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Transcript of 1.The need for book-keeping 2. The accounting equation 3. The double entry system for assets,...
1.The need for book-keeping1.The need for book-keeping
2. The accounting equation2. The accounting equation
3. The double entry system for assets, liabilities and capital3. The double entry system for assets, liabilities and capital
4. The asset of stock4. The asset of stock
5. The double entry system for expenses and revenue5. The double entry system for expenses and revenue
Introduction to double Introduction to double entry systementry system
6. Balancing off the accounts6. Balancing off the accounts
Introduction to double entry accounting
1.Recording Accounting Data1.Recording Accounting Data
RECORDSRECORDS
RECORDSRECORDS
e.g. Peter…e.g. Peter…
BuildingsBuildings
ComputerComputer
Motor VanMotor Van
Introduction to double entry accounting
1.Recording Accounting Data1.Recording Accounting Data RECORDSRECORDS RECORDSRECORDS2.Classifying and summarising data2.Classifying and summarising data
?We should put them in a systematical way!
e.g. Chan’s familye.g. Chan’s family
Introduction to double entry accounting
1.Recording Accounting Data1.Recording Accounting Data RECORDSRECORDS RECORDSRECORDS2.Classifying and summarising data2.Classifying and summarising data
?We should put them in a systematical way!
2.Classifying and summarising data2.Classifying and summarising data
3. Communicating Information3. Communicating Information
Profit?Profit?
Loss?Loss?
How can I know?How can I know?
AccountantAccountant
I can tell you!I can tell you!
Introduction to double entry accounting
1.Recording Accounting Data1.Recording Accounting Data RECORDSRECORDS RECORDSRECORDS
2.Classifying and summarising data2.Classifying and summarising data
3. Communicating Information3. Communicating Information
Introduction to double entry accounting
1.Recording Accounting Data1.Recording Accounting Data
2.Classifying 2.Classifying and summarising dataand summarising data
3. Communicating Information3. Communicating Information
Accounting is Accounting is the process of…the process of…
What is What is book-keeping?book-keeping?
BookBookkeepingkeeping
YES!YES!
NO!NO!
NO!NO!
Introduction to double entry accounting
Capital , Assets and LiabilitiesCapital , Assets and Liabilities
What are they?What are they?e.g. S.Wong wants to open a fast food shop…e.g. S.Wong wants to open a fast food shop…
$500 000$500 000Desk and chairDesk and chair$160 000
ComputersComputers $40 000
GoodsGoods
$210 000
$90 000
CookerCooker
Introduction to double entry accounting
Capital , Assets and LiabilitiesCapital , Assets and Liabilities
Desk and chairDesk and chair
ComputersComputers
GoodsGoods
CookerCooker
Asset : The resources possessed by the firmAsset : The resources possessed by the firm
Introduction to double entry accounting
Capital , Assets and LiabilitiesCapital , Assets and Liabilities
$500 000$500 000
Capital : The resources supplied by the ownerCapital : The resources supplied by the owner
Introduction to double entry accounting
Capital , Assets and LiabilitiesCapital , Assets and Liabilities
$500 000$500 000
CapitalCapitalAssetsAssets
Desk and chairDesk and chair
ComputersComputers
GoodsGoods
CookerCooker
$160000$160000
$210000$210000
$40000$40000
$90000$90000
++
++
++
==
Introduction to double entry accounting
Capital , Assets and LiabilitiesCapital , Assets and Liabilities
CapitalCapitalAssetsAssets ==
$500 000$500 000Desks and chairsDesks and chairs$160 000
ComputersComputers$40 000
GoodsGoods
$210 000
$90 000CookerCooker
e.g. S.Wong want to open a fast food shop…e.g. S.Wong want to open a fast food shop…e.g.One year later,S.Wong wants to expand his business…
Extra Desks and chairsExtra Desks and chairs
Extra goodsExtra goods
Introduction to double entry accounting
Capital , Assets and LiabilitiesCapital , Assets and Liabilities
$500 000$500 000
e.g.One year later,S.Wong want to expand his business…
Extra Desks and chairsExtra Desks and chairs
Extra goodsExtra goods
Desk and Chair
Computer
Goods
Cooker
Assets=Capital
But no money left…But no money left…
What can he do?What can he do?
Borrow from bank!Borrow from bank!
