Topic 1 Introduction and Double Entry System

Slide 1.
Topic 1
Introduction and
Double Entry System
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.2
L earning objectives
After you have studied this chapter, you should
be able to:
 Explain what accounting is about
 List the main users of accounting information
and what accounting information they are
interested in
 Present and explain the accounting equation
 Explain the relationship between the
accounting equation and the layout of the
statement of financial position (balance sheet)
Slide 1.3
L earning objectives (Continued)
 Explain the meaning of the terms assets,
capital, liabilities, accounts receivable
(debtors) and accounts payable (creditors)
 Describe how accounting transactions
affect the items in the accounting equation
 Draw up statements of financial position
after different accounting transactions have
occurred
Slide 1.4
W hat is accounting?
Accounting can be defined as:
The process of identifying, measuring and

communicating economic information to
permit informed judgements and decisions
by users of that information.
Slide 1.5
U sers of accounting information
 Managers
 Owner(s) of the business
 A prospective buyer
 The bank
 Tax inspectors
 A prospective partner
 Investors
 Creditors
Slide 1.6
T he accounting equation
Resources in business = Resources supplied by
owner
Assets = Capital
But if someone else has provided some of the
assets:
Assets = Capital + Liabilities
Assets – Liabilities = Capital
Slide 1.7
A sset Accounts
Current asset- within 1 year
Non-current asset-more thn 1
Accounts Receivable/ debtor/ customer/pen
year
Cash
Land
Buildings Asset Motor vehicles
Accounts
Equipment Prepaid
expensesAc
Stocks/ counts
inventory
Slide 1.8
counts
Payable/
Ac creditor/
Supplier
Liability Accounts
Liability Notes Payable

Accounts(liable
to pay
back)pemiutang
Accrued Liabilities Unearned Revenue
Slide 1.9
O wner’s Equity
Owner’s Equity
Owner’s Capital(modal)
Owner’s Withdrawals
Revenues/income Income – Expenses

expenses=profit
Slide 1.10
The statement of financial position

and the effects of business
transactions
On 1 May 2013, Mr. Bashier started in business
and deposited RM60,000 into a bank account
opened specially for the business
Statement of financial position as at 1 May 2013

Assets: Cash at bank RM60,000
Capital RM60,000
Slide 1.11 The statement of financial position
transactions (Continued)
On 3 May 2013, Mr. Bashier buys a small shop for
RM32,000, paying by cheque
ASSETS RM
Shop 32,000
Cash at bank 28,000
60,000
Capital 60,000
Slide 1.12
The statement of financial position

On 6 May 2013, Mr. Bashier buys some goods for RM7,000
from Mr. Sam and agrees to pay for them some time
within the next two weeks
Assets RM
Shop 32,000
Inventory 7,000
Cash at bank 28,000
67,000
Less: Account payable (7,000)
60,000
Capital 60,000
On 10 May 2013, goods which cost RM600 were sold to
Mr. Jagen for the same amount, the money to be paid later
Assets RM
Shop 32,000
Inventory 6,400
Account receivable 600
Cash at bank 28,000
67,000
60,000
Capital 60,000
On 13 May 2013, goods which cost RM400 were sold to
Mr. Danny for the same amount. Mr. Danny paid for
them immediately by cheque
Assets RM
Shop 32,000
Inventory 6,000
Cash at bank 28,400
67,000
60,000
Capital 60,000
On 15 May 2013, Mr. Bashier pays a cheque for RM3,000
to Mr.Sam in part payment of the amount owing
Assets RM
Shop 32,000
Inventory 6,000
Cash at bank 25,400
64,000
60,000
Capital 60,000
Mr. Jagen, who owed Mr. Bashier RM600, makes a part
payment of RM200 by cheque on 31 May 2013

