BSBFIA304 - Maintain a General Ledger

Trainer Manual & Assessment Maintain a General Ledger

BSBFIA304

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BSBFIA304 Maintain a General Ledger BSB Version Current

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BSBFIA304 Maintain a General Ledger Trainer Manual © Precision Group (Australia) Pty Ltd

Table of Contents 3

About BSB

5 Introduction 7

BSBFIA304/01 Process Journal Entries 1.1 Prepare general journal entries from source journals in accordance with accounting requirements, organisational policy, procedures and legislative accounting standards 1.2 Post journal entries into general ledger system in accordance with organisational policy, procedures and accounting standards 1.3 Reconcile accounts payable and accounts receivable subsidiary ledger systems with general ledger 1.4 Ensure processing maintains the accounting equation and is completed within designated timelines

18 19

Key Points ‘True’ or ‘False’ Quiz

21 BSBFIA304/02 Prepare a Trial Balance 2.1 Prepare trial balance of general ledger system in accordance with organisational requirements and accounting standards, and ensure it is checked for accuracy 2.2 Identify and rectify irregularities or refer them for resolution when trial balance does not balance, in accordance with organisational policy and procedures

28 29

Key Points ‘True’ or ‘False’ Quiz

30 Summary 31 Bibliography 33

Assessment Pack

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About BSB Business Services Training Package

“The purpose of education is to replace an empty mind with an open one.” Malcolm Forbes

About the Business Services Industry The BSB Business Services Training Package covers a diverse range of industries and occupations. Business Services covers a range of cross-industry functions and services supporting the commercial activities of all industries.

Defining Qualifications When units of competency are grouped into combinations that meet workplace roles, they are called qualifications. These qualifications are aligned to the Australian Qualifications Framework (AQF). Each qualification will have ’packaging rules’ which establish the number of core units, number and source of elective units and overall requirements for delivering the qualification.

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About BSB Business Services Training Package (continued)

Delivery and Assessment of Qualifications RTOs must have the qualifications (or specific units of competency) on their scope to deliver nationally recognised training and assessment. RTOs are governed by and must comply with the requirements established by applicable national frameworks and standards. RTOs must ensure that training and assessment complies with the relevant standards.

Qualification Training Pathways A pathway is the route or course of action taken to get to a destination. A training pathway is the learning required to attain the competencies to achieve career goals.

Everyone has different needs and goals, and therefore requires a personalised and individual training pathway.

Foundation Skills Foundation Skills are the non-technical skills that support the individual’s participation in the workplace, in the community and in education and training.

Australian Core Skills Framework (ACSF) This Assessment meets the five ACSF core skills as described in the Foundation Skills mapping.

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BSBFIA304 Maintain a General Ledger Trainer Manual © Precision Group (Australia) Pty Ltd

Introduction

“Knowledge is of no value unless you put it into practice.”

Anton Chekhov

This unit standard, BSBFIA304 Maintain a General Ledger, is about the performance outcomes, skills, and knowledge required to maintain a general ledger within an organisation including processing journal entries and preparing a trial balance.

This unit applies to individuals employed in a range of work environments with responsibility for simple accounting functions within an organisation. They may work as individuals providing administrative support within an enterprise, or may be other members of staff with delegated responsibilities relating to general ledger maintenance.

This manual is broken up into two Elements. They are:

1.

Process Journal Entries

2.

Prepare a Trial Balance.

There are activities throughout this workbook. These require the Learners to think about their experience or reactions, or to try and complete some research through reading or accessing the Internet. The activities will also help Learners towards completing the Assessment Task by assisting them to think about issues involved in the Assessment Tasks.

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Introduction (continued)

Learners will then be asked to complete an Assessment Pack for this unit of competency. The information contained in this workbook will assist them. These tasks can be completed as they work through the workbook, rather than leaving it all to be completed at the end of their study.

Finally, at the end of this workbook you will find a list of useful resources that you may use for further information. You will need to have access to an Internet terminal.

Throughout the text, there are references to websites for further information and for some activities.

This unit contributes the attainment of National Certificates.

