Financial Accounting A

HBA39c & HBE20e

Topic 3: Recording business transactions

Questions?
Class time (lectures/tutorials):
Ask your questions during class/during the break

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2 Financial Accounting A
Class plan

Topic 1: Topic 2: Topic 3:

The language of Introduction to Recording business
business financial statements transactions

• Week 1 (26.09) • Week 2 (03.10) • Week 3 (10.10)

• Week 4 (17.10)
• Week 5 (24.10)
• Assignment 1

3 Financial Accounting A
Class plan

Topic 4: Topic 5: Topic 6: Revision & exam

Accrual accounting Cash and receivables Inventory information

• Week 6 (31.10) • Week 8 (14.11) • Week 10 (28.11) • Week 12 (12.12)

• Week 7 (7.11) • Assignment 2 • Assignment 3 • Week 13 (19.12)
• Week 9 (21.11) • Week 11 (5.12) • Assignment 4

4 Financial Accounting A
This Chapter…

1. The accounting process

2. Recording business transactions

Learning objectives
LO3: Record business transactions using double entry bookkeeping.

5 Financial Accounting A
6 Financial Accounting A
7 Financial Accounting A
The accounting equation

The basic equation

The sum of an entity’s equity and liabilities is equal to the total assets

Assets Liabilities Equity

• The equation is always balanced

• Base for double entry bookkeeping

8 Financial Accounting A
The accounting equation (2)

Every transaction is recorded through

debit and credit, and ensures the
equation stays balanced: double-
entry bookkeeping
The equation stays balanced because
each transaction causes changes on
both sides of the equation
OR changes on the same side that
cancel each other out.

9 Financial Accounting A
The accounting process

Recognize a business transactions

Analyze impact on the accounting equation

D C Analyze impact on accounts

Journalize transaction and post to the

ledger

Make trial balance

10 Financial Accounting A
The accounting process (2)
Recognize a business transactions

Transactions are events that have an impact on the business, that we

can measure in a reliable way.
A transaction changes the resources or claims to those resources.
Example: Barry Callebaut sells its products, buys a machine,
borrows money, pays its staff…

11 Financial Accounting A
The accounting process (3)
Recognize a business transactions

What are we accounting for?

Financial position
Assets (economic resources controlled as a result of past events: what we own)
Liabilities (present obligations to transfer an economic resource as a result of past events: what
we owe)
Equity (residual of assets – liabilities; residual claim of the shareholders)

Financial performance
Income (increase in economic benefits)
Expense (decrease in economic benefits)

12 Financial Accounting A
The accounting process (3)
Recognize a business transactions

What are we accounting for?

Financial position
Assets (economic resources controlled as a result of past events: what we own)
Liabilities (present obligations to transfer an economic resource as a result of past events: what
we owe)
Equity (residual of assets – liabilities; residual claim of the shareholders)

Financial performance
Income (increase in economic benefits)
Expense (decrease in economic benefits)

13 Financial Accounting A
The accounting process (4)
Recognize a business transactions

In order to operate and do business, Barry Callebaut would

need to know more detail than the totals in the financial
statements.
➔What do the inventories consist of?
➔What property, plant and equipment do we have?

Barry Callebaut will keep record of all changes in each

asset, liability or shareholders’ equity.
➔ We call these records accounts.
➔ More detail = more accounts.

14 Financial Accounting A
The accounting process (5)
How many
accounts would
Recognize a business transactions Barry Callebaut
need?

In order to operate and do business, Barry Callebaut would

need to know more detail than the totals in the financial
statements.
➔What do the inventories consist of?
➔What property, plant and equipment do we have?

Barry Callebaut will keep record of all changes in each

asset, liability or shareholders’ equity.
➔ We call these records accounts.
➔ More detail = more accounts.

15 Financial Accounting A
The accounting process (6)
Recognize a business transactions

Typical accounts used in recording business transactions (assets):

• Cash: Money and other medium of exchange (examples: bank account balances, coins, bank
notes, cheques…)
• Accounts receivable (debtors, receivables): Amount of cash expected to be collected from
debtors.
• Notes receivable: Signed note promising payment on certain date or after a certain period
(usually with interest). More binding, but similar to receivables.
• Inventory (stocks, merchandise inventory): raw materials, work-in-progress and finished
goods ready to sell to customers.

