Concept

Account - the detailed record of all the changes that have occurred in a particular asset, liability or owners’ equity during a period.

Journal - the chronological record of the transactions.

Ledger - the record holding all the accounts.

Trial balance - the list of all the ledger accounts & their balances.

Asset - the resource

• controlled by an entity as a result of past events
• provide economic benefits to the entity in the future

Liability:

• present obligation
• arising from past events

Owners’ equity: the financial estimate of owners’ claims to the value in a business. Including:

• capital
• drawings
• income
• expenses

Double-entry accounting

Each transaction affects at least two accounts.
Format: T-account
Pattern:

Assets = Liabilities + Owners’ Equity
Debits = Credits

↓ Expansion of the accounting equation

Normal debit balance: Assets, expenses & drawings
Normal credit balance: Liabilities, capital & revenue

Recording transactions

To record transactions in the journal:

1. Identify the transaction from source documents.
2. Specify each account affected by the transaction and classify it by type.
3. Determine whether each account is increased or decreased by the transaction.
4. Enter the transaction in the journal, including a brief explanation.

Example:

• On 1 May 2016, Sheena Bright starts the business titled ' Smart Touch Learning‘ by investing $30,000 cash in the business.

↓ Copying (posting) information from the journal to the ledger

Flow of accounting information:

1. Transaction occurs.
2. Source documents prepared.
3. Transactions analysis takes place.
4. Transactions entered in journal.
5. Amounts posted to ledger.

The trial balance:

• Summarises the ledger by listing all the accounts with their balances
• Total debits = Total credits (if not, there is an error)

To find errors, calculating the difference between total debits & total credits on the trial balance.