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Level 1 Course Summary A B

Introduction to the Course Accounting in just 8 principles

Application of the 3 Documents

1. The 3 Basic Confusions 2. The 3 Basic Documents 3. The Principle of Legal Entity 4. The Principle of Debit and Credit 5. The Sources and Usage of funds 6. The changes in the company legal positions 7. Double Entry Accounting 8. The T Accounts

1. Application to the General Ledger 2. Application to the Journal 3. Application to the Trial Balance

Test your knowledge

Download the 22 tests

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A. Introduction
We believe our course to be the most effective to learn accounting for beginners. We make the following 4 Recommendations before starting:
1 Browse through the slides one by one in the presentation order without trying to understand everything on the first reading. Forget everything you were told on Debit & Credit. We start everything from scratch with Left & Right entries plus the Green & Red Color code.

Give it a try with confidence. We use very simple words & concepts. This will enable you to post your first simple booking entries in the T1 test. After the first reading,you are advised to take the 22 Simple T1 tests where you will find more explanations on how to post Booking Entries.

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A. Introduction
Along the course you should keep in mind

3 important concepts

The universality of Accounting Rules

Accounting follows Basic Rules valid throughout the world, but each country has its own regulations, especially related to Corporate Income taxes (e g Tax charged on pre tax profit).

2 The globality of the Chart of Accounts


The charts of accounts enlists all the different accounts used to record all transactions initiated by a company. Accounts are organized into 8 Classes of Accounts: class n1 to class n8.

3 The interactivity of the 3 Accounting Documents

You will use 3 interactive accounting Documents

The Journal

The General Ledger

The Trial Balance

B
Accounting in just 8 principles

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B. Accounting in just 8 principles


1. The 3 Basic confusions most often seen with beginners 1 Accounting is a world of Numbers

3
2

1 5

6 wrong

We should look at Accounting from a legal point of view. Who owes what to Whom & When
continue

Accounting is about $ Expenses & $ Revenues

$ $ $
3

The Accountant will first think in legal terms, which is different from the Act of Payment (IN or OUT).
continue .

wrong

Debit & Credit on my Bank Statements


debit - 200 credit +1200

A Bank statement is just an extract from the Banks books filled from the Bankers point of view, not from the clients point of view (Inversion).

wrong

continue .

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B. Accounting in just 8 principles


1 Confusion 1: A world of Numbers vs a world of Lawyers
In Accounting, we always need to know the legal parties on a

position in $ terms of a company towards other

given day.

A company has legal links with 5 types of third parties

Shareholders
1

Bank
2

Objects Owned
3

Clients
4
$

Suppliers
5

A company holds legal rights to things due from others and has legal duties to others holding claims against it. Such legal positions will change daily. Hence the importance to measure the company global legal position in $ terms at the end of a given day, the last day of a given Month, Quarter, Semester or Year.

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B. Accounting in just 8 principles


2 Confusion 2: $ Expenses and $ Revenues
People usually link Expenses with Money paid out and Revenues with Money paid in. But the Accountant will consider first the Day a Commitment to Pay is born. Regardless of the day a payment is to be made (cash or delayed) Each Commitment to Pay once born, will carry a Maturity Date (either cash or 30 days or 60 days or other). At maturity, a payment will have to be made (IN or OUT), hence extinguishing the maturing Commitment to Pay, which will no longer be due.

Commitment to Pay

Contractual Maturity Date

No longer due

Cash

30 days

60 days

More

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B. Accounting in just 8 principles


3 Confusion 3: Debit & Credit on a my Bank Statement
Most people discover the words Debit and Credit by reading their Bank statements. They associate the word Debit to a Negative Value (Debt) and Credit to a Positive Value (Cash). Once you hold your own Accounting books, you will open an Account for each business party with whom your company has a relationship, including the Bank. Accordingly, your booking entries will just be the reverse of the Banks booking entries.

DEBIT

CREDIT 1,000

DEBIT 1,000

CREDIT

We define this reversion as the mirror factor.

YOUR BANK BOOKS

YOUR OWN BOOKS

A debit entry on the statement from your Bank will become a credit entry on your own books inside your own accounting system.
DEBIT 1,000 CREDIT DEBIT CREDIT 1,000

YOUR BANK BOOKS

YOUR OWN BOOKS

To simplify,we shall use the words Left & Right instead of Debit & Credit and Green for LeftDebit Entries & Red for Right-Credit Entries.

