Manual Accounting Basics

Manual Accounting Basics

BSBFIA401 Learner Guide Version No. 1.4

Page 2 Australian College of Business and Accounting

Table of contents

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TABLE OF CONTENTS ........................................................................................................ 2

1. WHAT IS ACCOUNTING? ............................................................................................... 3

1.1 Accounting Standards ............................................................................................. 3 1.2 Accounting Systems ............................................................................................... 4

2. ACCOUNTING ELEMENTS, EQUATION AND RULES .......................................................... 7

2.1 Basic Accounting Equations .................................................................................. 12 2.2 The Extended Accounting Equation ...................................................................... 13 2.3 A Note about Debtors and Creditors ..................................................................... 15

3. TRANSACTION ANALYSIS ............................................................................................ 17

4. GOODS & SERVICES TAX (GST) ................................................................................. 24

5. ACCOUNTING PROCESSES .......................................................................................... 29

5.1 The Accounting Cycle ........................................................................................... 29 5.2 Source Documents ............................................................................................... 29 5.3 Journals ................................................................................................................ 30 5.4 Ledgers ................................................................................................................. 42

6. TRIAL BALANCE .................................................................................................... 58

6.1 Preparing Trial Balance ........................................................................................ 58 6.2 Correcting Errors in Trial Balance ......................................................................... 59

7. GLOSSARY OF ACCOUNTING TERMS ........................................................................... 62



1. What is Accounting?

Accounting is the process of recording and calculating financial transactions for a business,

including analysing, summarizing, clarifying, noting, and storing for reporting and

interpretation purposes.

Accounting presents the profit and loss of a business considering the value of assets,

liabilities, owner’s equity, revenue, and expenses – this will be explained in further detail in

the coming sections.

Modified from: Business Dictionary, “Accounting”, http://www.businessdictionary.com/definition/accounting.html

Accessed on 1/10/2010.

Some of the principle objectives (functions) of accounting include:

• Providing information to decision makers and stakeholders

• Ensuring financial records are accurate

• Assisting in evaluating the performance of a business

1.1 Accounting standards

For the Australian economy, the Australian Accounting Standards Board (AASB) is the

governing body determining and enforcing the standards applicable for financial reporting in

both the public and private, and the for-profit and not-for-profit sectors.

More information on the AASB can be found on their website at the following web address:

https://www.aasb.gov.au/. The AASB is governed by Australia’s corporate regulator, the

Australian Securities and Investments Commission (ASIC), and must comply with the

legislation outlined in the Australian Securities and Investments Commission Act 2001.

Further information on the Act can be searched for on the website of the Federal Register of

Legislation at this address: https://www.legislation.gov.au/.

The AASB uses the Conceptual Framework for Financial Reporting (also known as the

Conceptual Framework) to provide guidance on the concepts and purpose of financial

reporting. The Conceptual Framework has tabled the elements of financial reports whereby

more information can be sourced from the AASB website at the following address:

https://www.aasb.gov.au/Pronouncements/Conceptual-framework.aspx.

From the frameworks and guiding principles, organisations determine the most appropriate

accounting system and processes for their business, in line with government requirements.

http://www.businessdictionary.com/definition/accounting.html

https://www.aasb.gov.au/

https://www.legislation.gov.au/

https://www.aasb.gov.au/Pronouncements/Conceptual-framework.aspx



1.2 Accounting systems

An accounting system can be maintained manually or with the aid of a computerised

platform.

Manual accounting system

A manual accounting system is where transactions are recorded by hand or is not

automated. This may be either with paper or even a spreadsheet. The process from source

document to financial statements are completed as steps in the accounting process. The use

of a computer does not immediately imply that we have an ‘electronic’ or automated

accounting system.

Electronic accounting system

An electronic accounting system makes use of the speed of computing systems and

software to process the day-to-day transactions as they are entered into the general ledgers

immediately. The important distinction is that an electronic accounting system captures and

automates the accounting process from a source document to the preparation of financial

statements. A computer is not an electronic accounting system as it is merely hardware. It is

the software that is used (e.g. MYOB or Xero) that provides the system infrastructure to call

it an accounting system.

There are several computerised accounting systems software such as Intuit QuickBooks,

Xero, Fresh Books, Sage, etc; however, the accounting system used in this course is MYOB.

The following table outlines the key differences between a manual and computerised

accounting system:

Manual Computerised

Definition Transactions are recorded and

kept in physical registers of

journals and ledgers.

Transactions are recorded

digitally using appropriate

software.

Calculations and

errors

Calculations are done manually

and are vulnerable to human

error.

Calculations are done using the

computer system, and errors

are minimised.



Ledger Accounts

and Financial

Statements

Manual posting is done to

properly classify accounts.

Financial statements can only

be generated after the

preparation of a trial balance.

Posting is automatically done

after the transaction entry. Trial

balances and financial

statements are automatically

prepared by the system.

Cost Relatively cheaper than a

computerised system.

Initially, more expensive than a

manual system.

Benefits of Integrated Computerised Accounting Systems:

• Speed: Data entry can be carried out faster than manual processing because of the

computer’s formatted screens and built-in databases of customers, supplier details,

and stock records

• Cost: Computerised accounting programs reduce time entering and preparing

accounts and audit expenses as records are structured, up-to-date, and accurate

• Accuracy: There is less room for errors as only one accounting entry is needed for

each transaction rather than two (or three) for a manual system. The accounting

system may also have internal checks and balancing that will ensure that incorrect

entries are not processed

• Information management: Reports can be produced which will help management

monitor and control the business; for example, the aged debtor’s analysis will show

which customer accounts are overdue, trial balance, trading and profit and loss

account, and balance sheet

• Integrated system: When a business transaction is entered into an electronic

accounting information system, it is recorded in several different accounting records

at the same time

1.3 Key features of an accounting system

It is important to understand the key features of an accounting system including the

fundamental principles which are applied.

Basis of Accounting: Cash vs accrual basis



The main difference between these two lies in the timing of recognition of revenues and

expenses. A cash basis of accounting only recognises income when there is an actual

inflow of cash, and expenses when there is an actual outflow of cash.

With the accrual basis of accounting, income is recorded at the time of the event,

regardless of when the actual cash is received. The accrual basis of accounting thus gives

rise to accounts receivable and accounts payable. Accrual basis is the more common

method used by businesses.

Entry System of Bookkeeping: Single-entry vs double-entry bookkeeping

The single-entry method of bookkeeping maintains records in which a single entry is made

for every transaction. The entry contains only one account and primarily keeps track of the

movement of cash. There is no full record-keeping in accordance with the Generally

Accepted Accounting Principles (GAAP). A reconciliation of accounts is not possible using

this method, and the possibility of errors and fraud are very high.

The double-entry method of bookkeeping, on the other hand, records transactions based

on the principle of duality; that is, for every journal entry credit there is an equal journal entry

debit. It fully records the effects of every transaction in the accounts in the chart of accounts,

making reconciliation possible, and agrees with GAAP. It is the method most businesses

adapt.

Debits and credits

This will be explored in detail in Basic Accounting Equations section.



2. Accounting elements, equations, and rules

Accounting processes the transactions related to running a business. The nature of the

business and the products or services being sold will determine the focus of the accounting

system reporting. For example, while all businesses will report revenues, expenses, and net

profit, the financial accounts of a manufacturing business will differ somewhat from the

financial reports of a legal firm.