$100 000
Capital , Assets and LiabilitiesCapital , Assets and Liabilities
$100 000
Liabilities:The indebtedness of the firm for the resourcesLiabilities:The indebtedness of the firm for the resources
Extra goodsExtra goods Extra Desks and chairsExtra Desks and chairsAssetsAssets::
Introduction to double entry accounting
Capital , Assets and LiabilitiesCapital , Assets and Liabilities
$500 000$500 000
CapitalCapitalAssetsAssets LiabilitiesLiabilities
$100 000$100 000
Desk and Chair
Computers
Goods
Cooker
Extra goodsExtra goods
Extra Extra Desks and chairsDesks and chairs
= +
Introduction to double entry accounting
Capital , Assets and LiabilitiesCapital , Assets and Liabilities
Accounting Equation:Accounting Equation:
Assets = Capital + Liabilities
Introduction to double entry accounting
Introduction to double entry accounting
3.The double entry system:3.The double entry system:Assets,liabilities and capitalAssets,liabilities and capital
Introduction to double entry accounting
The Double Entry SystemThe Double Entry System
e.g. e.g. Tai Hung has a habit of recording the money he spent.Tai Hung has a habit of recording the money he spent.
When he buys a CD…When he buys a CD…
Cash
-CD
+Each transaction affects Each transaction affects 22 items… items…
We have to enterWe have to enter twicetwice…
DoubleDouble Entry System Entry System
Introduction to double entry accounting
What is an account?
Account Name
Specify asset, capital or liability
2001 $ 2001 $
Date
DebitDebit CreditCredit
Introduction to double entry accounting
How to process the double entry system?How to process the double entry system?
Assets = Capital + LiabilitiesAssets = Capital + Liabilities
1.Double entry for 1.Double entry for ASSETSASSETS
Jan 4 Bought motor van paying by cash $160 000.
Recall:
Motor Van
Cash
paying by cash
$160 000$160 000
$160 000$160 000
Bought motor van
$160 000$160 000
2003 $
$2003
Jan 4 Motor Van 160 000
Jan 4 Cash 160 000
Introduction to double entry accounting
Assets = Capital + LiabilitiesAssets = Capital + Liabilities
1.Double entry for 1.Double entry for ASSETSASSETS
Jan 6 Sold motor van by cash $90 000.
Motor Van
Cash $90 000$90 000
$90 000$90 000
$90 000$90 000
2003 $
$2003
Jan 6 Motor Van 90 000
Jan 6 Cash 90 000
Introduction to double entry accounting
Assets = Capital + LiabilitiesAssets = Capital + Liabilities
1.Double entry for 1.Double entry for ASSETSASSETS
Conclusion:For ANY asset a/c
+ Increase - Decrease
Introduction to double entry accounting
Assets = Capital + LiabilitiesAssets = Capital + Liabilities
2.Double entry for 2.Double entry for LiabilitiesLiabilities
Jan 10 Bought machinery from L.Lo Ltd. on credit $93 000.Jan 10 Bought machinery from L.Lo Ltd. on credit $93 000.
L.Lo Ltd.
Machinery $93 000$93 000
$93 000$93 000
$93 000$93 000
2003 $
$2003
Jan 10 L.Lo Ltd. 93 000
Jan 10 Machinery 93 000
$93 000$93 000
Introduction to double entry accounting
Assets = Capital + LiabilitiesAssets = Capital + Liabilities
2.Double entry for 2.Double entry for LiabilitiesLiabilities
Feb 3 Paid L.Lo Ltd. $93 000 in cash.Feb 3 Paid L.Lo Ltd. $93 000 in cash.
L.Lo Ltd.
Cash $93 000$93 000
$93 000$93 000
$93 000$93 000
2003 $
$2003
Feb 3 L.Lo Ltd. 93 000
Feb 3 Cash 93 000
$93 000$93 000
Introduction to double entry accounting
Assets = Capital + LiabilitiesAssets = Capital + Liabilities
2.Double entry for 2.Double entry for LiabilitiesLiabilities
Conclusion:For ANY liability a/c
- Decrease + Increase
Introduction to double entry accounting
Assets = Capital + LiabilitiesAssets = Capital + Liabilities
3.Double entry for 3.Double entry for CapitalCapital
Jan 1 The proprietor started business with $500 000 in cash.Jan 1 The proprietor started business with $500 000 in cash.
Capital
Cash $500 000$500 000
$500 000$500 000
$500 000$500 000
2003 $
$2003
Jan 1 Capital 500 000
Jan 1 Cash 500 000
$500 000$500 000
Introduction to double entry accounting
Assets = Capital + LiabilitiesAssets = Capital + Liabilities
3.Double entry for 3.Double entry for CapitalCapital
Conclusion:Capital a/c
- Decrease + Increase
Introduction to double entry accounting
Conclusion for double entry systemConclusion for double entry system
Assets = Capital + LiabilitiesAssets = Capital + Liabilities
DebitDebit
DebitDebit DebitDebit
CreditCredit CreditCredit
CreditCredit
++
--
Introduction to double entry accounting
The concept of The concept of DebtorDebtor and and CreditorCreditor
Debtor
Creditor
Business
Goods
When he has not paid the business money, he is a When he has not paid the business money, he is a
debtordebtor..
