transcript
- Slide 1
- 1 Understanding and Managing Finance 3 This Presentation is in
Self-Study Form To start the presentation: Press F5 (Top Row of
Keyboard) Then use the navigation buttons at the foot of each
page
- Slide 2
- 2 Understanding and Managing Finance Presentation 3 Self-Study
Version
- Slide 3
- 3 Objectives for This week After studying this weeks work, you
should: Understand the principles behind double entry bookkeeping
Be able to record transactions in a simple system Begin to
understand how these transactions can contribute to more formal
financial statements such as Balance Sheets and profit & Loss
Accounts.
- Slide 4
- 4 Menu 3a Bookkeeping: Terms & Principles 3b Bookkeeping
Examples 3c Follow-Up Activity: CashBook
- Slide 5
- 5 Part 3a Bookkeeping Some Terms & Principles
- Slide 6
- 6 A Reminder of Essential Terminology What are Assets and
Claims?
- Slide 7
- 7 A Reminder of Essential Terminology What are Assets and
Claims? Assets are what the business owns. This can be anything:
money in the bank, stock held, buildings, cars, land etc. and also
any monies owed to the business. Claims are what the business owes.
This can be bank loans extended to the business, unpaid bills,
profits which can be claimed by the owner or shareholders
- Slide 8
- 8 The Wealth of a Company As we have seen, the main purpose of
a Balance Sheet is to show the total wealth of a business at a
single point in time We show the Assets and the Claims To work
effectively, a Balance Sheet should Balance, that is what the
business owns should exactly match what the business owes In other
words, the net worth is zero.
- Slide 9
- 9 Balance Sheet Example Lemonade Stall (From Last Week) Assets:
Cash: 65 Stock: 20 (100 x 20p) Total: 85 On Day 2 of the Lemonade
Stall (Last week) we had: Total business assets:85 Total claims on
the business:85 Net worth of business 0 Claims: Loan outstanding:
20 Retained profits: 65 Total: 85
- Slide 10
- 10 Double Entry Bookkeeping Double Entry Bookkeeping is an
important underlying financial practice which has a long history,
and has been used since the Middle Ages. A book or ledger consists
of a number of pages in which are recorded all the business
transactions with dates and amounts. Each page is divided into two
halves: on the left is the debit side; one the right is the credit
side.
- Slide 11
- 11 Double Entry Bookkeeping Here are two pages: CASH STOCK Here
are two pages: CASH STOCK On each page we show Debits on the left;
Credits on the right. On each page we show Debits on the left;
Credits on the right.
- Slide 12
- 12 Double Entry Bookkeeping Principles Bookkeeping has two
principles: The Balancing Principle The Duality Principle
- Slide 13
- 13 Double Entry - Duality The Duality principle says that every
business transaction will be recorded on two different pages of the
book: Once on the Debit Side Once on the Credit side.
- Slide 14
- 14 Double Entry Bookkeeping EXAMPLE: Stock is bought for a cash
payment of 600 EXAMPLE: Stock is bought for a cash payment of 600
This is entered once as a credit and once as a debit: This is
entered once as a credit and once as a debit:
- Slide 15
- 15 Double Entry - Balancing The Balancing Principle says that
every business transaction has precisely two effects: One which
serves to increase the wealth of the business One which serves to
decrease the wealth of the business The Net result of these effects
is zero.
- Slide 16
- 16 Double Entry: Example 1 Suppose in the lemonade stall we buy
200 cans of lemonade for 20p per can (40) We have increased our
stock of lemonade by 40; We have reduced our cash by 40 Bookkeeping
rules would require two entries, one which increases assets by 40
(credit stock) and one which reduces assets by 40 (debit cash) Net
change is zero.
- Slide 17
- 17 Balance Sheet Example Lemonade Stall Assets: Cash: 25 Stock:
60 Total: 85 We still have Total business assets:85 Total claims on
the business:85 Net worth of business 0 Claims: Loan outstanding:
20 Retained profits: 65 Total: 85 Decrease by 40 Increase by
40
- Slide 18
- 18 Double Entry: Example 2 Suppose in the lemonade stall we pay
the outstanding loan of 20. We reduce our cash by 20; We reduce our
loan by 20 Bookkeeping rules would require two entries, one which
decreases assets by 20 (cash) and one which decreases claims by 20
(loan) Net change is zero.
- Slide 19
- 19 Balance Sheet Example Lemonade Stall Assets: Cash: 5 Stock:
60 Total: 65 We now have Total business assets:65 Total claims on
the business:65 Net worth of business 0 Claims: Loan outstanding: 0
Retained profits: 65 Total: 65 Decrease by 20
- Slide 20
- 20 Activity 3.1 Increase Asset Decrease Asset Increase Claims
Decrease Claims Increase Asset Decrease Asset Increase Claims
Decrease Claims Which of the actions on the right can balance each
of the actions on the left? Answer
- Slide 21
- 21 Financial Statements Some Terms Increase Asset Decrease
Asset Increase Claims Decrease Claims Increase Asset Decrease Asset
Increase Claims Decrease Claims Note that each action can be
balanced in two different ways.
- Slide 22
- 22 Part 3b Bookkeeping Double Entry Examples
- Slide 23
- 23 Double Entry Recap In Double Entry each financial
transaction is recorded twice, once as a debit and once as a
credit. Debits are always put on the left hand side of a
bookkeeping system. Credits are always put on the right hand side
of a bookkeeping system The Balance is what is left after the debit
total has been subtracted from the credit total.
