CDA COLLEGE ACC101: INTRODUCTION TO ACCOUNTING Lecture 3 Lecture 3 Lecturer: Kleanthis Zisimos

Chapter Review In Today’s Lecture we Analyze the accounting equation Analyze the accounting equation Explain what is a T Account Explain what is a T Account Define the double entry principles Define the double entry principles Record transactions in the Ledger Record transactions in the Ledger

The Accounting Equation All the accounting rules, legislations, treatment of transactions and financial statements are based on a simple accounting equation: Assets= Liabilities + Capital Assets= resources owned by the business Assets= resources owned by the business Liabilities=Debts of the business to creditors Liabilities=Debts of the business to creditors Capital.=Debt of the business to Owner Capital.=Debt of the business to Owner

The Accounting Equation Example 1. Mark invests 5000 euro in cash to Example 1. Mark invests 5000 euro in cash to create his company called Luna Ltd create his company called Luna Ltd Example 2. Luna ltd buys Furniture 2000 euro from cash. Example 2. Luna ltd buys Furniture 2000 euro from cash. Example 3. Luna Buys Machinery 1000 by credit from Indus Ltd Example 3. Luna Buys Machinery 1000 by credit from Indus Ltd Example 4. Introducing drawings.Mark draws 500 from company Example 4. Introducing drawings.Mark draws 500 from company Drawings are amount of money taken by from the business by its owner Drawings are amount of money taken by from the business by its owner Example 5. Introducing profit. Luna purchases Crystal Glasses for € 300 and sells them € 700 Example 5. Introducing profit. Luna purchases Crystal Glasses for € 300 and sells them € 700 Example 6. Prepare a balance Sheet Example 6. Prepare a balance Sheet

The Accounting Equation Assets=Liabilities +Capital Assets=Liabilities +Capital 1. cash (5000)=Capital (5000) 2. Cash (3000)+Furniture (2000)= Capital (5000) 3. Cash (3000) + Furniture (2000) +Machinery (1000)= Capital (5000) +Creditor Indus (1000)

The Accounting Equation Assets=Liabilities +Capital Assets=Liabilities +Capital 4. Cash (2500) + Furniture (2000) +Machinery (1000)= Capital (4500) +Creditor Indus (1000) 5. Profit= =400 Cash ( ) + Furniture (2000) +Machinery (1000)= Capital ( ) +Creditor Indus (1000)

The Accounting Equation 6.

Financial Statements Exhibition Example solved in the class. From the following trial balance of the company Beta Ltd prepare the Profit & Loss a/c and balance sheet for the year 2011 Exhibition Example solved in the class. From the following trial balance of the company Beta Ltd prepare the Profit & Loss a/c and balance sheet for the year 2011 Telephone400 Sundry expenses100 Salaries1000 Consulting revenues 5000 Rent400 Accountd payable 500 Creditors 5000 Capital Loan 7000 Cash1600 Bank30000

Financial Statements Income Statement of Beta Ltd for the year ended 2011 Revenues Consulting revenues € 5,000 Expenses Telephone Rent € 400 Sundry expenses€ 100 Salaries€ 1,000 € 1,900 € 3,100

Financial Statements Balance Sheet of Beta Ltd for the year ended 2011 Assets Cash€ 1,600 Bank €30,000 €31,600 Liabilities Creditors€ 5,000 Loan€ 7,000 Accounts payable€ 500 Equity Capital €16,000 Net income3100€ 31,600 Assets = Liabilities + Equity

Financial Statements Statement of Owners Equity Equity Capital € 16,000 Net income3100 € 31,600

Transactions & Accounts By now we have learn the basic principles underlying the Balance Sheet and Profit & Loss. By now we have learn the basic principles underlying the Balance Sheet and Profit & Loss. We now turn our attention to the process by which a business transaction works its way through the financial statements. We now turn our attention to the process by which a business transaction works its way through the financial statements. A business transaction is shown in a document. Documents maybe invoices, receipts, credit notes etc. A business transaction is shown in a document. Documents maybe invoices, receipts, credit notes etc. A document or a business transaction is recorded in the books of the company in two Ledger accounts. This is called double entry basis A document or a business transaction is recorded in the books of the company in two Ledger accounts. This is called double entry basis

Ledger Accounts Ledger accounts are included in the General ledger which summarizes all assets, liabilities, capital, income and expenditure of the company. Ledger accounts are included in the General ledger which summarizes all assets, liabilities, capital, income and expenditure of the company. The format of a ledger a/c is the following The format of a ledger a/c is the following Name of account Name of account Date Description € Date Description € Date Description € Date Description €

Ledger Accounts The left hand site of the account is called The left hand site of the account is called debit site debit site The right hand site of the account is called The right hand site of the account is called credit site credit site Every transaction is recorded twice in the accounts. One in the debit site and one in the credit site. That is why the accounting equation is always equal after each transaction. Every transaction is recorded twice in the accounts. One in the debit site and one in the credit site. That is why the accounting equation is always equal after each transaction.

Rules of Double Entry 1. Every transaction has 2 entries. A debit entry and a credit entry 2. The total value of debit entries must always be equal with the total value of credit entries 3. An increase in an asset is a debit 4. An increase in a liability or capital is a credit 5. An increase in an income is a credit 6. An increase in an expense is a debit

Discussion question 1 Identify the credit and debit entries in each transaction and post them in the ledger accounts. Identify the credit and debit entries in each transaction and post them in the ledger accounts. 1. Bought a machine for 2000 € by cash 2. Cash sales 1000 € 3. Payment of rent 500 € 4. Cash purchases 1300 € 5. The owner put 3000 € in cash to the business

Discussion question 2 Identify the credit and debit entries in each transaction and post them in the ledger accounts. Identify the credit and debit entries in each transaction and post them in the ledger accounts. 1. Paid salaries for 5000 € by cash 2. Credit sales € to Bob 3. Bob paid us 5000 € 4. Credit purchases 4600 € to Dylan 5. The company paid Dylan 2000 €