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Introduction to double entry system. 1.The need for book-keeping. 2. The accounting equation. 3. The double entry system for assets, liabilities and capital. 4. The asset of stock. 5. The double entry system for expenses and revenue. 6. Balancing off the accounts.

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introduction to double entry system

Introduction to double entry system

1.The need for book-keeping

2. The accounting equation

3. The double entry system for assets, liabilities and capital

4. The asset of stock

5. The double entry system for expenses and revenue

6. Balancing off the accounts

introduction to double entry accounting

Introduction to double entry accounting

1.The need for book-keeping

introduction to double entry accounting1

What is accounting?

Introduction to double entry accounting

1.Recording Accounting Data

e.g. Peter…

RECORDS

Motor Van

Buildings

Computer

introduction to double entry accounting2

What is accounting?

e.g. Chan’s family

Introduction to double entry accounting

1.Recording Accounting Data

RECORDS

2.Classifying and summarising data

?

We should put them in a systematical way!

introduction to double entry accounting3

What is accounting?

Introduction to double entry accounting

1.Recording Accounting Data

RECORDS

3. Communicating Information

2.Classifying and summarising data

?

I can tell you!

Loss?

2.Classifying and summarising data

We should put them in a systematical way!

How can I know?

Profit?

Accountant

introduction to double entry accounting4

What is accounting?

Introduction to double entry accounting

RECORDS

1.Recording Accounting Data

2.Classifying and summarising data

3. Communicating Information

introduction to double entry accounting5

Accounting is

the process of…

What is

book-keeping?

Introduction to double entry accounting

1.Recording Accounting Data

YES!

Book

keeping

2.Classifying

and summarising data

NO!

NO!

3. Communicating Information

introduction to double entry accounting6

Introduction to double entry accounting

2. The Accounting Equation

introduction to double entry accounting7

Capital , Assets and Liabilities

Introduction to double entry accounting

e.g. S.Wong wants to open a fast food shop…

What are they?

$160 000

Desk and chair

$500 000

$40 000

Computers

$210 000

Goods

$90 000

Cooker

introduction to double entry accounting8

Capital , Assets and Liabilities

Introduction to double entry accounting

Asset : The resources possessed by the firm

Desk and chair

Computers

Goods

Cooker

introduction to double entry accounting9

Capital , Assets and Liabilities

Introduction to double entry accounting

Capital : The resources supplied by the owner

$500 000

introduction to double entry accounting10

Capital , Assets and Liabilities

Introduction to double entry accounting

Assets

Capital

$160000

Desk and chair

+

Computers

$40000

$500 000

=

+

Goods

$210000

+

Cooker

$90000

introduction to double entry accounting11

Capital , Assets and Liabilities

Introduction to double entry accounting

e.g.One year later,S.Wong wants to expand his business…

e.g. S.Wong want to open a fast food shop…

$160 000

Desks and chairs

$500 000

$40 000

Computers

$210 000

Extra goods

Goods

Extra Desks and chairs

$90 000

Cooker

Assets

Capital

=

introduction to double entry accounting12

Capital , Assets and Liabilities

Introduction to double entry accounting

e.g.One year later,S.Wong want to expand his business…

But no money left…

Borrow from bank!

$500 000

$100 000

Desk and Chair

Computer

Extra goods

Goods

Extra Desks and chairs

Cooker

What can he do?

Assets=Capital

slide15

Introduction to double entry accounting

Capital , Assets and Liabilities

Liabilities:The indebtedness of the firm for the resources

$100 000

Assets:

Extra goods

Extra Desks and chairs

slide16

Introduction to double entry accounting

Capital , Assets and Liabilities

Capital

Assets

Liabilities

+

=

Desk and Chair

Computers

Goods

$500 000

$100 000

Cooker

Extra

Desks and chairs

Extra goods

slide17

Introduction to double entry accounting

Capital , Assets and Liabilities

Accounting Equation:

Assets = Capital + Liabilities

introduction to double entry accounting13

Introduction to double entry accounting

3.The double entry system:

Assets,liabilities and capital

introduction to double entry accounting14

The Double Entry System

Introduction to double entry accounting

e.g.

Tai Hung has a habit of recording the money he spent.

When he buys a CD…

We have to entertwice…

Cash

-

CD

+

Double Entry System

Each transaction affects 2 items…

introduction to double entry accounting15

Specify asset, capital or liability

What is an account?

Introduction to double entry accounting

Account Name

2001

2001

$

$

Date

Debit

Credit

introduction to double entry accounting16

How to process the double entry system?

1.Double entry for ASSETS

Introduction to double entry accounting

Jan 4 Bought motor van paying by cash $160 000.