16 Financial Accounting A
The accounting process (7)
Recognize a business transactions

Typical accounts used in recording business transactions (assets):

• Pre-paid expenses (prepayment): Payment that provides a future economic benefit (good or
service). For example: rent, insurance, leased goods, deposit …
• PPE (fixed assets, plant assets): Examples: land, buildings, equipment, furniture and fixtures.

17 Financial Accounting A
The accounting process (8)
Recognize a business transactions

Typical accounts used in recording business transactions (liabilities):

• Accounts payable (payables, creditors): Opposite of accounts receivable: promise to pay an
invoice.
• Notes payable: Opposite of notes receivable: Amounts that will need to be paid due to a
signed promise (usually with interest).
• Accrued liabilities: A liability for an expense you have not yet incurred. Common examples
are interest payable and salary payable.

18 Financial Accounting A
The accounting process (9)
Recognize a business transactions

Typical accounts used in recording business transactions (equity):

• Share capital: Owners’ investment in the business. A business will receive cash in exchange
for shares.
• Retained earnings (or accumulated losses): Cumulative net income received over the
business’ existence, minus accumulated dividends.
• Dividends: Optional distribution of profit to shareholders, declared by the board of directors.

19 Financial Accounting A
The accounting process (10)
Recognize a business transactions

Typical accounts used in recording business transactions (equity):

• Income: Increase in economic benefits. Examples of income accounts:
• Sales revenue (revenue or net sales): increase in equity from delivering goods or services.
• Service revenue: increase in equity from providing a service to customers.
• Rent revenue or rental income: increase in equity from renting out items.
• Expenses: Decrease in economic benefits, cost of operating a business. Examples of expense
accounts:
• COGS: cost of goods sold
• Salary expense
• Income tax expense

20 Financial Accounting A
The accounting process (11)

Recognize a business transactions

Analyze impact on the accounting equation

D C Analyze impact on accounts

Journalize transaction and post to the

ledger

Make trial balance

21 Financial Accounting A
Illustration
The following illustration will demonstrate for a number of common business
transactions how the accounting equation and accounts are impacted.

We will look at:

• Raising capital to start a business (transaction 1)
• Purchasing PPE (transaction 2)
• Purchasing on credit and paying on account (transaction 3 & 5)
• Generating revenue (cash and credit) and collecting on account (transaction 4, 6 & 8)
• Paying expenses (transaction 7)
• Pay out dividends (transaction 9)

22 Financial Accounting A
Illustration (2)

Example: Transaction 1 (01/03):You raise 15 000 EUR capital from investors to

start your accounting business. They pay cash in exchange for shares in your
business.

Assets Liabilities Equity

Cash Share capital

(1) 15 000 (1) 15 000
balance 15 000 balance 15 000

15 000 15 000

23 Financial Accounting A
Illustration (3)

Example: Transaction 2 (03/03): You purchase a company vehicle for 10 000

EUR using cash.

Assets Liabilities Equity

Cash PPE Share capital

Bal. 15 000 Bal. 15 000
(2) -10 000 10 000 _____
Bal. 5 000 10 000 Bal. 15 000

15 000 15 000
24 Financial Accounting A
Illustration (4)

Example: Transaction 3 (04/03): You purchase supplies from a supplier for 1 000
EUR and agree to purchase on credit.

Assets Liabilities Equity

Cash supplies PPE Accounts payable Share capital

Bal. 5 000 10 000 Bal. 15 000
(3) ____ 1 000 _____ (3) 1 000 _____
Bal. 5 000 1 000 10 000 Bal. 1 000 Bal. 15 000

16 000 16 000
25 Financial Accounting A
Illustration (5)

Example: Transaction 4 (06/03): You provide services for 3 000 EUR to a local
business who pays in cash.

Service
Assets Liabilities Equity revenue

Cash supplies PPE Accounts payable Share capital Retained earnings

Bal. 5 000 1 000 10 000 Bal. 1 000 Bal. 15 000
(4) 3 000 _____ _____ ____ (4) _____ 3 000
Bal. 8 000 1 000 10 000 Bal. 1 000 Bal. 15 000 3 000

19 000 19 000
26 Financial Accounting A
Illustration (6)

Example: Transaction 5 (15/03): You pay your supplier with cash (= pay on
account).