Business
Goods
When the business has not paid him the money, When the business has not paid him the money,
he is a he is a creditorcreditor..
Introduction to double entry accounting
Accounts for each type of dealing in goods
Supplier
Business
CustomerIn the business point of view…
Goods
Goods
Purchases
Sales
Introduction to double entry accounting
Purchases
Cash PurchasesCash Purchases Credit PurchasesCredit Purchases
Paid by cash or cheque immediately
Paid for it later
Introduction to double entry accounting
Assets = Capital + LiabilitiesAssets = Capital + Liabilities
1.Double entry of Purchases of stock for Cash1.Double entry of Purchases of stock for Cash
Aug 2 Goods costing $160 are bought by using cash.
Cash
Purchases $160$160
$160$160
$160$160
2003 $
$2003
Aug 2 Cash 160
Aug 2 Purchases 160
Introduction to double entry accounting
Assets = Capital + LiabilitiesAssets = Capital + Liabilities
2.Double entry of Purchases of stock on credit2.Double entry of Purchases of stock on credit
Aug 4 Goods costing $160 are bought on credit from Wong.Aug 4 Goods costing $160 are bought on credit from Wong.
Wong
Purchases $160$160
$160$160
$160$160
2003 $
$2003
Aug 4 Wong 160
Aug 4 Purchases 160
$160$160
Introduction to double entry accounting
Sales
Cash SalesCash Sales Credit SalesCredit Sales
Receive cash or cheque immediately
Receive it later
Introduction to double entry accounting
Assets = Capital + LiabilitiesAssets = Capital + Liabilities
1.Double entry of Sales of stock for Cash1.Double entry of Sales of stock for Cash
Aug 6 Goods are sold for $55,cash being received.
Sales
Cash $55$55
$55$55
$55$55
2003 $
$2003
Aug 6 Sales 55
Aug 6 Cash 55
Introduction to double entry accounting
Assets = Capital + LiabilitiesAssets = Capital + Liabilities
2.Double entry of sales of stock on credit2.Double entry of sales of stock on credit
Aug 8 Sold goods on credit for $250 to K.Lee.Aug 8 Sold goods on credit for $250 to K.Lee.
Sales
K.Lee $250$250
$250$250
$250$250
2003 $
$2003
Aug 8 Sales 250
Aug 8 K.Lee 250
Introduction to double entry accounting
Accounts for each type of dealing in goods
Supplier
Business
Customer
In the business point of view…
Goods
Goods
Purchases
Sales
Damaged goodsDamaged goods
Returns Outwards
Damaged goodsDamaged goodsReturns Inwards
Introduction to double entry accounting
Assets = Capital + LiabilitiesAssets = Capital + Liabilities
1.Double entry for Returns Inwards1.Double entry for Returns Inwards
F.Lo
Returns Inwards $29$29
$29$29
$29$29
2003 $
$2003
Aug 5 F.Lo 29
Aug 5 Returns Inwards 29
Aug 5 Goods which had been previously sold to F.Lo for $29 are now returned by him.
Introduction to double entry accounting
Assets = Capital + LiabilitiesAssets = Capital + Liabilities
2.Double entry for Returns Outwards2.Double entry for Returns Outwards
Returns Outwards
K.Lo $96$96
$96$96
$96$96
2003 $
$2003
Aug 6 Returns Outwards 96
Aug 6 K.Lo 96
$96$96
Aug 6 Goods previously bought for $96 are returned Aug 6 Goods previously bought for $96 are returned by the firm to K.Lo.by the firm to K.Lo.
Introduction to double entry accounting
Summary
Cash Purchases – Dr. Purchases Cr. Cash
Credit Purchases – Dr. Purchases Cr. Supplier (Creditor)
Cash Sales – Dr. Cash Cr. Sales
Credit Sales – Dr. Customer (Debtor) Cr. Sales
Returns Inwards – Dr. Returns Inwards Cr. Customer (Debtor)
Returns Outwards – Dr. Supplier (Creditor) Cr. Returns Outwards
Introduction to double entry accounting
5. The double entry system 5. The double entry system for expenses and revenuefor expenses and revenue
Introduction to double entry accounting
What is revenue?What is revenue?