Bought motor van

paying by cash

$160 000

Cash

2003

$

Jan 4 Motor Van 160 000

Motor Van

$160 000

2003

$

Jan 4 Cash 160 000

Recall:

$160 000

Assets = Capital + Liabilities

introduction to double entry accounting17

1.Double entry for ASSETS

Introduction to double entry accounting

Jan 6 Sold motor van by cash $90 000.

$90 000

Cash

2003

$

Jan 6 Motor Van 90 000

Motor Van

$90 000

2003

$

Jan 6 Cash 90 000

$90 000

Assets = Capital + Liabilities

introduction to double entry accounting18

1.Double entry for ASSETS

Introduction to double entry accounting

Conclusion:

For ANY asset a/c

- Decrease

+ Increase

Assets = Capital + Liabilities

introduction to double entry accounting19

2.Double entry for Liabilities

Introduction to double entry accounting

Jan 10 Bought machinery from L.Lo Ltd. on credit $93 000.

$93 000

Machinery

2003

$

Jan 10 L.Lo Ltd. 93 000

L.Lo Ltd.

$93 000

2003

$

Jan 10 Machinery 93 000

$93 000

$93 000

Assets = Capital + Liabilities

introduction to double entry accounting20

2.Double entry for Liabilities

Introduction to double entry accounting

Feb 3 Paid L.Lo Ltd. $93 000 in cash.

$93 000

Cash

2003

$

Feb 3 L.Lo Ltd. 93 000

L.Lo Ltd.

$93 000

2003

$

Feb 3 Cash 93 000

$93 000

$93 000

Assets = Capital + Liabilities

introduction to double entry accounting21

2.Double entry for Liabilities

Introduction to double entry accounting

Conclusion:

For ANY liability a/c

+ Increase

- Decrease

Assets = Capital + Liabilities

introduction to double entry accounting22

3.Double entry for Capital

Introduction to double entry accounting

Jan 1 The proprietor started business with $500 000 in cash.

$500 000

Cash

2003

$

Jan 1 Capital 500 000

$500 000

Capital

2003

$

Jan 1 Cash 500 000

$500 000

$500 000

Assets = Capital + Liabilities

introduction to double entry accounting23

3.Double entry for Capital

Introduction to double entry accounting

Conclusion:

Capital a/c

+ Increase

- Decrease

Assets = Capital + Liabilities

introduction to double entry accounting24

Conclusion for double entry system

Introduction to double entry accounting

Assets = Capital + Liabilities

+

Debit

Credit

Credit

-

Credit

Debit

Debit

introduction to double entry accounting25

The concept of Debtor and Creditor

Introduction to double entry accounting

Debtor

Goods

When he has not paid the business money, he is a debtor.

Business

Creditor

Goods

When the business has not paid him the money,

he is a creditor.

Business

introduction to double entry accounting27

Accounts for each type of dealing in goods

Introduction to double entry accounting

Purchases

Goods

Supplier

Sales

Goods

Business

Customer

In the business point of view…

introduction to double entry accounting28

Paid by cash or chequeimmediately

Introduction to double entry accounting

Purchases

Paid for it later

Cash Purchases

Credit Purchases

introduction to double entry accounting29

1.Double entry of Purchases of stock for Cash

Introduction to double entry accounting

Aug 2 Goods costing $160 are bought by using cash.

Purchases

$160

2003

$

Aug 2 Cash 160

Cash

$160

2003

$

Aug 2 Purchases 160

$160

Assets = Capital + Liabilities

introduction to double entry accounting30

2.Double entry of Purchases of stock on credit

Introduction to double entry accounting

Aug 4 Goods costing $160 are bought on credit from Wong.

Purchases

$160

2003

$

Aug 4 Wong 160

Wong

$160

2003

$

Aug 4 Purchases 160

$160

$160

Assets = Capital + Liabilities

introduction to double entry accounting32

1.Double entry of Sales of stock for Cash

Introduction to double entry accounting

Aug 6 Goods are sold for $55,cash being received.

Cash

$55

2003

$

Aug 6 Sales 55

Sales

$55

2003

$

Aug 6 Cash 55

$55

Assets = Capital + Liabilities

introduction to double entry accounting33

2.Double entry of sales of stock on credit

Introduction to double entry accounting

Aug 8 Sold goods on credit for $250 to K.Lee.

K.Lee

$250

2003

$

Aug 8 Sales 250

Sales

$250

2003

$

Aug 8 K.Lee 250

$250

Assets = Capital + Liabilities

introduction to double entry accounting34

Accounts for each type of dealing in goods

Introduction to double entry accounting

In the business point of view…

Purchases

Goods

Sales

Customer

Supplier

Goods

Returns Outwards

Business

Damaged goods

Damaged goods

Returns Inwards

introduction to double entry accounting35

1.Double entry for Returns Inwards

Introduction to double entry accounting

Aug 5 Goods which had been previously sold to

F.Lo for $29 are now returned by him.