Accountancy is the process of communicating financial information about a business entity to users such as shareholders and managers. Accounting is thousands of years old and was used by people to record the growth of crops and herds. Accounting evolved, improving over the years and advancing as business progressed.

General ledgers are the backbone of any accounting system which holds financial and non-financial data for an organisation. They hold all of the accounting data transferred from all sub-ledgers or modules like accounts payable, accounts receivable, cash management, fixed assets, purchasing, and projects.

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BSBFIA304  Maintain a General Ledger Trainer Manual  Š Precision Group (Australia) Pty Ltd

ELEMENT 1:

Process Journal Entries

Performance Criteria Element 1 1.1

Prepare general journal entries from source journals in accordance with accounting requirements, organisational policy, procedures and accounting standards

1.2

Post journal entries into general ledger system in accordance with organisational policy, procedures and accounting standards

1.3

Reconcile accounts payable and accounts receivable subsidiary ledger systems with general ledger

1.4

Ensure processing maintains the accounting equation and is completed within designated time lines.

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Element 1: Process Journal Entries

Process Journal Entries Prepare General Journal Entries from Source Journals in Accordance with Accounting Requirements, Organisational Policy, Procedures, and Accounting Standards Post Journal Entries into General Ledger System in Accordance with Organisational Policy, Procedures and Accounting Standards To begin, let’s define some of the terms that you will encounter in this competency.

The general ledger is the complete set of accounts that is established and maintained by a business. It usually refers to the actual accounts and balances in these accounts at a nominated time.

The chart of accounts is the formal list of the accounts in the general ledger.

A journal entry is a formal accounting entry used to identify a business transaction.

The entry itemises accounts that are debited and credited, and should include some description of the reason for the entry. Journal entries may include: • Bad debts written off • Correction of posting errors • Interest expense • Interest receivable • Opening entries • Purchase of a non-current asset on credit • Sale of a non-current asset on credit • Transfer of funds between bank accounts • Withdrawal of stock and assets by owner.

Source journals are where the individual transactions are recorded before being entered in the general ledger. These can include: • Cash payments journal • Cash receipts journal • General journal • Purchases journal • Purchases returns journal

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Element 1: Process Journal Entries

• Sales journal • Sales return journal.

You will notice that each of these refers to a different type of transaction, such as money received in cash, money spent on purchases, and so on. Each area has its own area for recording, or journal. Once that is done, the journal entries are entered in the general ledger so that a more complete picture of what money came in and what went out, as well as what is left.

Other information that you need are the policy and procedures required by your organisation. These will usually be incorporated in your procedures and will be based on accounting standards.

Australian Accounting Standards are set by the Australian Accounting Standards Board (AASB) and have the force of law for Corporations law entities under section 296 of the Corporations Act 2001. They must also be applied to all other general purpose financial reports of reporting entities in the public and private sectors. So these are the guidelines by which financial transactions must be recorded.

Preparing General Journal Entries from Source Journals Transactions are recorded in the accounting system in a journal. Examples of entries made into the general journal are asset sales, depreciation, interest income, and the sale of shares in the company. Thus, the general journal is a catch all location for the initial entry of transactions that do not occur in sufficient volumes to deserve recordation in a specialised journal. These transactions are recorded in chronological (date order, earliest to latest) order, which makes the general journal an excellent place in which to research transactions by date.

The general ledger contains a summary at the account level of every transaction that a business has engaged in. This information comes from the various journals. The information in the general ledger is then used to create the financial statements.

The general journal is where the transactions are first recorded that are not being stored in a subject-specific journal, while the general ledger stores the summary-level information from each of the journals. This means that the general journal contains a larger amount of detailed accounting information than the general ledger, which in turn contains more information than the financial statements.

The use of journals has declined since the advent of computerised accounting systems.

Many smaller accounting software systems store all transactional information directly in the general ledger, dispensing with all of the various types of journals.

To prepare an entry for the general journal requires several steps.

Transactions which do not fit into specialist journals, such as the cash payments journal, the cash receipt journal, or sales and purchases journals, are recorded in the general journal.

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Element 1: Process Journal Entries

The general journal is formatted in a way which makes it clear and guides the posting to the general ledger. The item is identified as a credit or debit, and the transaction described briefly. Businesses can use only the general journal if they choose not to maintain specialist journals.