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B. Accounting in just 8 principles


2. The 3 basic Documents
1. The Journal of Booking Entries The Journal of Booking Entries contains a short description of all business acts occurred and accounted for upon a given day hence the name of Journal from the French word Journal (Daily). Consider the Journal as a preparation document listing all booking entries, defined here as Dual Booking Entries made up of 2 Single Booking Items. The Journal can be compared to a summary sheet filled by a librarian receiving a batch of new books, each morning, all of them in 2 copies, but delivered in bulk.

Sort Out

Record & allocate the destination for the 2 twins

Store

twin book

His job is to find the twin book for each book, then decide where each twin will go inside the Storage cabinet of the library: Which shelf, which Box & which side of said Box. He keeps a record of such allocation (what & where) on his summary sheet (Journal of Booking Entries).

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B. Accounting in just 8 principles


2. The 3 basic Documents
2. The General Ledger (GL) The General Ledger (GL) is the central document of all accounting systems. You need to understand how it works before understanding the Journal & the Trial Balance. The General Ledger holds all the T Accounts which will be used to track the company legal position as it changes day after day. Such changes are triggered by a number of Business

Transactions.
They are measured in $ terms with $ amounts written inside the T Accounts. Each of these $ Amounts will be defined in this course as a Single Booking Item(SBI). A Booking Entry is defined as a Set of 2 equal Single Booking Items.. Certain complex Booking Entries will hold more than 2 Single Booking Items. In real life ,the GL does not use colors but only a vertical list in 4 columns of $ numbers in black.

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B. Accounting in just 8 principles


2. The 3 Basic Documents
3. The Trial Balance The Trial Balance is the compilation of all Single Booking Items (SBIs) of all accounts from the General Ledger (GL) as of a given day. It starts with each individual T. Account where all Single Booking Items held by each column are reduced to TWO Totals : Total of left SBIs on the left column & Total of right SBIs on the right column.

(SBIs)

Total of all Accounts opened inside the GL: Total of all Left-Debit SBIs = Total of all Right-Credit SBIs

The rule has it that the Total of the Left must be equal to the Total of the Right. Checking such L&R equality in the past made all accountants nervous with their manual entries for fear of some mistakes leading to a Non-Equality between Total Left & Total Right. This explains the expression of Trial Balance = Try to balance the total of all GL Accounts altogether and in case of failure, try new entries to secure the absolute Left & Right equality.

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B. Accounting in just 8 principles


3. The Principle of the Legal Entity
You need to get familiar with the

legal issues associated with Accounting Entries and see a company as a

legal entity by its own right. Think of the company as a person, distinct from the founding shareholders
or from its management, clients, suppliers-vendors, bankers, employees, federal, state & local authorities, social security, tax authorities etc.

Titles of receivables on Clients

usages

sources

The Company The company will enter into a combination of legal Trucks, Computers, Goods, etc.). The company will also hold Titles of Receivables and be subject to Titles of Payables, Titles of Debt & Titles of Votes & Dividends..

links, commitments, ownerships,

responsibilities and obligations, to third parties or through Titles of Ownership on objects (Plant, Cars,

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B. Accounting in just 8 principles


3. The Principle of the Legal Entity
Company legal titles Titles of usages Titles of sources

Clients
Titles of Receivables from clients Titles of Payables due to Suppliers

Suppliers

Each legal link has a given $ value. The Value of an item will vary with time. The mission of accounting is to produce a reliable $ valuation of such items as of the end of each day

Inventory
Titles of Ownership on Goods Titles of Debts due to others

Tax Authority

Shareholders

Plant
Titles of Ownership on Assets Titles of Ownership & Dividends

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B. Accounting in just 8 principles


4. The principle of Debit and Credit
The major difficulty for beginners is the concept of Debit & Credit. Instead of using these 2 confusing terms, we will use the Left & Right Positions. T. Account n1 for Assets will record all new Assets on the left of T. Account (here $20,000). If & when the $ value of one Asset decreases by $2,000, a single SBI will be posted on the Right of the related T. Account ($2,000) Title of Ownership
Asset owned 20,000 2,000 T. Account- No1- Truck

Commitment to Pay
T. Account- No2- Debt Due Supplier

T. Account n2 for Debt will record all new Debt on the Right of the related T. Account (here $2,000). When $ value of a Debt decreases by $ 1,000 a single SBI will be posted on the Left of the T. Account (here 1,000).

