2. Elements of A Business Entity
• In bookkeeping a business is considered to have 3 elements. These
are It`s
1. Assets - Value of all which are owned
2. Liabilities - Value of all which are owed
3. Owner`s Equity - Value of It`s Net Worth
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3. Transactions of business
• Exchange of products or services is referred as a transaction.
Transactions change elements of businesses.
Example- Tom & Company borrows $1000 to from ABC Bank
Result of This Transaction to Tom & Co is
Cash Asset Increase by $1000
Bank Loan Liability Increase by $1000
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4. What is Bookkeeping
• Bookkeeping is the systematic way of recording financial transactions
of a business.
• In recording the changes to Assets, Liabilities, Owner`s Equity are
considered.
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5. Elements of Bookkeeping
• Double Entry System
• Source Documents
• Journal/The day book
• Ledger
• Trial Balance
• Financial Statements
• Post Closing Trial Balance
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6. Double Entry Bookkeeping System
• Double Entry Bookkeeping Method in bookkeeping
Identifies dual affect of each transaction to assets, liabilities or
owner's equity and record it in books.
• Rules of Double Entry Bookkeeping system
Increase In Asset and Expenses- Debit
Decrease In Asset and Expenses-Credit
Increase In Liability, Owner`s Capital and Sales- Credit
Decrease In Liability, Owner`s Capital and Sales- Debit
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7. Bookkeeping Cycle
• Journalize transactions from source documents using double entry
system
• Post to ledger
• Prepare Trial Balance, & do Adjustments
• Prepare Financial Statements
• Prepare Post Closing Trial Balance
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8. Journalize Transactions from Source
Documents
• Source Documents
Original record containing the details to substantiate a transaction
entered in an accounting system.
Example - Purchase Invoice, Sales Receipt, Credit Note, Debit Note
• Journal
Journal is a the book of original entry. And the transactions are
journalized as soon as they are occurred.
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9. Journal
• A typical format of a journal is shown below. Business entity can
specialize and keep separate journals for separate transactions as
well.
Journal Page No 1
Date Account Title PR Debit Credit
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10. Journalize transaction
• Example - Tom & Company Sales goods for $1000 on 02nd February
2017
• Result of this transaction is, Company`s Cash Asset increases and
Sales Income Increases by $1000.
• Applying rules of double entry to this transaction will Debit Cash and
Credit Sales.
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11. Journalized Transaction
Journal Page No 1
Date Account Title PR Debit Credit
2017-
02 2 Cash 1,000
Sales Account 1,000
Sales Receipt No XXX
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12. Post to Ledger
• At the end of each day the bookkeeper transfer the entries from the
journal to the ledger. This is referred to as posting to ledger.
• The ledger consist separate accounts for all assets, liabilities, owner`s
equity, Income and Expenses. Collection of those accounts are called
the ledger.
• A ledger account has two sides Left and the right. Left side is for
debut transaction and right is for credit transactions.
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13. Posting to ledger
No1
2017-
02 1 Sales 1 1000
No2
2017-
02 1 Cash 1 1000
Cash Account
Sales Account
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14. Posting to ledger
Journal Page No 1
Date Account Title PR Debit Credit
2017-
02 2 Cash 1 1,000
Sales Account 2 1,000
Sales Receipt No XXX
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15. Prepare Trial Balance
• At a considered date the bookkeeper list down all the balances of the
ledger accounts to a report. This is called the trial balance.
• To prepare trial balance the bookkeeper go through all the ledger
accounts and pencil footing the difference between credit & Debit
sides.
• These difference will list down in the Trial Balance as debit and credit
balances.
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16. Trial Balance
Cash 1 1000
Sales 2 1000
Sales Returns 3 10
Purchases 4 100
Purchase Returns 5 10
Inventory 4 900
Equipments 5 200
Drawings 6 20
Selling Expenses 7 10
Creditors 8 1000
Owners Equity 9 230
2240 2240
Tom & Company
Trial Balance
As at 28.02.201X
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17. Trial Balance
• The Totals of Debits and Credits of the trial balance should equal.
Then the Trial balance is In balance
• Trial balance may Out of balance.
• A trial balance may out of balance due to errors in posting.
• Example- Missing posting entry to one ledger account
Debit both accounts
Debit and Credit different amounts
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18. Trial Balance
• When trial balance is out of balance the bookkeeper used to re-check
the debit and credit totals. If any totaling mistake has happened then
it is sorted.
• If it is still out of balance the bookkeeper used to go through the
pencil footings, journal and posting entries to locate any errors.
• If any error is met the bookkeeper needs to correct it to get the trial
balance in balance.
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19. Adjusting entries
• Adjusting entries are Journal entries used to correct errors in posting
• And used to record the physical inventory balance at the end of
period.
• Etc.