Assets Liabilities Equity

Cash supplies PPE Accounts payable Share capital Retained earnings

Bal. 8 000 1 000 10 000 Bal. 1 000 Bal. 15 000 3 000
(5) -1 000 _____ _____ -1 000 _____ ____
Bal. 7 000 1 000 10 000 Bal. 0 Bal. 15 000 3 000

18 000 18 000
27 Financial Accounting A
Illustration (7)

Example: Transaction 6 (16/03): You perform a service on account (i.e. the

customer can pay later). The customer agrees to pay the full amount, 1 500
EUR, within two weeks.
Service
Assets Liabilities Equity revenue

Cash Sup. PPE Accounts Share capital Retained earnings

receivable
Bal. 15 000 3 000
Bal. 7 000 1 000 10 000
(6) _____ 1 500
(6) _____ _____ _____ 1 500
Bal. 15 000 4 500
Bal. 7 000 1 000 10 000 1 500

19 500 19 500
28 Financial Accounting A
Illustration (8)

Example: Transaction 7 (18/03): You pay for the following expenses: utilities
(500 EUR) and equipment rent (500 EUR).

Utility
Assets Liabilities Equity and rent
expense

Cash Sup. PPE Accounts Share capital Retained earnings

receivable
Bal. 15 000 4 500
Bal. 7 000 1 000 10 000 1 500
(7) -500
(7) -500
(7) _____ -500
(7) -500 _____ _____ ____
Bal. 15 000 3 500
Bal. 6 000 1 000 10 000 1 500
29 Financial Accounting A
18 500 18 500
Illustration (9)

Example: Transaction 8 (30/03): Your customer pays their outstanding bill (=

collect cash on account).

Assets Liabilities Equity

Cash Sup. PPE Accounts Share capital Retained earnings

receivable
Bal. 15 000 3 500
Bal. 6 000 1 000 10 000 1 500
(7) _____ _____
(8) 1 500 _____ _____ -1 500
Bal. 15 000 3 500
Bal. 7 500 1 000 10 000 0

18 500 18 500
30 Financial Accounting A
Illustration (10)

Example: Transaction 9 (31/03): You pay your investor a dividend of 500 EUR.

Assets Liabilities Equity

Cash Sup. PPE Share capital Retained earnings

Bal. 7 500 1 000 10 000 Bal. 15 000 3 500

(9) -500 _____ _____ (7) _____ -500

Bal. 7 000 1 000 10 000 Bal. 15 000 3 000

18 000 18 000
31 Financial Accounting A
Illustration summary
ASSETS = LIABILITIES + EQUITY

Transaction Cash Accounts Supplies PPE Accounts Share Retained Details equity
receivable payable capital earnings transaction
Raise capital (1) 15 000 15 000 Issue of share
capital
Buy vehicle (2) (10 000) 10 000

purchase on credit (3) 1 000 1 000

Service provided (cash 3 000 3 000 Service income

payment)(4)
Pay on account (5) (1 000) (1 000)

Service provided (credit) (6) 1 500 1 500 Service income

Pay expenses (7) (500) (500) Utility expense

(500) (500) Rent expense
Collect cash on account (8) 1 500 (1 500)

Pay dividend (9) (500) (500) Dividend

payment
Balance 7 000 1 000 10 000 15 000 3 000

Totals 18 000 18 000

32 Financial Accounting A
Illustration
Data for summary (2)
statement of ASSETS = LIABILITIES + EQUITY

Transaction cash flows Cash Accounts Supplies PPE Accounts Share Retained Details equity
receivable payable capital earnings transaction
Raise capital (1) 15 000 15 000 Issue of share
capital
Buy vehicle (2) (10 000) 10 000

purchase on credit (3) 1 000 1 000

Service provided (cash 3 000 3 000 Service income

payment)(4)
Pay on account (5) (1 000) (1 000)

Service provided (credit) (6) 1 500 1 500 Service income

Pay expenses (7) (500) (500) Utility expense

(500) (500) Rent expense
Collect cash on account (8) 1 500 (1 500)

Pay dividend (9) (500) (500) Dividend

payment
Balance 7 000 1 000 10 000 15 000 3 000

33 Financial Accounting A
Illustration summary (3) Data for
income
ASSETS = LIABILITIES + EQUITY
statement
Transaction Cash Accounts Supplies PPE Accounts Share Retained Details equity
receivable payable capital earnings transaction
Raise capital (1) 15 000 15 000 Issue of share
capital
Buy vehicle (2) (10 000) 10 000

purchase on credit (3) 1 000 1 000

Service provided (cash 3 000 3 000 Service income

payment)(4)
Pay on account (5) (1 000) (1 000)

