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					Accounting I
Double Entry Bookkeeping




                           1
Dr. Clive Vlieland-Boddy FCA FCCA MBA
              Barcelona 2009




                                        2
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..



                                            3
History & Reasons

   Invented over 500 years ago.
   It was created to ensure that all entries are
    correctly and accurately recorded.




                                                    4
      Objective 1
What is Double Entry Bookkeeping




                               5
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.




                                                    6
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

                                                 7
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.




                                                   8
Objective 2
   The “T” Account




                     9
T-Account
Simple tool for analysing and determining the
          balance in a given account


              Account Name

         (Left Side)   (Right Side)
           Debit          Credit



                                                10
                     The “T” Accounts

      Which account is debited?   Which account is credited?

For what amount?                                 For what amount?




                                                                11
Debits

   Assets
   Bank Receipts
   Expenditures
   Losses




                    12
Credits

                       Liabilities
                 Bank Payments

             Shareholders Funds
                Incomes (Sales)

                          Profits




                                  13
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

                                               14
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.



                                              15
Asset Accounts

______________________________________
Debits: Increase I Credits : Reduce
         Assets   I            Assets




                                     16
Liability Accounts

______________________________________
Debits: Reduce I Credits : Increase
         Liabilities I      Liabilities




                                      17
Equity Accounts

______________________________________
Debits: Reduce I Credits : Increase
         Equity I           Equity




                                     18
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.



                                                  19
Income Accounts

_____________________________________
Debits: Reduce   I Credits : Increase
         Incomes I             Incomes




                                         20
Expense Accounts

_____________________________________
Debits: Increases    I Credits: Decrease
         Expenditure I           Expenditure




                                               21
 Rules of Debit and Credit

 Assets          =   Liabilities      +    Equity
Debit   Credit       Debit   Credit       Debit   Credit
 +       -            -       +            -       +




                                                       22
  Normal Balances
  Assets           =   Liabilities         +    Equity
 Debit    Credit        Debit     Credit       Debit     Credit
   +       -             -        +             -        +


Normal                          Normal                 Normal
Balance                         Balance                Balance




                                                             23
 Normal Balances
                   Profits & Losses
                   _
 Revenues                Expenses
                                          =   Profits or Losses
Debit     Credit        Debit    Credit         Debit   Credit
 -        +              +        -
                                                    -      +


        Normal         Normal                           Normal
        Balance        Balance                          Balance
                                                                  24
But who owns theses profits

The   Shareholders.




                              25
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.



                                        26
 Expanding the
 Rules of Debit and Credit
                 Shareholders Equity
                                            Profits =
 Revenues        _                        Shareholders
                      Expenses        =       Capital
Debit   Credit       Debit   Credit       Debit    Credit

 -       +            -       +           +             -


                                                            27
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.

                                                    28
How debits and credits affect the
different elements of the accounts.


        Debit/credit
        Account            Debit Credit
        Assets              ▲      ▼
        Expenses            ▲      ▼
        Liabilities         ▼      ▲
        Shareholder
                             ▼        ▲
          Equity
        Revenue              ▼        ▲   29
Objective 3
 Work an actual example




                          30
Lets work Basic Example 1
( See page 23)
   The owners invest €100,000 in cash into the
    business.
   So what are the double entries?




                                                  31
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



                                                 32
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


                                                33
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.


                                                 34
          Bank Account   Equity Account


Investors 100,000                100,000 Shares




                                                  35
 Analysis of Example 1 transaction:
  Accounts Bank is increasing

  Equity is increasing


                    The Double Entry
 DATE          DESCRIPTION             REF     DEBIT    CREDIT

Jun x Bank Account                           100,000
      Equity Account                                   100,000

                                                            36
Do the books Balance?


YES      they DO


                        37
Basic Example 2

   The company buys a car costing €20,000.
   It finances this purchase by way of a Bank
    Loan.




                                                 38
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
                                                  39
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.


