Debit and CreditRulesDebit Nature: To Increase – You need to Debit the itemTo Decrease – You need to Credit the itemCredit 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)CREDITNATUREA. L. O. R. E.DEBITNATUREAssetsCash 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 situatedon.Vehicles The motor vehicles controlled by the entity. Vehicles (if more than one held) can either be recordedseparately 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 carryingamount of the asset, it is a contra-asset account. Compare with depreciation expense which is thedepreciation for a single period.GST Outlays The amount of GST that has been paid by the entity when goods and services were bought. This willbe refunded by the tax office.LiabilitiesBank overdraft The amount owing to the bank because the business has overdrawn their bank account. This can bethought 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 principalowing whilst interest payable records the interest owing.Mortgage payable The amount owed to lenders after money is borrowed, secured by a mortgage. Usually mortgagepayable 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 providedto 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. Thisamount 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 effectivelyan expense payable. For ease of understanding, it is best (and required for this unit) to use the actualaccount name payable i.e. wages payable, electricity payable, rates payable etc.EquityCapital The value of assets contributed to the entity by the owner. Can be any contributed assets – not justmoney.Drawings The value of assets removed from the entity by the owner. Can be any assets – not just money. Sincedrawings 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.RevenuesSales revenue Money earnt through the provision of goods.Fees / servicerevenueMoney earnt through the provision of servicesDiscount received The amount of discount that suppliers grant the entity when paying an account, exclusive of GST (tofind this figure, multiply the total discount by 10/11).Sales returns andallowanceRepresents 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 acontra-revenue account.Rent/Interest/Dividend… revMoney 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 notnecessarily be when the cash is received. Revenues recognise what has been earnt though the money maynot have collected (money still to be collected is recognised as an asset i.e. accounts receivable).ExpensesCost of sales The cost of inventory that has been sold to the customers. Also known as cost of goods sold.DepreciationexpenseThe amount of a specified non-current asset’s finite productive capacity that has been used up duringthe period.Discount allowed The amount of discount granted to customers when an account is being paid, exclusive of GST (tofind this figure, multiply the total discount by 10/11).Remember that expenses are usually recognised when services are used or assets consumed, which maynot necessarily be when the cash is paid. Expenses recognise what has been incurred though the moneymay 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 6Owner 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• CapitalStep 3 – are they increasing or decreasing in value?• Cash Increasing – the entity has more• Capital Increasing – the entity has more of aclaim against it.Step 4 – apply debit/credit rules• Cash is debit in nature. It is increasingtherefore enter the amount on it’s natural side =debit cash.• Capital is credit in nature. It is increasingtherefore enter the amount on it’s natural side =credit capital.Journal entri esand T- LedgersSolution Journal Example 1General Journal p.1Date Details Debit Credit20×130 June Cash 100,000Capital 100,000(Owner contributed cash into the business)Ledger Accounts: T-AccountCash 101Jun 30 Capital 100,000Capital 301Jun 30 Cash 100,000Entity purchases $20,000 of goods on credit.What is the journal entry?Step 1 – identify the transaction from source documentsStep 2 – what are the accounts?