payable, electricity payable, rates payable etc.
Equity
Capital The value of assets contributed to the entity by the owner. Can be any contributed assets – not just
money.
Drawings The value of assets removed from the entity by the owner. Can be any assets – not just money. Since
drawings reduce owner’s equity, it is a contra-equity account.
Retained earnings The amount of profits not yet withdrawn from the business that the owner(s) are entitled to.
Revenues
Sales revenue Money earnt through the provision of goods.
Fees / service
revenue
Money earnt through the provision of services
Discount received The amount of discount that suppliers grant the entity when paying an account, exclusive of GST (to
find this figure, multiply the total discount by 10/11).
Sales returns and
allowance
Represents the amount refunded to customers (either in cash or through the reduction in their debt),
exclusive to GST, when sold items are returned to the entity. As it reduces the sales revenue, it is a
contra-revenue account.
Rent/Interest/
Dividend… rev
Money earnt through the provision of renting a building/ earning interest / earning dividend etc.…
Remember that revenues are usually recognised when goods or services are provided, which may not
necessarily be when the cash is received. Revenues recognise what has been earnt though the money may
not have collected (money still to be collected is recognised as an asset i.e. accounts receivable).
Expenses
Cost of sales The cost of inventory that has been sold to the customers. Also known as cost of goods sold.
Depreciation
expense
The amount of a specified non-current asset’s finite productive capacity that has been used up during
the period.
Discount allowed The amount of discount granted to customers when an account is being paid, exclusive of GST (to
find this figure, multiply the total discount by 10/11).
Remember that expenses are usually recognised when services are used or assets consumed, which may
not necessarily be when the cash is paid. Expenses recognise what has been incurred though the money
may not have paid (money still to be paid is recognised as a liability i.e. payable account).
Each separate category of expenses incurred can be given their own account. Most are self-explanatory (i.e.
supplies expense, advertising expense, wages expense, interest expense etc…)
Module 6
Owner contributes $100,000 to commence a business.
What is the journal entry?
Step 1 – identify the transaction from source documents.
Step 2 – what are the accounts?
• Cash
• Capital
Step 3 – are they increasing or decreasing in value?
• Cash Increasing – the entity has more
• Capital Increasing – the entity has more of a
claim against it.
Step 4 – apply debit/credit rules
• Cash is debit in nature. It is increasing
therefore enter the amount on it’s natural side =
debit cash.
• Capital is credit in nature. It is increasing
therefore enter the amount on it’s natural side =
credit capital.
Journal entri es
and T- Ledgers
Solution Journal Example 1
General Journal p.1
Date Details Debit Credit
20×1
30 June Cash 100,000
Capital 100,000
(Owner contributed cash into the business)
Ledger Accounts: T-Account
Cash 101
Jun 30 Capital 100,000
Capital 301
Jun 30 Cash 100,000
Entity purchases $20,000 of goods on credit.
What is the journal entry?
Step 1 – identify the transaction from source documents
Step 2 – what are the accounts?
• Inventory
• Accounts Payable
Step 3 – are they increasing or decreasing in value?
• Increasing – the business has more
• Increasing – the business owes more
Step 4 – apply debit/credit rules
• Inventory is an asset. Assets are debit in nature.
The account is increasing therefore enter the
amount on the debit side.
• Accounts payable is a liability. Liabilities are credit in
nature. The account is increasing therefore enter the
amount on the credit side.
Journal Exampl e 2
Solution Journal Example 2
General Journal Entry
Date Details Debit Credit
20×1
30 Jun Inventory 20,000
Accounts Payable 20,000
(Purchased goods on credit)
• Sell $15,000 of goods on credit
• Pay telephone expense of $1,000
• Apply the 4 steps: which accounts;
increasing/decreasing; debit or credit?
• What are the journal entries?
Journal Exampl e 3
Solution Journal Example 3
General Journal Entries
Date Details Debit Credit
20×1
30 June Accounts Receivable 15,000
Sales Revenue 15,000 (Sold goods on credit)
30 June Telephone Expense 1,000
Cash 1,000
(Paid telephone expense)
Purchase land for $45,000 cash and $15,000 loan.