2,000

1000

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B. Accounting in just 8 principles


5. The Sources and Usage of Funds
Source of funds

From a logical point, we all consider that we need to own Resources (Sources of Funds) before we may own some Assets (Usage of funds).

Usage of funds

As a rule of thumb, Sources of funds will be posted on the Right of the books and Usage of funds will be posted on the Left of the books. Source of funds If I want to buy a truck for $20,000 as Usage of Funds, I will need first $20,000 in Source of funds. The Source will be either in Cash-Out from the Bank or in Extended Payment Terms from the Supplier who agrees to give some time to his Client to pay him.

The Company Usage of funds

20,000

20,000

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B. Accounting in just 8 principles


6. The changes in the company legal positions
Any type of business is subjected to a suite of Changes of its Legal Positions towards the external world: It will hold legal claims on third parties and third parties will hold legal claims on it. The value of these legal positions will change with time depending on Payments made (In or out.) and/or on Market value of Post-Money Assets, such as Trucks, Cars, Machinery, Plants, Goods in warehouses etc. (Money converted in Non-Money upon purchase of a given Asset by the company)

The value of these legal positions will change. Such adjusted values will be computed according to specific accounting rules such as Amortization, Depreciation, Provision defined on Level 2 of the full course.

Any single change of a legal position triggers instantly another $ EQUAL change, in the same way a pendulum would hit another pendulum of equal weight. If I become the legal Owner of a truck or a car, simultaneously I will need to pay for it, since I just became the Debtor of the former owner of the truck or the car (until I eventually pay for it).

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B. Accounting in just 8 principles


7.
Banker of Venice Double Entry Accounting Around 1400, a new Banker in Venice decides to start its banking operations in his house. In a room, he places a large table with a dark blue napkin and 3 Books opened on the table. He also has a small Vault/Safe to keep all gold coins brought in by depositors. He wants to accept deposits from rich individuals and lend same deposits to Borrowers. He will have to pay interest on the deposits and he will charge interest on his loans to borrowers. Now, his 3 books will keep track of all transactions : 1. Deposits of Coins received from Depositors 2. Coins held in the Safe/Vault 3. Loans of Coins to Borrowers
200 Gold coins

Borrower

Borrower book

Depositor book

Depositor

100

200

Safe book
200 100

100 Gold coins

safe

Lets assume a Depositor brings 200 coins which are first placed in the safe. The Borrower will then borrow 100 coins. Question: how will the banker keep track of all movements of coins between the Depositor, the Safe & the Borrower?

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B. Accounting in Just 8 Principles


7.
Double Entry Accounting-The Banker of Venice Banker of Venice

Borrower Book

Depositor Book

Book 1

Book 2

Around 1400, a new Banker in Venice decides to start its banking operations in his house. He set up a large table with a dark blue napkin and places 3 opened Books on the table. He also has a small Vault/Safe to keep all gold coins brought in by depositors. He wants to accept deposits from rich individuals and lend all or part of same deposits to Borrowers. The Banker places one opened book on the upper left of the table (Book n1) called the Borrower Book to track all changes of legal positions with the borrower. He places another Book on the upper right side of the table (Book no2)called the Depositor Book to track all changes of legal position with the depositor. Finally,Banker places a third book on the middle lower part of the table (Book no3) to track all changes of legal position (ownership) on the Safe. The depositor comes on the right side of the table

Safe Book

Book 3

Safe

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B. Accounting in Just 8 Principles


7.
Double Entry Accounting-The Depositor,the Safe and the Borrower Banker of Venice Story next: The depositor,in red, is shown on the right side of the table and he brings 200 Gold Coins with him as shown on the image. Borrower
Borrower Book Depositor Book

Depositor

The coins are placed inside the safe. The borrower,in green, is shown on the left side of the table and he takes with him 100 Gold Coins coming from the safe.

