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ACCOUNTING STEP BY STEP THE LANGUAGE OF DEBIT AND CREDIT Dr .ppt

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     ACCOUNTING STEP BY STEP

THE LANGUAGE OF DEBIT AND CREDIT


   Dr. R.G.A. Boland FCA, CPA, DBA


BRIEF LECTURES TO REINFORCE THE KEY
    PROGRAM LEARNING ACTIVITY
        - LEARNING BY DOING!
                    2
CHAPTER I - INTRODUCTION TO BOOKKEEPING


In 2006 all the hard work of bookkeeping is now done
by computer.



But ... We must understand the language of
"debit and credit", so that we can use the computer
data to produce RELIABLE accounting reports in
accordance with IAS (International Accounting
Standards).
                      3


 No matter what the form of the record, the
basic rule of bookkeeping remains the same: the
           concept of debit and credit.

          The five key steps are ...
                         4
A. BOOKKEEPING:

I. Translate transactions into debits and credits
   in a journal.

2. Post the debits and credits to ledger accounts.

3. Balance the ledger accounts to summarize the
   net effect of the entries.

4. Extract a trial balance to check the
   arithmetical accuracy of the postings.
                       5
B. ACCOUNTING




5. From the trial balance prepare the accounting
reports, balance sheet and income statement
(profit and loss account) with IAS!
                      6
Our task of learning this language is complicated
by the fact that many of the words used in
accounting mean almost, but not quite, the same
as they mean in every-day life.

We must learn to think of words in their
accounting rather than their popular meaning.

In this program, we have used a standard set of
English and American accounting terms, although
certain other terms are also of accounting terms
reinforces your basic grasp of the language.
                    7
Accounting Period

The basis of all profit is the period (accounting
period) during which the profit is realized. Thus
$10 a week is not the same as $10 for a whole
year.

Again, the financial position of a business must
relate to a particular date. Thus the picture at
January 1st may not be the same as the picture
at June 3oth.

Therefore, the accounting period and the date, is
vital information which affect the significance of
the accounting reports.
                     8
 A glossary of common bookkeeping words is
    provided at the end of the program.




The following list indicates some of the major
 differences between English and American
                  terminology:
                    9

English Term             American Term

Debtors                 Accounts receivable
Creditors               Accounts payable
Stock of goods          Inventory

Share capital           Capital stock
Profit                  Income

Accumulated profits     Retained earnings
Profit and loss account Income statement
                  10
Some textbooks teach the application of debit and
credit as:




    (a) Credit the giver

   (b) Debit the receiver
                       11
However this has certain logical limitations. So, in
this program we use a different approach.

We first define:

(a) Debit, as the left-hand side
(b) Credit, as the right-hand side
(c) Basic debits as, assets, costs and expenses
(d) Basic credits, as liabilities, owners' equity
    and sales

This facilitates very rapid assimilation of the
bookkeeping technique, while the computer does all
the hard work!
                 12
 CHAP TER II - ACCOUNTING REPORTS

SET I - INCOME STATEMENT (PROFIT AND
LOSS ACCOUNT)

                 SUMMARY

The income statement (profit and loss account) of
a business relates to a specific accounting period.

It matches sales against cost of ales and
expenses, to compute a figure of profit for the
accounting period.

Profit realized is NOT the same as cash
received.Cash is more important than profit!
                      13

 Sales, less cost of sales and less expenses,
                equals profit.




Sales equals cost of sales, plus expenses, plus
                    profit.
                    14
              IMPORTANT NOTE

In the front of each set is a summary (as above)
 of technical terms and ideas to be learned from
             the set. Read it quickly.

If you already understand all of the summary do
 not complete the set, pass on to the next one.

  If you do not completely understand every
technical term and idea in the summary, do the
whole set. Do not attempt to do only parts of a
                particular set.
                  15
CHAPTER II SET 2 - BALANCE SHEET

                 SUMMARY

The balance sheet presents a financial picture of
a business and lists the assets, liabilities and
owner's equity of the business at a specific date.

