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

______________________________________


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

_____________________________________


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

- +- +

NormalNormalBalanceBalance



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==

Profits & LossesNormal Balances


+ -+ -Debit Debit CreditCredit- +- +


- +- +




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

+ + --

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


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


The Double Entry

Jun x Vehicles Account 20,000

Bank Loan 20,000

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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


The Double Entry

Jun x Bank Loan 5,000

Bank Account 5,000

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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


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


The Double Entry

Jun x Inventories 60,000

Accounts Payable 60,000

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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


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

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


The Double Entry

Jun x Cost of Goods Sold 18,000

Inventories of Widgets 18,000

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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


The Double Entry

Jun x Telephone Expense 1,000

Accounts Payable 1,000

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YES they DO

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.

Study Pack 1

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The End…

to be continued…..

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

Documents

assets slide

t account slide

debit credit assets

debits credits

double entry bookkeeping

equityi equity slide

incomesi incomes slide

credit total debits