Double Entry Accounting. Actimax Learning, Inc.2 Key Concepts Purpose of Accounting Accounting Methods Accounting Cycle Transactions Financial Statements

Double Entry Accounting

Actimax Learning, Inc. 2

Key Concepts Purpose of Accounting Accounting Methods Accounting Cycle Transactions Financial Statements Closing the Books


Think about… How do you keep track of your

money? How do you know if your

records are accurate? How do you know if your

enterprises or activities are profitable?

How much you are worth financially?


Keeping Track of Information Is important for businesses to determine

performance and be accountable

Bookkeeping is recording or posting the transactions of a businessvs

Accounting is the entire process of identifying, recording, and communicating financial information of a business


Purposes of Accounting Summarize economic activity of

a business Internally (managers, employees) Externally (investors, regulators,

IRS)


Accounting Methods Cash Method

Revenue is recorded when received Expense is recorded when paid Reap version of The Farming Game

Accrual Revenue and expense are recorded in

the year that the activity occurred More accurate representation


Single-Entry vs. Double-Entry Single-Entry System

Accounting profession does not acknowledge; not good practice

“Shoebox” method – put all receipts in one box and all bills in another box

Double-Entry System Debit and credit sides of the

transaction must be equal


Accounting Cycle Basic Accounting Equation

Assets = Liabilities + Owner’s Equity Assets

Property owned by a business Cash, accounts receivable, equipment, supplies

Liabilities Claims against business assets Accounts payable, notes payable, salaries

payable, interests payable Owner’s Equity

Remaining assets that go to owners after all liabilities are paid, if the business liquidates


Accounting Cycle

General Journal(or T-Accounts)

Trial Balance

General Ledger

Financial Statements


Accounts Assets, liabilities, income, expenses and

owner’s equity can be broken down into accounts

Each account has two sides (T-accounts) Debit = Left side Credit = Right side

Each account has a debit or credit balance Increase left side = Debit entry Increase right side = Credit entry

Asset Owner’s Equity# Debit Credit # # Debit Credit #

1/1

20,000

1 1 20,000

1/1


Debit Account vs. Credit Accounts

Asset Cash Expense

Income Owner’s Equity Notes Payable


Debits vs. Credits If you debit a Debit Account, it

increases the value of that account If you credit a Debit Account, it

decreases the value of that account

If you credit a Credit Account, it increases the value of that account

If you debit a Credit Account, it decreases the value of that account


Illustration of Accounting Cycle Sample year is illustrated in Part 2 See sample year of

General Journal & T-Accounts General Ledger Trial Balance


General Journal Historical record of transactions Chronological order

GENERAL JOURNALDate Account &

Description Debit Credi

tRef#

1/1 AssetEquity

Inherited 10 Acres of Hay

20,00020,00

0

1


Posting from General Journal to Specific Accounts T-Accounts are done for

illustrations or educational purposes More graphic

Most business post to General Ledger More textual Order of accounts are the same as

the Balance Sheet


General Journal to T-Accounts Done for educational purposes

Asset Owner’s Equity# Debit Credit # # Debit Credit #

1/1

20,000 1 1 20,000 1/1


General Ledger No description of transactions (references

transactions in General Journal) Tracks rolling balances of each account

GENERAL LEDGER

AssetRef# Date Debit Credit Balance

1 1/1 20,000 20,000

Owner’s EquityRef# Date Debit Credit Balance

1 1/1 20,000 20,000


Running a Trial Balance Completed at the end of a reporting

period Done to see if debits and credits equal

each other Helps identify possible errors from

journalizing or posting Adjusting entries can be made before

preparing financial sheets (not done in The Farming Game)


Trial Balance

TRIAL BALANCE

Account Debit Credit

Asset 50,000

Owner’s Equity

40,000

Notes Payable 8,000

Income 16,300

Expense 6,000

Cash 8,300

TOTAL 58,300 58,300


Reap’s Accounting Cycle Transaction Register replaces

General Journal & T-Accounts General Ledger Trial Balance

Transaction Register Financial Statements


Preparing the Financial Statements Final trial balance provides the

figures for financial statements Balance Sheet Income Statement Statement of Owner’s Equity


Closing the Books Temporary or nominal accounts are

closed when preparing the financial statements All accounts related to revenues and

expenses Closing temporary accounts resets them to

zero and they start afresh for the next accounting period

Permanent or real accounts keep a running total for the following year (rolling) All accounts related to the balance sheet **Ending balances become the opening

balances for the next accounting period


Review Questions Why do businesses perform

accounting? What is the cash method? What is the accrual method? What is single entry accounting? What is double entry accounting?


Review Questions What is the basic accounting formula? What is the comprehensive accounting

cycle? How does Reap adapt this cycle to a simpler system?

What are T-accounts? How are transactions entered in a

general journal?


Review Questions What is a general ledger? What is a trial balance? What is reflected on an income

statement? What is an owner’s equity statement? What is reflected on the balance

sheet? What period of time does it cover?


Review Questions What does ‘closing the books’ mean? What are 2 examples of nominal or

temporary accounts? What are 3 examples of accounts with

credit balances?


Review Questions What factors can be used when making

finance decisions? Define credit and borrowing capacity;

leverage and profitability; leverage and risk; and repayment capacity.

How does marketing affect a business?


Are you ready to track and manage information?

Reap with The Farming Game®

Ahhtomoney Learning Series

Documents

Double Entry Accounting. Actimax Learning, Inc.2 Key Concepts Purpose of Accounting Accounting Methods Accounting Cycle Transactions Financial Statements