Five main types of accounts

All accounting systems (manual and computerised) use the five main groups of accounts:

Assets, Liabilities, Owner’s Equity, Revenues and Expenses:

Assets

Assets are items of value that a business owns and that will be used in the business to

provide a future economic benefit. These items can be physical/tangible (such cash,

equipment, and property), or non-physical/intangible (such as certain intellectual property

rights e.g. patents and trademarks). Assets also include amounts owed to the business by

customers for prior sales on short-term credit (accounts receivable or debtors) or amounts

the business may have loaned to others and are legally repayable. For a more exhaustive

list of possible assets, see the Chart of Accounts in section 2.1.

Liabilities

Liabilities are monies legally owed by the business. These can include loans taken out by

the business, money owed to suppliers for purchases on short-term credit (accounts payable

or creditors), or money owing to the government for taxes (income tax, GST etc). As a rule,

you can assume that if an account name includes the descriptor ‘payable’, then it contains

liability. For other examples of liabilities, see the Chart of Accounts in section 2.1.

Owner’s Equity

Equity is what would be left over if a business or organisation sold all the assets and paid off

all the liabilities. Owner’s Equity is the net value of the business to the owner. Owner’s

Equity is made up of the owner’s investments (including cash and other assets) into the

business through the ‘Capital Account’ and the amounts taken out of the business for

personal use through the ‘Drawings Account’. Owner’s Equity also includes any retained

profits (i.e. Revenues less Expenses).

Revenue



Revenue is the money flowing into the business from trading such as sales of merchandise

or services. It can also include other amounts the business receives such as revenue from

rent property, interest on bank accounts, or commissions. For other examples of revenues,

see the Chart of Accounts in section 2.1.

Expenses

Expenses are the day-to-day operating costs of the business. Typically, they include

electricity, wages, repairs, bank charges, business vehicle costs etc. Expenses can also

include assets or supplies that are consumed or used up while earning income. For

example, stationary supplies (paper, pens, staples) fulfil the definition of an asset but as

these items are consumed in the normal course of business, they are correctly classified as

expenses. For some more examples of expenses, see the Chart of Accounts in section 2.1.

• Cost of Goods Sold (sometimes called Cost of Sales or COGS) is a special type of

expense that is directly related to producing and delivering goods/services. For a

retail business, COGS is the amount paid (cost) to purchase merchandise before it is

on-sold to customers. In a manufacturing business, COGS include all the raw

materials used to create the finished product before sale.

• The Cost of Goods Sold can be shown as a separate account, or a calculation

derived from other accounts. Regardless of which approach is used, the cost of

goods sold is reported separately from other general expenses such as electricity,

rent, telephone etc.

• The Purchases Account is a special type of expense account associated with the

cost of goods sold.

2.1 Chart of Accounts

The chart of accounts is a list of all the accounts relevant to that business. These are

generally grouped into the five main accounts of Assets, Liabilities, Owner’s Equity,

Revenues and Expenses. Within the major account groups, there are often additional

subcategories which allow for more meaningful reporting of information in financial reports.

The chart and types of accounts assist in the core and fundamental principle of accounting –

reporting of transparent, reliable financial and economic information to make a decision.



Real World Chart of Accounts Example (Extracted)



Practice exercise 1: Identifying the type of account

Tick the correct column to indicate the account type.

Account Name Asset Liability Owner’s Equity

Revenue Expense

Creditors (Ac payable)

Bank charges

Advertising

Furniture

Bank Loan

Rent paid

Capital

Cost of goods sold

Bank Cheque Account

Commission received

Computer supplies

Debtors (Ac receivable)

Credit/debit card fees

Telephone charges

Vehicle repairs

Machinery

Sales

Electricity

Drawings

Rent received

Commission paid

Building

Loan to Bill Smith



Practice exercise 1 Solution

Account Name Asset Liability Owner’s Equity

Revenue Expense

Creditors (Ac payable) X

Bank charges X

Advertising X

Furniture X

Bank Loan X

Rent paid X

Capital X

Cost of goods sold X

Bank Cheque Account X

Commission received X

Computer supplies X

Debtors (Ac receivable) X

Credit/debit card fees X

Telephone charges X

Vehicle repairs X

Machinery X

Sales X

Electricity X

Drawings X

Rent received X

Commission paid X

Building X

Loan to Bill Smith X



Basic accounting equations

From the earlier discussion of Owner’s Equity, we saw that Assets – Liabilities = Owner’s

Equity. This equation is sometimes referred to as the Basic Accounting Equation. For

example, if business assets are valued at $10,000 & liabilities are $3,000, then Owner’s

Equity must be valued at $7,000. This equation always holds true.

The role of accounting is to record the transactions of the business. Each transaction will

affect the Accounting Equation. After each transaction is recorded, the Accounting Equation

will still hold true.

The Rules of Debits & Credits

There are some important rules that guide the recording of transactions under the widely

used “double entry” accounting system:

• All accounts are designated as being Debit or Credit by nature

• All transactions will involve 2 or more accounts

• For every transaction, the total value of Debits will ALWAYS equal the value of

Credits. DEBITS = CREDITS

For the accounting system to be effective, these assumptions/conventions or rules must be

accepted. The way the account changes (whether it increases or decreases in value) when it

is credited or debited will depend on its nature. This can be confusing at first because,

depending on their nature, accounts do not behave in the same way.

Each of these account groups is given a default nature of either debit or credit; the following

table identifies the nature of each of these groups.

Assets Debit Revenue Credit

Liabilities Credit Expenses Debit

Owner’s Equity Credit



2.2 The Extended Accounting Equation

Notice that Assets and Expenses are DEBIT by nature and Liabilities, Revenue and Owner’s

Equity are CREDIT. Conforming with the DEBITS = CREDITS principle, we can rearrange

the “elements” of the accounting equation into:

Assets + Expenses = Liabilities + Owner’s Equity + Revenues

This is formally known as the Extended Accounting Equation and you will see it has account

groups with a DEBIT nature on the left and groups with a CREDIT nature on the right.

As mentioned previously, the role of accounting is to record the transactions of the business.

Each transaction will affect the Accounting Equation. After each transaction is recorded, the

Accounting Equation will still hold true.

When recording transactions, we want to make some accounts increase in value, others we

want to decrease in value. Accounting is dealt with in terms of debits and credits, rather than

in terms of pluses and minuses. We can change the value of an account by knowing the

nature of the account and then applying a debit or credit entry (the recording of a

transaction).

The rule to remember:

• To INCREASE an account, apply an entry that is the same as its nature

• To DECREASE an account, apply an entry that is the opposite as its nature

For example, to increase an Asset account (debit by nature) we need to create a debit entry.

To decrease a Liability account (credit by nature) we need to create a debit entry.

Two tables explaining the behaviour of each account group have been included below. The

tables contain the same information organised in different ways. To avoid confusion, you

should use whichever makes the most sense to you.