Service provided (credit) (6) 1 500 1 500 Service income

Pay expenses (7) (500) (500) Utility expense

(500) (500) Rent expense
Collect cash on account (8) 1 500 (1 500)

Pay dividend (9) (500) (500) Dividend

payment
Balance 7 000 1 000 10 000 15 000 3 000

34 Financial Accounting A
Illustration summary (4) Data for
statement
ASSETS = LIABILITIES + EQUITY
of changes
Transaction Cash Accounts Supplies PPE Accounts Share in equity
Retained Details equity
receivable payable capital earnings transaction
Raise capital (1) 15 000 15 000 Issue of share
capital
Buy vehicle (2) (10 000) 10 000

purchase on credit (3) 1 000 1 000

Service provided (cash 3 000 3 000 Service income

payment)(4)
Pay on account (5) (1 000) (1 000)

Service provided (credit) (6) 1 500 1 500 Service income

Pay expenses (7) (500) (500) Utility expense

(500) (500) Rent expense
Collect cash on account (8) 1 500 (1 500)

Pay dividend (9) (500) (500) Dividend

payment
Balance 7 000 1 000 10 000 15 000 3 000

35 Financial Accounting A
Illustration summary (5) Data for
ASSETS balance = LIABILITIES + EQUITY
sheet
Transaction Cash Accounts Supplies PPE Accounts Share Retained Details equity
receivable payable capital earnings transaction
Raise capital (1) 15 000 15 000 Issue of share
capital
Buy vehicle (2) (10 000) 10 000

purchase on credit (3) 1 000 1 000

Service provided (cash 3 000 3 000 Service income

payment)(4)
Pay on account (5) (1 000) (1 000)

Service provided (credit) (6) 1 500 1 500 Service income

Pay expenses (7) (500) (500) Utility expense

(500) (500) Rent expense
Collect cash on account (8) 1 500 (1 500)

Pay dividend (9) (500) (500) Dividend

payment
Balance 7 000 1 000 10 000 15 000 3 000

36 Financial Accounting A
Illustration summary (6)
Income statement March
Income
Service revenue 4 500 4 500
Balance sheet on 31/03
Expenses
Assets Liabilities
Utilities 500
Cash 7 000 Equity
Rent 500 1 000
Supplies 1 000 Share capital 15 000
Net income 3 500
PPE 10 000 Retained earnings 3 000
Total equity 18 000
Equity statement March
Total 18 000 Total liabilities and 18 000
Total equity on 01/03 0 assets equity
Issuance of capital 15 000
Net income 3 500
Dividends (500)
Total equity on 31/03 18 000

37 Financial Accounting A
Illustration summary (7)
Income statement March
Income
Service revenue 4 500 4 500
Balance sheet on 31/03
Expenses
Assets Liabilities
Utilities 500
Cash 7 000 Equity
Rent 500 1 000
Supplies 1 000 Share capital 15 000
Net income 3 500
PPE 10 000 Retained earnings 3 000
Total equity 18 000
Equity statement March
Total 18 000 Total liabilities and 18 000
Total equity on 01/03 0 assets equity
Issuance of capital 15 000
Net income 3 500
Dividends (500)
Total equity on 31/03 18 000

38 Financial Accounting A
Exercise
Indicate for each transaction which elements of the accounting equation
increase/decrease.
a. Cash investment to start business
b. Pay monthly rent
c. Purchase equipment on credit
d. Bill customer for product supplied
e. Cash withdrawal by owner for personal use
f. Cash receipt from (d)
g. Advertising expense on credit
h. Purchase of equipment with cash
i. Perform service for customers and receive cash

39 Financial Accounting A
Exercise
Record the following transactions using the accounting equation:
1. Invest 10 000 EUR cash to start a repair shop.
2. Purchased equipment for 5 000 EUR cash.
3. Pay 400 EUR cash for office supplies.
4. Pay 500 EUR cash for office rental.
5. Incur 250 EUR of advertising costs on national TV on credit.
6. Receive 6 100 EUR in cash from customers for repair service.
7. Withdraw 1 000 EUR cash for personal use.
8. Pay for employee training of 2 000 EUR.
9. Pay utility bills of 170 EUR.
10. Provide repair service on credit to customers for 750 EUR.
11. Partial payment of 120 EUR for services billed in transaction (10).