Assets RM
Shop 32,000
Inventory 6,000
Cash at bank 25,600
64,000
60,000
Capital 60,000
Slide 2.17
Part 2
The double entry system
for assets, liabilities and
capital
Slide 2.18
After you have studied this chapter, you
should be able to:
 Explain what is meant by ‘double entry’
 Explain how the double entry system
follows the rules of the accounting equation
 Explain why each transaction is recorded
into individual accounts
 Describe the layout of a ‘T-account’
Slide 2.19
L earning objectives (Continued)
 Explain what is meant by the terms debit
and credit
 Prepare a table showing how to record
increases and decreases of assets, liabilities
and capital in the accounts
 Enter a series of transactions into
T-accounts
Slide 2.20
T he accounts for Double Entry
• a system where each transaction is entered
TWICE, once on the debit side and once on
the credit side
• Account – part of the double entry record,
containing details of transactions for a
specific item
• Credit – the right-hand side of the
accounts in double entry
• Debit – the left-hand side of the accounts
in double entry
Slide 2.21
A double entry account
Slide 2.22
Double-Entry Accounting
If a company buy a building using
cheque two assets involved which are
building and cash in bank(should
= +
involve two separate acc)
Assets Liabilities Capital

ASSETS LIABILITIES Capital
De+bit Cr edit Credit Credit

- De bit - + De bit - +
Slide 2.23
cording in an
r account affects
e items
Slide 2.25
Accounts To record Entry in the

account
Assets (DR) an increase Debit
a decrease Credit
Liabilities (CR) an increase Credit
a decrease Debit
Capital (CR) an increase Credit
a decrease Debit
Expenses (DR) an increase Debit
a decrease Credit
Revenue or an increase Credit
Income (CR) a decrease Debit
Slide 2.26
Assets = Liabilities + Capital
To increase Debit Credit Credit

each item
To decrease Credit Debit Debit
each item
Slide 2.27
A ctivity
The owner starts the business with
£10,000(capital) in cash on 1 August 2012.
Capital
Cash
Slide 2.28
Act y (Continued)
A van is bought for £4,500 in cash on 2
August 2012.
Slide 2.29
A ctivity (Continued)
Fixtures (e.g. shelves) are bought on credit
from Shop Fitters(supplier)(liability) for £1,250 on
3 August 2008.
Slide 2.30
A ctivity (Continued)
Paid the amount owning to Shop Fitters in
cash on 17 August 2012.
Slide 2.31
Act y (Continued)
Combining all four of these transactions,
the accounts now contain:
Activity
Slide 2.32
1 capital increase 1 credit

2 assets bank increase 2 debit
1 assets of equipment increase 1 debit

2 liability of house supplies increase 2 credit
1 increase asset of cash 1 debit

2 decrease asset of bank 2 credit
1 asset of van increase 1 debit

2 asset of bank decrease 2 credit
1 acc receiveable from j. rose increase 2 1 debit

asset of equipment decrease 2 credit
1 liability decrease 1 debit

2 asset of equipment decrease 2 credit
1 asset of cash in bank increase 1 debit

2 asset cash owing by j rose decrease 2 credit
1 asset of van increase 1 debit

2 asset of cash in bank decrease 2 credit
1 liability decrease
1 debit
2 asset of cash in bnk decrease
Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12 th 2 credit
Edition, © Pearson Education Limited 2012
Slide 2.33 Activity (Continued)
Slide 2.34 Activity (Continued)
Slide 2.35
Activity (Continued)
Slide 3.36
Part 3
Inventory
Slide 3.37
should be able to:
 Explain why it is inappropriate to use an
inventory account to record increases and
decreases in inventory
 Explain how to record increases and
decreases of inventory in the appropriate
accounts
Slide 3.38
I nventory
Normally, goods and services are sold above

cost price, the difference being profit. As
you know, when goods and services are
sold for less than their cost, the difference
is a loss.
Slide 3.39
Movement of stock
• separate accounts are kept for each
different type of stock movement
• purchases – goods bought by the business
for the purpose of selling them again
• returns inwards – goods returned to
the business by its customers due to
wrong merchandise, damage or poor
quality
• returns outwards – goods returned
by the business to its suppliers
• sales – goods sold by the business
Slide 3.40
A n increase in inventory
An increase in inventory can be due to one
of two causes:
 The purchase of additional goods.
 The return in to the business of goods
previously sold.
Slide 3.41
rease in inventory
(Continued)
inTo distinguish the two aspects of the
cincrease of inventory, two accounts are
opened:
 A purchases account, in which purchases
of goods are entered.
 A return inwards account, in which goods
being returned into the business are
entered.
Slide 3.42
A decrease in inventory
A decrease in inventory can be due to one
of two causes:
 The sale of goods.
 Goods previously bought by the business
now being returned to the supplier.
Slide 3.43
A decrease in inventory (Continued)