It is not the same as an income statement.

Valuable things owned by a business such as cash,
debtors, inventory (stock), prepaid expenses and
car are assets. Creditors are liabilities.
                     16

The owner's equity is the original investment

of the owners (share capital) in the business

         plus the profits earned and

     left to accumulate in the business.
                     17

Assets are generally recorded at cost or lower


          and NOT at higher resale


         prices - very conservative!.
                     18

Assets less liabilities equals owner's equity
               or net worth.



Assets equals liabilities plus owner's equity.
                             19
Note.

(a)     In our balance sheets we shall (for

        bookkeeping) always record assets on he

        left side, and liabilities and owner's equity

        on the right side.

Note: In some countries they may present the
balance sheet in many different ways ... but in
bookkeeping ... debit (left) and credit (right) are
always the same... hooray!
                       20
(b) Remember:


  Debtors are receivables

  Creditors are payables

  Stock is inventory

  Accumulated profit is retained earnings

  Profit is income
                   21
      CHAPTER II - SET 3 - BUSINESS
             TRANSACTIONS


Transactions may be for cash or for credit. In a
credit transaction liability is incurred but cash is
   transferred later as a separate transaction.


  All transactions have a "dual aspect" (debit &
  credit) and thereby affect two items on the
                  balance sheet.
                    22
Accounting conventions recognize transactions at
particular times.


For example:

Sales transactions are generally recognized when
the goods leave the seller's premises, whereas

Purchase transactions arc normally recognized
when the goods are received by the buyer.
1. An instantaneous financial
picture of a business as of a
particular date is

a. income statement
b. statement of accumulated
    profit
c. balance sheet
d. profit and loss account

                                C
2. An accounting report of the
flows of sales, costs, expenses
and net profit over an accounting
period is called a:

a.   sales report
b.   balance sheet
c.   income statement
d.   owner's equity
                             C
3. In a balance sheet the assets
are exactly equal to the:

a.   liability to creditors
b.   owner's equity
c.   current assets
d.   claims against the assets


                                   D
4. Owner's claims against the
assets of a business are called:


 a.   liabilities
 b.   capital stock
 c.   owner's equity
 d.   income

                                   C
5. Valuable things owned by a
business are called:


a.   capital
b.   assets
c.   fixed assets
d.   liabilities

                                B
6. Assets less liabilities equals:

a.   share capital
b.   accumulated profits
c.   owner's equity
d.   sales


                                     C
7. People who owe debts to a
business are listed on a balance
sheet of that business as:

a.   trade creditors
b.   income
c.   claims against the assets
d.   debtors

                                   D
8. Land, building, etc., owned
by a manufacturing business is a:

a.   current asset
b.   "other" asset
c.   fixed asset
d.   capital


                                C
9. Stock is a:

a.   fixed asset
b.   part of owner's equity
c.   asset
d.   claim which the business
     agrees to pay


                                C
10. The owner's equity of a
limited company consists of:

a. share capital and
   accumulated profits
b. share capital
c. assets
d. dividends

                               A
11. Assets less owner's equity
equals:

a.   claims of the shareholders
b.   current liabilities
c.   capital
d.   liabilities


                                  A
.
12. If a business has cash of
£2,000, trade creditors of
£100, a mortgage payable of
£5,000 and land of 10,000 the
owner's equity is:

a.   impossible to compute
b.   £10,000
c.   £5,100
d.   £6,900
                                D
13. A balance sheet is prepared
for a business entity. For a
limited company this entity is:

a. the company and its
   management
b. the company and its
   shareholders
c. the shareholders alone
d. the company alone
                                  B
22. Which of the following are
basic debits?

a.   liabilities
b.   fixed assets
c.   owner's equity
d.   share capital
                      23
CHAPTER III     - BOOK-KEEPING TECHNIQUE

SET 4 - DEBIT AND CREDIT

                SUMMARY
Debit means "left-hand side".