Provide the final/total accounting equation.

Provide the final balance sheet, income statement and cash flow statement

40 Financial Accounting A
Double-entry accounting

How is what we saw in the first illustration applied in practice?

Double-entry accounting records the dual effect of a transaction on an entity.

Each transaction
• affects at least 2 of an entity’s accounts;
• includes at least 2 effects on an entity’s financial statements.
The accounting equation remains balanced at all times.

41 Financial Accounting A
The T-account
An account keeps track of the increases, decreases and balance of a certain asset,
liability or shareholders’ equity (incl. revenues and expenses).
An account is represented with a T (that is why we refer to them as T-accounts).

Cash

Debit (D) Credit (C)

At the top, you can find the account name. The vertical line divides the account into a
left (or debit) side and right (or credit) side.
Every transaction will involve a debit and credit, the total debit and credit must be
equal.

42 Financial Accounting A
Debit and credit

The rules of debit and credit:

• Increases in assets are recorded on the debit (left) side; decreases on the
credit (right) side.
• Increases in liabilities or equity are recorded on the credit (right) side;
decreases on the debit (left) side.

For example: if you pay cash, you will credit the cash account. If you receive
cash, you will debit the cash account.
Cash

Debit (D) Credit (C)

43 Financial Accounting A
Debit and credit (2)

The rules of debit and credit:

Assets Liabilities Equity

Debit (D) Credit (C) Debit (D) Credit (C) Debit (D) Credit (C)

44 Financial Accounting A
Debit and credit (3)

Example: Transaction 1 (01/03):You raise 15 000 EUR capital from investors to

start your accounting business. They pay cash in exchange for shares in your
business.
• You receive cash, cash (an asset) increases ➔ Debit
• You raise share capital, share capital (equity) increases ➔ Credit
Cash Share capital
15 000 15 000
Debit (D) Credit (C)

45 Financial Accounting A
Debit and credit (4)
Example: Transaction 2 (03/03): You purchase a company vehicle for 10 000 EUR using cash.
• You spend cash, cash (an asset) decrease ➔ Credit
• You obtain a vehicle, company car (an asset) increases ➔ Debit
Cash Share capital
Bal. 15 000 Bal. 15 000
10 000
Credit (C)
Bal. 5 000
Company car
10 000
Debit (D)
46
Bal. 10 000 Financial Accounting A
Debit and credit (5)

Note that after both transactions, the accounting equation is balanced (see
earlier illustration).

What about income and expenses?

Income and expenses (income statement accounts) are part of the
shareholders’ equity.
• Income (revenue and gains) includes increases in shareholders’ equity that result from
delivering goods or services to customers, or from other activities.
• Expenses and losses are decreases in shareholders’ equity due to the cost of running the
business.

47 Financial Accounting A
Debit and credit (6)

What about income and expenses?

• Increases in income are recorded on the credit (right) side; decreases on the
debit (left) side.
• Increases in expenses or dividends are recorded on the debit (left) side;
decreases on the credit (right) side.

Why?
An increase in income, increases equity; an increase in expenses or dividends
decreases equity.

48 Financial Accounting A
Debit and credit (7)

The rules of debit and credit:

Assets Liabilities Equity

Debit (D) Credit (C) Debit (D) Credit (C) Debit (D) Credit (C)

Income Expenses

Debit (D) Credit (C) Debit (D) Credit (C)

49 Financial Accounting A
The journal

The journal (or book of original entry) is a chronological record of the

transactions.
Recording the transaction is called journalizing the transaction or making the
journal entry.

JOURNAL
Date Accounts and explanation Debit Credit

50 Financial Accounting A
The journal (2)

Example: Transaction 1 (01/03):You raise 15 000 EUR capital from investors to

start your accounting business. They pay cash in exchange for shares in your
business.
• You receive cash, cash (an asset) increases ➔ Debit
• You raise share capital, share capital (equity) increases ➔ Credit
JOURNAL
Date Accounts and explanation Debit Credit
01/03 Cash 15 000
Share capital 15 000
Issued shares

51 Financial Accounting A
The ledger

The journal records transactions in a chronological order, so it does not tell you
the total balances.
The ledger is a grouping of all the T-accounts, with their balances.
All individual accounts combined make up the ledger.
Copying data onto the ledger is called posting.
The ledger is usually computerized.