To distinguish the two aspects of the
decrease of inventory, two accounts are
opened:
 A sales account, in which sales of goods are
entered.
 A return outwards account, in which goods
being returned out to a supplier are
entered.
Slide 3.44
Cash Purchases Credit Purchases

Debit purchases account 1. Debit purchases account
Credit cash account Credit supplier’s
account
2. Debit supplier’s account
Credit cash account
Cash Sales Credit Sales
Debit cash account 1. Debit customer’s
Credit sales account account Credit sales
account
2. Debit Cash account
Credit customer’s account
Returns inwards/sales returns
(return goods)
Debit returns inwards account
Credit customer’s account
Returns outwards/purchases
returns
Debit supplier’s account
Credit returns outwards account
Slide 3.45
Purchase of inventory on credit

On 1 August 2012, goods costing £165 are
bought on credit from D. Henry.
Slide 3.46
Purchase of inventory for cash

On 2 August 2012, goods costing £310 are
bought, cash being paid for them
immediately at the time of purchase.
Slide 3.47
Sales of inventory on credit

On 3 August 2012, goods were sold on
credit for £375 to J. Lee.
Slide 3.48
Sales of inventory for cash

On 4 August 2012, goods are sold for £55,
cash being received immediately at the
time of sale.
Slide 3.49
Returns inwards
On 5 August 2012, goods which had been
previously sold to F. Lower for £29 are
now returned to the business.
Slide 3.50
Returns outwards
On 6 August 2012, goods previously bought
for £96 are returned by the business to
K. Howe.
Slide 4.51
Part 4
The effect of profit or loss on
capital and the double entry
system for expenses and revenues
Slide 4.52
should be able to:
 Calculate profit by comparing revenue with
expenses
 Explain how the accounting equation is
used to show the effects of changes in assets
and liabilities upon capital after goods or
services have been traded
 Explain why separate accounts are used for
each type of expense and revenue
Slide 4.53
T he nature of profit or loss
 Profit means the amount by which revenue
is greater than expenses for a set of
transactions, where:
 Revenue means the sales value of goods
and services that have been supplied to
customers.
 Expenses means the cost value of all the
assets that have been used up to obtain
these revenues.
Slide 4.54
The Account and its Analysis
Owner’s
Assets = Liabilities + Equity
+ – + –
Owner’s
Owner’s
Withdrawals Revenues Expenses
Capital
/ DRAWINGS
Slide 4.55
The effect of Profit or Loss on

Capital
Owner’s
equity
+ –
Capital + Profit
Revenues Expenses
Capital - Loss
Slide 4.56
Owner’s equity
Owner’s _ Owner’s _Expenses
Capital Withdrawals +
Revenues
Revenues Expenses
- + + -
Slide 4.57
Owner’s equity
Owner’s _ Owner’s _
Capital Withdrawals
+ Revenues Expenses
Capital Withdrawals Revenues Expenses
- + + - - + + -
Slide 4.58
Normal Account Balances
Assets Debit balance
Liabilities Credit balance
Capital Credit balance
Withdrawal Debit balance
Revenue Credit balance
Expenses Debit balance
Slide 4.59
ffect of Profit and
Loss on Capital
E
• Profit increases capital, losses

reduce capital
Assets = Owner’s Equity + Liabilities
Assets = (Capital + Profit) + Liabilities;
OR Assets = (Capital – Loss) + Liabilities
Slide 4.60
Double Entry for Expenses and