Returns Inwards

$29

$

2003

Aug 5 F.Lo 29

F.Lo

$29

2003

$

Aug 5 Returns Inwards 29

$29

Assets = Capital + Liabilities

introduction to double entry accounting36

2.Double entry for Returns Outwards

Introduction to double entry accounting

Aug 6 Goods previously bought for $96 are returned

by the firm to K.Lo.

K.Lo

$96

$

2003

Aug 6 Returns Outwards 96

Returns Outwards

$96

2003

$

Aug 6 K.Lo 96

$96

$96

Assets = Capital + Liabilities

introduction to double entry accounting37

Summary

Cash Purchases – Dr. Purchases

Cr. Cash

Introduction to double entry accounting

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 accounting38

Introduction to double entry accounting

5. The double entry system

for expenses and revenue

introduction to double entry accounting39

What is revenue?

Introduction to double entry accounting

Revenue is the sales value of goods and

services that have been supplied to customers.

e.g.

Commission Received

Rent Received

introduction to double entry accounting40

What is expense?

Introduction to double entry accounting

Expense is the value of all assets and costs that

have been used to get those income.

e.g.

Motor Expenses

Postage

introduction to double entry accounting41

Recall:

Introduction to double entry accounting

Capital a/c

+ Increase

- Decrease

Assets = Capital + Liabilities

introduction to double entry accounting42

What is the relationship between

expenses and capital?

Introduction to double entry accounting

Expenses

Profit

Capital

Capital a/c

Any Expenses

-

+

Debit

introduction to double entry accounting43

Examples on double entry

Introduction to double entry accounting

Aug 6 The rent of $300 is paid in cash.

Rent

$300

2003

$

Aug 6 Cash 300

Cash

$300

$

2003

Aug 6 Rent 300

$300

$300

Assets = Capital + Liabilities

introduction to double entry accounting44

Examples on double entry

Introduction to double entry accounting

Aug 8 Motor expenses are paid by cheque $200.

Motor Expenses

$200

2003

$

Aug 8 Bank 200

Bank

$200

$

2003

Aug 8 Motor Expenses 200

$200

$200

Assets = Capital + Liabilities

introduction to double entry accounting45

What is the relationship between

revenue and capital?

Introduction to double entry accounting

Revenue

Profit

Capital

Capital a/c

Any Revenue

-

+

Credit

introduction to double entry accounting46

Examples on double entry

Introduction to double entry accounting

Aug 9 $250 cash is received for commission earned by the firm.

Cash

$250

2003

$

Aug 9 Commission 250

Commission

$250

$

2003

Aug 9 Cash 250

$250

$250

Assets = Capital + Liabilities

introduction to double entry accounting48

The concept of drawings

Introduction to double entry accounting

No…

The money is processed

by the company…

But not the boss !

introduction to double entry accounting49

The concept of drawings

Introduction to double entry accounting

If he wants to take the money…

He can…

But he should take it back later!

Drawings

Boss

introduction to double entry accounting50

Recall:

Introduction to double entry accounting

Capital a/c

+ Increase

- Decrease

Assets = Capital + Liabilities

introduction to double entry accounting51

What is the relationship between

drawings and capital?

Introduction to double entry accounting

Capital

Drawings

Capital a/c

Drawings

-

+

Debit

introduction to double entry accounting52

Examples on double entry

Aug 10 The proprietor takes $460 cash

out of the business for his own use.

Introduction to double entry accounting

Drawings

$460

2003

$

Aug 10 Cash 460

Cash

$460

$

2003

Aug 10 Drawings 460

$460

$460

Assets = Capital + Liabilities

introduction to double entry accounting53

Introduction to double entry accounting

6. Balancing off the accounts

slide59

Introduction to double entry accounting

Balancing an account

How to do it?

Bank

2004 $

2004 $

May 3 Rent 300

May 1 Capital 2000

May 6 Purchases 900

May 8 Sales 1100

May 31 Bal c/d 1900

3100

3100

1200

3100

>

Jun 1 Bal b/d 1900

slide60

Introduction to double entry accounting

Balancing an account

Sales

2004 $

2004 $

May 3 Bank 300

May 31 Bal c/d 1200

May 6 C.Wong 900

1200

1200

>

Jun 1 Bal b/d 1200

slide61

Introduction to double entry accounting

Balancing an account

Rent

2004 $

2004 $

May 1 Bank 900

May 31 Bal c/d 900

Jun 1 Bal b/d 900

K.Wo

2004 $

2004 $

May 21 Bank 1900

May 1 Sales 1900