Understand Accouting (Mechanical Approach)

Yoshi 1

Understand Accounting

From How to Why

Yoshi 2

Agenda

• Double Bookkeeping System

• Balance Sheet and

Profit Loss Statement

Slide No. 3-11

Slide No. 12-22

Yoshi 3

History of Accounting

Renaissance

Yoshi pays $100Receives $200 Paragraph:

Formulation:

100 200

Abstraction:

200 – 100=100

MathAccount

summa de arithmetica geometria proportioni et proportionalita

By Luca Pacioli

Picture Source : http://en.wikipedia.org/wiki/Luca_Pacioli

Yoshi 4

Double Bookkeeping System

• Recording

• Tracking

• Calculating

• Reporting

• Validating

In one format !

Yoshi 5

Account Origin (1)Ancient Rome (Account : Personal)

Slave Master

InvestmentMaster

Own Money

Segregation !

Investment

Asset Liability Asset Liability

Yoshi 6

Account Origin (2)Post – Industrial Revolution (Account : Impersonal)

Equity Cash Factory

Material

Labour

Process Product Sales

Profit/Loss

Finance Work In Progress Inventory Sales

Yoshi 7

Book Structure

Account A Account B

Ledger X

Account C Account D

Ledger Y

Books

Journal / Day Book (Diaries)Posting Posting

Yoshi 8

Journal / Day Book

Sales Day Book (Page 10)

2010 August Invoice No Folio Amount $

1 C Knight 10001 SL 15 100

5 C Knight 10002 SL 15 100

10 D Mike 10003 SL 21 200

15 C Knight 10004 SL 15 100

Posting ToSL: Sales Ledger

One Source to One Posting = Traceability !!

Source Documents

Yoshi 9

Yoshi 10

Yoshi 11

Posting Rules

• Post Same Amount to both Debit and Credit e.g. Dr C Knight A/c 300

Cr Sales 300or Dr C Knight A/c 300

D Mike A/c 200 Cr Sales 500

That is why, Trial Balance (TB) should balance (XXX=XXX)

Bal of A/c 11 Bal of A/c 12Bal of A/c 13 Total XXX

Bal of A/c 1 Bal of A/c 2 Bal of A/c 3

Total XXX

Control A/c for TB

Yoshi 12

Five Accounts (Cycle)(Introduction to Financial Statements)

Liability

Equity

12

Expense Income3 4

Profit

Asset

Yoshi 13

Which Account ? (1)

Liability

Equity

Expense Income

Out In

Stock

Flow

Asset

Yoshi 14

Which Account ? (2)

-B/S

P/L

+

Debit CreditAsset

-+

Debit CreditExpense

- +

Debit CreditIncome

- +

Debit CreditLiability/Equity

Yoshi 15

Which Account ? (3)

B/S

P/L

Asset

Expense Income

Liability/Equity

•Account Payable•Borrowing •Capital, etc

•Cash/Bank Account•Account Receivable•Lending •Land, etc

•Salary •Purchase•Office Rent•Commission Paid•Interest Paid, etc

•Sales•Commission Received•Interest Received, etc

Yoshi 16

Profit Calculation

Start End

LiabilityAsset Profit=-

Income - Expense

=Profit

Income - Expense

=Profit

Income - Expense

=Profit

Voyage, Caravan (Before Industrial Revolution)

On-Going (After Industrial Revolution)

Yoshi 17

Accounting Equation (1)

Balance Sheet (BS) Accounts:

• Asset – Liability = Equity

Asset

Liability

Equity

Liability

EquityAsset

Liability

Equity

Asset

Yoshi 18

Accounting Equation (2)

Profit and Loss (PL) Accounts:

Income – Expense = Profit (Loss)

IncomeProfit

Expense

ExpenseLoss

Income

Yoshi 19

Accounting Equation (3)

B/S and P/L:

Equity

Liability

Asset

IncomeProfit

Expense

Equity

Liability

Asset

IncomeExpense

Year 2009 Year 2010

Yr 2009 Profit = $100Yr 2009 Equity = $500

Yr 2010 Equity = $600

Yoshi 20

Posting for Allocation (1)

Cash Outflow

Cash Inflow

AccrualDeferral

A

B

C

D

DepreciationProvision

(Payables)

Unbilled Income(Receivables)

Unearned Income

Yoshi 21

Posting for Allocation (2)

Deferral Accrual

OutflowExpense Asset

Expense Liability

InflowIncome Liability

Income Asset

A C

DB

Yoshi 22

Posting for Disclosure

Asset Asset

Income Expense

Asset

No Cash flow !!

Market Value

Yoshi 23

Accounting Evolution/ Profession

18th - 19th Century South Sea Bubble >> Audit East Indian Company >> Yearly Profit / Loss Railway /Canal >> Fixed Asset /Depreciation Industrial Revolution >> Cost Concept

20th Century Financial Markets >> Mark to Market

21th Century WorldCom >> Sarbanes–Oxley Act (SOX)

Yoshi 24

Key Questions

• Equity is Corporate Value ?

• Profit is distributable ?

• Does Asset have “reality“ ?