Account group

Nature of the account (normal balance)

Increase in value

(same direction)

Decrease in value

(opposite direction)

Assets Debit Debit Credit

Liabilities Credit Credit Debit



Owners’ Equity Note1

Credit Credit Debit

Revenue Credit Credit Debit

Expenses Debit Debit Credit

Debit Credit

Increase in expense accounts Decrease in expense accounts

Increase in asset accounts Decrease in asset accounts

Decrease in equity accounts Note1

Increase in equity accounts Note1

Decrease in revenue accounts Increase in revenue accounts

Decrease in liability accounts Increase in liability accounts

A couple of simple examples:

• Assume the business has $10,000 in the bank account and an additional $1,000 is

deposited

o The bank account is an asset and its nature is DEBIT. Therefore, in our

accounts it shows as $10,000 DEBIT

o We need to increase this account to $11,000 DEBIT

o Therefore, we need to make an entry of $1,000 DEBIT

o In summary, $10,000 DEBIT + $1,000 DEBIT = $11,000 DEBIT

• Say we have a loan of $5,000, and a payment of $300 is made to reduce the loan

balance

o The loan is a liability and therefore is CREDIT by nature. It will be recorded as

$5,000 CREDIT in our accounts

o We need to decrease this amount to $4,700 CREDIT

o Therefore, we need to create a $300 DEBIT entry

o In summary, $5,000 CREDIT + $300 DEBIT = $4,700 CREDIT

Recording negative balances

Remember, in accounting we don’t have positive and negative numbers, we only have credits

and debits. An account balance can switch between debit and credit depending on its nature

and the amount of debits and credits applied to it. Here are some examples:



• $500 debit + $300 debit = $800 debit (increasing a debit balance)

• $500 credit + $400 credit = $900 credit (increasing a credit balance)

• $500 debit + $300 credit = $200 debit (decreasing a debit balance)

• $500 credit + $500 debit = zero (decreasing a credit balance)

• $500 credit + $600 debit = $100 debit (decreases a credit balance by more than what

was in the account)

Notice in the last example, we don’t record a negative number such as -$100 credit. Instead,

we record the net value of the account. There were more debits than credits and so the

balance of the account is now $100 debit.

Note 1: A few more words about Owner’s Equity

Owner’s Equity is deemed to be CREDIT by nature. Apart from retained profits, the two main

accounts in Owner’s Equity are the Capital account and the Drawings account. When the

owner’s puts cash or other assets into the business we will always CREDIT the Capital

account to record the increase in value of the business. But consider the opposite

circumstance where the owner takes cash or other assets OUT of the business. The value of

Owner’s Equity will go down, so we need to raise a DEBIT. When the owner takes assets out

of the business, we will always DEBIT the Drawings account.

So remember: we will always CREDIT the Capital account and we will always DEBIT the

Drawings account.

2.3 A note about debtors and creditors

While we are talking about Credits and Debits, particular distinction needs to be made with

the term ‘creditor’ and ‘debtor’. These words are similar but have very different meanings in

accounting.

Creditors (Accounts Payable)

Creditors are people or businesses that our business owes money to. Typically, creditors are

suppliers that we bought goods from, but have not yet made payment. In our accounting

records we will use the account name Creditors or Accounts for these amounts.

Debtors (Accounts Receivable)



Debtors are people or businesses that owe money to our business. Typically, these are the

customers who purchased from our business, but we have not received the payment yet. In

our accounting records we will use the account name Debtors or Accounts Receivable for

these amounts.



3. Transaction Analysis

All transactions must be analysed before they can be entered into the accounting books. A

transaction analysis table, as shown below, is one way to identify the required the

information, particularly if you are less familiar with accounting.

Account Account

Category

Nature Increase /

Decrease Debit Credit

The below example will help put this into action in a simplified form.

On January 1, we sell a stock item for $100 plus $10 GST to a customer, and we offer credit

terms. We would work through the following steps using the following questions to assist

with the creation of the required journal entries:

Step 1: Decide what two (or more) accounts are affected by the transaction.

These are the accounts that you would choose from the Chart of Accounts

which suit the type of transaction that has taken place.

Answer: Sales, GST Collected, & Accounts Receivable

The sale of the product obviously affects the Sales account, as well as GST

Collected because the sale included $10 towards GST. The Accounts

Receivable account is also affected because the item was purchased by the

customer on credit terms, so it means the money is yet to be received.

Step 2: Identify the type of account it is – asset, liability etc.

Based on your choice of account, this will determine which account type is

relevant. Choose between the main account types, such as assets, liabilities,

owner’s equity, revenue, expenses.



Answer: Accounts Receivable is Asset, Sales is Revenue, GST Collected is

Liability.

Step 3: Decide if the account is increasing or decreasing.

Consider whether money or value is flowing into the account (so increasing)

or out of the account (so decreasing). Is the transaction making the contents

or value go up or not?

Answer: Sales increases, GST Collected increases, Accounts Receivable

increases

All accounts in this case are increasing in value.

Step 4: Identify the underlying nature of each account.

Answer: Sales is credit by nature, GST Collected is credit by nature, and

Accounts Receivable is debit by nature.

Step 4: Determine whether you need to create a debit or credit entry.

As you know, transactions that are debit by nature and need to increase are

applied as debits, and transactions that are credit by nature and need to

increase are applied as credit.

Answer: Accounts Receivable is entered as a Debit, Sales is entered as

Credit, and GST Collected is entered as Credit.

Step 5: Record the amounts in the appropriate column of the table.

Answer: See the completed table below demonstrating the entries.

Account Name Account

Category

Nature Increase /

Decrease Debit Credit

Ac Receivable Asset Debit Inc $110

Sales Revenue Credit Inc $100

GST Collected Liability Credit Inc $10



The general journal entry for this transaction would then look like this:

Account Name /

Particulars

Folio Ac

#

Debit Credit

Ac Receivable 1-1200 $110.00

Sales 4-1100 $100.00

GST Collected 2-1310 $10.00

When analysing transactions for accounting remember the following basics:

• In any transaction there will always be 2 or more accounts involved. It is important to be

able to identify the accounts

• If the transaction description mentions the word “borrowed”, then it suggests that one of

the accounts will be a Loan account

• Words like “paid”, “received”, “cheque”, “cash” all indicate a cash transaction and that the

bank account will be involved

• If the owner is mentioned, then one of the Owner’s Equity accounts (capital or drawings)

will be involved. When the owner puts something into the business, we use the Capital

Account. If the owner takes something out of the business, we use the Drawings Account

• “On credit” means that Ac Receivable or Ac Payable will be involved

• Terms like “stock”, “goods”, “merchandise” refer to items of Inventory in the accounts.

When purchasing inventory, we will use the Purchases Account. When selling inventory,

we use the Sales Revenue account on the day of the transaction and record the cost of

sales and decrease in inventory in a later entry



Practice exercise 2: Identify the accounts involved

Name the two accounts involved in each of the following transactions:

Transaction Account 1 Account 2

Capital contribution by owner (cash)

The owner contributes vehicle as his capital contribution

The owner takes equipment for his own use

We buy furniture for cash

We pay for equipment bought previously on credit

We buy equipment on credit from X business

We buy premises from Y business and agree to pay next month

Sold old equipment for cash

Sold old equipment on credit to Mr P.

Borrowed cash from B Lending Co

Paid back part of the loan from B Lending Co

We paid money owed to account payable: X Business

Received money from Accounts Receivable: Mr P


Transaction Account 1 Account 2

Capital contribution by owner (cash) Capital Bank

The owner contributes vehicle as his capital contribution Capital Vehicle

The owner takes equipment for his own use Drawings Equipment

We buy furniture for cash Furniture Bank

We pay for equipment bought previously on credit Creditors Bank

We buy equipment on credit from X business Creditors Equipment

We buy premises from Y business and agree to pay next month Creditors Premises

Sold old equipment for cash Equipment Bank

Sold old equipment on credit to Mr P. Debtors Equipment

Borrowed cash from B Lending Co Loan Bank

Paid back part of the loan from B Lending Co Loan Bank

We paid money owed to account payable: X Business Creditors Bank

Received money from Accounts Receivable: Mr P Debtors Bank



Practice exercise 3: Transaction analysis

Complete the transaction analysis table for each of these business transactions.