52 Financial Accounting A
Posting to the accounts

After entering a transaction into the journal, data is posted to the ledger.

JOURNAL
Date Accounts and explanation Debit Credit
01/03 Cash 15 000
Share capital 15 000
Issued shares

Cash Share capital

15 000 15 000
Debit (D) Credit (C)

53 Financial Accounting A
Illustration
The following illustration will demonstrate for a number of common business
transactions how to journalize them and post to the ledger.

We will look at:

• Raising capital to start a business (transaction 1)
• Purchasing PPE (transaction 2)
• Purchasing on credit and paying on account (transaction 3 & 5)
• Generating revenue (cash and credit) and collecting on account (transaction 4, 6 & 8)
• Paying expenses (transaction 7)
• Pay out dividends (transaction 9)

54 Financial Accounting A
Illustration (2)
Example: Transaction 1 (01/03):You raise 15 000 EUR capital from investors to start your
accounting business. They pay cash in exchange for shares in your business.

JOURNAL
Date Accounts and explanation Debit Credit
01/03 Cash 15 000
Share capital 15 000
Issued shares

Assets = Liabilities + Equity

Accounting equation
+ 15 000 0 + 15 000

The ledger accounts Cash Share capital

(1) 15 000 15 000 (1)

55 Financial Accounting A
Illustration (3)
Example: Transaction 2 (03/03): You purchase a company vehicle for 10 000 EUR using cash.

JOURNAL
Date Accounts and explanation Debit Credit
03/03 Company car 10 000
Cash 10 000
PPE paid in cash

Assets = Liabilities + Equity

Accounting equation
+ 10 000 0 0
- 10 000
The ledger accounts Cash Company car
(1) 15 000 (2) 10 000 (2) 10 000

56 Financial Accounting A
Illustration (4)
Example: Transaction 3 (04/03): You purchase supplies from a supplier for 1 000 EUR and agree
to purchase on credit.

JOURNAL
Date Accounts and explanation Debit Credit
04/03 Supplies 1 000
Accounts payable 1 000
Purchase of supplies on account

Assets = Liabilities + Equity

Accounting equation
+ 1 000 + 1 000 0

The ledger accounts Supplies Accounts payable

(3) 1 000 1 000 (3)

57 Financial Accounting A
Illustration (5)
Example: Transaction 4 (06/03): You provide services for 3 000 EUR to a local business who
pays in cash.

JOURNAL
Date Accounts and explanation Debit Credit
06/03 Cash 3 000
Service revenue 3 000
Service performed for cash

Assets = Liabilities + Equity

Accounting equation
+ 3 000 + 3 000

The ledger accounts Cash Service revenue

(1) 15 000 (2) 10 000 3 000 (4)
(4) 3 000
58 Financial Accounting A
Illustration (6)
Example: Transaction 5 (15/03): You pay your supplier with cash (= pay on account).

JOURNAL
Date Accounts and explanation Debit Credit
15/03 Accounts payable 1 000
Cash 1 000
Cash paid on account

Assets = Liabilities + Equity

Accounting equation
- 1 000 -1 000

The ledger accounts Cash Accounts payable

(1) 15 000 (2) 10 000 (5) 1 000 1 000 (3)
(4) 3 000 (5) 1 000
59 Financial Accounting A
Illustration (7)
Example: Transaction 6 (16/03): You perform a service on account (i.e. the customer can pay
later). The customer agrees to pay the full amount, 1 500 EUR, within two weeks.

JOURNAL
Date Accounts and explanation Debit Credit
16/03 Accounts receivable 1 500
Service revenue 1 500
Service performed on account

Assets = Liabilities + Equity

Accounting equation
+ 1 500 + 1 500

The ledger accounts Accounts receivable Service revenue

(6) 1 500 3 000 (4)
1 500 (6)
60 Financial Accounting A
Illustration (8)
Example: Transaction 7 (18/03): You pay for the following expenses: utilities (500 EUR) and
equipment rent (500 EUR).

