1 Accounting I Double Entry Bookkeeping. 2 Dr. Clive Vlieland-Boddy FCA FCCA MBA Barcelona 2009.
Transcript of 1 Accounting I Double Entry Bookkeeping. 2 Dr. Clive Vlieland-Boddy FCA FCCA MBA Barcelona 2009.
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Accounting I
Double Entry Bookkeeping
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Dr. Clive Vlieland-Boddy FCA FCCA MBA
Barcelona 2009
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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..
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History & Reasons
Invented over 500 years ago. It was created to ensure that all entries are
correctly and accurately recorded.
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Objective 1
What is Double Entry Bookkeeping
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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.
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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
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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.
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Objective 2The “T” Account
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Account Name
(Left Side) Debit
(Right Side) Credit
Simple tool for analysing and determining the balance in a given account
T-Account
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Which account is debited?
For what amount?
Which account is credited?
For what amount?
The “T” Accounts
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Debits
Assets Bank Receipts Expenditures Losses
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Credits
Liabilities Bank Payments
Shareholders Funds Incomes (Sales)
Profits
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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
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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.
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Asset Accounts
______________________________________
Debits: Increase I Credits : Reduce
Assets I Assets
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Liability Accounts
______________________________________
Debits: Reduce I Credits : Increase
Liabilities I Liabilities
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Equity Accounts
______________________________________
Debits: Reduce I Credits : Increase
Equity I Equity
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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.
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Income Accounts
_____________________________________
Debits: Reduce I Credits : Increase
Incomes I Incomes
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Expense Accounts
_____________________________________
Debits: Increases I Credits: Decrease
Expenditure I Expenditure
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Debit CreditDebit Credit
AssetsAssets
+ + --
Rules of Debit and Credit
LiabilitiesLiabilities EquityEquity== ++Debit CreditDebit Credit - +- +
Debit CreditDebit Credit - +- +
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LiabilitiesLiabilities EquityEquityAssetsAssets == ++Normal Balances
Debit CreditDebit Credit
+ -+ -Debit CreditDebit Credit
- +- +Debit CreditDebit Credit
- +- +
NormalNormalBalanceBalance
NormalNormalBalanceBalance
NormalNormalBalanceBalance
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==
Profits & LossesNormal Balances
Debit CreditDebit Credit
+ -+ -Debit Debit CreditCredit- +- +
Debit CreditDebit Credit
- +- +
NormalNormalBalanceBalance
NormalNormalBalanceBalance
NormalNormalBalanceBalance
Profits or LossesProfits or LossesRevenues Revenues ExpensesExpenses__
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But who owns theses profits
The Shareholders.
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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.
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ExpensesExpenses__
==
Expanding the Rules of Debit and Credit
Shareholders Equity
Debit CreditDebit Credit
- +- +Debit CreditDebit Credit
- +- + Debit CreditDebit Credit
+ + --
Profits =Profits =Shareholders Shareholders
CapitalCapitalRevenuesRevenues
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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.
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Debit/credit
▲▼Revenue
▲▼Shareholder
Equity
▲▼Liabilities
▼▲Expenses
▼▲Assets
CreditDebitAccount
How debits and credits affect the
different elements of the accounts.
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Objective 3Work an actual example
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Lets work Basic Example 1 ( See page 23)
The owners invest €100,000 in cash into the business.
So what are the double entries?
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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
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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
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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.
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Bank Account Equity Account
Investors 100,000 100,000 Shares
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Analysis of Example 1 transaction: Accounts Bank is increasing Equity is increasing
CREDITDEBITREFDESCRIPTIONDATE
The Double Entry
Jun x Bank Account 100,000
Equity Account 100,000
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Do the books Balance?
YES they DO
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Basic Example 2
The company buys a car costing €20,000. It finances this purchase by way of a Bank
Loan.
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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
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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.
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Vehicle Account Bank Loan
Car 20,000 20,000 New Loan
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Analysis of Example 2 transaction: Vehicles Account is increasing Bank Loan is increasing
CREDITDEBITREFDESCRIPTIONDATE
The Double Entry
Jun x Vehicles Account 20,000
Bank Loan 20,000
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Do the books Balance?
YES they DO
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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.
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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
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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.
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Bank Loan Bank Account
Repay Loan 5,000 5,000 Repay Loan
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Analysis of Example 3 transaction: Accounts Loan is reducing Bank Account is reducing
CREDITDEBITREFDESCRIPTIONDATE
The Double Entry
Jun x Bank Loan 5,000
Bank Account 5,000
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Do the books Balance?
YES they DO
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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.
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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
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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.
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Inventories Accounts Payable
Widgets 60,000 60,000 Supplier of Widgets
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Analysis of Example 4 transaction: Inventories are increasing Accounts Payable is increasing
CREDITDEBITREFDESCRIPTIONDATE
The Double Entry
Jun x Inventories 60,000
Accounts Payable 60,000
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Do the books Balance?
YES they DO
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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.
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Accounts Receivable Sales of Widgets
Customer x 25,000 25,000 Sales
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Analysis of Example 5 transaction: Accounts Receivable is increasing Sales is increasing
CREDITDEBITREFDESCRIPTIONDATE
The Double Entry
Jun x Accounts Receivable 25,000
Sales of Widgets 25,000
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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.
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Asset Reduces
Inventories will be reduced by 6 units at €3,000 = €18,000
So Credit Inventories by $18,000
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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
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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
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Cost of Goods Sold Inventories
Cost of 6 Widgets 18,000
18,000 Widgets Sold
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Further Analysis of Example 5 transaction: Cost of Sales is increasing Inventories are reducing
CREDITDEBITREFDESCRIPTIONDATE
The Double Entry
Jun x Cost of Goods Sold 18,000
Inventories of Widgets 18,000
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Do the books Balance?
YES they DO
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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!
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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
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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.
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Telephone Accounts Payable
Phone Bill 1,000 1,000 Phone Co
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Analysis of Example 6 transaction: Expense Account – Telephone is increasing Accounts Payable is increasing
CREDITDEBITREFDESCRIPTIONDATE
The Double Entry
Jun x Telephone Expense 1,000
Accounts Payable 1,000
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Do the books Balance?
YES they DO
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Exercise 5.1.4
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Bank Account
100,000
Accounts Payable
Share Capital Inventories
100,000
Loan For Car
Sales of Widgets
60,000 5,000Bal 95,000Bal 95,000 1,0001,000
Bal 42,000Bal 42,000
Bal 100,000Bal 100,000
Share Capital
Share Capital
Phone ExpenseCost of Sales
Bal 20,000Bal 20,000
Car
20,000
20,000
Bal 15,000Bal 15,000
5,000 60,000
18,000
25,000Bal 25,000Bal 25,000
100,000Bal 100,000Bal 100,000
Bal 61,000Bal 61,000
18,000
Bal 18,000Bal 18,000
1,000
Bal 1,000Bal 1,000
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Objective 5Prepare and use a trial balance
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Trial Balance
List of all accounts with their balances
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See Page 26
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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.
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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.
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Locating Trial Balance Errors
What if it doesn’t balance? Is the addition correct? Are all accounts listed? Are the balances listed correctly?
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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
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The bank reconciliation . . .
A critical control activity for cash.
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Study Pack 1
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The End…
to be continued…..