INTRODUCTION TO FINANCIAL ACCOUNTING2nd Lecture

Janice Rhea P. Cabacungan

Objectives:1. Discussed history of accounting 2. Define Bookkeeping 3. Identify and differentiate bookkeeping systems - Single Entry System - Double Entry System 4. Florentine vs. Valentine Approach 5. Accounting Elements or values 6. Book of Accounts 7. Accounts 8. T-Accounts

History of Accountingy

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the earliest accounting records were found amongst the ruins of ancient Babylon, Assyria and Sameria, which date back more than 7,000 years. The people of that time relied on primitive accounting methods to record the growth of crops and herds. Because there is a natural season to farming and herding, it is easy to count and determine if a surplus had been gained after the crops had been harvested or the young animals weaned. Accounting tokens made of clay, from Susa, Uruk period, cira 3500 BCE. Department of Oriental Antiquities, Louvre. The invention of a form of bookkeeping using clay tokens represented a huge cognitive leap for mankind.

Accounting tokens made of clay, from Susa, Uruk period, cira 3500 BCE. Department of Oriental Antiquities, Louvre.

Economic tablet with numeric signs. Proto-Elamite script in clay, Susa, Uruk period (3200 BC to 2700 BCE). Department of Oriental Antiquities, Louvre.

Globular token envelope with a cluster of accounting tokens. Clay, Susa, Uruk period (4000 to 3100 BCE). Department of Oriental Antiquities, Louvre.

Part of the Res Gestae Divi Augusti from the Monumentum Ancyranum (Temple of Augustus and Rome) at Ancyra, built between 25 BCE - 20 BCE.

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The Res Gestae Divi Augusti (Latin: "The Deeds of the Divine Augustus") is a remarkable account to the Roman people of the Emperor Augustus' stewardship. It listed and quantified his public expenditure, which encompassed distributions to the people, grants of land or money to army veterans, subsidies to the aerarium (treasury), building of temples, religious offerings, and expenditures on theatrical shows and gladiatorial games. It was not an account of state revenue and expenditure, but was designed to demonstrate Augustus' munificence.

Roman writing tablet from the Vindolanda Roman fort of Hadrian's Wall, in Northumberland (1st-2nd century AD) requesting money to buy 5,000 measures of cereal used for brewing beer. Department of Prehistory and Europe, British Museum.

Evolvement of Double entry SystemThe early history of the double entry booking cannot be traced with much accuracy. The earliest known examples of this technique are the mercantile of Feris Bonis of Montauban, dated 1339 However, the evolution of the double entry bookkeeping has an Italian influence in the 13th to 15th century. Evidence?

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The book of Massari (treasury Officials) ledgers of Commune of Genoa written in 1340. These books were known the as a perfect double entry form because separate pages were used for debit and credit.

Presently known if as simplified T account or if expanded is called Ledger

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In Florence, there were double entry records wherein debits were written over credits. It is also in Florence that manuscripts of Partnership and Association Contracts reflecting how partners capital, division of profit and losses, and dissolution of partnership were computed. In the present system, the florentine method is observed in Journal entries.

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Venice of Northern Italy had key influence in the use of the double entry system in 1400s. y Luca Pacioli "Summa de Arithmetica, Geometria, Proportioni et Proportionalit" (Italian: "Review of Arithmetic, Geometry, Ratio and Proportion") was first printed and published in Venice in 1494. It included a 27-page treatise on bookkeeping, "Particularis de Computis et Scripturis" (Italian: "Details of Calculation and Recording"). It was written primarily for, and sold mainly to, merchants who used the book as a reference text, as a source of pleasure from the mathematical puzzles it contained, and to aid the education of their sons. It represents the first known printed treatise on bookkeeping; and it is widely believed to be the forerunner of modern bookkeeping practice. In Summa Arithmetica, Pacioli introduced symbols for plus and minus for the first time in a printed book, symbols that became standard notation in Italian Renaissance mathematics. Summa Arithmetica was also the first known book printed in Italy to contain algebray

In this book, Pacioli introduced three important books of records: 1. Memorandum Books for all information on a transaction; 2. Journal Book the original entry; 3. Ledger Book the book for final entry. For this reason Pacioli is known as the Father of Accounting, though he was neither an accountant nor a merchant

SAVARY COMMERCIAL CODE(Historical Cost Method of Accounting

Jacques Savary, (1622-1690) belong to a noble French Family devoted to trade and to publication of works on commercial matters. y He is known as the chief architect of the Commercial Code of France in 1673 (called Code of Savary)which generally uses historical cost as the basis of valuation.y

NAPOLEON COMMERCIAL CODEFair Value Method in accounting

Napoleon Bonapartes codification of the Frances Civil Law named Code of Napoleon was enforced on March 21, 1804. y Three years later (1807), the Code of Commerce was enacted as supplement to Code of Napoleon. It regulated commercial transactions, laws of business, bankruptcies and the courts jurisdiction and procedures dealing with this subjects.y

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The Code of Commerce does not provide for any rule of valuation but gives in notes and examples of inventory in which it is said that assets must be carried at their market value on the day of inventory and not on the basis of historical cost.

