ACCA Foundation Financial Accounting Chapter 2 － Double entry system

1、ACCA Foundation Financial Accounting Chapter 2 Double entry systemACCA FoundationFinancial AccountingChapter 2 Double entry systemLecture Outline:The accounting equationThe double entry systemStock movementExpenses: profit or lossA. The Accounting EquationResources in the Business (Assets)Resources

2、supplied by the Owner (Capital) =Assets =Capital + Liabilities(Balance Sheet Equation)Assets(Resources :What they are)Capital + Liability( Resources : Who Supplied them )=AssetsBuildings, machinery, motor vehicles Stocks of goods, debtors and bankCapitalNet worth of the businessOften called the owne

3、rs equity （业主权益）LiabilitiesObligations or DebtsLong-term liabilities : loan (more than one year)Current liabilities : Creditors, accrual expenses, dividendClassification capital liability & assetPhotocopy machineComputerMoney invested by ownerBuildingPhotocopy papersBank overdraftCreditor （债权人）D

4、ebtor (债务人）Loan from bankLiabilityCapitalAssetItems1. The introduction of capitalOn 1 May 27004 Grace started in business and deposited $10,000 into a bank account opened specially for the business.The effects of business transactions Grace Balance Sheet as at 1 May 200410,00010,00010,000Capital10,0

5、00Cash at bank$Assets2. The purchase of assets by chequeOn 7 May 2004 Grace buys office furniture for $600 and motor vehicle for $4,800 paying by cheque.GraceBalance Sheet as at 7 May 2004?0?0?0?0?0?0?0Assets?0$?0?0?0$Office furniture600?0Capital?010,000Motor vehicle4,800?0?0?0?0Cash at bank4,600?0?

6、0?0?0?0?0?0?0?010,00010,0003. The purchase of an asset and the incurring of a liabilityOn 10 May 2004 Grace buys some goods for $700 from Smith, and agrees to pay within next three weeks.Creditor（债权人） : A person to whom money is owned for goods or services.GraceBalance Sheet as at 10 May 2004?0?0?0?

7、0?0?0?0Assets?0$?0?0?0$Office furniture600?0Capital?010,000Motor vehicle4,800?0?0?0?0Stock of goods700?0?0LiabilitiesCreditor - Smith?0700Cash at bank4,600?0?0?0?0?0?0?0?0?010,70010,7004.Sale of an asset for immediate paymentOn 15 May 2004 goods had cost $200 were sold to Daley for the same amount,

8、Daley paying for them immediately by cheque.GraceBalance Sheet as at 15 May 2004?0?0?0?0?0?0?0Assets?0$?0?0?0$Office furniture600?0Capital?010,000Motor vehicle4,800?0?0Liabilities?0?0Stock of goods500?0Creditor - Smith?0700Cash at bank4,800?0?0?0?0?0?0?0?0?010,70010,7005.Sale of an asset on creditOn

9、 21 May 2004 goods which had cost $200 were sold to Brown for the same amount, the money to be paid later.Debtor（债务人） : A person who owes money to a business for goods or services supplied to him.GraceBalance Sheet as at 21 May 2004?0?0?0?0?0?0?0Assets?0$?0?0?0$Office furniture600?0Capital?010,000Mo

10、tor vehicle4,800?0?0Liabilities?0?0Stock of goods300?0Creditor - Smith?0700Debtor - Brown200?0?0?0?0Cash at bank4,800?0?0?0?0?0?0?0?0?010,70010,7006. The payment of a liabilityOn 23 May 2004 Grace pays a cheque for $400 to Smith in part payment of the amount owing. GraceBalance Sheet as at 23 May 20

11、04?0?0?0?0?0?0?0Assets?0$?0?0?0$Office furniture600?0Capital?010,000Motor vehicle4,800?0?0Liabilities?0?0Stock of goods300?0Creditor - Smith300Debtor - Brown200?0?0?0?0Cash at bank4,400?0?0?0?0?0?0?0?0?010,30010,3007. Receipt of money from a debtorBrown, who owned Grace $200, makes a part payment of

12、 $100 by cheque on 27 May 2004. GraceBalance Sheet as at 27 May 2004?0?0?0?0?0?0?0Assets?0$?0?0?0$Office furniture600?0Capital?010,000Motor vehicle4,800?0?0Liabilities?0?0Stock of goods300?0Creditor - Smith300Debtor - Brown100?0?0?0?0Cash at bank4,500?0?0?0?0?0?0?0?0?010,30010,3008. A combination ty

13、pe transactionOn 31 May 2004, Grace bought a building for $20,000 with payment $4,000 by cheque and other $16,000 obtained by borrowing from bank.GraceBalance Sheet as at 31 May 2004?0?0?0?0?0?0?0Assets?0$?0?0?0$Building ?020,000?0Capital?010,000Office furniture600?0?0?0?0Motor vehicle4,800?0Liabili

14、ties?0?0Stock of goods300?0Bank Loan?016000Debtor - Brown100?0Creditor - Smith300Cash at bank500?0?0?0?0?0?0?0?0?026,30026,30B. The double entry systemeach transaction has at least two effect on Balance Sheet the Balance Sheet need to be adjusted accordinglyThe balance sheet does not give enough inf