- Slide 24
- 24 Accounts The following pages are typical of those found in a
Double Entry Accounting system: Cash Stock Capital Trade Creditors
Trade Debtors Cost of Sales Sales Can you explain what each of
these Accounts are for? Answer
- Slide 25
- 25 Accounts Pages typically found in a Double Entry System:
Cash Money available in bank & petty cash Stock Goods which can
be sold for profit. Capital The owners investment in the business
Trade Creditors The people we owe money to Trade Debtors The people
who owe us money Sales How much we get for selling things Cost of
Sales The amount we paid for the things we sell.
- Slide 26
- 26 Examples of Bookkeeping Entries On these slides you will see
the following: Bookkeeping pages: Left & Right Bookkeeping
pages: Credit & Debit Example of Double Entry Activity 3.2
- Slide 27
- 27 Bookkeeping Pages: Left & Right On the Left is shown the
money which has come into that account. Each page shows a separate
Account On the Right is shown the money which has gone out of that
account. IN OUT
- Slide 28
- 28 Bookkeeping Pages Transaction Examples 5000 comes into the
Cash Account; its partner transaction will be found in the the
Capital Account, which will be debited by 5000. These are shown as
Debits and Credits 600 goes out of the Cash Account; its partner
transaction will be found in the the Stock Account, which will be
credited by 600.
- Slide 29
- 29 Bookkeeping Pages Example of Double Entry EXAMPLE: Stock is
bought for a cash payment of 600 EXAMPLE: Stock is bought for a
cash payment of 600 We reduce Cash by 600; this is shown on the
right in the Cash Account, as it is money going out of the account.
The money goes to Stock, so we Credit Stock by 600 We increase
Stock by 600; this is shown on the left in the Stock Account, as it
is money coming into the account. The money comes from Cash, so we
Debit Cash by 600
- Slide 30
- 30 Activity 3.2 Examine the entry for 18-Jan. What exactly is
the transaction? Where will its partner be found? Answer
- Slide 31
- 31 Activity 3.2 Solution Transaction: Receive 800 Cash from
Trade Debtors Transaction: Receive 800 Cash from Trade Debtors
Partner to 18-Jan entry on CASH Page: On the Trade Debtors page, we
show that Cash has been credited with 800 Partner to 18-Jan entry
on CASH Page: On the Trade Debtors page, we show that Cash has been
credited with 800
- Slide 32
- 32 Selling for Cash A More Complex Example When we sell
something for Cash, we have two different Double Entries to make.
This is because we have two different amounts: The amount we sell
for The amount we originally bought it for. Each of these requires
two entries to balance it. Original Purchase Price This is entered
in Cost of Sales and Stock Selling Price This is entered in Sales
and Cash
- Slide 33
- 33 Sales Page: Sales of 800 goes out (right hand side) Reads as
Credit Cash by 800 Sales Page: Sales of 800 goes out (right hand
side) Reads as Credit Cash by 800 Sales Example : Recording the
Selling price We sell goods for Cash to the value of 800, which we
originally bought for 750. The entries are recorded as follows:
Cash Page: Cash of 800 comes in (left hand side) Reads as Debit
Sales by 800 Cash Page: Cash of 800 comes in (left hand side) Reads
as Debit Sales by 800
- Slide 34
- 34 Stock: Stock of value 800 goes out (right hand side) Reads
as Credit Cost of Sales by 750 Stock: Stock of value 800 goes out
(right hand side) Reads as Credit Cost of Sales by 750 Sales
Example : Recording the Purchase Price We sell goods for Cash to
the value of 900, which we originally bought for 750. The entries
are recorded as follows: Cost of Sales: Cost of Sales increased by
750 (left hand side) Reads as Debit Stock by 750 Cost of Sales:
Cost of Sales increased by 750 (left hand side) Reads as Debit
Stock by 750
- Slide 35
- 35 Activity 3.3 An antique dealer buys a table for 3750 and
sells it on to retailer in a City Centre shop for 4500 on trade
credit. 1.What pages will the dealer use to record this
transaction, and why? 2.What are the amounts and on which sides
will they be recorded? Answer
- Slide 36
- 36 Activity 3.3 Solution (1) An antique dealer buys a table for
3750 and sells it on to retailer in a City Centre shop for 4500 on
credit. 1.The Pages used will be: Trade Debtors (the retailer will
owe the dealer money), Sales (obvious something is being sold!)
Cost of Sales (to account for the original purchase price) Stock
(the table is part of the dealers stock)
- Slide 37
- 37 Activity 3.3 Solution (2) An antique dealer buys a table for
3750 and sells it on to retailer in a City Centre shop for 4500 on
trade credit. 2. The Entries will be : Trade Debtors Page: (On
Left) debit Sales by 4500 Sales Page: (On Right) credit Trade
Debtors by 4500 Cost of Sales Page: (On left) debit Stock by 3750
Stock Page: (On right) credit Cost of Sales by 3750
- Slide 38
- 38 Part 3c Follow-Up Activities Cash Book
- Slide 39
- 39 Cash Book This activity practises and develops some of the
skills necessary to understand the principles behind double entry
bookkeeping. The material all comes from M & A Appendix A pp
546- 558, and you should begin by reading this. Next you should
download the Word Document: CashBook Activity. This will take you
through the Activity step-by-step. You may find that you will need
to refer to M & A from time to time.
- Slide 40
- 40 Cash Book Next, from the Website, Download the CashBook
spreadsheet. When you try to open this, you will normally get a
message telling you that the spreadsheet contains Macros. Click on
Enable Macros.
- Slide 41
- 41 CashBook Spreadsheet The details of how the Spreadsheet
works are given in the CashBook Activity document. You will find
that there are several features (buttons & lists) which will
help you complete the activity
- Slide 42
- 42 Seminar Preparation Cash Book Activity takes you through the
full set of tasks for preparing a balance sheet for January. For
the next Seminar, you should come prepared with the full details of
how you dealt with the February Transactions. These are given at
the end of Cash Book Activity.