Safe Book

The banker wants to record these 2 business transactions on his 3 books.


200 Gold coins

100 Gold coins

In the next 3 slides,we show the rules which define double entry accounting.

Safe

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B. Accounting in Just 8 Principles


7.
Double Entry Accounting- 3 Accounting Books on the Table Banker of Venice Note that the banker will have to repay the depositor according to the terms of the deposit agreement and he will be reimbursed by the borrower according to the terms of loan agreement. Borrower
Borrower book Depositor book

Depositor

Also,the Banker will be charged interest on the deposits and he will charge interest on his loans to borrowers. Now, his 3 books will keep track of all transactions : 1. Deposits of Coins received from Depositors 2. Coins held in the Safe/Vault 3. Loans of Coins to Borrowers. Question: How will the banker keep track of the 2 movements of coins between the Depositor, the Safe & the Borrower? He wants to keep track of the different legal positions related to the deposit,the safe & the loan.

Safe book

100 Gold coins

200 Gold coins

Safe

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B. Accounting in Just 8 Principles


7.
Banker of Venice Double Entry Accounting-New Deposit

The Depositor has brought in 200 coins which have been placed in the Safe. We record the arrival of these 200 coins by posting 2 opposite SBIs:

Borrower book

Depositor Book

Safe: One 200 SBI on the left side of B3 the book


Depositor SBI-2 opened for all legal changes taking place with the safe: In this case,we record a New Asset (200 coins)owned by the banker. This New Asset owned by Banker triggers a New Debt due to the Depositor. The New Debt is recorded by posting a 200 SBI on the right side of B2 the book opened for all legal changes taking place with the depositor (New Debt & Reimbursements of debt).
200 Gold coins

200 B2
Safe Book

SBI-1

200 B3

The 2 SBIs are part of a Dual Booking Entry (DBE). The New Asset is recorded by SBI no1 and the New Debt is recorded by SBI no2.

Safe

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B. Accounting in Just 8 Principles


7.
Banker of Venice Double Entry Accounting-New Loan The Borrower has borrowed 100 coins which have been taken from the safe. We record this Loan Transaction by posting 2 opposite SBIs: One 100 SBI on the Right side of B3 , the book opened for all legal changes taking place with the safe: In this case,we record a reduction in Asset (100 coins) owned by the banker. This Asset gone out triggers a New Asset owned by Banker: Loan on the Depositor. The New Asset is recorded by posting a 100 SBI on the Left side of B1, the book opened for all legal changes taking place with the Borrower (New Loans & New Reimbursements of Loans). SBI-3 The 2 SBIs are part of a Dual Booking Entry (DBE). The 100 Asset reduction is recorded by SBI no 3 on B3 (the 100 coins have taken from the safe) and the New 100 Asset-Loan is recorded by SBI no4 on the Borrower Book

Borrower SBI-4

Borrower book

Depositor Book

100 B1
Safe
Book

200

200 100
100 Gold coins

B3

Safe

B1.

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B. Accounting in Just 8 Principles


7. Double Entry Accounting-Table no2 for Costs & Revenues
Banker of Venice

Interest Costs

Interest Revenues

T2

Borrower

B5
Borrower Book

B4
Depositor Book

Depositor

In addition to the 1st table (T1), Banker decides to use T2 another table (T2) with a light blue napkin (compared to the other table T1 with a dark blue napkin). The banker places 2 opened books on this T2 Table 1 opened book (B4)on the right side B5 B4 & 1 opened book (B5) on the left side. This is to record Interest Revenues (on 100 loan) on the Book (B4)placed on the right side of the table and Interest Costs (on 200 deposit) on the other Book (B5)placed on the left side of table.

100

200

Safe Book
100 Gold coins

200 100

200 Gold coins

Safe

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B. Accounting in Just 8 Principles


7. Double Entry Accounting-How to Compute
Banker of Venice T2 Interest Revenues ? Content of the 2 Agreements You noted the banker signed 2 agreements : One with the depositor and One with the borrower. The Depositor Agreement says that a 10% interest will apply on the 200 coin deposit. The Borrower Agreement says that a 25 % interest will apply on the 100 coins Loan. Computing the Revenues We assume that a period of 12 months has just finished and the banker wants to post the related Revenues on the 100 coins loan to the borrower. The computation is simple: 25% of 100 coins equals 25 coins which are to invoiced to the borrower for the period. Accordingly, banker holds a new Asset: A new legal claim of 25 coins on the borrower. Question: How to post the booking entry on the Interest revenues Book ?