Credit means "right-hand side".

In bookkeeping debit and credit have NO
significance as being "good" or "bad" as is implied
by the popular use of the same words.
                       24

Each item in the balance sheet and income
statement is, by convention, either a basic debit
or a basic credit:

  1. The items on the left-hand side: assets,
      costs and expenses are basic debits.


  2. The items on the right-hand side: liabilities
     and owner's equity and sales are basic
     credits.
                       25
A basic debit is increased by debits and
decreased by credits. Conversely a basic credit is
increased by credits and decreased by debits.


Each business transaction has a debit aspect and
a credit aspect of the same amount. Thus in a set
of books the total debits always equal the total
credits.


"Dr" means debit. "Cr" means credit.
                       26

               IMPORTANT NOTE

At this point we must unlearn something about the
words debit and credit, which is current in every-
  day life but does NOT apply to bookkeeping!!

      Repeat aloud the following sentences:

 "Credit means right side, It does not mean good
                     or bad."

"Debit means left side. It does not mean good or
                      bad."
                   28
               CHAPTER III
       SET 5 ACCOUNTS AND BALANCE


                   SUMMARY

 For each basic debit item and each basic credit
    item in the accounting reports there is an
      "account" in the books of the business.

    An account is simply a page in the books.


 In a series of accounts in the books we analyze
and summarize each aspect (Dr and Cr) of a large
        number of business transactions.
                      29


 The balance brought down summarizes the net
  amount of the transactions recorded in the
               account to date.




Each account may have a debit or credit balance
 according to the net total of debit and credit
                   postings.
                  30
CHAPTER III SET 6 - CASH AND CREDIT


                 SUMMARY


In bookkeeping the word "credit" has two
meanings:

  Credit means NOT for cash

  Credit means right side of the account, the
  opposite of debit.
                    31
Transactions may be either for cash or credit



Cash transactions are either cash receipts or cash
payments, which increase or decrease the cash
balance.


Credit transactions increase either receivables or
payables, but NOT cash ... until they are paid
with a cash transaction!.
                     32



Cash is an asset and therefore a basic debit.
                      33
In terms of debit and credit, cash sales and
purchases are recorded thus:

Cash receipts:

   Cash account          Dr.
    Sales account                Cr.

Cash payments:.


   Purchases account    Dr.
     Cash account              Cr
                       34


Credit transactions do not affect the balance of
cash but they do increase debtors (basic debits)
or creditors (basic credits).


Remember - debtors - receivables - basic asset


Creditors - payables - basic credit
                      35

Credit transactions for sales and purchases are
recorded thus:



Credit sales:

  Debtor (receivable) account     Dr.
      Sales account                      Cr

Credit purchases:

  Purchases account               Dr
     Creditor account                    Cr.
                   36
CHAPTER III

SET 7 - JOURNALIZING TRANSACTIONS

              SUMMARY
This is a revision set to give you practice in
journalizing transactions by translating them into
debits and credits.


The journal of a business is the book in which any
transaction may be recorded in the following form
of entry.
                 37
FORM OF GENERAL JOURNAL ENTRY:



Date

Account name     Dr           1000

Account name    Cr                      1000


Plus an explanation of the transaction for future
reference.
22. Which of the following are
basic debits?

a.   liabilities
b.   fixed assets
c.   owner's equity
d.   share capital

                             B
23. Which of the following are
basic credits?

