COMM1140 Financial Management
Week 3
Recording Business Transactions –
Journal Entries
Tutor:
2Assessment timeline
Week 1
Lectures
start
Tutorials
start
Week 2
Week 3
Week 4
Week 5
Online
Quiz
(20%) due
Friday, 13
October at
5PM
Week 6
FLEXIBILITY
WEEK
(No lecture
or tutorial)
Week 7
Week 8
Week 9
Week 10
Group
Assessment
Due (15%)
Final Lecture
& Tutorial
Final Exam
Period
COMM140
Final Exam
(50%)
*Ongoing assessment from Week 2: Tutorial Participation (15%) (Homework + Individual participation)
3Tutorial Agenda
Lecture review and discussion
Tutorial (homework) questions:
Discussion Questions: 3.4, 3.6
Problem Questions: 3.12, 3.18
Socrative quiz
4Learning Objectives
• Carry out transaction analysis and determine the impact of transactions on
elements of balance sheets and income statements
• Understand the double-entry accounting system
• Understand debits and credits in the context of transaction analysis
5Expanded Accounting Equation
A = L + SC + (Op. RP + R – E – D)
A = L + SC + RP
A = L + OE
(Retained Profits)
Note:
A = Assets
L = Liabilities
OE = Owners’ Equity
SC = Share Capital
RP = Retained Profits
R = Revenue
E = Expenses
D = Dividends
61. Transaction analysis
1. Accounting transaction: an economic event that affects a company’s assets,
liabilities or equity at the time of the event.
• What is an example of an accounting transaction?
2. Transaction analysis: involves examining each business transaction with the
aim of understanding its effect on the accounting equation.
3. Golden rule of accounting (the double entry accounting system): Every
accounting transaction must affect at least TWO accounts (at least ONE
debited account & ONE credited account). The Accounting Equation (Assets =
Liabilities + Equity) must always be balanced.
71.2 Transaction analysis
Examples:
1. Borrowed $10,000 cash from the bank.
2. Purchase equipment for $50,000 cash.
3. Catering services provided for an office function; billed customer for $1,000
Assets = Liabilities + Owner’s Equity
↑ 10,000 (Cash) ↑ 10,000 (Loan) NE
↑ 50,000 (Equipment) ↓ 50,000 (Cash) NE NE
↑ 1,000 (Accounts Receivable) NE
↑ 1,000 (Service Revenue
→ Retained Profits)
↑ 11,000 ↑ 10,000 ↑ 1,000
↑ 11,000 (Assets) = ↑ 11,000 (Liabilities + Owners’ Equity)
NOTE: ‘Revenue’ is an account classification, and ‘Service Revenue’ is the specific
account name that you would see in a journal entry recording this accounting transaction.
81.3 Golden rule of accounting (double entry accounting)
• Golden rule of accounting (the double entry accounting system):
Every accounting transaction must affect at least TWO accounts (at
least ONE debited account & ONE credited account). The Accounting
Equation (Assets = Liabilities + Equity) must always be balanced.
• The normal balance of an account (i.e., whether an account is INCREASED with a debit or credit)
depends on the account classification (A, L, OE, R or E).
• Assets, Expenses & Dividends Paid = Normal debit balance (increase with a debit)
• Liabilities, Equity & Revenue = Normal credit balance (increase with a credit)
• The accounting equation must remain balanced (A=L+OE).
A + E = L + OE* + R
↑ Dr Dr Cr Cr Cr
↓ Cr Cr Dr Dr Dr
* To help you memorise how
debits and credits work,
here OE = SC + Op.RP – D
(i.e., R and E are expanded
in the accounting equation).
9Recording accounting transactions using journal entries
• A separate journal entry must be recorded for each accounting transaction.
• They are prepared using the rules of debit and credit: Dr = Cr
• In a journal entry, the debited account is always listed first, and the credited account is
listed second (and is indented!). Total debits = Total credits. (see below).
• Example: on 7 February 2023, employee wages of $500,000 that were outstanding
from January were paid:
Date of transaction Account and explanation Debit Credit
7 February 2023 Dr. Wages Payable
Cr. Cash
(Employee wages paid)
$500,000
$500,000
Purchasing a non-current asset and recording depreciation
1. Machinery with a life of 5 years is purchased for $5 000 cash:
Dr Machinery 5 000
Cr Cash 5 000
2. Straight line depreciation each year, no salvage value :
Dr Depreciation expense 1 000
Cr Accumulated depreciation 1 000
A L OE
Machinery ↑ (Dr) Cash ↓ (Cr) NE NE
A L OE
Accumulated depreciation
(A↓, Cr) NE
Depreciation expense ↑
(OE↓, Dr)
= +
= +
• Accumulated depreciation (contra asset account, B/S) shows all depreciation charged against an asset to date.
