BSBFIA304MAINTAIN A FINANCIAL LEDGERPRESENTATION 1

PRESENTATION OBJECTIVES

At the end of this presentation you will be able to:

• Prepare general journal entries

• Post journal entries into the general ledger

• Reconcile accounts payable and receivable with general ledger

• Maintain accounting equation and standards

MAINTAINING DAILY RECORDS

The processes of maintaining daily financial records starts with an

organisation’s financial transactions.

Transactions are recorded into source documents, then summarised

into journals.

Journals are then posted to the general ledger, and subsidiary ledgers

- accounts payable and accounts receivable ledger.

Whether you decide to manage your own financial records, or obtain

the services of a professional bookkeeper or accountant, it is

beneficial to have a general knowledge of basic bookkeeping so you

understand where the information comes from and how best you can

use this information.

BOOKKEEPING BASICS TO STARTDouble entry bookkeeping

• Means to record each transaction twice

• The first entry records what comes into the business (a debit), the second entry

records what goes out of the business (a credit)

• Every debit must have a credit of the same value

• Debits display on the left of the line for the transaction and credits on the right

• Each transaction reflects the basic accounting equation:

Assets = liabilities + capital

If each entry is recorded accurately the ‘books of account’ will balance, think of

your books looking like this, one side has to equal the other.Debit Credit

What comes into the business What goes out of the business

Example: Stock (inventory) Example: Account payable (owe money to supplier to pay for stock)

DEBIT AND CREDITTransactions affect two accounts - total debit amounts must equal total

credit amounts. They are one of the most important tools in an accounting

system.

In accounting, debits are balanced by credits, which operate in the

opposite way. When a debit is made to one account, a corresponding

credit must occur on an opposing account.

What’s the difference between credit and debit?

A credit is an accounting entry that either increases a liability or equity account, or decreases an asset or expense account. It is positioned to the right in an accounting entry. The reverse of a credit is a debit.

A debit is an accounting entry that either increases an asset or expense account, or decreases a liability or equity account. It is positioned to the left in an accounting entry. The reverse of a debit is a credit.

DEBIT AND CREDITWhat’s the difference between credit and debit?

Example if you were to record $100.00 for expenses, what would your transaction look like?

An expense increasing means to post this $100 as a debit.

If you were to deposit $100 into your bank account what would it look like?

Bank account is an asset – to increase an asset you need to record a debit, add the $100 to

your bank account total.

These rules help you make decisions as to the effect on each account:

Asset accountsTo increase an asset account, record amount in debit column

To decrease an asset account, record amount in credit column

Liability accounts

To increase a liability account, record amount in credit column

To decrease a liability account, record amount in debit column

Owner’s equity accounts

To increase an equity account, record amount in credit column

To decrease an equity account, record amount in debit column

Revenue accounts

To increase a revenue account, record amount in credit column

To decrease a revenue account, record amount in debit column

Expense accounts

To increase an expense account, record amount in debit column

To decrease an expense account, record amount in credit column

BOOKKEEPING BASICSChart of accounts

• This is a foundation of the double entry bookkeeping system

• Lists all accounts found in the general ledger, it is used to code each

transaction

• The chart of accounts consists of accounts for assets, liabilities, owners’

equity, income and expenses

• Needs to be appropriate to your business

• You will be responsible to work from the chart of accounts allocating

transactions to their relevant accounts

• The chart of accounts is normally broken into accounting groups and

subgroups for reporting and depends on the type of business you operate

and the needs of that business

• See your eBook for an example

BOOKKEEPING BASICSDaily recording involves working with:

• Income and expenses incurred through the operation of the business

• Dealing with debtors and creditors of the business

The customer/supplier relationship is often referred to as the debtor/creditor

relationship within accounting. Monitoring debtors and creditors systems is an

important part of daily financial management process - managing the flow of

money into the organisation with payments from debtors and payments to

creditors.