                                                   40
      Vehicle Account   Bank Loan


Car   20,000                  20,000 New Loan




                                                41
 Analysis of Example 2 transaction:
  Vehicles Account is increasing

  Bank Loan is increasing


                    The Double Entry
 DATE          DESCRIPTION             REF    DEBIT   CREDIT

Jun x Vehicles Account                       20,000
      Bank Loan                                       20,000

                                                          42
Do the books Balance?


YES      they DO


                        43
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.




                                                    44
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


                                                 45
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.


                                                   46
           Bank Loan   Bank Account


Repay Loan 5,000              5,000 Repay Loan




                                                 47
Analysis of Example 3 transaction:
 Accounts Loan is reducing

 Bank Account is reducing


                   The Double Entry
DATE          DESCRIPTION             REF   DEBIT   CREDIT

Jun x Bank Loan                             5,000
      Bank Account                                   5,000

                                                        48
Do the books Balance?


YES      they DO


                        49
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.




                                                      50
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
                                                  51
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.


                                                   52
           Inventories   Accounts Payable

Widgets   60,000                 60,000 Supplier of Widgets




                                                      53
 Analysis of Example 4 transaction:
  Inventories are increasing

  Accounts Payable is increasing


                    The Double Entry
 DATE          DESCRIPTION             REF    DEBIT   CREDIT

Jun x Inventories                            60,000
      Accounts Payable                                60,000

                                                          54
Do the books Balance?


YES      they DO


                        55
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.




                                                   56
      Accounts Receivable   Sales of Widgets

Customer x 25,000                    25,000 Sales




                                                    57
 Analysis of Example 5 transaction:
  Accounts Receivable is increasing

  Sales is increasing


                    The Double Entry
 DATE          DESCRIPTION             REF    DEBIT   CREDIT

Jun x Accounts Receivable                    25,000
      Sales of Widgets                                25,000

                                                          58
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.




                                                59
Asset Reduces

   Inventories will be reduced by 6 units at
    €3,000 = €18,000
   So Credit Inventories by $18,000




                                                60
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
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



                                                 62
       Cost of Goods Sold   Inventories


Cost of 6 Widgets                  18,000 Widgets Sold
           18,000




                                                   63
 Further Analysis of Example 5 transaction:
  Cost of Sales is increasing

  Inventories are reducing


                     The Double Entry
 DATE           DESCRIPTION             REF    DEBIT   CREDIT

Jun x Cost of Goods Sold                      18,000
      Inventories of Widgets                           18,000

                                                           64
Do the books Balance?


YES      they DO


                        65
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!




                                                  66
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


                                                   67
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.




                                                   68
              Telephone   Accounts Payable


Phone Bill   1,000                 1,000 Phone Co




                                                    69
Analysis of Example 6 transaction:
 Expense Account – Telephone is increasing

 Accounts Payable is increasing


                   The Double Entry
DATE          DESCRIPTION             REF   DEBIT   CREDIT

Jun x Telephone Expense                     1,000
      Accounts Payable                               1,000

                                                        70
Do the books Balance?


YES      they DO


                        71
Exercise 5.1.4
                                      Share Capital
                                                100,000
                                                Bal 100,000

   Bank Account           Accounts Payable                    Car
100,000 5,000                      60,000 20,000
Bal 95,000                          1,000 Bal 20,000
                                 Bal 61,000

    Loan For Car
                            Share Capital             Inventories
              20,000              100,000          60,000
    5,000                         Bal 100,000                  18,000
             Bal 15,000                         Bal 42,000

 Sales of Widgets           Cost of Sales           Phone Expense
             25,000                18,000                           1,000
             Bal 25,000           Bal 18,000                    Bal 1,000
                                                                       73
Objective 5
Prepare and use a trial balance




                                  74
Trial Balance

   List of all accounts with their balances




                                               75
See Page 26




              76
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.

                                                 77
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.

                                                 78
Locating Trial Balance Errors
What if it doesn’t balance?
 Is the addition correct?

 Are all accounts listed?

 Are the balances listed correctly?




                                       79
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




                                                          80
The bank reconciliation . . .



            A critical control activity for cash.




                                             81
Study Pack 1
The End…

   to be continued…..




                         83

				
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