• Inventory• Accounts PayableStep 3 – are they increasing or decreasing in value?• Increasing – the business has more• Increasing – the business owes moreStep 4 – apply debit/credit rules• Inventory is an asset. Assets are debit in nature.The account is increasing therefore enter theamount on the debit side.• Accounts payable is a liability. Liabilities are credit innature. The account is increasing therefore enter theamount on the credit side.Journal Exampl e 2Solution Journal Example 2General Journal EntryDate Details Debit Credit20×130 Jun Inventory 20,000Accounts 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 3Solution Journal Example 3General Journal EntriesDate Details Debit Credit20×130 June Accounts Receivable 15,000Sales Revenue 15,000 (Sold goods on credit)30 June Telephone Expense 1,000Cash 1,000(Paid telephone expense)Purchase land for $45,000 cash and $15,000 loan.Apply the 4 Steps and journaliseDate Details Debit Credit20×130 June Land 60,000Cash 45,000Loan 15,000(Purchased land for cash and on credit)Journal Exampl e 4Summary of Journal EntriesDate Particulars Debit Credit30 Jun Cash 100,000Capital 100,00030 Jun Inventory 20,000Accounts Payable 20,00030 Jun Accounts Receivable 15,000Sales Revenue 15,00030 Jun Telephone expense 1,000Cash 1,00030 Jun Land 60,000Cash 45,000Loan 15,000Post from the Journal to the Ledger (TAccount)CashDate Details Amount Date Details Amount30-Jun Capital $ 100,000.00 30-Jun Telephone Expense $ 1,000.0030-Jun Land $ 45,000.00Balance C/D $ 54,000.00$ 100,000.00 $ 100,000.001-Jul Balance B/D $ 54,000.00Module 7Goods and Services Tax – GSTGST Inclusive:GST Amount = Price / 11GST Exclusive:GST Amount = Price * 10%GST Outlay: You are OUTLAYING (paying) GST, and the tax office will thereforeprovide you with a refund for the GST paid.GST OUTLAY – PURCHASEGST Outlay is therefore an ASSET – DR NATUREGST Collection: You are COLLECTING (receiving) GST, and you will therefore need topass the GST collected to the tax office.GST COLLECTION – SALEGST Collection is therefore a LIABILITY – CR NATUREGST Exempt: Salaries, wages, other employee related expenseCapital contribution and / or drawingFinance service (loan, interest, bank fee)Step One: GST Component (if the question says GSTinclusive)$1,100GST Collection$100(1,100/11)Revenue$1,000Practi ce Questi onPractice QuestionStep TwoThe accounts affected:
Accounts Receivable
GST Collection
Fees Revenue accountStep Three: Accounts increasing or decreasingAccounts Receivable (asset):• Customers owe more money – Increasing, DebitGST Collection (liability):• More GST Payable – Increasing, CreditFees Revenue (income):• More income earned – Increasing, CreditPractice QuestionGeneral Journal EntryDate Account Debit Credit23 April Accounts Receivable 1,100GST Collection 100Fees Revenue 1,000Recording purchases ofInventories in a PerpetualInventory SystemExample (With GST – Inclusive):• Purchased 10 chairs for $110 each (GST Inclusive)on creditMay 5 Inventory 1 000GST Outlay 100Accounts Payable 1 100(To record goods purchased on account)• A purchase return is the return of goods by thecustomer.• The customer will receive a refund in the form of eithercredit or cash.• A purchase allowance occurs where the customerkeeps 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 providedby the supplier.May 8 Accounts Payable 220 GSTOutlay 20 Inventory 200(To record return of goods previously purchased)Purchase ReturnsRecording Sales of Inventory in a Perpetual Inventory SystemTwo entries are required:
to record the sale of goods
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 660GST Collection 60 Sales Revenue 600Cost of Sales 300Inventory 300(To record cash sale and adjust for cost of inventories sold for cash)Sales returns and allowancesReturn of goods by a customer.Two entries are required:
To record sales return at selling price.