1. The owner invested $20000 in the business as Capital

2. Purchased a vehicle on credit for $6000.

3. Purchased Equipment for $1500 cash.

4. Paid rent $800

5. Purchased inventories for $600. Paid by cash.

6. Received $750 for services rendered.

7. Paid telephone bill, $150

8. Purchased equipment on credit from Y Vent for $2900

9. The owner withdrew $600 for personal use.

10. Paid $150 for an advertisement in the local paper

11. Charged a credit customer $350 for services rendered.

12. Purchased stock on credit for $400.

13. Borrowed $5000 from NAB Bank.

No Accounts involved

Account Type

Inc/ Dec

Debit Credit

1

2

3

4

5

6

7

8



9

10

11

12

13


No Accounts involved Account Type Inc/Dec Debit Credit

1 Bank Asset Inc $20,000.00

Capital Owner's Equity Inc $20,000.00

2 Vehicle Asset Inc $6,000.00

Accounts Payable (Creditors) Liability Inc $6,000.00

3 Equipment Asset Inc $1,500.00

Bank Asset Dec $1,500.00

4 Rent Expense Expense Inc $800.00

Bank Asset Dec $800.00

5 Purchases Expense Inc $600.00


6 Bank Asset Inc $750.00

Service Revenue Revenue Inc $750.00

7 Telephone Expense Expense Inc $150.00


8 Equipment Asset Inc $2,900.00

Accounts Payable (Creditors) Liability Inc $2,900.00

9 Drawings Owner's Equity Inc $600.00


10 Advertising expense Expense Inc $150.00


11 Accounts Receivable (Debtors) Asset Inc $350.00



Services Revenue Revenue Inc $350.00

12 Purchases Expense Inc $400.00

Accounts Payable (Creditors) Liability Inc $400.00

13 Bank Asset Inc $5,000.00

Bank Loan Liability Inc $5,000.00



4. Goods & Services Tax (GST)

Goods and services tax (GST) is a broad-based tax of 10% on most goods, services and

other items sold or consumed in Australia. For consumers, the tax is usually included in price

of item, however some items are tax free.

Business must register with the ATO for GST if turnover is more than $75,000.

Modified from: Australian Tax Office, “GST”, https://www.ato.gov.au/Business/GST/

Accessed on 1/10/2020.

Some common terminology:

• Exempt: the item is exempt of GST

• Inc GST: the price quoted INCLUDES a GST amount

• Gross Amount: the price quoted includes GST

• All up amount: the price quoted includes GST

• Exc. GST: the price quoted DOES NOT include the GST amount

• Net of GST: the price quoted is not showing the GST amount

GST Exempt items include:

• Most fresh or unprocessed food

• Wages

• Domestic Rent

• Interest Expense

• Interest Revenue

• Bank Charges

• Council Rates

• Loans given or received

• Capital Contributions by the owner

• Drawings of cash by owner

• Cash paid to A/c Payable (Creditors)

• Cash received from A/c Receivable (Debtors)

For more information, visit the ATO website, https://www.ato.gov.au/business/gst/when-to-

charge-gst-(and-when-not-to)/gst-free-sales/

How to perform GST Calculations

https://www.ato.gov.au/Business/GST/

https://www.ato.gov.au/business/gst/when-to-charge-gst-(and-when-not-to)/gst-free-sales/

https://www.ato.gov.au/business/gst/when-to-charge-gst-(and-when-not-to)/gst-free-sales/



If Ex GST price is quoted:

• If the price EXCLUDES GST: E.g.: $80 (ex GST), $80 (net of GST), $80 plus GST

• Multiply the price by 10%. Add the percentage of GST to the price. This is now the

amount inclusive of GST

• $80.00 x 10% = $8.00

• $80 + $8 = $88 (inc. GST)

If Inc GST price is quoted:

• If the price INCLUDES GST:

• E.g.: $88 (inc. GST), $88 (all up), $88 (gross)

• Divide the price by 11. Deduct the amount from the price. This is the amount

excluding GST

• $88.00 ÷ 11 = $8.00

• $88 - $8 = $80 (exc. GST)

Accounting for GST:

• GST accounts are usually listed as a Liability in a business books = CREDIT in

nature

• When we sell non-exempt products and services (including assets), we add GST to

the selling price and in our accounts, we write a CREDIT to the account called GST

Collected for the GST

• When we buy non-exempt products including assets, services, or pay an expense,

we pay GST in the price and we will record this as a DEBIT to the account called

GST Paid in our books



Practice exercise 4: Transaction Analysis inc. GST

Complete the transaction analysis table for the following transactions. GST needs to be

added to the amounts where applicable:

1 The Owner began the business with $60,000 in cash which was deposited into the bank. Machinery ($15,000) and a Vehicle ($12,000) was put into the business by the owner.

2 Bought inventory on credit $35,000.

3 Borrowed $15,000 from ABC bank.

4 Received a commission of $50 for referring a customer to another local business.

5 Paid $3,500 in council rates for the year.

6 Sold inventory on credit for $6,000.

7 Purchased furniture for the business $15,000 on credit.

8 Paid electricity $264.

9 Customers bought goods for $3,000 for cash.

10 The owner withdrew cash $150.

# Accounts

Inc Account

Type Debit Credit

Decr






# Accounts Inc Dec

Account Type

Debit Credit

1 Bank Inc Asset $60,000.00

Machinery Inc Asset $15,000.00

Vehicle Inc Asset $12,000.00

Capital Inc Owner Equity $87,000.00

2 Purchases Inc Expense $35,000.00

GST Paid Inc Liability $3,500.00

Accounts Payable Inc Liability $38,500.00


Bank Loan Inc Liability $15,000.00

4 Bank Inc Asset $55.00

Commission Revenue Inc Revenue $50.00

GST Collected Inc Liability $5.00

5 Rates Expense Inc Expense $3,500.00

Bank Dec Asset $3,500.00

6 Accounts Receivable Inc Asset $6,600.00

Sales Revenue Inc Revenue $6,000.00


7 Furniture Inc Asset $15,000.00

GST Paid Inc Liability $1,500.00

Accounts Payable Inc Liability $16,500.00

8 Electricity Expense Inc Expense $264.00

GST Paid Inc Liability $26.40

Bank Dec Asset $290.40


Sales Revenue Inc Revenue $3,000.00


10 Drawings Inc Owner Equity $150.00

Bank Dec Asset $150.00



5. Accounting processes

5.1 The Accounting Cycle

Business information is systematically coded, classified and checked through an information

system. At the heart of the accounting system lies the accounting process, which is detailed

below.

Source

document > Journal >

General

Ledger >

Trial

Balance >

Financial

Statements

An information system, whether in a manual or computerised platform, accepts input called

transactions captured from source documents, which are then converted through processes

into output information for end users.

Source Documents

A source document is a document or form that provides details of a transaction and

evidence that the transaction has occurred. Examples include Invoices, Receipts, Cheques,

General Journal Vouchers, Cash Sales Slips, or any other document that validates or

supports the creation of a transaction in the business books.

A source document is drawn up by a business and given to another business or person.

Accounting entries are made from source documents and they provide evidence that the

transaction has occurred.

Source documents may vary in appearance, however typically they will include:

• Date

• Document number

• Nature of the transaction (e.g. sale on credit, purchase for cash, etc)



• Parties to the transaction (i.e. names – or “cash”)

• The amount

• Terms and conditions of the transaction

• Any other relevant details (account numbers, etc)

Source documents can be manually written such as a handwritten sales docket or memo, or

electronically generated such as EFTPOS receipts, cash register receipts, or reference

details for payments made on the internet.

Details of the source document must be recorded within the transaction journal entry.

5.2 Journals

All business financial transactions must firstly be recorded into a journal. A business can

structure its system of journals according to its needs however many simplify the process by

using a series of specialist journals to group similar transactions in one place.