• The journal entry is when an entry is made to the appropriate journal.

• The journal is a record that keeps the accounting transactions in the order they occur by date.

• The ledger is the record that keeps accounting transactions by accounts.

• The account is a unit to record and summarise the accounting transactions.

All accounting transactions are recorded through journal entries that show account names, amounts, and whether those accounts are recorded in debit or credit side of accounts.

When you are charged with making journal entries when the business has purchased supplies and paid in cash, there are six questions to ask yourself in the order following.

An example would be if a business bought supplies for $100 and paid cash.

1. What did the business receive? [Supplies] 2. If the business received supplies, how would this affect the supplies balance?

[It increases supplies balance]

3. Which side of the supplies account represents the increase in cash? [Debit side (Left side)]

4. What did the business pay? [Cash] 5. Which side of the cash account represents the decrease in cash? [Credit side (Right side)]

6. Does the sum of the debit side amounts equal to the sum of credit side amounts?

In other words, does this journal entry balance? [Yes – $100 = $100] There are also six questions that you must ask yourself when you are making journal entries for sales. Again, if the business sold its products at $250 and received the full amount in cash and you are making the entry, the following questions must be asked in this order:

1. What did Company A receive? [Cash] 2. If Company A received cash, how would this affect the cash balance? [Receiving cash increases the cash balance of the company]

3. Which side of cash account represents the increase in cash? [Debit side (Left side)]

4. What is the account name to record the sales of products? [Sales] 5. Which side of the sales account represents the increase in sales? [Credit side (Right side)]

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Element 1: Process Journal Entries

6. Does the sum of the debit side amounts equal to the sum of credit side amounts?

In other words, does this journal entry balance? [Yes – $250 = $250] Examples of transactions recorded in the general journal are: • Opening entries ○ ○ To record the assets, liabilities, and equity to start the accounting system of a business – to ‘open’ its accounting records (a once only entry) • The purchase of non-current assets on credit ○ ○ Such as the purchase of vehicles, equipment, furniture on credit ○ ○ If the above were purchased for cash, the transaction would be recorded in the cash payments journal • The owner’s contribution of capital in assets other than cash to the business (or drawings of an asset other than cash) ○ ○ Such as the owner contributing their own computer or office furniture to the business (or taking them from the business) ○ ○ If the owner contributes capital in the form of cash, the transaction is recorded in the cash receipts journal (if they take cash drawings, the transaction is recorded in the cash payments journal).

Example 1: Opening Entry General Journal

Date Jan 1

Details

Post ref.

Debit

Bank

20,400

Manufacturing Equipment

10,200

Office Equipment

Credit

9,400

Loan from Credit Union

15,000

Capital

25,000

Assets, liabilities, and capital at commencement of business

Notes: • Details:

Describes the entry

• Debit:

These are debited to accounts in the ledger

• Credit:

These are credited to accounts in the ledger.

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Element 1: Process Journal Entries

Example 2: Purchase of Non-current Asset on Credit

General Journal

Date

Details

Feb 8

Post ref.

Fitness equipment

Debit

Credit

1,500

GST Paid

150

Weight World

1,650

Purchase of computer on credit from Weight World Notes: • Details:

Describes the entry

• Debit:

$1,500 will be debited to computer equipment account

$150 will be debited to GST Paid

• Credit:

$1,650 will be credited to the Weight World account as a sundry

creditor

Example 3: Owner’s Contribution of Asset Other Than Cash General Journal

Date Mar 5

Details

Post ref.

Office furniture Capital Contribution of owner’s personal office furniture to the business

Notes: • Details:

Describes the entry

• Debit:

$500 will be debited to office furniture account

• Credit:

$500 will be credited to capital account.

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BSBFIA304 Maintain a General Ledger Trainer Manual © Precision Group (Australia) Pty Ltd

Debit

Credit

500 500

Element 1: Process Journal Entries

Reconcile Accounts Payable and Accounts Receivable Subsidiary Ledger Systems with General Ledger Account reconciliation is a process to ensure that the record of transactions on the bank account matches the bank statement received each month or quarter. Each time a cheque is written, direct credit payment made, credit card used, or otherwise makes withdrawal from, or a deposit into a bank account, a record must be kept of the transaction. Account reconciliation involves making sure that these records match the bank’s records of the same transactions. Account reconciliation helps avoid, or at least remedy, such problems as identify theft and bank errors.