Revenues
Expenses
• every different type of expense will be shown in
a separate account
• shown as DEBIT entries in the various expense
accounts
• postage, stationery, motor expenses, discount
allowed – cash discounts allowed by a firm to
its customers when they pay their accounts
quickly
Revenues
• shown as CREDIT entries in the various
revenue accounts
• rent receivable, discount received – received by a
firm from its suppliers when it pays their
accounts
quickly Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 4.61
Drawing
• cash or goods taken out of a business
by the owner for his private use
Effect Action
Drawing Cash Debit drawing account
capital is decrease Credit cash account
cash is decrease
Drawing Goods Debit drawing account
capital is decrease Credit purchases account
cost of goods available
for sale is reduced
Slide 4.62
Calculating profit
If we supplied goods and services valued for
sale at £100,000 to customers, and the
expenses incurred by us in order to supply
those goods and services amounted to £70,000,
the result would be a profit of £30,000:
Revenue £100,000
Less expenses (£70,000)
Profit £30,000
Slide 4.63
Recording expenses
In order to calculate profit, expenses must
be entered into appropriate accounts. A
separate account is opened for each type of
expense:
Bank interest account Subscriptions Rent account
account
Overdraft interest Motor expenses Postages
account account account
Audit fees account Telephone account Stationery
account
Insurance account General expenses Wages account
account
Slide 4.64
Debit or credit
 Assets and expenses involve expenditure by
the business and are shown as debit entries
because they must ultimately be paid for.
 Revenue is the opposite of expenses and

therefore revenue entries appear on the
credit side of the revenue accounts.
Slide 4.65
Debit or credit (Continued)

Slide 4.66
Double entries for expenses and

revenues
Rent of £200 is paid in cash:
Debit the rent account with £200

Credit the cash account with £200
Slide 4.67

revenues (Continued)
M otor expenses of £355 are paid by cheque:
Debit the motor expenses account with £355

Credit the bank account with £355
Slide 4.68

revenues (Continued)
£ 0 cash is received for commission
6 earned by the business:
Debit the cash account with £60

Credit the commissions received account with
£60
Slide 4.69
Activity
June 1 – Paid for postage stamps by cash £50
June 2 – Paid for electricity by cheque £229
June 3 – Received rent in cash £138
June 4 – Paid insurance by cheque £142
Slide 4.70
Acltivity (Continued)
Slide 4.71
Drawings
 Money that the owner takes from the
business for private use is called drawings.
 Drawings reduces capital – they are never
an expense of the business.
 An increase in drawings is a debit entry in
the drawings account.
 The credit entry is against cash or bank if
money was taken from the business, or
purchases if stock was taken.
Slide 4.72
Recording drawings
On 25 August, the owner takes £50 cash
out of the business for his own use:
Slide 4.73
Recording drawings (Continued)

On 28 August, the owner takes £400 of
goods out of the business for his own use:

Topic 1 Introduction and Double Entry System

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Topic 1 Introduction and Double Entry System

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Slide 1.

The process of identifying, measuring and

Buildings Asset Motor vehicles

Liability Notes Payable

Accrued Liabilities Unearned Revenue

Revenues/income Income – Expenses

The statement of financial position

Statement of financial position as at 1 May 2013

The statement of financial position

Statement of financial position as at 31 May 2013

Assets Liabilities Capital

De+bit Cr edit Credit Credit

Accounts To record Entry in the

Assets = Liabilities + Capital

To increase Debit Credit Credit

1 capital increase 1 credit

1 assets of equipment increase 1 debit

1 increase asset of cash 1 debit

1 asset of van increase 1 debit

1 acc receiveable from j. rose increase 2 1 debit

1 liability decrease 1 debit

1 asset of cash in bank increase 1 debit

1 asset of van increase 1 debit

Normally, goods and services are sold above

A decrease in inventory (Continued)

Cash Purchases Credit Purchases

Purchase of inventory on credit

Purchase of inventory for cash

Sales of inventory on credit

Sales of inventory for cash

The Account and its Analysis

The effect of Profit or Loss on

Capital Withdrawals Revenues Expenses

• Profit increases capital, losses

Double Entry for Expenses and

 Revenue is the opposite of expenses and

Debit or credit (Continued)

Double entries for expenses and

Debit the rent account with £200

Double entries for expenses and

Debit the motor expenses account with £355

Double entries for expenses and

Debit the cash account with £60

June 3 – Received rent in cash £138

June 4 – Paid insurance by cheque £142

Recording drawings (Continued)

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