Typical specialist journals include:

• The cash receipts journal (CRJ)

o Records all transactions involving cash received into the business from any

source. E.g. cash from sales, receipt of payments from previous sales to

debtors, and could also include proceeds of loans and contributions by

owners in cash

• The cash payments journal (CPJ)

o Records all cash paid by the business for any purpose. This can include

cash purchases of inventory, cash payments to suppliers for previous

purchases on credit, cash payments of expenses, purchase of assets, or

repayments of loans

• The sales journal (SJ)



o Records sales of inventory or merchandise to customers on credit only

• The purchases journal (PJ)

o Records purchases of inventory from suppliers on credit only

• General Journal:

o In addition to the specialist journals, the general journal is used for recording

any transactions that cannot be accommodated in any of the specialist

journals

Cash Receipts Journal (CRJ)

A business that uses a CRJ will record all receipts of cash into this journal. Each row is

a separate transaction. The Bank Column amounts are DEBIT, the other amounts are

CREDIT.

For example, on June 2 we CREDIT Sales $1,500, CREDIT GST $150 and DEBIT

Bank $1,650. Notice that debits = credits in each transaction (row).

Cash Receipts Journal – June 2019

Date Particulars Folio Receipt

No Debtor Sales

GST

Collected Sundries Bank

(For

Sundries) 1-1200

4-

4100 2-1310

(Use

Folio)

1-

1100

2-Jun Sales CRS 1,500 150 1,650

10-

Jun John Earl 120 5,445 5,445

17-

Jun Loan 2-2700 126 10,000 10,000

Totals 5,445 1,500 150 10,000 17,095

Explanations:

• Date: Record the date of each transaction

• Particulars: This is the name of the Ledger account. In the case of Debtors

payments, this will be the name of the Debtor

• Folio: The General Ledger account number

• Receipt no: The number or description of the source document (CRS = Cash

Register Summary)



• Debtor: All payments received from credit customers are recorded in this

column. This is a CREDIT to the Debtor Ac

• Sales: All cash sales amounts are recorded in this column. This is a CREDIT to

the Sales Ac

• GST Collected: The GST component of any receipts is recorded in this column.

This is a CREDIT to the GST Collected Ac

• Sundries: Use this column for any amounts that cannot be allocated to any

other column. This is a CREDIT to the account involved

• Bank: This is the total amount of cash received. The amounts in the other

columns on this row will equal the Bank amount. This is a DEBIT to the Bank

Ac

• Totals: At the end of month, all the columns are totalled. The Bank column will

always equal the total of all the other columns

Cash Payments Journal (CPJ)

A business that uses a CPJ will record all payments of cash into this journal. Each row

is a separate transaction. The Bank Column amounts are CREDIT, the other amounts

are DEBIT.

For example, on June 17 we DEBIT GST $100, DEBIT Lease (expense) $1000 and

CREDIT Bank $1,100. Notice that debits = credits in each transaction (row).

Cash Payments Journal – June 2019

Date Particular

s Folio

Chq

no.

Credito

r

Purchase

s

GST

Paid

Sundrie

s

Ban

k

(Sundries

) 2-1200 5-5200

2-

133

0

(Use

Folio)

1-

1100

12-

Jun

Stock

Purchases 57 2,500 250

2,75

0

16-

Jun ABC Co 58 1,199

1,19

9

17-

Jun Lease 6-6500 59 100 1,000

1,10

0

Total

s 1,199 2,500 350 1,000

5,04

9



Explanations:


• Particulars: This is the name of the Ledger account. In the case of Creditor

payments, this will be the name of the Creditor

• Folio: The General Ledger account number

• Chq no: The number of the cheque or other source document

• Creditor: All payments to credit suppliers are recorded in this column. This is a

DEBIT to the Creditor’s Ac

• Purchases: All cash payments for inventory are recorded in this column. This

is a DEBIT to the Purchases Ac

• GST Paid: The GST component of any payment is recorded in this column. This

is a DEBIT to the GST Paid Ac

• Sundries: Use this column for any amounts that cannot be allocated to any

other column. This is a DEBIT to the account involved

• Bank: This is the total amount of cash paid. The amounts in the other columns

on this row will equal the Bank amount. This is a CREDIT to the Bank Ac

• Totals: At the end of month, all the columns are totalled. The Bank column will

always equal the total of all the other columns

The sales journal (SJ)

Records sales of inventory or merchandise to customers on credit only.

For example, on 8 June we made a sale to Red Traders on Credit. We CREDIT Sales

$8,070, CREDIT GST Collected $807 and record DEBIT to the Debtor’s Ac $8,877.

Sales Journal – June 2019

Date Particulars Invoice

Number Sales

GST

Collected Debtor Total

4-4100 2-1310 1-1200

8/6 Red Traders 5711 8,070 807 8,877

12/6 Blue Lake Pty Ltd 5712 5,400 540 5,940

22/6 Green & Co 5713 2,500 250 2,750



Totals: 15,970 1,597 17,567

Explanations:


• Particulars: This is the name Debtor

• Invoice no: The number of the source document

• Sales: The sales (ex GST) amount is recorded in this column. This is a

CREDIT to the Sales Ac

• GST Collected: The GST component of the sale is recorded in this

column. This is a CREDIT to the GST Collected Ac

• Debtor Total: This is the amount inc. GST to be collected from the

customer in this column. This is a DEBIT to the Debtor Ac

• Totals: At the end of the month, all the columns are totalled. The

Debtor column will always equal the total of all the other columns

The Purchases Journal (PJ)

Records purchases of inventory or merchandise from suppliers on credit only.

For example, on 12 June we purchased stock from Catering Services on Credit. We

DEBIT Purchases $1,500, DEBIT GST Collected $150 and record to the Creditor Ac

$1,650.

Purchases Journal – June 2019

Date Particulars Invoice

Number

Purchase

s

GST Paid Creditor Total

5-5200 2-1330 2-1200

12/6 Catering Services 887 1,500 150 1,650

27/6 Office Supplies P/L 7896 3,300 330 3,630

Totals: 4,800 480 5,280

Explanations:




• Particulars: This is the name Creditor

• Invoice no: The number of the source document

• Purchases: The inventory purchases (ex GST) amount is recorded in this

column. This is a DEBIT to the Purchases Ac

• GST Collected: The GST component of the sale is recorded in this column.

This is a DEBIT to the GST Paid Ac

• Creditor Total: This is the amount inc. GST to be collected from the customer

in this column. This is a CREDIT to the Creditor Ac

• Totals: At the end of month, all the columns are totalled. The Creditor column

will always equal the total of all the other columns

The General Journal (GJ)

Businesses can structure a system of journals in whatever way suits its needs. A smaller

business may choose to enter all transactions into a general journal. When specialist journals

are used however, the general journal is reserved for recording any transactions that cannot

be accommodated in any of the specialist journals.

The general journal looks very similar to the transaction analysis tables shown previously and

the same transaction analysis steps need to be worked through to determine which accounts

to use and decide which to debit and which will be credit.

Shown below is an example of a general journal entry:

The Coffee Shop

General Journal

Date Particulars

4Folio

ref Debit Credit

1/6/201 Inventory2 1-1200 5,000

Delivery Vehicle 1-1320 5,000

3Capital 3-1000 10,000

5(Owner contributes assets to start

business)

6



There are some formatting rules to be followed when preparing GJ entries. Consistent

formatting makes the journals easier to read and reduces the likelihood of error.