Apply the 4 Steps and journalise
Date Details Debit Credit
20×1
30 June Land 60,000
Cash 45,000
Loan 15,000
(Purchased land for cash and on credit)
Journal Exampl e 4
Summary of Journal Entries
Date Particulars Debit Credit
30 Jun Cash 100,000
Capital 100,000
30 Jun Inventory 20,000
Accounts Payable 20,000
30 Jun Accounts Receivable 15,000
Sales Revenue 15,000
30 Jun Telephone expense 1,000
Cash 1,000
30 Jun Land 60,000
Cash 45,000
Loan 15,000
Post from the Journal to the Ledger (TAccount)
Cash
Date Details Amount Date Details Amount
30-Jun Capital $ 100,000.00 30-Jun Telephone Expense $ 1,000.00
30-Jun Land $ 45,000.00
Balance C/D $ 54,000.00
$ 100,000.00 $ 100,000.00
1-Jul Balance B/D $ 54,000.00
Module 7
Goods and Services Tax – GST
GST Inclusive:
GST Amount = Price / 11
GST Exclusive:
GST Amount = Price * 10%
GST Outlay: You are OUTLAYING (paying) GST, and the tax office will therefore
provide you with a refund for the GST paid.
GST OUTLAY – PURCHASE
GST Outlay is therefore an ASSET – DR NATURE
GST Collection: You are COLLECTING (receiving) GST, and you will therefore need to
pass the GST collected to the tax office.
GST COLLECTION – SALE
GST Collection is therefore a LIABILITY – CR NATURE
GST Exempt: Salaries, wages, other employee related expense
Capital contribution and / or drawing
Finance service (loan, interest, bank fee)
Step One: GST Component (if the question says GST
inclusive)
$1,100
GST Collection
$100
(1,100/11)
Revenue
$1,000
Practi ce Questi on
Practice Question
Step Two
The accounts affected:

  1. Accounts Receivable
  2. GST Collection
  3. Fees Revenue account
    Step Three: Accounts increasing or decreasing
    Accounts Receivable (asset):
    • Customers owe more money – Increasing, Debit
    GST Collection (liability):
    • More GST Payable – Increasing, Credit
    Fees Revenue (income):
    • More income earned – Increasing, Credit
    Practice Question
    General Journal Entry
    Date Account Debit Credit
    23 April Accounts Receivable 1,100
    GST Collection 100
    Fees Revenue 1,000
    Recording purchases of
    Inventories in a Perpetual
    Inventory System
    Example (With GST – Inclusive):
    • Purchased 10 chairs for $110 each (GST Inclusive)
    on credit
    May 5 Inventory 1 000
    GST Outlay 100
    Accounts Payable 1 100
    (To record goods purchased on account)
    • A purchase return is the return of goods by the
    customer.
    • The customer will receive a refund in the form of either
    credit or cash.
    • A purchase allowance occurs where the customer
    keeps the goods and a reduction in price is granted.
    Example (With GST – Inclusive):
    • Returned 2 of the chairs purchased on the 5 May,
    since they were damaged. A credit was provided
    by the supplier.
    May 8 Accounts Payable 220 GST
    Outlay 20 Inventory 200
    (To record return of goods previously purchased)
    Purchase Returns
    Recording Sales of Inventory in a Perpetual Inventory System
    Two entries are required:
  4. to record the sale of goods
  5. to record the cost of sales.
    Example:
    • Sold 3 chairs for $220 each (GST Inclusive)
    • Cost of sales was $300 in total ($100 per chair)
    May 5 Cash 660
    GST Collection 60 Sales Revenue 600
    Cost of Sales 300
    Inventory 300
    (To record cash sale and adjust for cost of inventories sold for cash)
    Sales returns and allowances
    Return of goods by a customer.
    Two entries are required:
  6. To record sales return at selling price.
  7. To record return to inventory at cost price.
    Example:
    On May 8, Customer returned 2 of the chairs sold on the 2 June, since they were damaged. A refund was provided.
    Credit of $440 given to the customer
    Initial cost of sales was a total of $200 ($100 per chair).