• Depreciation expense (I/S) shows only this year’s depreciation allocation.
• Net Book Value = Original Purchase Cost – Accumulated Depreciation
NOTE about ‘Retained Profits’: You should NEVER use the Retained Profits account when recording any
transaction with respect to revenues and expenses in journal entries.
• The Retained Profits account is used during the closing process at the end of the accounting period when
revenue and expense accounts are closed to retained earnings.
Dividends
1. Company A declares $20 000 dividends:
Dr Retained profits 20 000
Cr Dividends payable 20 000
2. Company B paid off $2000 dividends previously declared:
Dr Dividends payable 20 000
Cr Cash 20 000
3. Company C declared and paid $2000 dividends to shareholders:
Dr Retained profits 20 000
Cr Cash 20 000
A L OE
Dividends payable ↑ (Cr) RP ↓ (Dr)
A L OE
Cash ↓ (Cr) Dividends payable ↓ (Dr) NE
= +
= +
A L OE
Cash ↓ (Cr) RP ↓ (Dr)
= +
12
Using the Transaction Analysis Template
to record accounting transactions
Use the Transaction Analysis Template to help you record accounting transactions.
Follow these steps when recording accounting transactions:
1) Identify the accounts affected by the transaction
2) Identify the relevant debit/credit rules for those accounts:
• For each account, is it classified as an Asset, Liability, Owners’ Equity, Revenue, Expense or Dividend?
• What is the normal balance? (Does the account increase with a debit or credit side?)
• Does the transaction increase or decrease that specific account? Is the account therefore debited or credited?
3) Record the transaction in the journal: journalise the transaction – always put the debited accounts BEFORE the
credited accounts in the journal entry.
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COMM1140: Week 3 Tutorial Questions
• Please log into Microsoft Teams to access the in-class worksheet for
the Week 3 tutorial. We will use this to answer the tutorial questions.
• Tutorial solutions will be posted on Moodle at the end of this week.
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Discussion Questions
15
DQ3.4
Why does an increase in expenses result in a decrease in shareholders’
equity? What other part of the accounting equation is likely to be affected?
• Expenses decrease profit.
• Profit increases retained profits, which is a part of shareholders’ equity.
• Expense ↑ Profit ↓ Retained Profit ↓ shareholders’ equity ↓ .
• It is likely to also increase a liability, such as a payable or decrease an
asset such as cash.
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DQ3.6 – Account Balance
Which accounts normally have a debit balance and which
normally have a credit balance?
Assets Liabilities Owners’ equity Revenues Expenses
Debit Credit Credit Credit Debit
• Cash
• Accounts
receivable
• Inventory
• Land & buildings
• Prepayments
• Accounts payable
• Loan
• Revenue received
in advance
(unearned
revenue)
• Share capital
• Retained
profits
• Sales revenue
• Services
revenue
• Salaries and
wages
expense
• Rent expense
• Depreciation
expense
17
Problem Questions
1. Borrowed $80 000 cash from the bank with an agreement to pay back the loan in 4 years with
interest of 10 per cent per annum.
Dr Cash $80 000
Cr Bank loan $80 000
2. Purchased inventory costing $64 000 with cash.
Dr Inventory $64 000
Cr Cash $64 000
3. Purchased additional inventory costing $30 000 on credit.
Dr Inventory $30 000
Cr Accounts payable $30 000
4. Received an $16 000 deposit on a rental property to be rented for the month of January 2023.
Dr Cash $16,000
Cr Unearned revenue $16,000
5. Sold inventory costing $16 000 to customers for $29 000 on account.
Dr COGS $16,000
Cr Inventory $16,000
Dr Accounts receivable $29,000
Cr Sales $29,000
6. Received $11 000 from a customer in question 5.
Dr Cash $11,000
Cr Accounts receivable $11,000
7. Paid $10 000 owing to a supplier.
Dr Accounts payable $10,000
Cr Cash $10,000
DRAGONS LTD
BALANCE SHEET AS AT 30 JUNE 2021
Assets $ Liabilities and Shareholders’ equity $
Current assets Current liabilities
Cash 14 000 Accounts payable 12 000
Accounts receivable 36 000 Tax payable 6 000
Inventory 42 000
Shareholders’ equity
Share capital 40 000
Retained profits 34 000
92 000 92 000
Required: Prepare journal entries, an income statement for the year ended 30 June 2022
and a balance sheet as at 30 June 2022.