Each GJ entry should follow these formatting rules:

1. Transaction date

2. Debit entries are written before Credit entries

3. Credit account names are indented slightly (about 1cm from the margin)

4. Record the ledger account number in the Folio/ref column

5. A narration or brief description is written (usually placed in brackets)

6. Rule off the transaction with a heavy or double line in the Particulars column

Remember, the GJ is used whenever a transaction cannot be accommodated in one of the

specialist journals. Typical transactions that are recorded in the GJ include:

1. When the owner contributes non-cash assets to the business

2. When the business buys a non-inventory asset on credit

3. When the business sells a non-inventory asset on credit

4. When the business is charged interest on overdue amounts payable (Creditors)

5. When the business charges interest on overdue amounts receivable (Debtors)

6. When the business makes a provision for Bad Debts

7. When the business writes off a Bad Debt

8. When the owner withdraws non-cash assets from the business or incurs business

expenses for personal use

9. Recording end of period account adjustments

In the GJ below are examples of each of the outlined transactions.

Date

2020 Particulars

Folio Debit Credit

1. 1 Jun Equipment 1-1500 4,000.00

Motor Vehicle 2-1330 400.00

Capital 1-1100 4,400.00

(Owner’s contribution to business)

2. 10 Jun Computer 1-1200 4,800.00



GST paid 2-1330 480.00

Creditors – (ABC

Computers)

2-1200 5,280.00

(Purchase Computer on credit)

3. 12 Jun Debtors 1-1200 17,567.00

GST collected 1-1310 1,597.00

Furniture 4-4100 15,970.00

(Sell obsolete furniture on credit)

4. 14 Jun Interest Expense 6-3220 45.00

Creditors – (XYZ Limited) 2-1200 45.00

(Interest charged on overdue

supplier bill)

5. 15 Jun Debtors 1-1200 55.00

Interest Revenue 4-3220 55.00

(Charged customer on overdue bill)

6. 20 Jun Bad Debts Expense 6-6600 1,000.00

Provision for Doubtful Debts 1-1250 1,000.00

(Record a provision for Bad Debts)

7. 25 Jun Bad debts 6-6300 1,500.00

GST Collected 2-1310 150.00

Debtors 1-1200 1,650.00

(Andrew Stimpson bad debt written

off)



8. 26 Jun Drawings 3-3200 297.00

Telephone Expense 6-4500 120.00

Paint supplies (Inventory) 1-1300 150.00

GST Collected 2-1330 27.00

(Owner took paint and used

telephone for personal use)

9. 28 Jun Salaries & Wages 6-6900 4,250.00

Accrued expenses 2-2500 4,250.00

(Feb wages not yet due for

payment)

Practice exercise 5: Writing transactions into journals

Ms White starts a business on 1 June 20xx. These are the transactions for her business

White's Fruit Shop for June 20xx.

Record these transactions into the appropriate journal and total the journals off at the end of

the month. Note: * indicates which transactions have no GST

Day Source Doc

Transaction Amount

(Incl GST)

1 R001 Ms White contributes cash to start the business. 4200*

2 C001 Inventory is purchased for cash. 473

4 TXC34 We buy inventory on credit from Richlands Farms. 220

5 CRS Cash sales. 198

7 R002 We take out a loan from Global Bank. 500*

9 C002 Wages paid. 620*

10 RFE47 We buy 3 Desks (Furniture) on credit from Sparkle Shops.

825

12 TXCR01 We sell inventories to Brisbane School on credit. 352



14 R003 Rent received from our tenant (business rent). 55

C003 Pay electricity bill. 143

15 C004 The owner, Ms White took cash for her own use. 300*

17 456W We bought inventory on credit from Donne Farm. 143

19 TXCR02 Sold inventory on credit to Pink Ribbon Stores. 231

22 INT01 We charge Spring Hill School interest on their overdue account.

12*

23 R004 We sell a desk (Furniture) that is not needed to Jim’s Handyman for cash.

165

26 R005 Brisbane School pays the following off their account.

150*

29 TXCR03 Sell inventory on credit to Brisbane School. 99

Cash Receipts Journal

Date 20xx

Particulars Folio Doc Sales Debtors Other GST

Collected Bank

4-1000 1-5000 2-3100 1-1100

Cash Payments Journal

Date 20xx

Particulars Folio Doc Purchases Creditors Other GST Paid

Bank

5-5100 2-5000 2-3200 1-1100



Purchases Journal

Date 20xx

Particulars Doc Purchases GST Paid Creditors

5-5100 2-3200 2-5000

Sales Journal

Date 20xx

Particulars Doc Sales GST

Collected Debtors

4-1000 2-3100 1-5000

General Journal

Date 20xx

Particulars Folio Debit Credit



Practice exercise 5 solution

Purchases Journal

Date 20xx

Particulars Doc Purchases GST Paid Creditors

5-5100 2-3200 2-5000

4-Jun Richlands Farms TXC34 200 20 220

17-Jun Donne Farm 456W 130 13 143

330 33 363

Sales Journal

Date 20xx

Particulars Doc Sales GST

Collected Debtors

4-1000 2-3100 1-5000

12-Jun Brisbane School TXCR01 320 32 352

19-Jun Pink Ribbons Stores

TXCR02 210 21 231

29-Jun Brisbane School TXCR03 90 9 99

620 62 682

Cash Receipts Journal

Date 20xx

Particulars Folio Doc Sales Debtors Other GST

Collected Bank

4-1000 1-5000 2-3100 1-1100

1-Jun Capital 3-1000 R001 4200 4200

5-Jun Sales CRS 180 18 198

7-Jun Loan: Global Bank

2-4000 R002 500 500

14-Jun Rent Revenue

4-1200 R003 50 5 55

23-Jun Furniture 1-3100 R004 150 15 165

26-Jun Brisbane School

R005 150 150

180 150 4900 38 5268



Cash Payments Journal

Date 20xx

Particulars Folio Doc Purchases Creditors Other GST Paid

Bank

5-5100 2-5000 2-3200 1-1100

2-Jun Inventory 1-2000 C001 430 43 473

9-Jun Wages 6-1300 C002 620 620

14-Jun Electricity 6-1400 C003 130 13 143

17-Jun Drawings 3-2000 C004 300 300

430 0 1050 56 1536

General Journal

Date 20xx Particulars Folio Debit Credit

10-Jun Furniture 1-3100 750

GST Paid 2-3200 75

A/c Payable control - Sparkle Shops 2-5000 825

(Bought desks on credit – RFE47)

22-Jun A/c Receivable control - Brisbane School 1-5000 12

Interest revenue 4-1100 12

(Charged interest on late account – INT01)

5.3 Ledgers

A General Ledger is a separate list of all the accounts of a business. It is a place where the

balances of each account are calculated. In a manual accounting system, the general ledger

is a "book" with a separate section, page, or ledger sheet for each account in the business.

Posting from the journal into the ledger is a very straight forward process. Follow these steps:

• Read the transaction in the journal

• Locate the required account in the General Ledger

• Record the exact same amount as shown in the journal into the debit column or credit



column in the ledger as indicated in the journal

Posting Journals to Ledgers

Posting Specialist journals

A major advantage of using specialist journals is that we can post monthly totals into the ledger

rather than individual transactions. In the following CRJ we have highlighted the relevant data

in red. Remember that in the CRJ, the Bank account figure ($17,095) is a debit and all the

other figures are credits.

To post this CRJ we need to record the following entries into the general ledger:

• Debtor Account – 5,445 Credit (dated Jun 30)

• Sales Account – 1,500 Credit (dated Jun 30)

• GST Collected - $150 Credit (dated Jun 30)

• Loan Account - $10,000 Credit (dated Jun 17) *

• Bank Account – 17,095 Debit (dated Jun 30)

*Note that all amounts in the Sundry column need to be posted separately to their respective

accounts. We also use the actual date of the transaction, not the end of month date.