JOURNAL
Date Accounts and explanation Debit Credit
18/03 Utilities expense 500
Rent expense 500
Cash 1 000
Paid expenses
Accounting equation Assets = Liabilities + Equity
- 1 000 - 1 000
The ledger accounts Cash Rent expense Utility expense
(1) 15 000 (2) 10 000 (7) 500 (7) 500
(4) 3 000 (5) 1 000
61 Financial Accounting A
(7) 1 000
Illustration (9)
Example: Transaction 8 (30/03): Your customer pays their outstanding bill (= collect cash on
account).

JOURNAL
Date Accounts and explanation Debit Credit
30/03 Cash 1 500
Accounts receivable 1 500
Collect cash on account
Assets = Liabilities + Equity
Accounting equation + 1 500 + 0
-1 500
Cash Accounts receivable
The ledger accounts
(1) 15 000 (2) 10 000 (6) 1 500 (8) 1 500
(4) 3 000 (5) 1 000
62 Financial Accounting A
(8) 1 500 (7) 1 000
Illustration (10)
Example: Transaction 9 (31/03): You pay your investor a dividend of 500 EUR.

JOURNAL
Date Accounts and explanation Debit Credit
30/03 Dividends 500
Cash 500
Paid dividend

Assets = Liabilities + Equity

Accounting equation - 500 0 - 500
Cash Dividends
The ledger accounts (1) 15 000 (2) 10 000 (9) 500
(4) 3 000 (5) 1 000
(8) 1 500 (7) 1 000
63 Financial Accounting A
(9) 500
Accounts after posting to the ledger
Assets = Liabilities + Equity

Cash
Share capital Dividends
(1) 15 000 (2) 10 000
15 000 (1) (9) 500
(4) 3 000 (5) 1 000
Bal. 15 000 Bal. 500
(8) 1 500 (7) 1 000
(9) 500 Service revenue Rent expense
Bal. 7 000 3 000 (4) (7) 500
Supplies 1 500 (6) Bal. 500
(3) 1 000 Bal. 4 500
Utility expense
Bal. 1 000
(7) 500
Company car
Bal. 500
(2) 10 000 
Bal. 10 000
64 Financial Accounting A
Trial balance
The trial balance summarizes all the account balances for the financial statements and shows whether total
debits equal total credits.
Trial balance 31/03
Balance
Account title Debit Credit
Cash 7 000
Supplies 1 000
Company car 10 000
Share capital 15 000
Dividends 500
Service revenue 4 500
Rent expense 500
Utility expense 500
65
Total 19 500  19 500 Financial Accounting A
Trial balance (2)

What if your trial balance is not balanced? In that case an error was made.

Let’s say you have a difference between debit and credit of 200 EUR:
• An account may be missing, trace all accounts from ledger to accounts.
• A debit (credit) was treated as credit (debit): divide the number by 2 and
search the journal for this amount.
• Example: 100 EUR was added instead of subtracted to cash: the difference between
debit and credit will be 200 EUR.

66 Financial Accounting A
Trial balance (3)

What if your trial balance is not balanced? In that case an error was made. Even
in a computerized system errors can still occur (e.g. typing 40 instead of 400,
typing 120 instead of 210…).

If the difference between debit and credit can be divided by 9 (without decimals)
potentially a transposition error was made:
• Typing 120 instead of 210: difference = 90 => can be divided by 9.
If the difference between debit and credit can be divided by 9 (without decimals)
potentially a slide error was made:
• Missing or adding a zero at the end of an amount (e.g. 40 instead of 400).

67 Financial Accounting A
Illustration
Trial balance 31/12
Balance
Debit Credit
725
620
115
520
480
160
795
737
808
Total 2 300 2660
68 Financial Accounting A
Illustration
Trial balance 31/12
Balance
Debit Credit
725 Difference = 360
620  360/9 = 40

115 Transposition or slide error

520
480
160
795
737
808
Total 2 300 2660
69 Financial Accounting A
Illustration
Trial balance 31/12
Balance
Debit Credit
725 If no slide error (check
620 journal)

115 => Check amounts where

520 difference between first two
digits is 4 (360)
480
160
795
737
808
Total 2 300 2660
70 Financial Accounting A
Illustration
Trial balance 31/12
Balance
Debit Credit
725 620 => 260?
620 D
480 => 840?
115 C
520 737 => 377?
C
480
160
795
737
808
Total 2 300 2660
71 Financial Accounting A
Chart of accounts
The ledger groups accounts into
Position: assets, liabilities and equity
Performance: income and expenses

Organizations will use a chart of accounts listing all their accounts with the
corresponding account number. Each account will have multiple digits.
A chart of accounts uses a hierarchical structure.
A good chart of accounts has structure and proper categorization of accounts,
and there’s always room for creation of additional accounts when the need
arises.