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 customerInitial cost of sales was a total of $200 ($100 per chair).May 8 Sales Return and Allowances 400GST Collection 40Cash 440(Recording the sales return and refund provided to customer)Inventory 200Cost of Sales 200(Adjusting the inventory for the sales return)Credit Terms & Cash DiscountsCredit 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 deductedfrom invoice amount).• 1/15, n/60 (Payment due within 60 days, but if paid within 15 days a 1% discount will be deductedfrom invoice amount) .Credit Terms & Cash DiscountsSupplier 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 discountof 2%.Ex 1- Purchase with Discount1 June Purchased 10 chairs for $110 each (GST Inclusive) on credit, term is 3/15 Net 45.Inventory 1,000GST Outlay 100Accounts 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 1,100Cash 1,100(Recording the payment made)Cash Discount Journal Entry ExamplesHowever, 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, initiallyyou 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 taxoffice still owes you $100 will be wrong. As a result of the discount, the tax office will owe you $3 less.Total Discount$33GST Amount Discount Received$3 (33/11) $30 (33/11*10)Accounts Payable (FULL AMOUNT BEFORE APPLYING THE DISCOUNT) 1,100GST Outlay (1,100 * 3% = 33 / 11) 3Discount Received (1,100 * 3% = 33 – 3 = 30) 30Cash (Amount post-applying the discount) 1,067(Recording the payment with discount)Ex 2- Sale with Discount2 June Sold 3 of the chairs purchased on the 1st for $220 (GST Inc), term is 7/10 Net 30Accounts Receivable 660GST Collection 60Sales Revenue 600(Cash sale of Inventory)Cost of Sale 300Inventory 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 660Accounts Receivable 660(Recording the payment received)Cash Discount Journal Entry ExamplesHowever, 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 owethe 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$46.20GST Amount Discount Allowed$4.20 (46.20/11) $42 (46.20/11*10)Cash (Amount post-applying the discount) 613.80GST Collection (660 * 7% = 46.20 / 11) 4.20Discount Allowed (660 * 7% = 46.20 – 4.2 = 42) 42Account Receivable (Full amount before applying the disc) 660(Recording the payment received and the discount allowed)Cash Discount Journal Entry ExamplesModule 8Fi ve Categori es Of Adj usti ng Entri esPrepaid expensesAccrued expensesAccrued revenuesUnearned revenuesDepreciationPrepaid Expensea) Paid but not yet incurredDr Prepaid AccountCr Cashb) Subsequently incurredDr Expense AccountCr Prepaid AccountAccrued Expensea) Incurred but not yet paidDr Expense AccountCr Payable Accountb) Subsequently paidDr Payable AccountCr CashDepreciationDepreciates assets for the periodDr Depreciation ExpenseCr Accumulated DepreciationAccrued Revenuea) Money earnt but not yet receivedDr Receivable AccountCr Revenue Accountb) Money subsequently receivedDr CashCr Receivable AccountUnearned Revenuea) Money received but not yet earntDr CashCr Unearned Revenue Accountb) Money subsequently earntDr Unearned Revenue AccountCr Revenue AccountClosing EntriesCREDITNATUREA. L. O. R. E.DEBITNATUREBalanceSheet ItemsPermanentAccountsIncomeStatementItemsTemporaryAccountsRevenueAccountsExpenseAccountsProfit and LossSummaryAccountDrawingsAccountCapital(or RetainedEarnings) AccountCloses toCloses toCloses toCloses toModule 9Preparation of Financial StatementsIncome statement• Prepared first to determine profit or loss• Reflects entity’s performance• Statement users find it useful if assetsStatement 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 sheetBalance Sheet• Reflects entity’s financial position• Three major categories of accounts• Assets• Liabilities• Equity• Statement users find it useful if assets and liabilitiesare further categorised as• current (used up/paid off within 12 months)• non-currentCREDITNATUREA. L. O. R. E.DEBITNATUREBalanceSheet ItemsPermanentAccountsIncomeStatementItemsTemporaryAccountsBob’s Party HireIncome Statementfor the year ended 30 June 2016$ $INCOMERevenues:Catering Revenue 75,40075,400EXPENSESWages expense 54,080Electricity expense 3,400Depreciation expense catering equipment 15,700Insurance expense 1,70074,880PROFIT 520Bob’s Party HireBalance Sheetas at 30 June 2016$ $CURRENT ASSETSCash at Bank 10,664Accounts receivable 4,536Prepaid insurance 70015,900NON CURRENT ASSETSCatering Equipment 62,800Less Accumulated Dep’n – catering equip. (50,900) 11,900TOTAL ASSETS 27,800CURRENT LIABILITIESAccounts payable 14,200Wages payable 1,08015,280TOTAL LIABILITIES 15,280NET ASSETS 12,520EQUITYB. Baker, Beginning Capital 12,000Add Profit for year 520TOTAL EQUITY 12,520NB: In this example movements in equity shown in Balance Sheet Equity sectionModule 10Bank ReconciliationAfter identifying all discrepancies (differences between cashledger and bank statement):
Does the difference pertains to a bank statement orcash ledger error (i.e. does it affect the bankstatement or cash ledger)?
Does it need to be added or subtracted?Exam – Key PointsPlease refer to Blackboardunder “Assessment >Assessment 3: Final Exam” formore information about the finalexam.
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