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1 Accounting I Double Entry Bookkeeping. 2 Dr. Clive Vlieland-Boddy FCA FCCA MBA Barcelona 2009.

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Presentation on theme: "1 Accounting I Double Entry Bookkeeping. 2 Dr. Clive Vlieland-Boddy FCA FCCA MBA Barcelona 2009."— Presentation transcript:

1 1 Accounting I Double Entry Bookkeeping

2 2 Dr. Clive Vlieland-Boddy FCA FCCA MBA Barcelona 2009

3 3 Qualification & Objectives You do not need to become accountants, nor can I achieve that today. You need to have a basic understanding to how financial accounts are created. So we need to appreciate the issue of Double Entry Bookkeeping..

4 4 History & Reasons Invented over 500 years ago. It was created to ensure that all entries are correctly and accurately recorded.

5 5 Objective 1 What is Double Entry Bookkeeping

6 6 What is Double Entry By recording the same entry twice, it enables a higher degree of confidence of the accuracy and completeness of the accounting.

7 7 Double Entry System Record dual effects of each transaction Each transaction affects at least two accounts Each transaction is recorded with at least One debit One credit Total debits must equal total credits

8 8 Debits and Credits Books of accounts and ledgers are divided in half. On the left is the so called DEBIT side. And on the right is the so called CREDIT side.

9 9 Objective 2 The T Account

10 10 Account Name (Left Side) Debit (Right Side) Credit Simple tool for analysing and determining the balance in a given account T-Account

11 11 Which account is debited? For what amount? Which account is credited? For what amount? The T Accounts

12 12 Debits Assets Bank Receipts Expenditures Losses

13 13 Credits Liabilities Bank Payments Shareholders Funds Incomes (Sales) Profits

14 14 Debits & Credits If we post the same amount to both the Debit and the Credit side, then when we add up all the debits and the credits…. They will total the same. YES they WILL

15 15 Assets vs Liabilities In Session 2 we talked about assets and liabilities. For every asset there will be a corresponding and equal liability EG. If you buy a new car for £10,000 you will owe the garage that sum.

16 16 Asset Accounts ______________________________________ Debits: Increase I Credits : Reduce Assets I Assets

17 17 Liability Accounts ______________________________________ Debits: Reduce I Credits : Increase LiabilitiesI Liabilities

18 18 Equity Accounts ______________________________________ Debits: Reduce I Credits : Increase EquityI Equity

19 19 Equity (Shareholders) Account This represents the funds invested into the company by the owners. It also is the profits that have been generated to date but have not been paid out as dividends. This is really shareholders money that the company retains for future growth.

20 20 Income Accounts _____________________________________ Debits: Reduce I Credits : Increase IncomesI Incomes

21 21 Expense Accounts _____________________________________ Debits: Increases I Credits: Decrease ExpenditureI Expenditure

22 22 Debit Credit Assets Rules of Debit and Credit LiabilitiesEquity=+ Debit Credit Debit Credit

23 23 LiabilitiesEquityAssets=+ Normal Balances Debit Credit + - Debit Credit - + Debit Credit - + NormalBalanceNormalBalanceNormalBalance

24 24 = Profits & Losses Normal Balances Debit Credit + - Debit Credit - + Debit Credit - + NormalBalanceNormalBalance NormalBalance Profits or Losses Revenues Expenses Expenses _

25 25 But who owns theses profits The Shareholders.

26 26 The Shareholders As the shareholders own the profits that are generated, they are shown in the Shareholders Equity. Thus the net balances of the Incomes and Expenses are shown in Shareholders Equity.

27 27 Expenses _ = Expanding the Rules of Debit and Credit Shareholders Equity Debit Credit Debit Credit Debit Credit Profits = ShareholdersCapital Revenues

28 28 Profits and Losses ( Incomes & Expenses) Previously we talked about Incomes & Expenses. These result in either a profit or a loss depending on whether the income is greater or less than the expenditures. Therefore the net Profit or loss being owned by the shareholders is shown in the Equity account.