72 Financial Accounting A
Chart of accounts (2)

The ledger groups accounts into

Position: assets, liabilities and equity
Performance: income and expenses

The first digit represents the account class, the subsequent numbers represent
the position of the account in the category.
For example, accounts starting with 1-5 can represent the balance sheet
(position) accounts and the accounts starting with 6 and 7 the income statement
(performance).

73 Financial Accounting A
Chart of accounts (3)

The ledger groups accounts into

Position: assets, liabilities and equity
Performance: income and expenses

Each organization will create their own chart of accounts with own system.
The chart of accounts designed for this course is available on Toledo and will be
provided on the final exam.

74 Financial Accounting A
Chart of accounts (4)

Example using the chart of accounts designed for this course.

Transaction: You provide a service for 3 000 EUR to a customer. The customer
will pay half immediately in cash, and the remainder next month.

75 Financial Accounting A
Chart of accounts (5)

Recognize a business transactions

Analyze impact on the accounting equation

D C Analyze impact on accounts

Journalize transaction and post to the

ledger

Make trial balance

76 Financial Accounting A
Chart of accounts (6)
Example using the chart of accounts designed for this course.

Transaction (02/04): You provide a service for 3 000 EUR to a customer. The
customer will pay half immediately in cash, and the remainder next month.

Accounting equation: This transaction will increase assets (cash and accounts
receivable) and equity (service revenues).

Impact on accounts: Cash will increase, trade receivables will increase and
income (equity) will increase.

77 Financial Accounting A
Chart of accounts (7)

Example using the chart of accounts designed for this course.

Journal:
JOURNAL
Date Accounts Explanation Debit Credit
02/04 5500 Cash 1 500
400 Accounts receivable 1 500
700 Service revenue 3 000
Service provided cash and on account
Ledger:
5500 Cash 400 Accounts receivable 700 Service revenue
1 500 1 500 3 000

78 Financial Accounting A
Normal balance of accounts

An account’s normal balance falls on the side of the account, debit or credit,
where increases are recorded.
The normal balance of assets is on the debit side (debit-balance accounts), the
liabilities and shareholders’ equity usually have a credit balance (credit-balance
accounts)
Normal balance:
Assets Liabilities Equity
Debit Credit Credit

79 Financial Accounting A
Normal balance of accounts (2)

An account’s normal balance falls on the side of the account, debit or credit,
where increases are recorded.
The normal balance of revenues (and gains) is on the credit side (credit-balance
accounts), the expenses (and losses) and dividends usually have a debit
balance (debit-balance accounts)
Normal balance:
Income Expenses Dividends
Credit Debit Debit

80 Financial Accounting A
Normal balance of accounts (3)

Normal balances: links

Income Expenses Net profit > 0
Credit Debit Credit

Net profit Dividends Retained earnings > 0

Credit Debit Credit

Retained earnings Share capital Equity

Credit Credit Credit

81 Financial Accounting A
Normal balance of accounts (4)

Normal balances: links

Assets Liabilities
Debit Credit

Equity
Credit

82 Financial Accounting A
Recap

What have you learned?

You should now be able to

• understand how business transactions impact the accounting equation;
• understand how business transactions impact accounts;
• journalize transactions and post to the ledger;
• use a chart of accounts.

83 Financial Accounting A
Recommended reading
De Groote, H., Ghijselinck, V. & Van Canegem, T. (2024). A Practical Guide to Financial
Accounting. Gent. Owl Press. (ISBN 9789464983531)
• Chapter 3

Harrison, W. T., Suwardy, T., Tietz, W. M., Horngren, C., & Thomas, C. W. (2023). Financial
Accounting, Global Edition (12th ed.). Pearson International Content (ISBN: 9781292412900).
• Chapter 2

84 Financial Accounting A
Prepared by Dr. Skrålan Vergauwe for the course Financial Accounting
do not share or copy without permission

Illustrations by https://icons8.com/

85 Financial Accounting A