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20. Adjusting Entries
• Examples of adjusting journal entries are shown below
Journal Page No 1
Date Account Title PR Debit Credit
2017-
2 28 Adjusting Entries
cash 1 10
Sales 2 10
Error corection
2017-
2 28 Revenue and epenses summary 10 300
Inventory 4 300
Recording physical inventory
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21. Adjusted Trial Balance
• After making adjusting entries in Journal and posting the Adjusted
Trial balance can be prepared as shown below.
Cash 1 1000
Sales 2 1000
Sales Returns 3 10
Purchases 4 100
Purchase Returns 5 10
Inventory 4 600
Equipments 5 200
Drawings 6 20
Selling Expenses 7 10
Creditors 8 1000
Owners Equity 9 230
Revenue & Expence
Summary 10 300
2240 2240
Tom & Company
Adjusted Trial Balance
As at 28.02.201X
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22. Financial Statements
• Consists
The Income Statement,
Capital Statement,
Balance Sheet,
Let`s go through one by one.
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23. Income Statement
• Income statement is prepared for measure the profitability of the
business over a period.
• Income statement is prepared in report form.
• Income and Expenses account balances are considered in preparing
income statement.
• Income statement shows the Gross profit and the Net profit
• Gross profit is calculated by deducting Cost of goods sold from Sales.
• Net profit is calculated by deducting other expenses from Gross profit
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24. Income Statement
• Typical form a Income Statement is shown below.
Sales 1,010
Sales Returns (10) 1,000
opening inventory 100
(+)purchases 100
(-)Purchaes Returns (10) 90
190
(-)Closing Inventory 40
Cost of Goods Sold 150
Gross Profit 850
(-)Selling & Other Expenses (10)
Net Profit 840
Tom & Company
Income Statement
for the period ended in 28.02.201X
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25. Capital Statement
• Capital Statement is prepared to report the changes during the period
to owner`s equity accounts of a company.
• To prepare capitals statement, balance of accounts related to owner`s
equity are considered.
• And the Net profit or loss occurred during the period will be
considered as well.
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26. Capital Statement
• Typical format of a Capital Statement is shown below.
Opening Capital 150
(+) Additional Investment 80
230
(+) Net Proft of the period 840
Capital after net profit 1,070
(-)Drawings (20)
Closing Balance as at 28.02.201X 1,050
Tom & Company
Capital Statement
for the period ended in 28.02.201X
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27. Balance Sheet
• In order to report the financial condition at a certain date The balance
sheet is prepared.
• The assets, Liabilities and the Owner`s Equity related accounts
balance are listed to prepare the balance sheet.
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28. Balance Sheet
• A typical form of a balance sheet is shown below.
Assets
Cash in hand 1,010
Closing Inventory 40
Equipments 1,000
Total Assets 2050
Liabilities
Creditors 1000
Total Liabilities 1000
Owner`s Equity 230
(-)Drawings (20)
210
(+)Net Profit 840
1050
Total Liabilities & Owner`s Capital 2050
As at 28.02.201X
Tom & Company
Balance Sheet
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29. Revenue & Expense Summery
• At the end of a accounting period Revenue & expense summary is
prepared to close all income and expenses.
• Closing entries will be made in general journal transferring all income
and expense balances to revenue and expense summary.
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30. Revenue & Expense Summary Closing Entries
Journal Page No 12
Date Account Title PR Debit Credit
Closing Entries
2017-Feb 28 Sales 2 1,010
Purchase Returns 5 10
Revenue & Expense Summary 10 1,020
closing all Income related account balance
2017-Feb 28 Revenue & Expense Summary 10 120
Purchases 3 100
Sales Return 4 10
Selling & Other Expenses 7 10
closing all Expence related account balance
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31. Closing Revenue & Expense Summary Account
• At the end of accounting period the balance of the revenue &
expense summary which equals to the profit or loss of the period will
be transferred to capital accounts.
• With closing revenue & expenses summary, the Balance of the
drawing account will be transferred to capital account as well
• A journal entry will be made to get capital account up-to-date
• .
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32. Closing Revenue & Expense Summary Account
Journal Page No 12
Account Title PR Debit Credit
Closing Entries
28 Revenue & Expense Summary 10 840
Capital Account 9 840
Transfer profit to capital accounts
28 Capital Account 9 20
Drawings Account 6 20
Transfer profit to capital accounts
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33. Post-Closing Trial Balance
• After closing all temporary accounts (Income, Expenses and Drawing
Accounts) the remaining Assets, Liabilities and Capital Accounts will
be balances & Ruled. Balance & Ruled account is shown below.
• And the all the balances of them will be listed on a trial balance.
Cash Account No1
2017-
Feb 1 Sales 1 1000
2017-
Feb 28 Sales 8 10
2017-
Feb 28 Balance 1010
2017-
Feb 28 1010
2017-
Feb 28 1010
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34. Post-Closing Trial Balance
Cash In Hand 1 1010
Inventory 4 40
Equipments 5 1000
Creditors 8 1000
Capital Account 9 1050
2050 2050
Tom & Company
Post-Closing Trial Balance
As at 28.02.201X
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