29 29 Debit/credit Revenue Shareholder Equity Liabilities Expenses Assets CreditDebitAccount How debits and credits affect the different elements of the accounts.

30 30 Objective 3 Work an actual example

31 31 Lets work Basic Example 1 ( See page 23) The owners invest 100,000 in cash into the business. So what are the double entries?

32 32 The Double Entries are: We have to show that the owners (Shareholders) have invested 100,000 into the business. And.. We have to show that the bank account has received 100,000

33 33 Assets Increases This represents a Debit entry to an Asset account. So the bank balance has increased by 100,000. Therefore we increase the bank balance by 100,000. So Debit (DR) Bank Account with 100,000

34 34 Equity Increases This represents an increase in the Equity account which is a Credit entry. So as the investors have injected 100,000 into the business, we need to increase the Equity account by that sum. So Credit (CR) the Equity account by 100,000.

35 35 Bank AccountEquity Account Investors 100,000100,000 Shares

36 36 Analysis of Example 1 transaction: Accounts Bank is increasing Equity is increasing CREDITDEBIT REF DESCRIPTIONDATE The Double Entry JunxBank Account100,000 Equity Account100,000

37 37 Do the books Balance? YES they DO

38 38 Basic Example 2 The company buys a car costing 20,000. It finances this purchase by way of a Bank Loan.

39 39 Assets Increases This represents a Debit entry to an Asset account. The company has acquired a car costing 20,000. Therefore we increase the Asset account for Cars by 20,000. So Debit (DR) Cars (Vehicles) Account with 20,000

40 40 Liability Increases This represents an increase in the liability account which is a Credit entry. So as the Bank has lent 20,000 to the business, we need to increase the liability account by that sum. So Credit (CR) the Liability (Bank Loan Account) by 20,000.

41 41 Vehicle AccountBank Loan Car 20,00020,000 New Loan

42 42 Analysis of Example 2 transaction: Vehicles Account is increasing Bank Loan is increasing CREDITDEBIT REF DESCRIPTIONDATE The Double Entry JunxVehicles Account20,000 Bank Loan20,000

43 43 Do the books Balance? YES they DO

44 44 Basic Example 3 The company repays 5,000 to the bank to reduce the loan of 20,000 it took out to buy the car.

45 45 Assets Decreases This represents a Credit entry to an Asset account. The company has reduce the bank by 5,000. Therefore we decrease the Bank Account by 5,000. So Credit (CR) Bank Account with 5,000

46 46 Liability Decreases This represents an decrease in the liability account which is a Debit entry. So as the Bank Loan has been reduced by 5,000, we need to decrease the liability account by that sum. So Debit (DR) the Liability (Bank Loan Account) by 5,000.

47 47 Bank LoanBank Account Repay Loan 5,0005,000 Repay Loan

48 48 Analysis of Example 3 transaction: Accounts Loan is reducing Bank Account is reducing CREDITDEBIT REF DESCRIPTIONDATE The Double Entry Junx Bank Loan5,000 Bank Account5,000

49 49 Do the books Balance? YES they DO

50 50 Basic Example 4 The company buys 20 widgets costing 3,000 each that it will resell (inventories or stocks) with a total value of 60,000 but still owes the supplier for them.

51 51 Assets Increases This represents a Debit entry to an Asset account. The company has acquired inventories of goods it will sell costing 60,000. Therefore we increase the Asset account for Inventories by 60,000. So Debit (DR) Inventories Account with 60,000

52 52 Liability Increases This represents an increase in the liability account which is a Credit entry. So as the company owes the supplier 60,000, we need to increase the liability account by that sum. So Credit (CR) the Liability (Accounts Payable Account) by 60,000.

53 53 InventoriesAccounts Payable Widgets 60,000 60,000 Supplier of Widgets

54 54 Analysis of Example 4 transaction: Inventories are increasing Accounts Payable is increasing CREDITDEBIT REF DESCRIPTIONDATE The Double Entry JunxInventories60,000 Accounts Payable60,000

55 55 Do the books Balance? YES they DO

56 56 Basic Example 5 The company sells 6 of the widgets it has to customers for 25,000 allowing 90 days for them to pay for the goods.