Interest Costs

Interest Revenues

B4
Borrower Book Depositor Book

100

200

Safe Book
100 Gold coins

200 100

200 Gold coins

Safe

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B. Accounting in Just 8 Principles


7. Double Entry Accounting-How to Post Interest Revenues ?
Banker of Venice T2 Question: How to post the TWIN booking entry on the Interest revenues Book ? B4 SBI-6 Answer: The banker holds a New Asset made up of a claim (Receivables) for 25 coins on the Borrower at the end of 12 months,as per loan agreement. This New Asset will go on top of the initial loan of 100 coins already reported on the Borrower book. SBI for 25 coins (SBI-5)will be posted on the left side of the Borrower book, just under the 100 SBI.. Accordingly,the banker total claim on borrower will add up to reach 125 coins (100 & 25). How do we post the twin SBI ? As a rule of thumb,the twin SBI (SBI-6)will be posted on the right side of the Interest revenues book. There is a logic behind this rule,which is explained in level 2..

Interest Costs

Interest Revenues

25

Borrower Book

Depositor Book

100 SBI-5 25
Safe Book
100 Gold coins

200

200 100

200 Gold coins

Safe

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B. Accounting in Just 8 Principles


7. Double Entry Accounting-Computing Interest Costs
Banker of Venice T2 You noted the banker signed 2 agreements: One with the depositor and One with the borrower. The Depositor Agreement says that a 10% interest per year will apply on the 200 coin deposit. We assume that a period of 12 months has just finished and the banker wants to post the related Interest Costs on the 200 coins Deposit by the Depositor. The computation is simple: 10% of 200 coins equals 20 coins which are to be invoiced by the depositor for the period. Accordingly, banker has a New Debt: A new legal claim of 20 coins by the Depositor. Question: How to post the booking entry on the Interest Costs Book

Interest Costs

Interest Revenues

B4

SBI-8

20
Borrower Book

25

Depositor Book

100 25
Safe Book
100 Gold coins

200 20 SBI-7

200 100

200 Gold coins

Safe

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B. Accounting in Just 8 Principles


7. Double Entry Accounting- How to Post Interest Costs ?
Banker of Venice T2 Question: How to post the TWIN booking entries on the Interest Costs Book ? Answer: The banker has a New Debt made up of a claim (payables) for 20 coins by the Depositor at the end of 12 months,as per Deposit agreement. This New Debt will go on top of the initial Debt of 200 coins already reported on the Depositor book. The SBI for 20 coins (SBI-7)will be posted on the Right side of the Depositor book, just under the 200 SBI.. Accordingly,the banker total Debt to Depositor will add up to 220 coins (200 & 20). How do we post the twin SBI ? As a rule of thumb,the twin SBI (SBI-8)will be posted on the Left side of the Interest Costs book. There is a logic behind this rule,which will be explained in Level 2.. Safe

Interest Costs

Interest Revenues

B4

SBI-8

20
Borrower Book

25
Depositor Book

100 25
Safe Book
100 Gold coins

200 20 SBI-7

200 100

200 Gold coins

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B. Accounting in Just 8 Principles


7. Double Entry Accounting-The Yellow Double Arrow
Banker of Venice T2

Interest Costs

Interest Revenues

B4

How T Accounts are linked ? To symbolize the relationship between the lower dark blue table and the upper light blue table, we use a double arrow. This is a way to visualize the twin SBIs related to Revenues and Costs. Revenues trigger new Asset-Claims on Clients. Costs trigger new Debt due to Suppliers. All books on the Dark Blue table (T1) represent the so called Balance Sheet Accounts which keep the record of the $ value of all Assets and all Debts as of the end of any day.

20

25

Borrower Book

Depositor Book

100 25
Safe Book

200 20

100 Gold coins

200 100

200 Gold coins

All books on the light blue table represent the so called Income statement accounts which keep the record of all Revenues & Costs over a past period of time (usually the last 12 months).

