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Slide 5.1
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Chapter 5
Accounting information for service businesses
Slide 5.2
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
Assets denotes a decrease in an asset
Liabilities denotes an increase in a liability
Assets – Liabilities = Ownership interest
Accounting equation
Slide 5.3
Pauline Weetman, Financial and Management Accounting, 5th 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, 5th 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, 5th 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, 5th edition © Pearson Education 2011
transaction A – 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, 5th 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
creditors
Slide 5.8
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
transaction A – L = OI
Pay employee cash expense
Four patients are examined, each paying £500 cash
cash revenue
The business pays cash for goods acquired on credit
cash Creditors
The business pays an electricity bill in cash
cash expense
Dr Lee’s medical practice (Continued)
Slide 5.9
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
transaction A – L = OI
Pay employee cash expense
Three patients examined, invoice sent requesting payment
trade receivables (debtors)
revenue
Pay employee cash expense
Cash for the examination of three patients
cashdebtors
Dr Lee’s medical practice (Continued)
Slide 5.10
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
transaction A – L = OI
Four patients areexamined; invoice sent requesting payment
trade receivables (debtors)
revenue
Dr Lee draws cashfrom the business for personal use
cash drawings
Pay employee cash expenses
The medical equipment and office furniture is estimated to have fallen in value
fixed assets expenses
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, 5th 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, 5th edition © Pearson Education 2011
Chapter 5
Bookkeeping Supplement
Slide 5.13
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
DEBIT ENTRIES CREDIT ENTRIES
Left-hand side of the equation
Asset Increase Decrease
Right-hand side of the equation
Liability Decrease Increase
Ownership interest Expense Revenue
Capital withdrawn Capital 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, 5th edition © Pearson Education 2011
Transaction Aspects 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, 5th edition © Pearson Education 2011
Oct Transactions Amount Debit Credit
£
1 Cash to allow business to start
50,000 Cash Owner
2 Medical equipment bought for cash
30,000 Equipment
Cash
2 One month’s rent 1,900 Rent Cash
2 Office furniture bought on credit
6,500 Furniture Office 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, 5th edition © Pearson Education 2011
Debit and credit transactions of medical practice (Continued)
7 Purchase medical supplies on credit
1,200 Inventory (stock)
P. Jones
8 Pay employee 300 Wages Cash
10 Four patients are examined, each paying £500 cash
2,000 Cash Patients’ 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, 5th edition © Pearson Education 2011
11 The business pays cash for goods acquired on credit
1,200 P. Jones Cash
14 The business pays an electricity bill in cash
100 Electricity Cash
15 Pay employee 300 Wages Cash
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, 5th edition © Pearson Education 2011
17 Three patients examined, invoice sent requesting payment
1,500 Mrs West Fees
22 Pay employee 300 Wages Cash
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, 5th edition © Pearson Education 2011
23 The employer (Mrs West) pays in cash for the examination of three patients
1,500 Cash Mrs West
24 Four patients are examined, invoice sent requesting payment
2,000 Mr East Fees
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, 5th edition © Pearson Education 2011
28 Dr Lee draws cash from the business for personal use
1,000 Owner Cash
29 Pay employee 300 Wages Cash
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, 5th edition © Pearson Education 2011
31 The medical equipment and office furniture is estimated to have fallen in value
250 Depreciation Equipment and furniture
31 Medical supplies costing £350 have been used
350 Medical 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, 5th edition © Pearson Education 2011
DATE PARTICULARS PAGE DEBIT CREDIT BALANCE
£ p £ p £ p
Three-column ruling for ledger account
Slide 5.23
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
DEBIT ENTRIES CREDIT ENTRIES
DATE PARTIC-ULARS
PAGE £ p DATE PARTIC-ULARS
PAGE £ p
Balance
T-Account form of ledger account
Slide 5.24
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
L1 Cash L8 Inventory (stock) of medical supplies
L2 Ownership interest L9 P. Jones
L3 Medical equipment and office furniture
L10 Electricity
L4 Office Supplies Company L11 Mrs West
L5 Rent L12 Mr East
L6 Wages L13 Depreciation
L7 Patients’ fees L14 Expense of medical supplies
Ledger account titles
Slide 5.25
Pauline Weetman, Financial and Management Accounting, 5th edition © Pearson Education 2011
L1 CASH
DATEPARTICULARS PAGE DEBIT CREDIT BALANCE
£ £ £
Oct 1 Owner’s capital L2 50,000 50,000
L2 OWNERSHIP INTEREST
DATEPARTICULARS PAGE DEBIT CREDIT BALANCE
£ £ £
Oct 1 Cash L1 50,000 (50,000)
Dr Lee, Transaction 1
Slide 5.26
Pauline Weetman, Financial and Management Accounting, 5th 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, 5th 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, 5th 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).