57 57 Accounts ReceivableSales of Widgets Customer x 25,00025,000 Sales

58 58 Analysis of Example 5 transaction: Accounts Receivable is increasing Sales is increasing CREDITDEBIT REF DESCRIPTIONDATE The Double Entry Junx Accounts Receivable25,000 Sales of Widgets25,000

59 59 But we need to match income with expenditure….. We have shown the total sales of 6 units but as yet no cost has been matched against this revenue. We need to transfer from inventories the cost of the 6 widgets sold.

60 60 Asset Reduces Inventories will be reduced by 6 units at 3,000 = 18,000 So Credit Inventories by $18,000

61 Inventories We bought 20 widgets We have now sold 6 widgets How many do we have left in inventories? Yes 16. And what is therefore the value of the inventories. Yes 16 * £3000 = £48,000

62 62 Expense This is an expense, it will represent a movement in the profit or loss which belongs to the shareholders. As it is an expense, it will be a debit to the Cost of Sales Account. So Debit Cost of Sales Account with 18,000

63 63 Cost of Goods SoldInventories Cost of 6 Widgets 18,000 18,000 Widgets Sold

64 64 Further Analysis of Example 5 transaction: Cost of Sales is increasing Inventories are reducing CREDITDEBIT REF DESCRIPTIONDATE The Double Entry Junx Cost of Goods Sold18,000 Inventories of Widgets18,000

65 65 Do the books Balance? YES they DO

66 66 Finally – Basic Example 6 The company receives the telephone bill for the last 3 months for 1,000. It has received…. Not actually paid it!

67 67 This is an Expense This represents a Debit entry to the expense account. The company has incurred telephone expense of 1,000. This reduces the profits that the shareholders get. So Debit (DR) Telephone Account with 1,000

68 68 Liability Increases This represents an increase in the liability accounts as the telephone company is owed 1,000. So Credit (CR) the Liability (Accounts Payable Account) by 1,000.

69 69 TelephoneAccounts Payable Phone Bill 1,0001,000 Phone Co

70 70 Analysis of Example 6 transaction: Expense Account – Telephone is increasing Accounts Payable is increasing CREDITDEBIT REF DESCRIPTIONDATE The Double Entry Junx Telephone Expense 1,000 Accounts Payable1,000

71 71 Do the books Balance? YES they DO

72 Exercise 5.1.4

73 73 Bank Account 100,000 Accounts Payable Share Capital Inventories 100,000 Loan For Car Sales of Widgets 60,000 5,000 Bal 95,000 1,000 Bal 42,000 Bal 100,000 Share Capital Phone Expense Cost of Sales Bal 20,000 Car 20,000 Bal 15,000 5,000 60,000 18,000 25,000 Bal 25, ,000 Bal 100,000 Bal 61,000 18,000 Bal 18,000 1,000 Bal 1,000

74 74 Objective 5 Prepare and use a trial balance

75 75 Trial Balance List of all accounts with their balances

76 76 See Page 26

77 77 Incomes & Expenditures We have stated that as profits and losses are the property of the shareholders. Then in the Balance Sheet, Incomes & Expenditures are shown in the Equity Account. So the total of all the Income and Expenditure accounts are shown in the Balance Sheet as Equity.

78 78 Revenue = Equity Account This represents an increase in the Equity account which is a Credit entry, as this creates profits which belongs to the shareholders. So as the company has generated incomes of 25,000, we need to increase the Equity account by that sum. So Credit (CR) the Equity by 25,000.

79 79 Locating Trial Balance Errors What if it doesnt balance? Is the addition correct? Are all accounts listed? Are the balances listed correctly?

80 80 Locating Trial Balance Errors Divide the difference by two Is there a debit/credit balance for this amount posted in the wrong column? Divide the difference by 9. If evenly divisible, the error may be a slide or transposition error

81 81 The bank reconciliation... A critical control activity for cash.

82 Study Pack 1

83 83 The End… to be continued…..


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