03 Topic 3 Recording Transactions BB

8/2/2019 03 Topic 3 Recording Transactions BB

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Scoil Ghn U Chuinn UCDUCD Quinn School of Business

Financial Accounting 1Topic 3Recording Transactions: Double-Entry System

Professor Aileen PierceRoom Q206 Quinn School

Phone 716 4745 (x4745)

[email protected]


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Luca PacioliSumma de arithmetica,

geometrica, proportioni et proportionalita

(Venice 1494), a synthesisof the mathematicalknowledge of his time, isalso notable for includingthe first publisheddescription of the methodof keeping accounts thatVenetian merchants usedduring the ItalianRenaissance, known as thedouble-entry accountingsystem. Although Paciolicodified rather thaninvented this system, he iswidely regarded as the"Father of Accounting".

See pages 30 33 of SLD


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Luca Pacioli

The system he published included most of the accounting cycle as we knowit today. He described the use of journals and ledgers, and warned that aperson should not go to sleep at night until the debits equaled the credits!His ledger had accounts for assets (including receivables and inventories),liabilities, capital, income, and expenses the account categories that arereported on an organization's balance sheet and income statement,respectively. He demonstrated year-end closing entries and proposed that atrial balance be used to prove a balanced ledger. Also, his treatise toucheson a wide range of related topics from accounting ethics to cost accounting.(From http://en.wikipedia.org/wiki/Luca_Pacioli )
http://en.wikipedia.org/wiki/Luca_Paciolihttp://en.wikipedia.org/wiki/Luca_Pacioli


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Painting of Luca Pacioli, attributed to Jacopo de' Barbari,1495 (attribution controversial). Table is filled withgeometrical tools: slate, chalk, compass, a dodecahedronmodel. A rhombicuboctahedron half-filed with water issuspended from the ceiling. Pacioli is demonstrating atheorem by Euclid.

Luca Pacioli
http://en.wikipedia.org/wiki/Image:Pacioli.jpg


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Objective of Double Entry AccountingSystem

Record and summarise financial transactions

Classify transactions

Keep orderly records

Build up to reports providing information to users


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Accounting Equation

Assets

-

Liabilities

=Equity

Accountingrecords are

maintainedin way thatensures

accounting

equationholds

Whetherrecording

10 transactionsor trillions

of transactions


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Example

A business buys a car for 20,000

Purchase of Car

AssetsCar +20,000Bank -20,000EquityIssued share capitalShares of 1.00 each


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Accounting System: Double Entry

Every transaction has two effects:

Increase one asset and reduce another asset

Increase assets and increase liabilities

Increase assets and increase equity/capital Reduce assets and reduce liabilities Reduce assets and reduce equity/capital

Exercise for you:Think up examples to fit

each of above!


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SAMPLE TRANSACTIONS: IMPACT ON RESOURCES AND CLAIMS

Resources ClaimsTransaction Cash Receiv-

ablesOtherassets

Outsiders Owner

1 Original capital +100 +1002 Borrowing +50 +503 Buy property -50 +504 Buy inv. for cash -45 +455 Sell some inventory +35 -15 +20

What is going on here?


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SAMPLE TRANSACTIONS: IMPACT ON RESOURCES AND CLAIMS

Resources ClaimsTransaction Cash Receiv-ables

Otherassets

Outsiders Owner

1 Original capital +100 +1002 Borrowing +50 +503 Buy property -50 +50

4 Buy inv. for cash -45 +455 Sell some inv. +35 -15 +206 Pay wages -4 -47 Customer pays +16 -168 Buy inv. on credit +25 +25TOTALS +67 +19 +105 +75 +116


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Statement of financial position (Balance sheet) '000

Property 50Inventory 55Receivables 19Cash 67

191Financed by:Share capital 100Retained earnings 16Equity 116Loan 50

Payables 25191


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Figure 2.11 Summary table

Study pages 47-59 in Chapter 2 of SLD

Figures 2.3 to 2.11 in Chapter 2 of SLD


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Table 2.3 Statement of financial position(Balance sheet) on 31 December X1

Assets Equity and liabilitiesNon-current assets Shareholders equity 210Equipment 125 Share capital 150

Earnings (net income) 60

Current assets LiabilitiesAccounts receivable 70 Financial debt (Loan) 48Cash at bank 68 Accounts payable 5

Total assets 263 Total equity and liabilities 263


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Statement of financial position on 31December X1 vertical format

Non-current assets

Equipment 125

Current assetsAccounts receivable 70

Cash at bank 68

138

263

Equity and liabilitiesOrdinary share capital 150

Retained earnings 60

210

Long-term loan 48

Accounts payable 553

263


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Accounting System: Practicalities

Transactions too numerous to calculate impacton SFP for each transaction

System developed over time to:

Summarise similar transactions and recordsystematically

Stages involved:o Record volume in Books of first entry

o Journal entries to indicate 2 sides of recordo T Accounts


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Double-entry book-keeping: Terminology

Two sides to each transactionor to record total of similar transactions

DEBITCREDIT


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Double-Entry Bookkeeping: Exercise 1

Debit Credit

Increase in An asset A liability or equity item

Decrease in A liability or equity item An asset

Is there anylogic to this?


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Example

Purchase of car for 20,000

Use Table in Exercise 1 to work out the twosides of this transaction


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Journal Entry

Date Account Debit Credit

Car 20,000

Bank 20,000

Being purchase of car

Journal entry specifies whichaccount is debited and which is credited


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Journal Entries

One per transaction or per total of similar

Debits must equal credits to reflect both sides of transaction

Keeps the accounting equation in balance

Brief description of the transaction under the journal entry

Note the format


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Debit X Account; Credit Y Account

What do we mean byACCOUNT?


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Keeping Track of Transactions:T-account

One for every asset, liability, revenue,expense and equity item

Records date, nature and amount of

transactionDebit Bank Credit

Date Account Amount Date Account Amount

Where otherside is recorded


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Using T Accounts to Record Transactions

Debit Car Credit

Date Account Amount Date Account Amount

... Bank 20,000

Debit Bank CreditDate Account Amount Date Account Amount

... Car 20,000Where other

side is recorded

Where otherside is recorded


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Balancing T Accounts

Debit Bank CreditDate Account Amount Date Account Amount

... Issued share capital 1,000 ... Machine 500

... Bank loan 1,500Balance 2,000

2,500 2,500Balance 2,000


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The Trial Balance: so far!

The trial balance is a list of balances on all Taccounts: Two columns Debit Credit

Each column should have same total (debitsshould equal credits)

Debits indicate assets ..for the moment!

Credits indicate liabilities and equity . ditto


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Example: Simple Trial Balance

Account Debit Credit

Bank 2,000Machine 500Bank loan 1,500Issued share capital 1,000

2,500 2,500


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Summary

1. Record transactions in a way that is consistentwith the accounting equation

2. Use debits and credit to reflect

increases/decreases in assets, liabilities andequity

3. Use T accounts to accumulate transactions foreach item

4. Extract a trial balance that list the balance oneach T account in the appropriate column


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To-Do-List

Prepare for Tutorial Sessions on FinancialStatement Analysis Study material from Session 2 Re-read sections from SLD

Complete problems set for Tutorials (Week 3) Tutorial Exercises A,B and C (on BB); Past exam

questions

Remember: Next online Test focuses on above

Read specified pages of textbook (S4) beforeMonday 6 th February

Documents

03 Topic 3 Recording Transactions BB