Slide 5.1 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Chapter 5 Accounting information for service businesses

Slide 5.2 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Assetsdenotes a decrease in an asset Liabilitiesdenotes an increase in a liability Assets –Liabilities =Ownership interest Accounting equation

Slide 5.3 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Transaction 1 Receive cash from the owner The business acquires an asset of cash and the ownership interest is created by this contribution of capital from the owner. Assets –Liabilities = Ownership Interest

Slide 5.4 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Transaction 2 Buy a vehicle for cash The business records an increase in one asset (the vehicle) but a decrease in another asset (cash). Assets –Liabilities =Ownership interest

Slide 5.5 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Transactions (Continued) See chapter for further illustrations of the effect of transactions on the accounting equation.

Slide 5.6 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 transactionA–L=OI Cash to allow business to start cash opening capital Medical equipment bought for cash cash fixed assets Dr Lee’s medical practice

Slide 5.7 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Dr Lee’s medical practice (Continued) Purchase medical supplies on credit Office furniture bought on credit expensescashOne month’s rent OI=L–Atransaction fixed assets Inventory (stock) of med. supplies creditors

Slide 5.8 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 transactionA–L=OI Pay employeecashexpense Four patients are examined, each paying £500 cash cashrevenue The business pays cash for goods acquired on credit cashCreditors The business pays an electricity bill in cash cashexpense Dr Lee’s medical practice (Continued)

Slide 5.9 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 transactionA–L=OI Pay employeecashexpense Three patients examined, invoice sent requesting payment trade receivables (debtors) revenue Pay employeecashexpense Cash for the examination of three patients cash debtors Dr Lee’s medical practice (Continued)

Slide 5.10 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 transactionA–L=OI Four patients are examined; invoice sent requesting payment trade receivables (debtors) revenue Dr Lee draws cash from the business for personal use cashdrawings Pay employeecashexpenses The medical equipment and office furniture is estimated to have fallen in value fixed assetsexpenses Medical supplies costing £350 have been used inventory (stock) of medical supplies expenses Dr Lee’s medical practice (Continued)

Slide 5.11 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 See Chapter 5 for: Spreadsheet entries Financial statements Dr Lee’s medical practice (Continued)

Slide 5.12 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Chapter 5 Bookkeeping Supplement

Slide 5.13 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 DEBIT ENTRIESCREDIT ENTRIES Left-hand side of the equation AssetIncreaseDecrease Right-hand side of the equation LiabilityDecreaseIncrease Ownership interestExpenseRevenue Capital withdrawnCapital contributed Debit and credit entries in ledger accounts Table 5.5 Rules for debit and credit entries in ledger accounts

Slide 5.14 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 TransactionAspects of the transaction DEBIT ENTRY IN CREDIT ENTRY IN Receive cash from the owner Acquisition of an asset (cash) CASH Acceptance of ownership interest OWNERSHIP INTEREST Buy a vehicle for cash Acquisition of an asset (vehicle) VEHICLE Reduction in an asset (cash) CASH See Supplement to Ch 5 for more illustrations Analysis of service business transactions Table 5.6 Analysis of service business transactions (from Table 5.1) to identify two aspects of each

Slide 5.15 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 OctTransactionsAmountDebitCredit £ 1Cash to allow business to start 50,000CashOwner 2Medical equipment bought for cash 30,000Equip ment Cash 2One month’s rent1,900RentCash 2Office furniture bought on credit 6,500FurnitureOffice supplies Debit and credit transactions of medical practice Table 5.7 Analysis of debit and credit aspect of each transaction of the medical practice

Slide 5.16 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Debit and credit transactions of medical practice (Continued) 7Purchase medical supplies on credit 1,200Inventory (stock) P. Jones 8Pay employee300WagesCash 10Four patients are examined, each paying £500 cash 2,000CashPatients’ fees Table 5.7 Analysis of debit and credit aspect of each transaction of the medical practice (Continued)

Slide 5.17 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education The business pays cash for goods acquired on credit 1,200P. JonesCash 14The business pays an electricity bill in cash 100ElectricityCash 15Pay employee300WagesCash Debit and credit transactions of medical practice (Continued) Table 5.7 Analysis of debit and credit aspect of each transaction of the medical practice (Continued)

Slide 5.18 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education Three patients examined, invoice sent requesting payment 1,500Mrs WestFees 22Pay employee300WagesCash Debit and credit transactions of medical practice (Continued) Table 5.7 Analysis of debit and credit aspect of each transaction of the medical practice (Continued)

Slide 5.19 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education The employer (Mrs West) pays in cash for the examination of three patients 1,500CashMrs West 24Four patients are examined, invoice sent requesting payment 2,000Mr EastFees Table 5.7 Analysis of debit and credit aspect of each transaction of the medical practice (Continued) Debit and credit transactions of medical practice (Continued)

Slide 5.20 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education Dr Lee draws cash from the business for personal use 1,000OwnerCash 29Pay employee300WagesCash Table 5.7 Analysis of debit and credit aspect of each transaction of the medical practice (Continued) Debit and credit transactions of medical practice (Continued)

Slide 5.21 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education The medical equipment and office furniture is estimated to have fallen in value 250DepreciationEquipment and furniture 31Medical supplies costing £350 have been used 350Medical supplies expense Inventory (stock) Table 5.7 Analysis of debit and credit aspect of each transaction of the medical practice (Continued) Debit and credit transactions of medical practice (Continued)

Slide 5.22 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 DATEPARTICULARSPAGEDEBITCREDITBALANCE £ p Three-column ruling for ledger account

Slide 5.23 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 DEBIT ENTRIESCREDIT ENTRIES DATEPARTIC- ULARS PAGE£pDATEPARTIC- ULARS PAGE£p Balance T-Account form of ledger account

Slide 5.24 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 L1 CashL8 Inventory (stock) of medical supplies L2 Ownership interestL9 P. Jones L3 Medical equipment and office furniture L10 Electricity L4 Office Supplies CompanyL11 Mrs West L5 RentL12 Mr East L6 WagesL13 Depreciation L7 Patients’ feesL14 Expense of medical supplies Ledger account titles

Slide 5.25 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 L1 CASH DATE PARTICULARSPAGEDEBITCREDITBALANCE £££ Oct 1Owner’s capitalL250,000 L2 OWNERSHIP INTEREST DATE PARTICULARSPAGEDEBITCREDITBALANCE £££ Oct 1CashL150,000(50,000) Dr Lee, Transaction 1

Slide 5.26 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Checking the accuracy of double entry records A summary of all the balances at the end of the accounting period is called a Trial Balance (‘trial’ means ‘tests the accuracy’ of the balances). If the total of the debit balances equals the total of the credit balances then we know that the total of the debit entries in the ledger accounts must equal the total of the credit entries in the ledger accounts.

Slide 5.27 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Error detection Errors which will be detected by unequal totals in the trial balance Entering only one aspect of a transaction (e.g. a debit entry but no credit entry). Writing different amounts in each entry (e.g. debit £290 but credit £209). Writing both entries in the same column (e.g. two debits, no credit). Incorrect calculation of ledger account balance.

Slide 5.28 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Error detection (Continued) Errors which will not be detected because they leave the trial balance totals equal Omitting both aspects of a transaction. Errors in both debit and credit entry of the same magnitude. Entering the correct amount in the wrong ledger account (e.g. debit for wages entered as debit for heat and light).