    May 8 Sales Return and Allowances 400
    GST Collection 40
    Cash 440
    (Recording the sales return and refund provided to customer)
    Inventory 200
    Cost of Sales 200
    (Adjusting the inventory for the sales return)
    Credit Terms & Cash Discounts
    Credit terms:
    • The time period in which account must be paid, eg:
    • n/30 (Payment due within 30 days of invoice date)
    • n/60 (Payment due within 60 days of invoice date)
    Cash discounts:
    • To motivate debtors to pay early, firms can offer cash (or settlement) discounts, eg:
    • 2/10, n/30 (Payment due within 30 days, but if paid within 10 days a 2% discount will be deducted
    from invoice amount).
    • 1/15, n/60 (Payment due within 60 days, but if paid within 15 days a 1% discount will be deducted
    from invoice amount) .
    Credit Terms & Cash Discounts
    Supplier provided you with a discount Disc Received Cr (Revenue)
    You provided your customer with a discount Disc Allowed Dr (Expense)
    2/10 Net 30 Amount due within 30 days, but if you pay (or are paid) within 10 days, you will then receive (give) a discount
    of 2%.
    Ex 1- Purchase with Discount
    1 June Purchased 10 chairs for $110 each (GST Inclusive) on credit, term is 3/15 Net 45.
    Inventory 1,000
    GST Outlay 100
    Accounts Payable 1,100
    (Credit purchase of inventory)
    20 June Paid for the purchase of inventory made on the 1st June
    (Since the payment is being made after the 15 days limit, no discount is received)
    Accounts Payable 1,100
    Cash 1,100
    (Recording the payment made)
    Cash Discount Journal Entry Examples
    However, what if:
    15 June Paid for the purchase of inventory made on the 1st June
    (Since the payment is being made within the 15 days limit, a 3% discount is received)
    Discount received = 1,100 * 3% = $33. However, this amount include a GST amount of $3 (33/11). This is because, initially
    you recorded that the tax office owes you $100 since you made a purchase of $1,100. However, after getting the discount,
    you are no more paying $1,100 for that purchase; you are only paying $1,067 (1,100 * 0.97). Therefore, saying that the tax
    office still owes you $100 will be wrong. As a result of the discount, the tax office will owe you $3 less.
    Total Discount
    $33
    GST Amount Discount Received
    $3 (33/11) $30 (33/11*10)
    Accounts Payable (FULL AMOUNT BEFORE APPLYING THE DISCOUNT) 1,100
    GST Outlay (1,100 * 3% = 33 / 11) 3
    Discount Received (1,100 * 3% = 33 – 3 = 30) 30
    Cash (Amount post-applying the discount) 1,067
    (Recording the payment with discount)
    Ex 2- Sale with Discount
    2 June Sold 3 of the chairs purchased on the 1st for $220 (GST Inc), term is 7/10 Net 30
    Accounts Receivable 660
    GST Collection 60
    Sales Revenue 600
    (Cash sale of Inventory)
    Cost of Sale 300
    Inventory 300
    (Adjusting inventory level to reflect the sale)
    30 June Customer paid for the purchase made on the 2nd June
    (Since the customer made the payment after the 7 days limit, no discount is given)
    Cash 660
    Accounts Receivable 660
    (Recording the payment received)
    Cash Discount Journal Entry Examples
    However, what if:
    8 June Customer paid for the purchase made on the 2nd June
    (Since the payment is being made within the 10 days limit, a 7% discount is allowed)
    Discount allowed = 660 * 7% = $46.2. However, this amount include a GST amount of $4.20 (46.2/11). This is because,
    initially you recorded that you owe the tax office $60 since you made a sale of $66. However, after allowing for the discount,
    you are no more receiving $660 for that sale; you are only receiving $613.80 (660 * 0.93). Therefore, saying that you still owe
    the tax office $60 will be wrong. As a result of the discount given to your customer, you will owe the tax office $4.20 less.