Accounts Payable Accounts Payable (AP) are classified as current liabilities and reported on the balance sheet. In order to close the books at month end and at year end, AP must be in reconcilement which means that they must balance.

Generally, companies use a general ledger balance (total sum) and a subsidiary balance (details of accounts) to accounts payable. Use these tips to help you reconcile the master AP account and its records.

The steps to achieve this are:

1. Obtain the general ledger balance or the sum of AP, and the subsidiary ledger balance or the details of AP. These two records must be the same amount in order to reconcile the account.

2. Use a spreadsheet program to set up the reconciliation of AP. Use column A to input the balance of AP as per the general ledger. Use column B to input the detailed balance of AP. If these two match, the account is reconciled. If there is a reconciling difference, there is more work to do before closing the account.

3. Review items in the detail of accounts or subsidiary that are not in the general ledger. Also, note any items in the general ledger omitted from the detail of accounts. Add and subtract these items as appropriate from each record.

4. Look for possible recording errors to help you reconcile AP.

Find entries that were posted directly to the General Ledger and are not recorded in the subsidiary ledger or the details. Add these entries to the sub ledger side or the reconciliation.

Look for entries in the sub ledger that are not recorded in the general ledger.

Add the amounts to the general ledger column of the reconciliation.

Review the entries on the Accounts Receivable and AP details or sub ledgers.

Make sure that the entries were properly recorded as debits and credits.

Common recording errors include: credits to receivables, or debits to record payable.

Examine the cash account entries. Look for credits and debits to cash instead of AP. BSBFIA304 Maintain a General Ledger Trainer Manual © Precision Group (Australia) Pty Ltd

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Element 1: Process Journal Entries

5. Make adjusting entries to close the books if the account still doesn’t reconcile. If the difference exceeds your company’s materiality threshold, continue reviewing all entries until reconciled.

Accounts Receivable Accounts receivable track payments due from your customers for goods or services you provide. Receivables might have a duration of 30, 60, or 90 days or longer. The business manager needs to know how much they have in total receivables. This helps determine the organisational solvency even if the accounts are not yet paid. Reconciling the accounts receivable tells you what is actually paid and what is outstanding.

1. Write

column headers on your spreadsheet for ‘Account’, ‘Invoice Total’,

‘Paid’ and ‘Outstanding Due’. List vendors who have been sent invoices under ‘Account’. Write the total invoice amount for each vendor under ‘Invoice Total’.

Write how much of the invoice has been paid next to the ‘Invoice Total’ column in ‘Paid’.

2. Subtract

payments made from the total and write the balance for each vendor

in the ‘Outstanding Due’ column.

“Cut your losses and let your profits run.”

American proverb

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Element 1: Process Journal Entries

3. Compare

the General Ledger posts for accounts receivable with your

reconciliation spreadsheet. Most accounting software uses a journal post to register the receivables as they are paid, maintaining outstanding balances.

This report must coincide with your spreadsheet. If it doesn’t, manually go through each receivable to find the discrepancy – the software can assume a payment that wasn’t actually paid.

Ensure Processing Maintains the Accounting Equation and is Completed within Designated Time Lines The ability to read financial statements requires an understanding of the items they include and the standard categories used to classify these items. The accounting equation identifies the relationship between the elements of accounting.

The accounting equation is: Assets = Liabilities + Owner’s (Stockholders’) Equity.

The accounting equation should remain in balance at all times because of doubleentry accounting or bookkeeping. (Double-entry means that every transaction will affect at least two accounts in the general ledger.)

