Before you begin. Chapter 1: Processing journal systems 1

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1 Contents Contents Before you begin What you will learn What is expected of a Certificate III learner Assessment Employability skills How to work through this unit Resources v v vii vii viii x xi Chapter 1: Processing journal systems 1 The accounting process 2 The general ledger and the chart of accounts 3 The accounting equation 9 The rules of double-entry accounting 10 The journals 21 Posting journals to the general ledger 33 Reconciling subsidiary ledger systems with the general ledger 63 Discussion topics 65 Chapter summary 65 Checklist for Chapter 1 65 Assessment activity 1: Processing journal entries 66 Record your employability skills 74 Chapter 2: Preparing a trial balance 75 The purpose of a trial balance 76 Summary of posting to the general ledger 76 Identifying and correcting trial balance errors 91 Discussion topics 92 Chapter summary 92 Checklist for Chapter 2 92 Assessment activity 2: Preparing a trial balance 93 Record your employability skills 101 Aspire Training & Consulting iii

2 Final assessment: BSBFIA304A Maintain a general ledger 103 Check your progress solutions 117 Employability skills 129 iv Aspire Training & Consulting

3 Check your progress 1 N. Nolan operates a business that has the following accounts. She is thinking of computerising the accounts and has been asked to present the existing accounts in a chart of accounts format. You are required to provide numbers for each account in accordance with the following numbering scheme. Assets Liabilities Owner s equity Revenues Expenses Administration wages Bad debts Buildings Capital N. Nolan Cash at bank Cash on hand Commission revenue Creditors Debtors Discount allowed Discount revenue Dividends revenue Donations Drawings N. Nolan Duty and wharfage Entertainment expenses Equipment Freight and cartage on purchases Freight and cartage on sales Furniture and fittings Goodwill GST payable Insurance Insurance on purchases Interest expense Interest revenue Investments Loan from AGC Ltd Manager s salaries Mortgage loan Office wages Petty cash Postage and stationery Purchases Purchases returns Rates Rent Sales Sales commissions Sales returns Sales vehicles expenses Salespersons wages Stock Telephone expenses Travel expenses Vehicles Check your work with the solution provided at the end of this unit. 8 Aspire Training & Consulting

4 Chapter 1: Processing journal entries The accounting equation The relationship between assets, liabilities and owner s equity is expressed in the following accounting equation. Assets = liabilities + owner s equity (net worth) This equation is the cornerstone of accounting. A business records every transaction in such a way that the equation will always balance. If assets increase, liabilities and/ or owner s equity will increase by an equivalent amount. Alternatively, one asset might increase while another decreases by the same amount, leaving liabilities and owner s equity unchanged. Double-entry accounting ensures that the accounting equation always remains in balance. For example, if a business purchases a new printer for $550 cash including GST, the effect of this transaction is that: the printer has increased the business s assets the business has an input tax credit of $50 (GST paid) to claim from the tax office (an asset has increased) the business has $550 less in its bank account (an asset has decreased). Every transaction has at least a twofold effect on the accounting equation. The accounting equation can be expanded to include the remaining two accounting elements revenues and expenses which are used to calculate profit and loss. The effect of a net profit or a net loss is calculated as follows. Owner s equity = capital drawings + net profit (revenue exceeds expenses) Owner s equity = capital drawings net loss (expenses exceed revenue) Aspire Training & Consulting 9