Posting General Journal

Each individual line of the GJ needs to be posted separately into the GL. So, in the following

GJ, we must post a $4,000 debit to the Equipment account: $400 debit to the Motor Vehicle

account and $,400 credit to the Capital account.



Date

2020 Particulars

Folio Debit Credit

1. 1 Jun Equipment 1-

1500

4,000.00

Motor Vehicle 2-

1330

400.00

Capital 1-1100 4,400.00

(Owner’s contribution to business)

Posting to ledgers can seem a bit confusing at first. However, after a little practice, you will

see how straight forward it can be.

Ledger Formats

General ledgers can be formatted in accordance with the needs of the business. In practice

there are two common ways to present a general ledger:

• T-Account format

• Running balance format

T Account Format

The T-Account is a visual way of presenting individual accounts in the General Ledger. They

get their name from the obvious “T” shape. See below for a simplified example.

Note the following formatting rules:



• The name of the account always appears at the top of the T

• Debits are always shown on the left side of the T

• Credits are always shown on the right side of the T

Posting Journal entries to the T account.

The example below will demonstrate posting into the Bank Account from specialist journals

(CRJ & CPJ).

Consider the CRJ shown previously:

Cash Receipts Journal – June 2019

Date Particulars Folio Receipt

No Debtor Sales

GST

Collected Sundries Bank

(For

Sundries) 1-1200 4-4100 2-1310

(Use

Folio)

1-

1100

2-Jun Sales CRS 1,500 150 1,650

10-Jun John Earl 120 5,445 5,445

17-Jun Loan 2-2700 126 10,000 10,000

Totals 5,445 1,500 150 10,000 17,095

Cash Payments Journal – June 2019

Date Particulars Folio Chq

no. Creditor Purchases

GST

Paid Sundries Bank

(Sundries) 2-1200 5-5200 2-1330 (Use

Folio) 1-1100

12-

Jun

Stock

Purchases 57 2,500 250 2,750

16-

Jun ABC Co 58 1,199 1,199

Totals 1,199 2,500 250 3,949

Below is the Bank Account T account with the 3 entries posted.



Note the following:

• The name and account number of the account is shown at the top

• The T is written in a heavy line with debits on the left and credits on the right

• On 1/6/xx we carried forward a balance from the previous month

• The CRJ total is recorded in the debit side

• The CPJ total is recorded on the credit side

• In the date column is the date of the transaction in the journal

• In the Particulars column we record the name of the account that was the “other

side” of the transaction

• In the Folio column, we will show the source journal where the transaction was

recorded

• On 30/6/xx we calculated the closing (ending) balance of the account for the month

The posting process continues for all the other accounts written in the journals.

Running Balance Format

The running balance general ledger format looks slightly different from the T style format as

shown below. The major difference here is the debit and credit column are shown on the right

hand side and an extra column is added to keep a “running balance” of the account after every

transaction, rather than at the end of the month as shown in the T account example previously.

1-1100 Bank Asset

Date Particulars Ref Debit Credit Balance Dr

Cr



Let us post the previous CPJ & CRJ into the General Ledger using the running balance format:

Note the following:

• Date: the date of the transaction in the journal (in this case it is end of month totals).

• Particulars column: the name of the account that was the “other side” of the

transaction.

• Ref column: the source journal where the transaction was recorded.

• Debit/Credit column: record the amount of transaction into the same column it

appeared in the journal.

• Balance column: calculate the balance of the account after each entry.

The posting process continues for all the other accounts in the journals.



Practice Exercise 6: Posting Journals to the General Ledger Post the journal entries from the journal solutions shown for exercise 5 into the General

Ledger below.

General Ledger

Bank 1-1100

Date Particulars Post Debit Credit Balance Dr/CR

Furniture 1-3100


Debtors 1-5000


Creditors 2-5000


GST Collected 2-3100


GST Paid 2-3200


Loan: Global Bank – 2-4000




Capital 3-1000


Drawings 3-2000


Sales 4-1000


Interest Revenue 4-1100


Rent Revenue 4-1200


Purchases 5-5100


Wages 6-1300


Electricity 6-1400




Practice Exercise 6: Solution

General Ledger

Bank 1-1100


30-Jun Receipts CRJ 5268 5268 DR

Payments CPJ 1536 3732 DR

Furniture 1-3100


10-Jun A/c Payable Control

GJ 750 750 DR

23-Jun Bank CRJ 150 600 DR

Debtors 1-5000


22-Jun Interest Revenue GJ 12 12 DR

30-Jun Sales & GST SJ 682 694 DR

Bank 150 544 DR

Creditors 2-5000


10-Jun Furniture & GST GJ 825 825 CR

30-Jun Purchases & GST PJ 363 1188 CR

GST Collected 2-3100


30-Jun Bank CRJ 38 38 CR

Debtors SJ 62 100 CR

GST Paid 2-3200


10-Jun Creditors GJ 75 75 DR



30-Jun Bank CPJ 56 131 DR

Creditors PJ 33 164 DR

Loan: Global Bank – 2-4000



Capital 3-1000



Drawings 3-2000



Sales 4-1000


30-Jun Debtors SJ 620 620 CR

Bank CRJ 180 800 CR

Interest Revenue 4-1100


22-Jun Debtors GJ 12 12 CR

Rent Revenue 4-1200



Purchases 5-5100



Creditors PJ 330 760 DR

Wages 6-1300





Electricity 6-1400



Subsidiary Ledgers

A Subsidiary ledger is a group of accounts whose combined balances equal an overriding

“control account” in the general ledger.

An Accounts Receivable Subsidiary (or Debtors) Ledger shows an account for each

customer who makes a credit purchase. All details for this customer are posted to this

subsidiary account (e.g. sales, receipts, interest charged, etc) so that we can track how

much a particular customer owes us.

An Accounts Payable Subsidiary (or Creditors) Ledger shows an account for each

supplier from whom we make a credit purchase. All details for this supplier are posted to

this subsidiary account (e.g. purchases, payments, interest charged, etc) so that we can

track how much we owe a particular supplier.

Transactions are posted to accounts in the general ledger as usual. However, an additional

entry is made to the subsidiary ledger whenever amounts are posted to the control accounts.

Below is an example of an Accounts Receivable Subsidiary Ledger for B. Brown.

B Brown

Accounts Receivable Subsidiary Ledger

Date Particulars Post

Ref Debit Credit Balance

Jun-01 Balance b/d 140.00 140.00 DR

3 Bank CRJ 140.00 0.00 DR

4 Sales and GST Clearing SJ 495.00 495.00 DR

10 Bank CRJ 450.00 45.00 DR

12 Sales and GST Clearing SJ 682.00 727.00 DR



The format is identical for the Accounts Payable Subsidiary Ledger. The same posting rules

apply as for posting to the General Ledger regarding the date, particulars, source journal etc.

Accounts Receivable and Accounts Payable Schedules

An Accounts Receivable Schedule is a list of all the customers in the AC Receivable

Subsidiary Ledger. It includes the current balance of their account (what they currently owe

us). Schedules are an important way to check for errors because the Schedule total must

equal General Ledger Control Ac.

Below is a series of Accounts Receivable Subsidiary Ledgers.