Here are some examples of how the accounting equation remains in balance: • An owner’s investment into the company will increase the company’s assets and will also increase the owner’s equity • When the company borrows money from its bank, the company’s assets increase and the company’s liabilities increase • When the company repays the loan, the company’s assets decrease and the company’s liabilities decrease • If the company pays cash for a new delivery van, one asset (cash) will decrease and another asset (vehicles) will increase • If a company provides a service to a client and immediately receives cash, the company’s assets increase and the company’s owner’s equity will increase because it has earned revenue • If the company provides a service and allows the client to pay in 30 days, the company has increased its assets (Accounts Receivable) and has also increased its owner’s equity because it has earned service revenue • If the company runs a radio advertisement and agrees to pay later, the company will incur an expense that will reduce the owner’s equity and has increased its liabilities.

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Element 1: Process Journal Entries

From our examples, you can see that owner’s equity increased when the owner made an investment in the business and also when revenues were earned. Owner’s equity decreased when the owner withdrew assets from the business and when expenses were incurred. This leads us to the expanded accounting equation: Assets = Liabilities + Owner’s Equity + Revenues – Expenses – Draws The timeframe for completing all financial record keeping will be determined by procedures in your organisation which will fit neatly with legislative and Australian Taxation Office (ATO) requirements.

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Element 1: Process Journal Entries

Activity One Complete the journal entries for the following: Dan opens a fishing supply store.

On the 3 rd of January he invests $25,000 into his new business. On the 5 th of January he leases store space for $1,700 per month and pays the first month’s rent. Then on the 10 th of January he purchases an initial inventory of $3,800 and begins trading.

On the 15 th January he sold $1,250 worth of goods. On the 15 th of January his mate asked him to repair a rod and reel, and Dan used $250 worth in making the repair.

On the 28 th of January, he paid $3,800 to suppliers for parts purchased on 10 th of January. Finally on the 30 th of January, Dan purchased office supplies for $125 and office furniture for $225.

Trainer’s Notes for Activity One The entries should be as follows: Date

Account Names & Explanation

3/1

Cash

Debit 25,000

Capital

Credit 25,000

Owner contributes $25,000 in cash to capitalise the business.

5/1

Lease Expense

1,700

Cash

1,700

Paid first month’s store lease of $1,700.

10/1

Stock

3,800 Accounts Payable

3,800

Purchased $3,800 in stock on account, payable in 30 days.

15/1

Cash

1,250 Revenue

1,250

Sales of $1250

15/1

Expenses

250

Rod and Reel parts

250

$250 in repair parts were used.

28/1

Accounts Payable

3,800

Cash

3,800

Paid $3800 to suppliers for parts purchased earlier in the month.

30/1

Office Supplies

125 225

Office Furniture Cash

350

Purchased office supplies and filing cabinet from Oliver’s Office Supplies.

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Element 1: Process Journal Entries

Key Points Element 1 • General journal entries must be prepared from source journals in accordance

with

accounting

requirements,

organisational

policy,

procedures, and accounting standards.

• Journal entries must be posted into general ledger system in accordance with organisational policy, procedures, and accounting standards.

• Accounts payable and accounts receivable subsidiary ledger systems must be reconciled with the general ledger.

• Processing must maintain the accounting equation and is completed within designated time lines.

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Element 1: Process Journal Entries

Element 1 – ‘True’ or ‘False’ Quiz True

Q

The chart of accounts is the formal list of the accounts in the general ledger.

Q

The general ledger is a formal accounting entry used to identify a business transaction.

False

The general ledger is the complete set of accounts that is established and maintained by a business.

Q

An owner's investment into the company will increase the company's assets and will also increase owner's equity.

Q

The timeframe for completing all financial record keeping will be determined by procedures in your organisation which will fit neatly with legislative and Australian Taxation Office (ATO) requirements.

Q

A journal entry is the complete set of accounts that is established and maintained by a business.

A journal entry is a formal accounting entry used to identify a business transaction.

Q

Account reconciliation is a process to ensure that the record of transactions on the bank account matches the bank statement received each month or quarter.

Q

The general ledger usually refers to the actual accounts and balances in these accounts at a nominated time.

Q

Account reconciliation involves making sure that these records match the bank's records of the same transactions.

Q

If the company pays cash for a new delivery van, one asset (cash) will increase and another asset (vehicles) will decrease.

If the company pays cash for a new delivery van, one asset (cash) will decrease and another asset (vehicles) will increase.

Q

Account reconciliation helps avoid, or at least remedy, such problems as identify theft and bank errors.

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