Section 2: The Bookkeeping Process (Module 3)

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1 Section 2: The Bookkeeping Process Dermott Crofton 1

2 This Section of the Course Bookkeeping Process Double Entry Bookkeeping Rules of Debits and Credits The T-Account Representing transactions in a T-account 2

3 Bookkeeping The procedure commonly known as bookkeeping is the record keeping phase of accounting. Bookkeeping can also be defined as the process of keeping records of cash received and cash spent, sales and purchases, and other money-related activities in which the business is involved 3

4 The Bookkeeping Process The three steps in the bookkeeping process are: 1. Creating a journal entry to record the transaction 2. Posting the journal entries to the ledgers 3. Preparing financial statements 4

5 Source Documents First step is to the locate the source document: examples include cheques, invoices, deposit slips (records of accounting transactions ) Source documents include date, name of the accounts to debit and credit, the amounts and a description of the transaction 5

6 Recording the transaction The bookkeeper records the transaction in the journal (there are several types) Once the information is recorded in the journal (e.g. cash journal, sales journal, etc.) the information is posted to the ledgers 6

7 Ledgers Two primary types of ledgers: General ledger lists all the accounts in the Chart of Accounts The Subsidiary Ledger lists amounts owing from customers (accounts receivable) or amounts owing to suppliers (accounts payable) note: there are other types of subsidiary ledgers (e.g. payroll) 7

8 Trial Balance Once the information has been posted to the ledgers, the debit or credit balance of each ledger is used to prepare the Trial Balance The Trial Balance lists the debits and credit balances of each account (from each account s ledger) and proves the accounting records are in balance total debits must equal total credits! 8

9 Double Entry Bookkeeping The Double Entry Bookkeeping system requires a transaction to be recorded in two or more different accounts For every transaction recorded, the debits must always equal the credits. See page 3-2 for recap of the rules of debits and credits 9

10 Rules of Debits and Credits 10

11 GST/HST If a company sells a product or service, they will collect the GST/HST. This amount must be submitted to the Receiver General (Federal Government) However, companies often pay the GST/HST when they purchase products or services Companies keep track of how much GST/HST they have paid, and this amount is subtracted from the amount they need to submit These two amounts are tracked in separate accounts 11

12 GST/HST Accounts GST/HST a company pays is recorded in an account called GST Paid on Purchases GST/HST a company collects is recorded in an account called GST Charged on Sales An assumption is made that a company will collect more GST/HST than pay (sales will be larger than purchases). 12

13 GST/HST Instead of having a single account called GST, companies track GST Charged and GST Paid separately. The difference between GST Charged and GST Paid is submitted to the Receiver General (Federal Government) If GST Paid is greater than GST Charged (very unusual), the Receiver General will write the company a cheque for the difference! Module 3 does not make this very clear! 13

14 GST Paid on Purchases (Contra-Liability) GST/HST Paid on Purchases is considered to be a contra-liability account. It is classified as a liability account (although it is more similar to an asset) It is an example of an Unusual Account Just as Accumulated Depreciation isn t really an asset it reduces the book value of an asset. GST Paid on Purchases reduces the amount of a liability (GST Charged on Sales) 14

15 Debits and Credits Debits are on the left side and credits are on the right side Every time a transaction is recorded at least one account is debited and one is credited. Two or more account balances will change each time a transaction is recorded. The Accounting Equation always remains in balance * Assets = Liabilities plus Owner s Equity! 15

16 T-Account The T-Account Form is used to analyze debit and credit entries for each transaction. Debits are recorded in the left column and credits in the right column Every transaction will have AT LEAST two accounts involved (so two separate t-accounts will be affected). 16

17 T-Account and The Ledgers Please note that the t-account is not something that actually exists in the accounting system It is to help the bookkeeper/accountant plan journal entries (next section of the course) The ledgers in the accounting system have many of the same attributes of t-accounts 17

18 Form of the T-account Name of the Account Debit Increase for Assets, Expenses Decrease for Credit Assets, Expenses Decrease for Liabilities, Revenue and Equity Increase for Liabilities, Revenue and Equity 18

19 T-Account for a Cash Purchase: Cash/Bank Credit GST Paid on Purchases Debit Asset or Expense Account Debit 19

20 T-Account for a Credit Sale: Accounts Receivable Debit GST Charged on Sale Credit Sales Credit 20

21 T-Account: Petty Cash Fund To set up the Fund: Petty Cash (an asset) Bank/Cash To Replenish the Fund: Expense Account(s) GST Paid on Purch. Bank/Cash 21

22 Bank Reconciliation What the company has a balance (in the ledgers) for cash in the bank may be different from what the bank actually states is the balance in the bank. The difference is usually the result of timing. 22

23 Bank Reconciliation, ctd. For example, if a company receives a cheque from a supplier on Friday, they will debit Cash/Bank account that day and deposit the cheque in the bank. However, the bank won t recognize the cash until the customer s cheque clears (the amount is transferred from their bank). This process often takes several days. The company and bank will have different amounts for the bank account balance. Neither the bank nor the company are in error. 23

24 Bank Reconciliation, ctd. The process of determining why the bank and company records (balance of cash in the ledgers) are different is called the Bank Reconciliation. Other sources of difference are bank service fees, bank interest, automatic withdrawals and mistakes (by either the bank or the company). The company s bookkeeper must find and explain ALL the reasons that the bank and company s cash balances do not match. 24

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