Safe

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B. The 8 principles of Accounting


8. The T Accounts
Borrower T account Depositor T account

Each T. Acc. records all transactions made with the 3 external parties: The Depositor, The Safe, and the Borrower. Each T. Acc. has a specific ID Number & a Name. Each transaction is defined as a Dual Business Act which will be recorded by a Dual Booking Entry (DBE) made up of 2 Single Booking Items (SBI).

100

200

spread spread

Safe T account

200 The General Ledger

100

spread

Each SBI symbolize a specific Change of Legal Position for the banker. Deposit of 200 coins from the depositor means 1 Dual Business Act between Banker & the Depositor, with 2 Changes of Legal positions which are recorded by 2 SBIs, hence making 1 DBE. In the Journal, we show 2 DBEs, each one with the full details, such as the Amounts, the targeted Accounts Names & No & the destination side of each SBI (left or right) inside each of the 2 Targeted T Acc. Total of all Left SBIs must be equal to the Total of all Right SBIs. The Journal is the only way to post a DBE inside the General Ledger.

Journal of Booking Entries SBIs* descriptions & T acc destinations (GL*numbers) DBE 1 DBE 2 DBE n Total of all SBIs sent to GL*
300

left

right
200 100

200 - SBI 1 description 200 - SBI 2 description 200 100 - SBI 3 description

100

100 - SBI 4 description

300

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B. The 8 principles of Accounting


8. The T Accounts

Balance of one Account Total Left minus Total Right

A T. Account over the life of the company will record a large number of SBIs coming from the Journal. The life of the company is divided into accounting periods of 12 months often starting on January 1st and ending on december31st. From time to time and at the end of regular periods, we proceed to the addition of all SBIs of the left side & of all SBIs of the right side inside each T Account of the General Ledger. Then, we compute the spread between the 2 totals. We define the Spread Balance as the Balance of the account. It is symbolized by a small triangle, either green or red. Each SBI in a given T. Account is linked to its twin SBI which is posted into another T. Account as indicated on the Journal.

SBI SBI SBI SBI SBI

Total Left

Total Right

Spread Balance

C
Application of the 3 Documents

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C. Application of the 3 Documents


1. Application to the General Ledger : Replacing 5 Books by 5 T. Accounts
Int. Cost Acc. Int. Rev. Acc. The example of the banker of Venice and his 2 tables with 5 books (3 & 2) will serve as an introduction to the GL shown here in a semi-vertical format as opposed to the standard full vertical format as shown on previous slide. You can see on the other half of this slide representation of the so called SBI-poster design.. You can recognize the light blue upper table for income statement accounts (Revenues & Costs)and the dark blue lower table for the the balance sheet accounts. Each of the 5 Books used by the Banker has been replaced by a T Account. Between the 2 tables/Rectangles,we have placed the double yellow arrow for the guidance of SBIs between Income Statement accounts and Balance Sheet accounts. We have inserted the 8 SBIs previously shown on the 2 tables.

20

25

Borrower Acc

Depositor Acc

100 25 Safe Account 200 100

200 20

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C. Application of the 3 Documents


1. Application to the General Ledger: Class/SubClass Numbers.
5.1 Int. Cost Acc. 20 Int. Rev. Acc. 25 4.1 As initially told on the first slide, there are 8 classes of accounts inside a GL. The classes range from Class 1 to Class 8. Each T Account carries a Name and a Number. The Number starts with the class Number. It may include many digits. The second digit indicates the subclass number as defined by the Chart of Accounts specific to a given company. Obviously a small company (say a grocery store) will not use the same type of Chart of Accounts as a Bank or a Car manufacturer. However,each company will stick to the same basic accounting rules,as applied by CPAs(Certified Professional Accountants). The rules give some freedom for classes definitions which may vary from one company to another, especially for Revenues & Costs. We have chosen the most frequent class allocation with class 1 for Asset, class 2 for Debts, class 3 for Shareholders,class 4 for Revenues & class 5 for Costs..