Debtors

Customers

Accounts

receivable

Money owed to us

Creditors

Suppliers

Accounts

Payable

Money we owe

BOOKKEEPING BASICS

Cash accounting•Usually for smaller less complicated businesses that often handle cash payments eg: hairdresser•Tracks the actual money coming in and out of your business•Doesn't capture money owed by you or to you•When you send an invoice to a customer, don't record the sale in your books until you receive the money from the customer•Eg: if you send an invoice on Tuesday, and don't receive the payment in your account until Thursday, record the income on Thursday's date•Records involve income and expenses, any wage records

Accrual accounting

•More complicated and better suited for businesses that charge by invoice and don't get paid immediately eg: builders

•The performance and position of a company can be measured by recognising economic events regardless of when cash transactions occur

•Record expenses and sales when they take place, instead of when cash changes hands

•Eg: if you're a builder and send an invoice for a project completed, record the sale in your books even though you haven't received payment yet

•Captures money owed by you or to you so provides an true picture of your financial position

•Records required involve all source documents, journals and ledgers

Accounting for your businessThere are two main methods for accounting for your business. The main choice depends on the size of your business and how complicated your business is.

GOODS AND SERVICES TAX GST• The government requires organisations to charge GST on the goods and services they sell at

a rate of 10% of the value of the transaction.

• Some goods and services are GST-free - you can find out more specific information on the

Australian Taxation Office website www.ato.gov.au

• When an organisation charges GST it must set this GST amount aside and remit it to the

Australian Tax Office (ATO) at the end of a reporting period

• Businesses registered for GST are required to complete a Business Activity Statement (BAS).

The BAS is a summary of the GST paid, the GST collected on your sales and any PAYG

withholding tax owing

• Depending on your business you need to complete a BAS monthly or quarterly and make the

appropriate payment or request the refund as determined by your figures.

• There are two kinds of GST for a business to be concerned with:Amounts the ATO owes you – this is the amount of GST that you pay when you purchase goods and services - input

tax credit or GST receivable, or GST on

purchases

Amounts that you owe the ATO – this is the

amount of GST that you charge (or collect) on the

sale of goods and services

JOURNALS

Cash payments journal

CPJ

Cash receipts journal

CRJ

Sales journalSJ

Purchases journal

PJ

General journalGJ

Daily recording involves working with journals and ledgers. Throughout this

unit we will work on a colour coded system to help you understand how this

works.

• All the journals listed above have coloured templates in your eBook

• Each journal will deal with transactions and debtors and creditors of the

business

.

MAINTAIN DAILY FINANCIAL RECORDS

• Accounting and financial management activities in an organisation

are mainly based around these areas:

• Financial record keeping is accomplished through tracking financial

events (transactions – eg. expenses and income)

• Your organisation will use a system that suits their size and needs

• Managing daily financial transactions can be done by using

software or manual bookkeeping. Whichever system your business

uses, the following steps make up the flow of information:

Transaction

s – invoic

es

Journals

Accounts

Ledgers

Financial reports

MAINTAIN DAILY FINANCIAL RECORDS

The early stages of daily financial record keeping involves monitoring

the flow of money in and out.

Daily recording involves working with:

• Income and expenses incurred through the business

• Debtors and creditors of the business

• Main purpose of recording transactions into the journal and ledger

system is to identify the overall current financial accounts of the

business

The customer/supplier relationship is often referred to as the

debtor/creditor relationship within accounting and involves managing

the flow of money into the organisation with payments from debtors

and payments to creditors.

ORGANISATIONAL REQUIREMENTSEach organisation has strict guidelines and requirements for

maintaining financial records.

Example

You may be required to perform certain activities within a certain time:

• Banking

• Reconciliations

• Posting transactions to the general ledger

• Performing trial balance

Why is this important?

Possibility for errors is minimised High standards of accountability

ORGANISATIONAL AND LEGISLATIVE REQUIREMENTS

The organisation you work for will have specific requirements for their operation.

Standards are set down for business activities and legislated by various government

regulations.

Example

The (ATO) requires compliance with taxation legislation i.e. paying GST on time and

completing the Business Activity Statement (BAS) by the due date.

They may involve these guidelines:Timelines

•Work with any set timeframes in your organisation

Reconciling journals

•How does your business work with reconciliation?•How often are you required to perform a reconciliation? •What can you do if there is a problem?

Legal and organisational requirements

•Understand and comply with all legal requirements •Consider:•Ethical principles•Codes of practice•Anti-discrimination

•Your organisation will have policies around the areas of financial management

WHS requirements

•You must comply with safe working procedures at all time•Any reasonable request must be adhered to •Contribute to safe work for self and others

Security

•Work to all security procedures:•Cash handling•Privacy and confidentiality•Back up systems

GENERAL JOURNAL

Business entries Correction of posting errors

Interest expense Interest receivable

The general journal is an important part of the journal keeping system for a business. It is a place to

record transactions which do not fit into specialised journals (cash and credit journals).