a.   assets
b.   costs
c.   owner's equity
d.   expenses


                             C
24. A debit balance is increased
by a:

a.   credit
b.   debit
c.   something else
d.   both credits and debits

                               B
25. A basic debit is decreased
by a:

a.   credit
b.   debit
c.   neither
d.   both debits and credits


                               A
26. A basic credit is decreased
by a:

a.   debit
b.   credit
c.   neither
d.   both debits and credits


                               A
27. Debtors are decreased by:

a.   debits
b.   credits
c.   something else
d.   both debits and credits



                               B
28. Expenses are increased by:

a.   debits
b.   credits
c.   something else
d.   both debits and credits


                               A
29. Sales are increased by:

a.   debits
b.   credits
c.   something else
d.   both debits and credits


                               B
37. Creditors normally have a
balance:

a.   debit
b.   credit
c.   something else
d.   debit or credit

                                B
38. Debtors normally have a
    balance:

a.   debit
b.   credit
c.   something else
d.   both debit and credit

                              A
39. Owner's equity and profits
normally have a balance:

a.   debit
b.   credit
c.   something else
d.   both debit and credit

                                 B
40. Expenses and sales normally
have balance which are:

   a. the same-debit
   b. the same-credit
   c. credit and debit
      respectively
   d. debit and credit
      respectively                D
41. Assets normally have a
    balance:

   a.   debit
   b.   credit
   c.   something else
   d.   both debit and credit

                                A
42. Posting in book-keeping
means:

a.   writing in the journal
b.   journalizing
c.   writing in the ledger accounts
d.   preparing a trial balance
                   38
CHAPTER IV - SPECIAL TRANSACTIONS

SET 8 ACCRUALS

              SUMMARY

Accruals are credit transactions. They record a
liability not yet paid for.

The liability may be for the purchase of a fixed
asset, or a cost or an expense incurred.

Thus the books and the accounting reports must
show the full liabilities of a business. Settlement
of the accrual in cash, is a subsequent cash
transaction.
                      39
To record an accrual we journalize:

 Asset (basic debit           Dr.
   Creditor (basic credit)            Cr.

   OR

Cost (basic debit)           Dr.
  Creditor (basic credit)              Cr.

   OR

Expense (basic debit)        Dr.
  Creditor (basic credit)              Cr.
                    40
To record the cash settlement of the accrual we
journalize:


Creditor (basic credit) - decreased Dr.
    Cash (basic debit) - decreased        Cr.
                         41
CHAPTER IV
SET 9 - FIXED ASSETS AND DEPRECIATION

                     SUMMARY

Fixed assets, such as land, buildings, machinery,
plant, furniture, trucks, cars, etc., are normally
purchased for use in the business, and not for
resale.
The process of "depreciation" allocates the cost
of each fixed asset to "depreciation expense"
proportionally over its working life.
It is a process of allocation not valuation of the
fixed asset, Depreciation expense" (basic debit) is
shown in the income statement.
                     42


 Fixed assets (basic debits) are shown in the
   balance sheet at cost, less accumulated
         depreciation (basic credit).




Exception: Land is not depreciated - shown at
             cost until revalued.
                      43
The amount charged to depreciation expense for
the accounting period may be journalized in one of
two ways:

I.Directly against the cost of the fixed asset:
 Depreciation expense (basic debit) Dr
      Fixed asset (basic debit)              Cr
     OR
                   44
2.Through an intermediate account deducted
from the cost of the fixed asset in the balance
sheet:


Depreciation expense (basic debit)   Dr

     Accumulated depreciation (basic credit)   Cr.

Note:
Accumulated depreciation is deducted from the
total of fixed assets (basic debits) on the left
side of the balance sheet. It is therefore a basic
credit (not basic debit).
44. A cash payment is
journalized:

a. debit cash, credit some
   other account
b. debit some other account,
   credit debtors
c. debit cash, credit creditors
d. credit cash, debit some
   other account                  D
45. Cash receipts are always
journalized as debit to:

a.   debtors
b.   creditors
c.   owner's equity
d.   something else


                               D
46. Credit sales are journalized:

a.   credit debtors, debit sales
b.   debit cash, credit sales
c.   debit creditors, credit sales
d.   debit debtors, credit sales


