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Lecture notes Accounting 1
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Lecture 3Introduction to the Journal and Capital Transactions
Lecture #3 – Study contents:
• ➢ Day books
• ➢ The Journal
• ➢ Journal entries
• ➢ Capital transactions
• ➢ Acquisition of fixed assets
• ➢ Depreciation
• ➢ Disposal of fixed assets
Introduction:
The majority of business transactions can be categorised as sales, purchases, receipts
and / or payments. Accounting for these transactions can be standardised for efficiency
and effectiveness.
The journal is a day book used to deal with transactions that are other than day-to-day.
Capital transactions are business transactions involving the business fixed assets. These
transactions are not part of normal trading and should be accounted for in a different
way.
The acquisition of fixed assets is a balance sheet transaction.
Depreciation is an annual charge on the fixed asset value in compliance with the
matching principle of accounts.
Accounting for the disposal of fixed assets seeks to clear all fixed asset values from the
accounts and to identify the profit or loss when sold.
The journal is used as the book of original entry for capital transactions.
Day Books (Review):
Day books are a logical link between the original transaction documentation and the
accounting system
Transactions Day Books Accounts system
Sales
• • Sales / Returns • Sales and
• Purchases • Purchases / purchase
• Receipts Returns
• Payments • Bank / Cash ledgers (Personal a/cs)
, • General ledger
(Nominal / real a/cs)
The Journal:
The journal is a day book used for the initial recording of other business transactions
Other transactions e.g.:
• Opening and closing entries:
Business commencement and cessation (financial positions)
• Closing inventory valuations:
Asset expenditure recognition matching
• Capital transactions:
Fixed assets: acquisitions, depreciation and disposals
• Bad debts:
Specific write-off and general provision adjustments
• Accruals and prepayments:
Transaction timing / period (matching) adjustments
• Correction of errors:
Accounting entries to correct accounting errors. Not editing
The Journal:
Code
Date Narrative Dr £ Cr £
(folio)
Capital Transactions:
Capital transactions are transactions involving fixed assets including:
Acquisition:
, • Fixed asset acquisition
• Usually involving long-term finance
• Balance sheet transactions
Depreciation:
• Allocation of fixed asset depreciable value over useful economic life
• Revenue expenditure
• Range of methods
Disposal:
• Fixed asset disposal
• Not trading operations
• Profit = Sales price less net book value
Fixed Assets Acquisition:
Fixed asset acquisition refers to the purchase of fixed assets:
Investment:
• Capital investment will require top level management decision - making
• Extensive cost / benefit analysis should be undertaken
Financing:
• The finance for fixed asset acquisition will usually be:
o Long-term loan
o Owner(s) capital introduced
Statement of financial position:
• Capital transactions are balance sheet transactions
• No income statement entries
Depreciation of Fixed Assets:
Capital expenditure and depreciation is and application of the accounting principles of
matching and prudence. Depreciation attempts to match the fixed asset cost to the
revenues generated by it
Methods of calculating depreciation:
Cost less residual value
Useful economic life
Straight-line method:
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