1.2

Borrower Acc

Depositor Acc

2.1

100 25 1.1 Safe Account 200

200 20

100

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C. Application of the 3 Documents


1.
5.1 Int. Cost Acc. Application to the General Ledger: Semi-vertical GL versus Full-Vertical GL 4.1 Vertical list of all SBIs after 12 months 1.1 20 25 Depositor Acc 2.1 1.1 1.2 1.2 100 25 1.1 Safe Account 200 20 2.1 2.1 4.1 5.1 200 SBI-Poster 100
First 200 Coins In Safe First 100 Coins out of Safe First 100 Coins loan to Borrower First Inter Receivable-12 months First 200 Coins Deposit First Interest Payable-12 months Int. Rev. earned over 12 months Int.Costs incurred over 12 months

Int. Rev. Acc.

Left 200

Right 100

1.2

Borrower Acc

100 25 200 20 25 20 345 345

Total of all SBIs at year end in GL

Above is the Semi-Vertical GL Format called the SBI-poster in this course .Each T. Acc. has a predefined position inside. This Format is designed for learning purpose with colors.

Above is the Full Vertical GL Format in B&W as used by CPAs & accounting Softwares. All accounts and all SBIs are listed vertically. Standard GLs are often confusing for beginners

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C. Application of the 3 Documents


1. Application to the General Ledger: New legal Entity
5.1 Int. Cost Acc. 20 1.2 Borrower Acc 100 25 1.1 Safe Account Int. Rev. Acc. 25 Depositor Acc 200 20 2.1 4.1 & New Shareholder Foundation of a New legal Entity We assume that the banker has now made the decision to run his bank as distinct legal entity,under the name of Bank of Venice. He decides to bring 900 coins as New Capital. The 900 coins are placed inside the Safe. How to post booking entry for New Capital ? First,900 coins have been brought in the safe. This will be recorded by a 900 SBI (no9)posted on the left side of the T Account allocated to the Safe. (History of the safe coin content over time) Shareholder 3.1 The twin 900 SBI (no10) will be posted on the right side of the T Account allocated to the Shareholder. (History of all capital brought in by Shareholder). This T. Acc is also defined as paid up capital. More explanations on Level 2.

200 SBI-9 1.3 New House 900

100

900

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C. Application of the 3 Documents


1. Application to the General Ledger:
5.1 Int. Cost Acc. 20 Borrower Acc 100 25 1.1 Safe Account Int. Rev. Acc. 25 Depositor Acc 200 20 How to post booking entry for a New House ? First the new bank has taken ownership of the new house,recorded by a 400 SBI (no 11)posted on the left side of the T Account allocated to the House. 100 900 1.3 SBI-11 New House 400 400 SBI-12 900 Shareholder 3.1 The twin 400 SBI,(no13)recording the 400 coins taken out of the safe,will be posted on the right side of the T Account allocated to the Safe. The money value of the house will be adjusted downwards over time.This will be done with SBIs posted on the right side. 2.1 4.1 New House T. Account Foundation of a New legal Entity We assume that the banker has now made the decision to run his bank as distinct legal entity,under the name of Bank of Venice. He decides to bring 900 coins as New Capital. He then decides to buy at a price in cash of 400 coins a New House for the company business instead of using his own house. How would you post the related booking entries ?

1.2

200

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C. Application of the 3 Documents


2. Application to the Journal: How to fill the Journal of DBEs
5.1 Int. Cost Acc. 20 1.2 Borrower Acc 100 25 1.1 SBI-1
DBE1

Int. Rev. Acc. 25 Depositor Acc 200 20

4.1

Once you know how to fill a GL under the SBI-poster format,it becomes easier to fill the Journal of Booking Entries (or DBE for Dual Booking Entries). Each Business transaction will be recorded by a DBE Entry made up of at least 2 Twin SBIs posted on 2 different T Accounts. As defined on slide,the accountant needs to identify the Twin SBIs for each transactions..He needs to know the $ amount,the names and numbers of the 2 T Accounts and on which sides to post each SBI. We have designed a sample of a Journal with the first DBE posted inside the GL. The Journal list the first SBI (SBI-1)with information related to this Item (200 coins placed in the safe). The Safe T. Acc number is indicated (1.1) and the 200 amount is inserted on the left column. The twin SBI (SBI-2) record the new debt due to the Depositor (T Acc. nber 2.1) & the 200 amount is inserted on the right column.