1. Credit sales, $200 000.
2. Cash sales, $6 000.
3. Collections from customers, $150 000.
4. Purchases of inventory on credit, $70 000.
5. Payments of accounts payable, $50 000.
6. Cost of goods sold, $80 000.
7. Wages expense, $90 000, not yet paid.
8. Wages paid, $22 000.
9. Paid tax payable, $6 000.
10. Cash dividends of $20 000, declared and paid.
During the year ended 30 June 2022, the following information was recorded in the company's accounts:
P3.18 – Journal Entries
1. Credit sales, $200 000.
Dr Accounts receivable $200,000
Cr Sales revenue $200,000
2. Cash sales, $6000.
Dr Cash $6,000
Cr Sales revenue $6,000
3. Collections from customers, $150 000.
Dr Cash $150,000
Cr Accounts receivable $150,000
4. Purchases of inventory on credit, $70 000.
Dr Inventory $70,000
Cr Accounts payable $70,000
5. Payments of accounts payable, $50 000.
Dr Accounts payable $50,000
Cr Cash $50,000
Dragons Ltd – Journal entries
6. Cost of goods sold, $80 000.
Dr COGS $80,000
Cr Inventory $80,000
7. Wages expense, $90 000, not yet paid.
Dr Wages expense $90,000
Cr Wages payable $90,000
8. Wages paid, $22 000.
Dr Wages payable $22,000
Cr Cash $22,000
9. Paid tax payable, $6000.
Dr Tax payable $6,000
Cr Cash $6,000
10. Cash dividends of $20 000, declared and paid.
Dr Retained Profits $20,000
Cr Cash $20,000
Dragons Ltd – Journal entries
1 Dr Accounts receivable 200,000
Cr Sales revenue 200,000
2 Dr Cash 6,000
Cr Sales revenue 6,000
3 Dr Cash 150,000
Cr Accounts receivable 150,000
4 Dr Inventory 70,000
Cr Accounts payable 70,000
5 Dr Accounts payable 50,000
Cr Cash 50,000
6 Dr COGS 80,000
Cr Inventory 80,000
7 Dr Wages expense 90,000
Cr Wages payable 90,000
8 Dr Wages payable 22,000
Cr Cash 22,000
9 Dr Tax payable 6,000
Cr Cash 6,000
10 Dr Retained Profits 20,000
Cr Cash 20,000
Accounts:
• Accounts receivable
• Sales
• Cash
• Inventory
• Accounts payable
• COGS
• Wages expense
• Wages payable
• Tax payable
• Retained Profit
A
R
A
A
L
E
E
L
L
OE
P 3.18 Dragons Ltd
Prepare journal entries, an income statement and a balance sheet for the year
ended 30 June 2022
→ Steps?
Dragons Ltd
Income Statement for the year ended 30 June 2022
$
Sales revenue 206,000
Less: COGS (80,000)
Gross Profit 126,000
Less: Other expenses
Wages expense (90,000)
Net profit 36,000
P 3.18 Dragons Ltd
Prepare journal entries, an income
statement and a balance sheet for
the year ended 30 June 2022 →
Steps?
Dragons Ltd
Balance Sheet as at 30 June 2022
Assets $
Current assets
Cash 72,000
Accounts receivable 86,000
Inventory 32,000
Total assets 190,000
Liabilities and Equity
Current Liabilities
Accounts payable 32,000
Income tax payable 0
Wages payable 68,000
Total liabilities 100,000
Shareholder’s equity
Share capital 40,000
Retained profits 50,000
Total shareholder’s equity 90,000
Total liabilities and shareholder’s equity 190,000
Retained Profit calculation:
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Socrative quiz: How to access
Access Socrative room via -> https://b.socrative.com/login/student/ or
scan this QR code.
Access your unique room name at the top of the homepage.
You can attempt the questions immediately upon entry. I suggest you
take about 10 minutes to answer all the questions.
You can work on the quiz individually or in groups.
This quiz is for your revision purposes – it does not count towards your
assessment so don’t worry if you make mistakes. ☺
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Your To-Do List…
• Next week, Week 4, we will cover Topic 4: Recording Business Transactions –
Adjusting Entries
• Your To-Do List to prepare for Week 4:
✓ Complete Week 4 required reading (see student handout in lecture materials folder)
✓ Attend the lecture
✓ Answer and submit allocated Week 4 homework tutorial questions before 9am on
Wednesday using the homework submission link on Moodle
✓ Attend your tutorial and participate!
✓ Check your emails regularly – for any important course announcements posted on
Moodle
✓ If you have any questions, post them in the relevant Q&A forum on Moodle. For
personal questions, send an email to: COMM1140@unsw.edu.au