understand accouting (mechanical approach)
DESCRIPTION
This presentation targeted anyone who would like to understand accounting. Accounting is rather big topic, and even worse, the foundation of accounting, i.e. the double bookkeeping system is very abstract, so often neglected. This presentation tries to address the gap, the missing link between the double bookkeeping concept and profit definition. The script is found at http://getthingsright.blogspot.com/2010/07/normal-0-7.htmlTRANSCRIPT
Yoshi 1
Understand Accounting
From How to Why
Yoshi 2
Agenda
• Double Bookkeeping System
• Balance Sheet and
Profit Loss Statement
Slide No. 3-11
Slide No. 12-22
Yoshi 3
History of Accounting
Renaissance
Yoshi pays $100Receives $200 Paragraph:
Formulation:
100 200
Abstraction:
200 – 100=100
MathAccount
summa de arithmetica geometria proportioni et proportionalita
By Luca Pacioli
Picture Source : http://en.wikipedia.org/wiki/Luca_Pacioli
Yoshi 4
Double Bookkeeping System
• Recording
• Tracking
• Calculating
• Reporting
• Validating
In one format !
Yoshi 5
Account Origin (1)Ancient Rome (Account : Personal)
Slave Master
InvestmentMaster
Own Money
Segregation !
Investment
Asset Liability Asset Liability
Yoshi 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
Yoshi 7
Book Structure
Account A Account B
Ledger X
Account C Account D
Ledger Y
Books
Journal / Day Book (Diaries)Posting Posting
Yoshi 8
Journal / Day Book
Sales Day Book (Page 10)
2010 August Invoice No Folio Amount $
1 C Knight 10001 SL 15 100
5 C Knight 10002 SL 15 100
10 D Mike 10003 SL 21 200
15 C Knight 10004 SL 15 100
Posting ToSL: Sales Ledger
One Source to One Posting = Traceability !!
Source Documents
Yoshi 9
Yoshi 10
Yoshi 11
Posting Rules
• Post Same Amount to both Debit and Credit e.g. Dr C Knight A/c 300
Cr Sales 300or 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 12Bal 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
Yoshi 12
Five Accounts (Cycle)(Introduction to Financial Statements)
Liability
Equity
12
Expense Income3 4
Profit
Asset
Yoshi 13
Which Account ? (1)
Liability
Equity
Expense Income
Out In
Stock
Flow
Asset
Yoshi 14
Which Account ? (2)
-B/S
P/L
+
Debit CreditAsset
-+
Debit CreditExpense
- +
Debit CreditIncome
- +
Debit CreditLiability/Equity
Yoshi 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
Yoshi 16
Profit Calculation
Start End
LiabilityAsset Profit=-
Income - Expense
=Profit
Income - Expense
=Profit
Income - Expense
=Profit
Voyage, Caravan (Before Industrial Revolution)
On-Going (After Industrial Revolution)
Yoshi 17
Accounting Equation (1)
Balance Sheet (BS) Accounts:
• Asset – Liability = Equity
Asset
Liability
Equity
Liability
EquityAsset
Liability
Equity
Asset
Yoshi 18
Accounting Equation (2)
Profit and Loss (PL) Accounts:
Income – Expense = Profit (Loss)
IncomeProfit
Expense
ExpenseLoss
Income
Yoshi 19
Accounting Equation (3)
B/S and P/L:
Equity
Liability
Asset
IncomeProfit
Expense
Equity
Liability
Asset
IncomeExpense
Year 2009 Year 2010
Yr 2009 Profit = $100Yr 2009 Equity = $500
Yr 2010 Equity = $600
Yoshi 20
Posting for Allocation (1)
Cash Outflow
Cash Inflow
AccrualDeferral
A
B
C
D
DepreciationProvision
(Payables)
Unbilled Income(Receivables)
Unearned Income
Yoshi 21
Posting for Allocation (2)
Deferral Accrual
OutflowExpense Asset
Expense Liability
InflowIncome Liability
Income Asset
A C
DB
Yoshi 22
Posting for Disclosure
Asset Asset
Income Expense
Asset
No Cash flow !!
Market Value
Yoshi 23
Accounting Evolution/ Profession
18th - 19th Century South Sea Bubble >> Audit East Indian Company >> Yearly Profit / Loss Railway /Canal >> Fixed Asset /Depreciation Industrial Revolution >> Cost Concept
20th Century Financial Markets >> Mark to Market
21th Century WorldCom >> Sarbanes–Oxley Act (SOX)
Yoshi 24
Key Questions
• Equity is Corporate Value ?
• Profit is distributable ?
• Does Asset have “reality“ ?