Double entry rules apply:

• Assets increase = debit

• Liability decrease = credit

• Debit entries always appear on the right, (credit entries can be indented)

• The more information you can include in your work the less likely there is to be a

misunderstanding of the entry, narrations are always important to include

• Journal entries are ‘ruled off’ to indicate the transaction is in balance and ready for another entry

They can include the following transactions:

MAINTAIN GENERAL LEDGERS

Chart of accountsA list containing all general ledger accounts for the business. An account fits into categories with a number and a description.

General journalsHouse other accounts that don’t have their own journal, eg: asset sales, depreciation. A location for entry of transactions that don’t occur with enough frequency to require their own journal.

General ledger Houses company accounts. Contains a summary of journals for every transaction.

InvoicesGenerated by a business to charge for a goods sent or services provided. Source document with a statement of the sum due for these. Also known as a bill.

JournalsBooks of where accounting entries are recorded in date order. There may be several journals: sales, purchases, cash receipts etc.

Trial balance The already summarised information in the general ledger is further combined to create the Trial Balance.

Look at a few definitions before starting this section:

• The financial transactions throughout the life of an organisation are collected within one complete record known as the general ledger

• Originally journals were made up of pages ruled to represent movement in and out of accounts

• The number of accounts needed depends on the business• A chart of accounts includes all defined accounts in a list

WHAT IS A GENERAL LEDGER?

Thought of as a master set of accounts that summarise all

transactions. A general ledger is where your organisation’s financial

statements will be built from.

It provides a:

• Complete record of the transactions over an organisation’s lifetime

• Summary of monthly posting from the journals

• Provides a final balance for each accountGeneral ledger is created from

Cash payments

journal

Cash receipts journal

Purchases journal

Sales journal

General journal

POST JOURNAL ENTRIES INTO GENERAL LEDGER

• Separate accounts are kept for every asset, liability, equity, income and

expense account in the business

• Each of these accounts combines to create the general ledger for the

business

• Posting means to allocate the transaction to the relevant account

The following journals are to be entered into the general ledger :Sales journal SJ Records sales we have made on credit

Sales returns journal

SRJ Records sales we have made on credit but which were subsequently returned by our customers

Purchases journal

PJ Records purchases we have made on credit

Purchases returns journal

PRJ Records purchases we have made on credit but which were subsequently returned to our suppliers

Cash receipts journal

CRJ Records money received (through cash register, receipts)

Cash payments journal

CPJ Records money paid out (purchases receipts, cheque stubs or direct debit records)

GENERAL LEDGER ACCOUNTSCommon general ledger accounts include:

Income #4•Sales•Revenues•Sales discounts* (a reduction in sales)•Investment income•Commission

Expenses #6

•Payments made by the organisation to keep operating•Purchases•Bank charges•Insurance•Advertising

Balance sheet accounts

Income statement accounts

*Discounts are another area that requires careful entry and may be handled in a particular way

in your organisation. Early payment discounts can occur as can discounts on items of stock.

Make sure you understand how these need to be entered before you begin.

Assets #1

• Items of value owned and used by the organisation to generate income

• Bank accounts Petty cash• Office supplies• Investments• Buildings/land

Liabilities #2

• Amounts owed by the organisation to external stakeholders; or debts to be paid in the future

• Accounts payable• Accrued wages• Unearned revenue• Accrued income taxes

Capital accounts #3

• Amounts the owner(s) has in the organisation

• Owner’s equity• Common stock• Preferred stock• Retained earnings

TRANSACTIONS Posting is a bookkeeping function which involves the procedure of transferring journal

entry amounts into ledger accounts.

It is necessary to provide an accurate and complete set of figures for the business.

This includes all transactions for the period, they need to be:

• Correctly allocated to debit and credit with account numbers attached to match

the chart of accounts for your business (see your eBook for an example chart of

accounts)

• This is the relationship between journals and ledgers of a business

POSTING TRANSACTIONS

• There are examples in your eBook outlining the steps in posting

transactions

• You need to make the following decisions then enter the details

into the journal templates

• Then transfer these figures to the ledger templates Which journ

al does the

transaction affect

?

Which account will

we allocate the transaction

to?

