CDA COLLEGECDA COLLEGE

ACC101: BOOK KEEPING 1ACC101: BOOK KEEPING 1

Lecture 5Lecture 5

Lecturer: Kleanthis Zisimos Lecturer: Kleanthis Zisimos

Chapter ReviewChapter Review

In Today’s Lecture weIn Today’s Lecture we

Analyze the accounting equationAnalyze the accounting equation Explain what is a T AccountExplain what is a T Account

The Accounting EquationThe Accounting Equation

All the accounting rules, legislations, treatment All the accounting rules, legislations, treatment of transactions and financial statements are of transactions and financial statements are based on a simple accounting equation:based on a simple accounting equation:

Assets= Liabilities + CapitalAssets= Liabilities + Capital

Assets= resources owned by the businessAssets= resources owned by the business

Liabilities=Debts of the business to creditorsLiabilities=Debts of the business to creditors

Capital.=Debt of the business to OwnerCapital.=Debt of the business to Owner

The Accounting EquationThe 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 Ltdcreate his company called Luna Ltd Example 2. Luna ltd buys Furniture 2000 Example 2. Luna ltd buys Furniture 2000

euro from cash.euro from cash. Example 3. Luna Buys Machinery 1000 by Example 3. Luna Buys Machinery 1000 by

credit from Indus Ltdcredit from Indus Ltd Example 4. Introducing drawings .Mark draws Example 4. Introducing drawings .Mark draws

500 from company500 from company Drawings are amount of money taken by Drawings are amount of money taken by

from the business by its ownerfrom the business by its owner Example 5. Introducing profit. Luna Example 5. Introducing profit. Luna

purchases Crystal Glasses for purchases Crystal Glasses for € 3€ 300 and 00 and sells them sells them €€ 700 700

Example 6. Prepare a balance SheetExample 6. Prepare a balance Sheet

The Accounting EquationThe Accounting Equation

Assets=Liabilities +CapitalAssets=Liabilities +Capital

1. cash (5000)=Capital (5000)1. cash (5000)=Capital (5000)

2. Cash (3000)+Furniture (2000)= Capital 2. Cash (3000)+Furniture (2000)= Capital (5000)(5000)

3. Cash (3000) + Furniture (2000) +Machinery 3. Cash (3000) + Furniture (2000) +Machinery (1000)= Capital (5000) +Creditor Indus (1000)= Capital (5000) +Creditor Indus (1000)(1000)

The Accounting EquationThe Accounting Equation

Assets=Liabilities +CapitalAssets=Liabilities +Capital

4. Cash (2500) + Furniture (2000) 4. Cash (2500) + Furniture (2000) +Machinery (1000)= Capital (4500) +Machinery (1000)= Capital (4500) +Creditor Indus (1000)+Creditor Indus (1000)

5. Profit=700-300=4005. Profit=700-300=400

Cash (2500+400) + Furniture (2000) Cash (2500+400) + Furniture (2000) +Machinery (1000)= Capital (4500+400) +Machinery (1000)= Capital (4500+400) +Creditor Indus (1000)+Creditor Indus (1000)

The Accounting EquationThe Accounting EquationBalance Sheet

Fixed AssetsFurniture 2000Machinery 1000

Current AssetsCash 2900

5900

Capital 4900

Short Term LiabilitiesCreditor 1000

5900

6.

Transactions & AccountsTransactions & Accounts By now we have learn the basic principles By now we have learn the basic principles

underlying the Balance Sheet and Profit & Loss.underlying the Balance Sheet and Profit & Loss. We now turn our attention to the process by We now turn our attention to the process by

which a business transaction works its way which a business transaction works its way through the financial statements.through the financial statements.

A business transaction is shown in a document. A business transaction is shown in a document. Documents maybe invoices, receipts, credit Documents maybe invoices, receipts, credit notes etc.notes etc.

A document or a business transaction is recorded A document or a business transaction is recorded in the books of the company in two in the books of the company in two Ledger Ledger accountsaccounts. This is called double entry basis . This is called double entry basis

Ledger AccountsLedger Accounts

Ledger accounts are included in the Ledger accounts are included in the General ledger which summarizes all General ledger which summarizes all assets , liabilities, capital , income and assets , liabilities, capital , income and expenditure of the company. expenditure of the company.

The format of a ledger a/c is the followingThe format of a ledger a/c is the following

Name of accountName of account Date Description Date Description € € Date Description Date Description €€

Ledger AccountsLedger 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 calledThe right hand site of the account is called

credit sitecredit site Every transaction is recorded twice in the Every transaction is recorded twice in the

accounts. One in the debit site and one in accounts. One in the debit site and one in the credit site. That is why the accounting the credit site. That is why the accounting equation is always equal after each equation is always equal after each transaction.transaction.