15、ormationCredit Side(Cr)Debit Side(Dr)Title of account written hereAccountAssetLiabilityCapitalExpensesIncome $10 on the debit side of the accountDebit the account with $10 orThe account needs debiting with $10CreditDebitAn increaseA decreaseCapitalCreditDebitAn increaseA decreaseLiabilitiesDebitCred

16、itAn increaseA decreaseAssetsEntry in the accountTo recordAccountsDebitDebit Credit To decrease each itemCreditCreditDebitTo increase each item Asset = liabilities + capitalAsset Account Increase Decrease + -Liability Account Decrease Increase - +Capital Account Decrease Increase - +Title of the acc

17、ount Date Description $ Date Description $Format of the account Example The owner starts the firm with $1,000 in cash on 1 August 19x8. Debit the cash account Credit the capital account increase the asset of cash increase the capitalActionEffectSteps to following in order to avoid mistakes:Identify

18、the accounts to record transaction.Think about the transaction effect.Follow the double entry rule and put onto correct side of the accounts follow the right format.2. A motor vehicle is bought for $275 cash on 2 August 19x8. Debit the motor vehicle account Credit the cash account increase the asset

19、 of motor vehicle decrease the asset of cashActionEffect3. Fixtures bought on credit from James for $115 on 3 August 19x8. Debit the fixtures account Credit the James account increase the asset of fixtures increase the liability to JamesActionEffect4. Paid the amount owing in cash to James on 17 Aug

20、ust 19x8.Debit the James accountCredit the cash account decrease the liability to James decrease the asset of cashActionEffectC. Stock MovementStock/GoodsIncrease Decrease(Purchase) (Sale)Increase in the Stock1. The purchases of Additional Good Purchase Account2. The return in to the firm of goods p

21、reviously sold. Returns Inwards Account ( Sales Returns Account)Decrease in the Stock of goods1. The Sale of goods Sale Account2. Goods previously bought being returned out of the firm. Returns Outwards Account (Purchases Returns Account)Four Accounts for the Stocks1. Purchase Account2. Returns Inwa

22、rds Account (Sales Returns Account)3. Sales Account4. Returns Outwards Account (Purchases Returns Account)Purchase of Stock on Credit1 August 19x8, Goods costing $165 are bought on credit from D Henry.Asset increase-Purchases (goods)Liability increase-CreditorEffect :Purchases of Stock for Cash2 Aug

23、ust 19x8. Goods costing $22 are bought, cash being of them immediately.Asset increase-Purchases (goods)Asset decrease-BankEffect :Sales of Stock on credit3 August 19x8. Sold Goods on credit for $250 to J Lee.Asset Decrease - Sales (goods)Asset Increase - DebtorEffect :Sales of Stock Cash4 August 19x

24、8. Goods are sold for $55, cash being received immediately upon sale.Asset Decrease - Sales (goods)Asset Increase - CashEffect :Returns inwardsReasons for return:Wrong Size, wrong colour or wrong modelDamaged in transitPoor quality5 August 19x8. Goods which had been previously sold to F Lowe for $29

25、 are now returned by him. Asset Decrease - DebtorAsset Increase - Return inwards (Goods)Effect :Returns outwards6 August 19x8. Goods previously bought for $96 are returned by the firm to K Howe.Effect :Asset Decrease - Returns outwards (Goods)Liability Decrease - CreditorSpecial meaning of sales and

26、 purchasesMeaning of purchaseIn accounting, purchase means goods Bought with intention to resale.Bought in order to use them in production of other goods, e.g. raw materialBought in order to change their form, e.g. re-packaging Meaning of SalesIn accounting, Sales means goods The firm normally deals

27、Bought with prime intention of resale Comparison of cash and credit transactions for purchases and salesCash PurchasesDebit the purchases accountCredit the cash accountCredit PurchasesFirst part:Debit purchases accountCredit suppliers accountSecond part: (pay money)Debit suppliers accountCredit cash

28、 accountCash Sales :Debit the cash AccountCredit the Sales accountCredit SalesFirst part:Debit the Customers accountCredit the Sales accountSecond part: (Receive money)Debit Cash accountCredit Customers accountSummary Cash or bank or creditor a/c Return inwards a/cReturn inwards Return outwards a/c

29、Cash or bank or debtor a/cReturn outwards Sales Cash or bank or debtor a/c Sales Cash or bank or creditor a/c Purchase a/c Purchases Credit Debit Account D. Expenses : profit or lossCompanyObjective: Some OrganizationsCharity Non-profit organizationProfitRevenues / Sales :Monetary value of goods and

30、 services supplied to the customers.Example:SchoolBank Tuition feeInterest D. Expenses : profit or lossExpenses :Costs of operating the businessRental Lecturer salaryElectricitySchoolExample:Bank SalaryAdvertising ElectricityRevenue > ExpensesRevenue < Expenses ProfitLossExample :RevenueExpens

31、es100,00070,00030,00080,00060,00020,000ProfitLoss $ $The effect of profit and loss on capitalAssets :Creditors $2,000Liabilities :Fixtures $10,000Stock $7,000Cash $3,000Capital :$ 18,000Stock sold for $11,000Fixtures $10,000Stock NilCash $14,000Creditors $2,000$22,000Old Capital + Profit = New Capital$18,000 +($11,000 - $7,000)=$22,000Old Capital - Loss