                                     D
47. A cash purchase is always
recorded as a credit to:

a.   creditors
b.   assets
c.   cash
d.   purchases

                                C
49. Receipt from a debtor is
journalized as:

a.   debit   sales, credit cash
b.   debit   debtors, credit cash
c.   debit   debtors, credit sales
d.   debit   cash, credit debtors


                                D
50. A credit transaction is
normally followed by a cash
transaction:

    a.   true
    b.   false
    c.   neither
    d.   both

                              A
51. Cash is a basic:

a.   debit
b.   credit
c.   neither
d.   debit or credit



                       A
52. In the cash account cash
receipts are:

a.   debits
b.   credits
c.   neither
d.   both debits and credits


                               A
53. In the cash account cash
payments are:

a.   debits
b.   credits
c.   neither
d.   both debits and credits


                               B
54. Debtors are:

a.   debits
b.   credits
c.   neither
d.   both debits and credits



                               A
55. A debit balance on a
creditors' account probably
means:

a.   we owe him money
b.   he owes us money
c.   something else
d.   there is an error or a return
     to supplier.

                         B/D
56. Purchase of land on credit is
recorded:

a.   debit purchases, credit cash
b.   debit cash, credit land
c.   debit land, credit creditors
d.   something else


                                    C
57. Purchase of machinery for
cash is recorded:

a. debit cash, credit machinery
b. debit debtors, credit
   machinery
c. credit cash, debit machinery
d. something else


                                  C
58. Payment of rent in cash is
recorded:

a.   debit rent, credit creditors
b.   credit rent, debit cash
c.   debit rent, credit debtors
d.   something else
                45
CHAPTER V RECORDS

SET 10 - JOURNALS AND LEDGERS


               SUMMARY


Books of account may be divided into books of.

         Prime entry (journals)

         Second entry (ledgers)
                      46


In the journal each transaction is translated into
debits and credits,




Only one journal is essential but in practice we
have separate journals for each main source of
transactions.
                   47
The cash book (journal) records cash receipts and
payments.



The sales journal records credit sales.



The purchases journal records credit purchases.


The general journal records all types of
transactions
                       48



  The sales journal and the purchases journal

summarize one side of transactions so that the

 debit to purchases and the credit to sales may

be made in total figures, instead of in detail for

                each transaction.
                     49

Posting to the ledger accounts is made from the
journals.




Each ledger includes a series of accounts to
record the debit and credit aspects of the
transactions.
                    50
Three separate ledgers are usually kept.


The sales ledger contains an account for each
debtor.


The purchases ledger contains an account for each
creditor,


In the general (private) ledger are all the other
accounts for assets, liabilities, owner's equity,
sales, costs and expenses
                  51
CHAPTER V - SET 11 - TRIAL BALANCE

                  SUMMARY

Bookkeeping is the process of keeping books of
account. The bookkeeping records analyze,
classify and summarize transactions to provide the
basic data for accounting reports.

In the books the total debit postings equals the
total credits.

The arithmetical accuracy of the books is verified
by making a "trial" or test by listing the balances
of the accounts in the form of a trial balance, to
check that total debits and credits agree.
66. "Depreciation expense is a
basic credit." This statement is:

a.   true
b.   false
c.   either
d.   neither



                                    B
67. Accumulated depreciation is:

a.   an expense
b.   a liability
c.   a fixed asset
d.   deducted from fixed assets



                                   D
68. Depreciation is a process of:

a.   allocation
b.   valuation of fixed assets
c.   accrual
d.   sales




                                    A
69. Bad debt expense is
recorded:

a. debit debtors, credit bad
   debts
b. debit creditors, credit bad
   debts
c. debit bad debt expense,
   credit debtors
d. something else
                                 C
70. Debit cash, credit machinery
normally records:

a.   purchase of fixed asset
b.   prepaid expenses
c.   sale of a debtor
d.   something else