XYZ Pty Ltd


Date 20XX

Particulars Post Ref

Debit Credit Balance

Jun 16 Sales and GST SJ 561.00 561.00 DR

20 Sales and GST GJ 605.00 1 166.00 DR

ABC Pty Ltd


Date 20XX



Jun 8 Sales and GST SJ 9 460.00 9 460.00 DR

23 Interest Revenue GJ 7.88 9 467.88 DR

BTU Pty Ltd


Date 20XX




28 Bank CRJ 200.00 174.00 DR

EEE Pty Ltd


Date 20XX






Here is an Accounts Receivable Schedule. The total of the schedule should be reconciled

with the balance of the Accounts Receivable Control Ac in the General Ledger.

Schedule of Accounts Receivable

as at 30 Jun 20XX Customer Balance $

XYZ Pty Ltd 1 166.00

ABC Pty Ltd 9 467.88

BTU Pty Ltd 174.00

EEE Pty Ltd 858.00

Balance as per GL control Ac $11,665.88

Practice exercise 7: Posting to the Subsidiary Ledgers & Schedules

Using the journals from exercise 6, post all entries to the Debtors and Creditors Subsidiary Ledgers and prepare the Debtor and Creditor Schedules.

Check that the schedules agree with the control accounts in the General Ledger.

Debtors Subsidiary Ledgers

Brisbane School


Pink Ribbon Stores


Creditor Subsidiary Ledgers

Richlands Farms




Donne Farm


Sparkle Shops


Debtors Schedule

As of June 30, 20xx

Creditors Schedule

As of June 30, 20xx




Debtors Subsidiary Ledgers

Brisbane School



22-Jun Interest revenue GJ 12 364 DR

26-Jun Bank CRJ 150 214 DR


Pink Ribbon Stores



Creditor Subsidiary Ledgers

Richlands Farms



Donne Farm



Sparkle Shops


20-Jun Furniture & GST GJ 825 825 CR



Debtors Schedule

As of June 30, 20xx

Brisbane School 313

Pink Ribbon Stores 231

Balance as per General Ledger control Ac

544

Creditors Schedule

As of June 30, 20xx

Richlands Farms 220

Donne Farm 143

Sparkle Shops 825

Balance as per General Ledger control Ac

1188



6. Trial balance

6.1 Preparing Trial Balance

A trial balance is an accounting worksheet that lists each account name and balance that is

recorded in the general ledger, and these are compiled in debit and credit columns. The trial

balance is to verify that all the postings to the general ledger do in fact balance whereby all

the debit entries equal all credit entries. This is a quick check that highlights if any errors

have occurred in posting entries to the ledgers.

You perform a trial balance by transferring all the general ledger account ending balances to

the trial balance in the appropriate column of credit or debit. For example, the bank account

is showing a debit balance at the end of the period and would be posted to the debit column

of the trial balance. Accounts with credit balances will appear in the credit column of the trial

balance. At the end of this process, the debit column should equal the credit column. Again,

this is one of the fundamental rules of accounting.

In the example below, the general ledger account folio number and name circled in red, and

the balance of the account circled in green, are the elements of information transferred to the

trial balance as shown below. The nature of the balance (debit or credit) determines which

column to use in the trial balance.



Example Trial Balance

6.2 Correcting errors in trial balance

Steps to take when trial balance does not balance:

• Check that you have transferred each general ledger balance to the trial balance

correctly

• Check that a general ledger account balance was not entered into the incorrect

side of the trial balance

• Check that the journal entries have been entered into the general ledger correctly

Common causes of an unbalanced trial balance

These include:

• A general ledger account balance has been brought forward incorrectly

• A number has a transposition error. This means that the two digits in a number will

have been reversed inadvertently, for example, $847 was entered as $874

o One way to check for a transposition error is to take the larger balance of the

trial balance and subtract away the lower balance of the trial balance, and if

the number will divide equally by nine, then there is a high chance that you

are looking for a transposition error. Using the numbers provided in this



example $874 - $847 = $27. If we then divide by nine, $27 ÷ 9 = 3, we find the

result is three with no decimal carryover

Modified from: Fresh Books Cloud Accounting, “Accounting Errors: What is a Transposition Error”,

https://www.freshbooks.com/hub/accounting/transposition-error. Accessed on 28/07/2020.

• A general ledger balance entered on the wrong side. To find this kind of error we take

the lower trial balance number away from the higher trial balance number and then

divide by two. If a number is placed on the incorrect side, it is this number that we are

looking for

o Let us assume on our trial balance shown above, the $847 loss on the sale of

the asset was placed on the credit side instead of the debit side. This would

mean that the credit side would be $336,899.59 and if we subtract the debit

total of $335,205.59 we have a difference of $1694 and if we divide this by

two, we find that we are looking for $847

• Calculations for the general ledger balances are incorrect. These calculations should

be checked prior to transfer to trial balance

• A calculation error on the trial balance

Practice exercise 8: Trial Balance

From the General Ledger solution in Exercise 6, complete the trial balance below.

Ensure the totals agree – debits = credits:

Trial Balance

As of 30 June, 20xx Bank

Furniture

Debtors

Creditors

GST Collected

GST Paid

Loan: Global Bank

Capital

Drawings

Sales

Interest Revenue

Rent Revenue

Purchases

Wages

Electricity

Totals

https://www.freshbooks.com/hub/accounting/transposition-error



Practice exercise 8 solution

Trial Balance

As of 30 June, 20xx Bank 3732

Furniture 600

Debtors 544

Creditors 1188

GST Collected 100

GST Paid 164

Loan: Global Bank 500

Capital 4200

Drawings 300

Sales 800

Interest Revenue 12

Rent Revenue 50

Purchases 760

Wages 620

Electricity 130

Totals 6850 6850



7. Glossary of accounting terms

AASB: Australian Accounting Standards Board.

Account Nature: Refers to whether the account whole is either a debit or a credit nature by

default.

Asset: Items a business owns or controls that will provide a future economic benefit.

Asset Register: Used to record all the details of an asset from its purchase to its disposal.

AUASB: Auditing and Assurance Standards Board.

Bad Debt: A debt owing that that cannot be recovered.

Balance Sheet: A summary of a company’s financial position at a single moment in time.

Cash Payments Journal: A journal that records all cash outflows from the business

regardless of purpose.

Cash Receipts Journal: A journal that records all cash inflows into a business regardless of

source.

Depreciation: A reduction in the value of an asset over time, due to wear and tear and age.

Depreciation Schedule: A table that summarises the annual depreciation claim for each

asset item and each asset group for the purpose of creating the accounting adjustment

journals and the business tax return.

Doubtful Debt: A debt that appears unlikely to be recovered, though all avenues of recovery

have not yet been completed.

End of Period Adjustments: Adjustment is made at the end of an accounting period to

correct for errors or account adjustments that need to be made.

General Journal: is used to record ‘general’ transactions that do not meet the criteria to be

entered into any specialist journals.

General Ledger: is the core of the accounting system and the ultimate destination of the

breakup of all business transactions. It is the general ledger that provides understandable

information to be used in the management processes of a business.

Low-Value Pool: A pooled group of assets costing more than $300 and less than

$1000 tax-exempt that is used to simplify the depreciation process

Prepayment: A payment that is made by the business for goods or services not yet

delivered or used.



Profit and Loss Statement: A financial statement that reports a company’s trading

performance over a chosen period.

Purchasers Journal: A journal that records all credit purchases made by the business.

Purchasers Returns Journal: A journal that records any returns of purchases made on

credit and recorded on the purchases journal.

Sales Journal: A journal that records all credit sales made by the business.

Sales Returns Journal: A journal that records any returns of sales made on credit and

recorded in the sales journal.

Trial Balance: A form used that lists all debit and credit general ledger account balances for

the purpose of checking for a balance of the accounts.

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