2.1 SBI-2

Safe Account 200

100

List of DBE and T acc destinations


SBI-1 DBE 1 SBI-2 200 on depo (2.1) 200 in safe (1.1)

left
200

right

200

back to summary

C. Application of the 3 Documents


3. Application to the Trial Balance: The connection between GL and Trial Balance
The 3 Accounting Documents
Journal General Ledger

We have seen on slides no 9-10-11 the first presentation of the 3 accounting documents: The Journal is a preparation document used to define each Dual Booking Entry made up of at least 2 twin SBIs. Each SBI is then sent to its destination inside the GL,that is the correct T. Account and the correct side of such T. Account. Over the accounting period (usually 12 months),the company will experience a number of business transactions,each of them recorded by 2 twin SBIs. SBIs are stored into T Accounts inside the GL.

Trial Balance

At the end of these 12 months,the accountant will try to balance all the SBIs held inside the GL.This means that the total of all left SBIs must be equal to the total of all right SBIs.
The GL will show a large Number of lines for each T Account. The Trial Balance will show only one line for each T Account.

The Difference between a GL and a Trial balance The GL lists all SBIs which will have been posted over a given period of time (usually 12 months). The Trial balance will only show the totals of SBIs (Total Left & Total Right),Account after Account, as well as the Spread Balance.(Left minus Right)

back to summary

C. Application of the 3 Documents


3. Application to the Trial Balance: The 4 Columns (SBIs & Spreads)
The Next slide will show the GL of the Bank of Venice at the end of a 12 months accounting period, including the New Capital and the New Investment (new house). GL is shown according to the SBI-poster format instead of the standard full vertical format. In the Trial Balance, the T. Accounts will be listed vertically by numerical order (from 1. 1 to 5. 1). Each T. Account will be represented by a single line with 3 Total Amounts shown on 3 columns: 1.The total of all left SBIs represented by a small Green Box 2.The total of all right SBIs represented by a small red Box. 3.The difference between these 2 totals. also called the spread balance which will be symbolized by a triangle (green or right). A complete GL & Trial balance should list T Accounts from 8 different classes. Here the Bank only uses 5 classes (1-2-3-4-5)

back to summary

C. Application of the 3 Documents


3.
5.1
Int. Cost Acc.

Application to the Trial Balance: How to fill the Trial Balance.


All SBIs (L&R) Int. Rev. Acc. Spread Balance

4.1

List of all Acc. 1.1. Safe Ac.


1.100

200 1.2
Borrower Acc

25
Depositor Acc

500

600

nap

2.1

1.2. Borrower Ac.

125

125

nap

100 25
Safe Account

200 200

1.3. House Ac. 2.1.Deposit.Ac

400

400 nap

nap 220

220

1.1
3.1.ShareH.Ac
0 900

nap

900

200 900 1.3


New House

100 400

Shareholder

3.1

4.1.Int.Rev.Ac.

25

nap 20

25 nap

5.1.Int.Cost Ac

20

400

900

Totals 4 Col.

1,645

1,645

1,145

1,145

back to summary

C. Application of the 3 Documents


3. Trial Balance: Comments at the end of
We are now making some comments on this simplified Trial Balance. This GL held only 7 T Accounts, while a normal GL inside a normal Bank would hold thousands of T Accounts. This chart of accounts covers only 5 classes of accounts (1 to 5) while a normal chart of accounts would hold accounts belonging to 8 classes of accounts. We note that certain T Accounts have a natural tendency to show a Left Spread Balance while other have a natural tendency to show a Right Spread Balance. The spread balance for a given account is either left or right, it can not be both. If the spread balance happen to be zero,it means the account carries no residual value at the end of the day the GL was closed. In level 2, you will be shown how to compute the profit (or loss) as well as how to draw the financial statements. 12 months
All SBIs (L&R) List of all Acc. 1.1. Safe Ac. 1.100 500 600 125 nap nap Spread Balance

1.2.Borro Ac. 1.3. House Ac. 2.1.Deposit.Ac

125 400 0

0 0 220

400 nap

nap 220

3.1.ShareH.Ac

900

nap

900

4.1.Int.Rev.Ac.

0 20

25 0

nap 20

25 nap

5.1.Int.Cost Ac

Totals 4 Columns

1,645

1,645

1,145

1,145