    Total Discount
    $46.20
    GST Amount Discount Allowed
    $4.20 (46.20/11) $42 (46.20/11*10)
    Cash (Amount post-applying the discount) 613.80
    GST Collection (660 * 7% = 46.20 / 11) 4.20
    Discount Allowed (660 * 7% = 46.20 – 4.2 = 42) 42
    Account Receivable (Full amount before applying the disc) 660
    (Recording the payment received and the discount allowed)
    Cash Discount Journal Entry Examples
    Module 8
    Fi ve Categori es Of Adj usti ng Entri es
    Prepaid expenses
    Accrued expenses
    Accrued revenues
    Unearned revenues
    Depreciation
    Prepaid Expense
    a) Paid but not yet incurred
    Dr Prepaid Account
    Cr Cash
    b) Subsequently incurred
    Dr Expense Account
    Cr Prepaid Account
    Accrued Expense
    a) Incurred but not yet paid
    Dr Expense Account
    Cr Payable Account
    b) Subsequently paid
    Dr Payable Account
    Cr Cash
    Depreciation
    Depreciates assets for the period
    Dr Depreciation Expense
    Cr Accumulated Depreciation
    Accrued Revenue
    a) Money earnt but not yet received
    Dr Receivable Account
    Cr Revenue Account
    b) Money subsequently received
    Dr Cash
    Cr Receivable Account
    Unearned Revenue
    a) Money received but not yet earnt
    Dr Cash
    Cr Unearned Revenue Account
    b) Money subsequently earnt
    Dr Unearned Revenue Account
    Cr Revenue Account
    Closing Entries
    CREDIT
    NATURE
    A. L. O. R. E.
    DEBIT
    NATURE
    Balance
    Sheet Items
    Permanent
    Accounts
    Income
    Statement
    Items
    Temporary
    Accounts
    Revenue
    Accounts
    Expense
    Accounts
    Profit and Loss
    Summary
    Account
    Drawings
    Account
    Capital
    (or Retained
    Earnings) Account
    Closes to
    Closes to
    Closes to
    Closes to
    Module 9
    Preparation of Financial Statements
    Income statement
    • Prepared first to determine profit or loss
    • Reflects entity’s performance
    • Statement users find it useful if assets
    Statement of changes in equity
    • Profit (loss) must be added to (subtracted from)
    equity
    • Shows details of movements in equity
    • Equity balance is reported in balance sheet
    Balance Sheet
    • Reflects entity’s financial position
    • Three major categories of accounts
    • Assets
    • Liabilities
    • Equity
    • Statement users find it useful if assets and liabilities
    are further categorised as
    • current (used up/paid off within 12 months)
    • non-current
    CREDIT
    NATURE
    A. L. O. R. E.
    DEBIT
    NATURE
    Balance
    Sheet Items
    Permanent
    Accounts
    Income
    Statement
    Items
    Temporary
    Accounts
    Bob’s Party Hire
    Income Statement
    for the year ended 30 June 2016
    $ $
    INCOME
    Revenues:
    Catering Revenue 75,400
    75,400
    EXPENSES
    Wages expense 54,080
    Electricity expense 3,400
    Depreciation expense catering equipment 15,700
    Insurance expense 1,700
    74,880
    PROFIT 520
    Bob’s Party Hire
    Balance Sheet
    as at 30 June 2016
    $ $
    CURRENT ASSETS
    Cash at Bank 10,664
    Accounts receivable 4,536
    Prepaid insurance 700
    15,900
    NON CURRENT ASSETS
    Catering Equipment 62,800
    Less Accumulated Dep’n – catering equip. (50,900) 11,900
    TOTAL ASSETS 27,800
    CURRENT LIABILITIES
    Accounts payable 14,200
    Wages payable 1,080
    15,280
    TOTAL LIABILITIES 15,280
    NET ASSETS 12,520
    EQUITY
    B. Baker, Beginning Capital 12,000
    Add Profit for year 520
    TOTAL EQUITY 12,520
    NB: In this example movements in equity shown in Balance Sheet Equity section
    Module 10
    Bank Reconciliation
    After identifying all discrepancies (differences between cash
    ledger and bank statement):
  8. Does the difference pertains to a bank statement or
    cash ledger error (i.e. does it affect the bank
    statement or cash ledger)?
  9. Does it need to be added or subtracted?
    Exam – Key Points
    Please refer to Blackboard
    under “Assessment >
    Assessment 3: Final Exam” for
    more information about the final
    exam.

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