                               D
71. Transactions are first
translated in debits and credits
in the:

a.   ledger
b.   journal
c.   cash book
d.   something else

                        B/C
72. The three types of ledgers
are normally:

a.   sales, purchases, assets
b.   sales, general, purchases
c.   cash book, sales, purchases
d.   purchases, sales, expenses



                                   B
73. The four types of journals
are normally:

a. cash book, sales, expenses,
   general
b. sales, cash, purchases,
   general
c. general ledger, sales and
   purchases
d. something else
                                 B
74. The arithmetical accuracy of
the book-keeping is verified in
the:

a.   books
b.   balance sheet
c.   trial balance
d.   journal


                                   C
75. "An error of the right
amount posted to the wrong
account is ALWAYS revealed by
the trial balance." This is:

a.   true
b.   false
c.   neither
d.   partly true

                                B
76. "An error of the right
amount posted to the wrong
account is SOMETIMES revealed
by the trial balance." This is:

a.   true
b.   false
c.   neither
d.   partly true

                              A
77. The original entry of a
transaction to charge
depreciation would be recorded
first in the:

a.   Sales ledger
b.   Sales journal
c.   General journal
d.   Private ledger

                                 C
78. The process of book-keeping
alone involves:
a. journalizing, posting
b. journalizing, posting,
     balancing
c. journalizing, posting,
     balancing, trial balance
d. journalizing, posting,
     balancing, trial balance,
     balance sheet, income
     statement                    C
79. We prepare accounting
reports normally from a:

a.   ledger
b.   balance sheet
c.   journal
d.   trial balance
                52
CHAPTER VI - SET 12       SUMMARY


This is a revision set on the whole process of
BOOKKEEPING and accounting which involves:

  Journalizing transactions into debits and credits
  Posting to accounts in the ledger
  Balancing ledger accounts
  Extracting a trial balance

and .. the ACCOUNTING work of preparing an
income statement and a balance sheet with IAS!.
                     53


The set includes the routine for recording the
       following types of transactions:


        Starting a business with cash
        Purchases for cash and credit
  Purchase and depreciation of fixed assets
          Sales for cash and credit
Transfer to cost of sales (cost of goods sold)
      Accrual and payment of expenses
     Settlement of debtors and creditors
73. The four types of journals
are normally:

a. cash book, sales, expenses,
   general
b. sales, cash, purchases,
   general
c. general ledger, sales and
   purchases
d. something else
                                 B
74. The arithmetical accuracy of
the book-keeping is verified in
the:

a.   books
b.   balance sheet
c.   trial balance
d.   journal


                                   C
75. "An error of the right
amount posted to the wrong
account is ALWAYS revealed by
the trial balance." This is:

a.   true
b.   false
c.   neither
d.   partly true

                                B
76. "An error of the right
amount posted to the wrong
account is SOMETIMES revealed
by the trial balance." This is:

a.   true
b.   false
c.   neither
d.   partly true

                              A
77. The original entry of a
transaction to charge
depreciation would be recorded
first in the:

a.   Sales ledger
b.   Sales journal
c.   General journal
d.   Private ledger

                                 C
78. The process of book-keeping
alone involves:
a. journalizing, posting
b. journalizing, posting)
     balancing
c. journalizing, posting,
     balancing) trial balance
d. journalizing, posting,
     balancing, trial balance,
     balance sheet, income
     statement                    C
79. We prepare accounting
reports normally from a:

a.   ledger
b.   balance sheet
c.   journal
d.   trial balance


                            D
80. In the U.K. we present a
balance sheet with the assets
(basic debits) on the right-hand
side. Does this affect the book-
keeping?

a.   yes
b.   no
c.   maybe
d.   sometimes
                      54

      ... and so ends ... And begins ...



THE LANGUAGE OF DEBIT AND CREDIT ...



    ... on we go together . with a quiz ...


... to give YOU feedback on how well YOU have
           learned ... bye for now ...

				
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