Revenue is the sales value of goods and Revenue is the sales value of goods and services that have been supplied to customers.services that have been supplied to customers.
e.g.
Commission ReceivedCommission Received Rent ReceivedRent Received
Introduction to double entry accounting
What is expense?What is expense?
Expense is the value of all assets and costs thatExpense is the value of all assets and costs thathave been used to get those income.have been used to get those income.
e.g.Motor ExpensesMotor Expenses
PostagePostage
Introduction to double entry accounting
Assets = Capital + LiabilitiesAssets = Capital + Liabilities
Recall:Recall:
Capital a/c
- Decrease + Increase
Introduction to double entry accounting
What is the relationship between What is the relationship between expenses and capital?expenses and capital?
ExpensesExpenses ProfitProfit CapitalCapital
Capital a/c
- +Any Expenses
Debit
Introduction to double entry accounting
Assets = Capital + LiabilitiesAssets = Capital + Liabilities
Examples on double entryExamples on double entry
Cash
Rent $300$300
$300$300
$300$300
2003 $
$2003
Aug 6 Cash 300
Aug 6 Rent 300
$300$300
Aug 6 The rent of $300 is paid in cash.Aug 6 The rent of $300 is paid in cash.
Introduction to double entry accounting
Assets = Capital + LiabilitiesAssets = Capital + Liabilities
Examples on double entryExamples on double entry
Bank
Motor Expenses $200$200
$200$200
$200$200
2003 $
$2003
Aug 8 Bank 200
Aug 8 Motor Expenses 200
$200$200
Aug 8 Motor expenses are paid by cheque $200.Aug 8 Motor expenses are paid by cheque $200.
Introduction to double entry accounting
What is the relationship between What is the relationship between revenue and capital?revenue and capital?
RevenueRevenue ProfitProfit CapitalCapital
Capital a/c
- +Any Revenue
Credit
Introduction to double entry accounting
Assets = Capital + LiabilitiesAssets = Capital + Liabilities
Examples on double entryExamples on double entry
Commission
Cash $250$250
$250$250
$250$250
2003 $
$2003
Aug 9 Commission 250
Aug 9 Cash 250
$250$250
Aug 9Aug 9 $250 cash is received for commission earned by the firm. $250 cash is received for commission earned by the firm.
Introduction to double entry accounting
The concept of drawingsThe concept of drawings
BossBoss
Can I take them
away?
One day…One day…
Introduction to double entry accounting
The concept of drawingsThe concept of drawings
NoNo…The money is processed by the company…
But not the boss !
Introduction to double entry accounting
The concept of drawingsThe concept of drawings
BossBoss
If he wants to take the money…If he wants to take the money…
He can…He can…
But he should take it back later!But he should take it back later!
DrawingsDrawings
Introduction to double entry accounting
Assets = Capital + LiabilitiesAssets = Capital + Liabilities
Recall:Recall:
Capital a/c
- Decrease + Increase
Introduction to double entry accounting
What is the relationship between What is the relationship between drawings and capital?drawings and capital?
DrawingsDrawings CapitalCapital
Capital a/c
- +Drawings
Debit
Aug 10 The proprietor takes $460 cash Aug 10 The proprietor takes $460 cash out of the business for his own use.out of the business for his own use.
Introduction to double entry accounting
Assets = Capital + LiabilitiesAssets = Capital + Liabilities
Examples on double entryExamples on double entry
Cash
Drawings $460$460
$460$460
$460$460
2003 $
$2003
Aug 10 Cash 460
Aug 10 Drawings 460
$460$460
Introduction to double entry accounting
Balancing an accountBalancing an account
How to do it?How to do it?Bank
2004 $2004 $ 2004 $2004 $May 3 Rent 300
May 6 Purchases 900May 1 Capital 2000
May 8 Sales 1100
31003100 12001200>>May 31 Bal c/d 1900
3100 3100
Jun 1 Bal b/d 1900
Introduction to double entry accounting
Balancing an accountBalancing an account
Sales
2004 $2004 $ 2004 $2004 $May 3 Bank 300
May 6 C.Wong 900
>>
May 31 Bal c/d 1200
1200 1200
Jun 1 Bal b/d 1200
Introduction to double entry accounting
Balancing an accountBalancing an account
Rent2004 $2004 $ 2004 $2004 $May 1 Bank 900 May 31 Bal c/d 900
Jun 1 Bal b/d 900
K.Wo2004 $2004 $ 2004 $2004 $May 1 Sales 1900 May 21 Bank 1900