Understand Accouting (Mechanical Approach)
- 1. Understand Accounting From How to Why
- 2. Agenda Double Bookkeeping System Balance Sheet and Profit Loss Statement Slide No. 3-11 Slide No. 12-22
- 3. History of Accounting Renaissance Yoshi pays $100 Receives $200 Paragraph: Formulation: 100 200 Abstraction: 200 – 100 =100 Math Account summa de arithmetica geometria proportioni et proportionalita By Luca Pacioli Picture Source : http://en.wikipedia.org/wiki/Luca_Pacioli
- 4. Double Bookkeeping System Recording Tracking Calculating Reporting Validating In one format !
- 5. Account Origin (1) Ancient Rome (Account : Personal) Slave Master Investment Master Own Money Segregation ! Investment Asset Liability Asset Liability
- 6. Account Origin (2) Post – Industrial Revolution (Account : Impersonal) Equity Cash Factory Material Labour Process Product Sales Profit/Loss Finance Work In Progress Inventory Sales
- 7. Book Structure Account A Account B Ledger X Account C Account D Ledger Y Books Journal / Day Book (Diaries) Posting Posting
- 8. Journal / Day Book Posting To SL: Sales Ledger One Source to One Posting = Traceability !! Source Documents 100 SL 15 10004 15 C Knight 200 SL 21 10003 10 D Mike 100 SL 15 10002 5 C Knight 100 SL 15 10001 1 C Knight Amount $ Folio Invoice No 2010 August Sales Day Book (Page 10)
- 11. Posting Rules Post Same Amount to both Debit and Credit e.g. Dr C Knight A/c 300 Cr Sales 300 or Dr C Knight A/c 300 D Mike A/c 200 Cr Sales 500 That is why, Trial Balance (TB) should balance ( XXX =XXX ) Bal of A/c 11 Bal of A/c 12 Bal of A/c 13 Total XXX Bal of A/c 1 Bal of A/c 2 Bal of A/c 3 Total XXX Control A/c for TB
- 12. Five Accounts (Cycle) (Introduction to Financial Statements) Liability Equity 1 2 Expense Income 3 4 Profit Asset
- 13. Which Account ? (1) Liability Equity Expense Income Out In Stock Flow Asset
- 14. Which Account ? (2) - B/S P/L + Debit Credit Asset - + Debit Credit Expense - + Debit Credit Income - + Debit Credit Liability/Equity
- 15. Which Account ? (3) B/S P/L Asset Expense Income Liability/Equity • Account Payable • Borrowing • Capital, etc • Cash/Bank Account • Account Receivable • Lending • Land, etc • Salary • Purchase • Office Rent • Commission Paid • Interest Paid, etc • Sales • Commission Received • Interest Received, etc
- 16. Profit Calculation Start End Liability Asset Profit = - Income - Expense = Profit Income - Expense = Profit Income - Expense = Profit Voyage, Caravan (Before Industrial Revolution) On-Going (After Industrial Revolution)
- 17. Accounting Equation (1) Balance Sheet (BS) Accounts: Asset – Liability = Equity Asset Liability Equity Liability Equity Asset Liability Equity Asset
- 18. Accounting Equation (2) Profit and Loss (PL) Accounts: Income – Expense = Profit ( Loss ) Income Profit Expense Expense Loss Income
- 19. Accounting Equation (3) B/S and P/L: Equity Liability Asset Income Profit Expense Equity Liability Asset Income Expense Year 2009 Year 2010 Yr 2009 Profit = $100 Yr 2009 Equity = $500 Yr 2010 Equity = $600
- 20. Posting for Allocation (1) Cash Outflow Cash Inflow Accrual Deferral A B C D Depreciation Provision (Payables) Unbilled Income (Receivables) Unearned Income
- 21. Posting for Allocation (2) A C D B Income Asset Income Liability Inflow Expense Liability Expense Asset Outflow Accrual Deferral
- 22. Posting for Disclosure Asset Asset Income Expense Asset No Cash flow !! Market Value
- 23. Accounting Evolution/ Profession 18 th - 19 th Century South Sea Bubble > > Audit East Indian Company > > Yearly Profit / Loss Railway /Canal > > Fixed Asset /Depreciation Industrial Revolution >> Cost Concept 20 th Century Financial Markets >> Mark to Market 21 th Century WorldCom >> Sarbanes–Oxley Act (SOX)
- 24. Key Questions Equity is Corporate Value ? Profit is distributable ? Does Asset have “reality“ ?