Analysing
Transactions
✓ Describe the characteristics of an account
✓ List the rules of debit and credit and the
normal balances of accounts.
✓ Prepare a trial balance
What is an Account and its usefulness?
Characteristics of an Account
Debit and credit
Trial balance
A record to record the increase and decrease of each item
on the Financial Statement
◦ Cash account: record the increase and decrease of
cash
◦ Fixed Assets account: record the increase and
decrease of fixed assets
◦ Liabilities account: record the increase and decrease
of liabilities
◦ ....
A company will have separate accounts for such items
as cash, salaries expense, accounts payable, and so on.
Group of accounts called a ledger
List of accounts called a chart of accounts
Assets = Liabilities + Owner’s Equity
Revenues: a result of providing services or
selling products to customers.
Expenses: the using up of assets and the
consuming of services in the process of
earning revenues.
T Account Columnar Account
There are 4 columns:
◦ Account title
◦ Debit
◦ Credit
◦ Balance
There are 3 parts:
◦ Title
◦ Debit side (Dr)
◦ Credit side (Cr)
When an amount entered on the left side of
an account (whatever!!!), is called debit to the
account (or the account is said to be debited)
On the other hand, when an amount entered
on the right side of an account (whatever!!!),
is called credit to the account (or the account
is said to be credited)
The sum of the increases recorded in an
account is usually greater than the sum of the
decreases recorded in the account.
Increase side is normal balances of an
account
Remember the phrase:
◦ After Eating Dinner (Debit)
◦ Let’s Read Comics (Credit)
EASY???
* Every transaction affects at least two accounts
Deposit in bank account for initial capital
investment
Purchase a machine by cash
Borrow money from your family
Sell goods to customer and receive cash
The sum of debits must always equal the sum
of the credits for each transaction.
1
• Transaction Authorised
2
• Transaction takes place
3
• Business document prepared
4
• Entry recorded in journal
5
• Entry posted to ledger
Steps:
◦ 1: Determine which account is affected by the
transaction
◦ 2: Increase or Decrease?
◦ 3: Debit or Credit?
“Trial” is process of proving or testing
TB is used as a proof that the debit balances
equal credit balances.
❖ Remember: TB does not ensure that the ledger is
100% correct.
Prepare a TB
You have a list of transactions (provided in
class).
You might want to help me to prepare a TB.
Remember to follow steps as stated below:
◦ 1: Record transactions in journal
◦ 2: Post to accounts
◦ 3: Make a TB
Column incorrectly added
Amount incorrectly entered on TB
Posted a wrong amount
Debit posted as credit, or vice versa
Debit or credit omitted
The following errors still make a TB to be
balanced:
◦ Not journalising a transaction or posting a
transaction
◦ Recording the same wrong amount for both debit
and credit parts of a transaction
◦ Recording the same transaction more than once
◦ Posting a part of a transaction correctly as a debit
or credit but to the wrong account