Is it an asset, liabilit

y, equity, revenu

e or expen

se accou

nt

Is it a

debit or credit?

ANALYSIS CHART

Transactions an example

30/1 phone bill $150.00 paid from the bank account direct debit invoice # T1789

30/1 Payment received cash from customer cash sales $350.00

An analysis chart is another step in the process which can help you determine the effect of each transaction.

It is good practice to use a form like this to help you understand the process.

Looking at these two transactions the effect will be as follows

Date Transaction details  What happens to the transaction? Account # from chart of accounts

30/1 Phone bill paid $150Increase telephone expense (DR) 6-1200Increase bank account (CR) 1-1000

30/1Payment received from customer cash sales

Increase bank account (DR) 1-1000Increase sales account (CR) 4-1000

RECONCILE ACCOUNTS WITH GENERAL LEDGER

Before the trial balance is prepared it is necessary to reconcile all

accounts

• The bank accounts from financial institutions

• The accounts payable and accounts receivable ledgers

Preparing reconciliation statements provide evidence that the total of

all the accounts in the organisation match general ledger.

• A subsidiary ledger exists for the AP and AR and contains records

on account details

• Having this information accessible and up-to-date allows

organisations to keep track of creditors and debtors and the

overall organisational cash flow

RECONCILE AP AND AR WITH GENERAL LEDGER

AP ledger - Also known as the creditor’s ledger, has information regarding each creditor the

organisation owes money to

• Maintaining this ledger makes sure suppliers are paid accurately and on time

• Use the purchase, purchase returns and allowances and cash payments journals

• Like the accounts receivable ledger, once transactions affecting creditors have been

posted and totalled, the balance needs to be reconciled with the balance in the creditor’s

control account in the general ledger, then we can be confident what we are paying

AR ledger - Also known as the debtor’s ledger, it contains an account for each debtor and

every transaction that takes place on a daily basis

• Shows which debtor owes money, amount and how regularly they are paying their

account

• This ledger is updated by using information contained in the sale journal, sales return and

allowances journal and cash receipts journal

• After transactions have been posted in this ledger the total of all the balances should be

reconciled with the balance of the debtors’ control account in the general ledger

• Accounts need to be reconciled before we can demand money from our customers, how

do we know if our records are right?

RECONCILE AP AND AR

As a rule of thumb

use this check list

to help you with

your

reconciliation.

If any of the

answers are

incorrect, make

the changes and

check again.

Accounts payable Check Accounts receivable Check Are all entries correctly entered? Are all entries correctly

entered?

Are all invoices correct from your supplier, have they been checked?

Are all invoices to your customers correct, have they been checked by an independent person?

Are all invoices entered correctly into the purchases journal?

Are all invoices entered correctly into the sales journal?

Is GST correctly recorded? Is GST correctly recorded? Have all credit notes or returns been entered properly?

Have all credit notes or returns been entered properly?

Have all payments been applied to the suppliers account properly?

Have all payments been applied to the customer’s account properly?

Does the statement from the supplier match your transactions, credit and payments?

Is your statement accurate and match your transactions, credit and payments?

Does the ending balance in the general ledger match the aged summary report?

Does the ending balance in the general ledger match the aged summary report?

MAINTAIN ACCOUNTING EQUATION AND STANDARDS

The accounting equation forms the basis for recording accounting

transactions and reporting the organisations financial results and is

known as the relationship between assets, liabilities and owner’s

equity:

Assets = Liabilities + Owner’s Equity

Bookkeepers record transactions making sure the equation always

balances:

Debit DR   Credit CRASSETS = LIABILITIES + OWNER EQUITYCash

Accounts receivable

Product (stock)

$3000

$824

$3824

  Accounts payable

Capital

$2680

$4788

Total $7648   Total $7648

MAINTAIN ACCOUNTING EQUATION AND STANDARDS

• These rules show when one account is debited by a certain amount,

another account must be credited by the same amount

• Maintaining accounts using this process will lead to a balanced

general ledger and accurate financial reports

• When an amount is recorded in either the debit or credit column it will

have an effect of increasing or decreasing the balance of the account

As a reminder these rules are critical refer to them as you need:

PRESENTATION OBJECTIVES

Now that you have completed this presentation, you will be able to:

• Prepare general journal entries

• Post journal entries into the general ledger

• Reconcile accounts payable and receivable with general ledger

• Maintain accounting equation and standards