5 The rules of double-entry accounting The rules of double-entry accounting require amounts to be recorded in the debit and credit columns of an account according to their classifications, that is, assets, liabilities, owner s equity, revenues and expenses. The following table shows the account classifications and the rules to record increases and decreases in these accounts. Asset accounts 1. To increase an asset account, record the amount in the debit column. 2. To decrease an asset account, record the amount in the credit column. Liability accounts 1. To increase a liability account, record the amount in the credit column. 2. To decrease a liability account, record the amount in the debit column. Owner s equity accounts 1. To increase an owner s equity account, record the amount in the credit column. 2. To decrease an owner s equity account, record the amount in the debit column. Revenue accounts 1. To increase a revenue account, record the amount in the credit column. 2. To decrease a revenue account, record the amount in the debit column. Expense accounts 1. To increase an expense account, record the amount in the debit column. 2. To decrease an expense account, record the amount in the credit column. These rules are summarised in the following table. Account classification Increases Decreases Assets Dr Cr Liabilities Cr Dr Owner s equity Cr Dr Revenue Cr Dr Expenses Dr Cr These rules are called the rules of double-entry accounting because when you debit an account with an amount, another account must be credited with the same amount. In this way, the accounts will always balance, and the trial balance prepared after the journals have been posted to the general ledger will balance. Therefore, the resulting financial reports will be accurate. If the accounts are not maintained in this way, the trial balance will not reconcile, the reported profit may be incorrect, and the balance sheet will be wrong. You must learn these rules as they will be applied in the following pages. As you proceed through these materials you should continually reinforce the account classifications and the rules of double-entry accounting explained in this chapter. 10 Aspire Training & Consulting

6 Example Quan Nguyen commences business on 31 January 2008 and contributes the following assets and liabilities. A source document detailing Quan s contribution has been prepared. Cash: $10,000 Dr Computer: $3,500 Dr Furniture and fittings: $1,200 Dr Stock: $5,000 Dr Creditor ABC Supplies: $500 Cr Loan Australasia Bank: $5,000 Cr From the given information the total assets and total liabilities are shown in the following table. Assets $ Liabilities $ Cash Creditor ABC Supplies Stock Loan Australasia Bank Computer Furniture and fittings The assets contributed total $19,700 and the liabilities total $5,500. The difference is $14,200. This amount represents the amount of assets owned by the owner, Quan Nguyen. This amount must be recorded in Quan s capital account as a credit. The assets, liabilities and owner s equities are recorded in the general journal as follows. General journal Date Particulars Folio Debit $ Bank Stock Computer Furniture and fittings Creditor ABC Suppiles Loan Australasia Bank Capital Quan Nguyen Assets and liabilities introduced by owner to commence business (memo dated ) Credit $ Note: The total value of debits equals the total value of credits. However, the monetary columns are not totalled. 24 Aspire Training & Consulting

7 Chapter 1: Processing journal entries Discussion topics Learners in a classroom can form a discussion group or have a debate. Those in the workplace might like to brainstorm these ideas with their colleagues. If you are learning independently, you might like to set up a chat room with other learners or ask a friend for their opinion. I don t understand how you can say that an entry in the credit column of an account will decrease the account balance in an expenses account! Discuss. How can it possibly be right that I have money in my bank account and yet the bank regards me as a liability? Try to explain this to the speaker. Modern Construct Ltd sold a photocopier to its subsidiary company. The sale was recorded in the general journal. Discuss whether this was correct accounting practice. Write down and discuss any other issues that are relevant to you and your team. Chapter summary The general ledger contains the accounts of a business. The accounts in the general ledger are classified as: assets liabilities owner s equity revenues expenses. Journals are posted to the general ledger using double-entry accounting. Double-entry accounting requires amounts to be recorded in the debit and credit columns of an account according to the five classifications. The rules of double-entry accounting demand that when you debit an account with an amount you must credit another account with the same amount. Subsidiary ledger systems must be reconciled with the general ledger. Processing of accounts must be completed according to the time lines of your organisation. Checklist for Chapter 1 Tick the box when you can do the following. Prepare general journal entries from source journals in accordance with accounting requirements, organisational policy, procedures and accounting standards Post journal entries into general ledger system in accordance with organisational policy, procedures and accounting standards Reconcile accounts payable and accounts receivable subsidiary ledger systems with general ledger Ensure processing maintains the accounting equation and is completed within designated time lines Aspire Training & Consulting 65

8 Assessment activity 1 Processing journal entries The following table maps the assessment activity for this chapter against the element and performance criteria of Element 1 in BSBFIA304A Maintain a general ledger. The activity has been designed for all learners to complete. Part Element Performance criteria A B C D E Part A Prepare a table similar to the one below and classify the following as Assets (A), Liabilities (L), Owner s Equity (OE), Revenue (R), Expenses (E). Account Classification Drawings Motor vehicles Electricity Mortgage Office equipment Sales Wages and salaries Loan from Quickloans Pty Ltd Rent received Rates 66 Aspire Training & Consulting

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