BOOKKEEPING IS THE RECORDING OF FINANCIAL TRANSACTIONS. TRANSACTIONS INCLUDE SALES, PURCHASES, INCOME, AND PAYMENTS BY AN INDIVIDUAL OR ORGANIZATION.

Bookkeeping systemsy

Two common bookkeeping systems used by businesses and other organizations are the singleentry bookkeeping system and the doubleentry bookkeeping system. SINGLE-ENTRY BOOKKEEPING uses only income and expense accounts, recorded primarily in a revenue and expense journal. Single-entry bookkeeping is adequate for many small businesses. DOUBLE-ENTRY BOOKKEEPING requires posting (recording) each transaction twice, using debits and credits.

SingleSingle-entry systemy

The primary bookkeeping record in single-entry bookkeeping is THE CASH BOOK, which is similar to a checking (chequing) account register but allocates the income and expenses to various income and expense accounts. Separate account records are maintained for petty cash, accounts payable and receivable, and other relevant transactions such as inventory and travel expenses. These days, single entry bookkeeping can be done with DIY bookkeeping software to speed up manual calculations.

Sample revenue and expense journal for singlesingle-entry bookkeeping

The double-entry bookkeeping doublesystemy

was codified in the 15th century and refers to a set of rules for recording financial information in a financial accounting system in which every transaction or event changes at least two different accounts. In modern accounting this is done using debits and credits within the accounting equation: Equity = Assets - Liabilities. The accounting equation serves as a kind of error-detection system: if at any point the sum of debits does not equal the corresponding sum of credits, an error has occurred.

The Florentine Approach of double entry in Journal EntriesGeneral Journal Page Number 01 Date 2010 Descriptions PR Debit Credit

2-JanCash X, Capital To record the initial investment of the owner

50,000.00 50,000.00

The Venetian Approach of double entry gave emphasis on Ledger Posting which is simplified in T-account TGENERAL LEDGER

Account: Owner's Equity

Accounts No. 70

Date

Item

PR

Dr

Date 2010

Item

PR

Cr

2-JanInitial Investment

GJ1

50,000.00

GENERAL LEDGER Account: Cash Accounts No. 01

Date 2010

Item

PR

Dr

Date

Item

PR

Cr

2-JanInitial Investment

GJ1

50,000.00

Florentine vs Venetian ApproachIn the 14th Century, Amatino Manucci, the inventor of double entry bookkeeping and partner of a merchant partnership called Giovanni Farolfe & Company in Florence, introduced the Florentine Approach(known as Journal entries) y This method records each transaction twice in at least one account being debited and at least one account credited, with the total debits of the transaction equal to total credits.y

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The Venetian approach ( known as the ledger posting ), were accounts are recoded in bilateral forms, with debits recorded on the left side of the page across form credits. It points to highly evolved system using several books, carefully cross indexed and coordinated to form a coherent whole. This was introduced by merchant Andrea Bargarigo (1418-1449).

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Accounting Elements or ValuesAssets y Liabilities y Capitaly

Assetsy

These are property or rights owned or possessed by the business.

Liabilitiesy

Financial obligations or debts owing to persons other than the owner or owners.

Capitaly

Equity or share of the owner or owners in the property or rights on the property of the business.

Book of Accountsy

Journal - the book of original entry, is an accounting book that is used to initially record business transactions and events. The ledger known as the book of final entry, because the balances of accounts contained in it are used to prepare the financial reports.

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Accounty

An accounting form of record in which the effect of the similar business transactions are grouped or classified. This is an accounting device to record the increases or decreases of a specific asset, liability, owner equity, revenue or expense

The T-account TAn account may be expressed in a T device form where debits are recorded on the left side and credits are recorded on the right side. y CASHy y

Debit

Credit

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To debit is to record the value received in an economic transaction. The credit is to record the value parted with in an economic transaction * For every transaction, the value received there is always value parted with.

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