Introduction to double entry bookkeeping.ofp

copyright © 2012 Kaung Myat Tun
www.kaungmyattun.com

BUSINESS ACCOUNTING

Part 1
Introduction to
Double Entry Bookkeeping


Contents
1. Accounting Equation and Balance sheet
2. Double Entry System
3. Inventory
4. Effect of Profit or loss
5. Balancing-off accounts
6. The trial balance

2


Contents
1. Accounting Equation and Balance sheet
2. Double Entry System
3. Inventory
4. Effect of Profit or loss
5. Balancing-off accounts
6. The trial balance

3


1. Accounting Equation and Balance Sheet

● What is accounting?

Process

Identifying
Economic Judgements
Measuring
Information Decisions
Communicating

4



● What is the objectives of accounting?
Letting people and organizations know:

1. If you are making a profit or a loss;

2. What your business is worth;

3. What a transaction was worth to you;

4. How much cash you have;

5. How wealthy you are;

6. How much you are owed;

7. How much you owe to someone else;

8. Enough information so that you can keep a financial check on the things you do.

To provide information for decision-making!
5



● Who use accounting information?
1. Managers : Day-to-day decision-makers; need to know how well things are progressing financially and
about the financial status of the business.

2. Owner(s) of the business : whether or not the business is profitable; what are financial resources.

3. Bank : if you are thinking to borrow money from there.

4. Tax inspectors : to calculate the taxes payable

5. Partner : when sharing ownership with someone else

6. Investors : whether or not to invest their money in the business

Stakeholders

owner Partner employee directors

managers

inspectors
Bank buyers shareholders
Etc.

Investors suppliers

6



● Accounting Equation
Resources Resources
=
supplied by the owner supplied by the owner

Capital = Assets

Capital = Assets - Liabilities

Assets = Capital + Liabilities

Resources : Resources :
=
what they are who supplied them 7



● Balance Sheet &
Effects of Business Transactions
Accounting equation is expressed in a financial position statement called the balance sheet. The balance
sheet shows the financial position of an organization at a point in time. The balance sheet is not the first
accounting record to be made, nor the first that you will learn how to do, but it is a convenient place to start to
consider accounting.

Let's look at how a series of transactions affects the balance sheets.

8



● Balance Sheet &
1. The introduction of capital
On 1 May 2012, Kaung started in business and deposited $60,000 into a bank account opened espically for
the business. The balance sheet would show:

Note how the top part of the balance sheet contains the assets and the bottom part contains the capital. This
is always the way the transacction is presented in a balance sheet.

9



● Balance Sheet &
2. The purchase of asset by cheque
On 3 May 2012, Kaung buys a small shop for $32,000 paying by cheque. The effect of this transaction on the
balance sheet is that the cash at the bank is decreased and the new asset, building, is added.

Note how the two parts of the balance sheet 'balance'. That is, their totals are the same. This is always the
case with balance sheets.

10



● Balance Sheet &
3. The purchase of an asset and the incurring of a liability
On 6 May 2012, Kaung buys some goods for $7,000 from Htun Lin(Creditor), and agrees to pay for them
some time within the next two weeks. The effect of this is that a new asset, inventory, is acquired, and the
liability for the goods is created.

Note how the liability (the account payable) is shown as a deduction from the assets. This is exactly the same
calculation as is presented in the most common form of the accounting equation. 11



● Balance Sheet &
4. Sale of an asset on credit
On 10 May 2012, goods which cost $600 were sold to Chit Hein(Debtor) for the same amount, the money to
be paid later. The effect is reduction in the stock of goods and creation of a new asset.

12



● Balance Sheet &
5. Sale of an asset for immediate payment
On 13 May 2012, goods which cost $400 were sold to Thura for the same amount. Thura paid for them
immediately by cheque. Here one asset, inventory, is reduced, while another asset, cash at bank, is
increased.

13



● Balance Sheet &
6. The payment of a liability
On 15 May 2012, Kaung pays a cheque for $3,000 to Htun Lin(Creditor) in part payment of the amount owing.
The asset of cash at bank is therefore reduced, and the liability to the creditor is also reduced.

Note how the total of each part of the balance sheet has not changed. The business is still worth $60,000 to 14
the owner.



● Balance Sheet &
7. Collection of an asset
Chit Hein(Debtor), who owned Kaung $600, makes a part payment of $200 by cheque on 31 May 2012. The
effect is to reduce one asset, account receivable, and to increase another asset, cash at bank.

15



● Equality of the accounting equation
• Every transaction has affected two items
• Sometimes, it has changed two assets by reducing one and increasing the other (effect has been different)
• No change was made to the total of either section of the balance sheet (except start up time)
• Equality between their two totals has been maintained

16



• The effect of each of these seven accounting transaction actions upon the two sections of the balance sheet
is shown below:

Number of Assets Capital and Effect on balance sheet totals
transaction as Liabilities
above
1 + + Each side added to equally
2 + A plus and a minus both on the assets side
- cancelling each other out
3 + + Each side has equal additions
6 - - Each side has equal deductions

17



• The effect of each of these seven accounting transaction actions upon the two sections of the balance sheet
is shown below:

Example of transaction Effect
(1) Owner pays capital into the bank ↑ Increase asset (Bank) ↑ Increase capital
(2) Buy inventory by cheque ↓Decrease asset (Bank) ↑ Increase asset (Inventory)
(3) Buy inventory on credit ↑ Increase asset (Inventory) ↑ Increase liability (Accounts payable)
(4) Sale of inventory on credit ↓Decrease asset (Inventory) ↑ Increase asset (Accounts receivable)
(5) Sale of inventory for cash (cheque) ↓Decrease asset (Inventory) ↑ Increase asset (Bank)
(6) Pay creditor ↓Decrease asset (Bank) ↓Decrease liability (Accounts payable)
(7) Debtor pays money owing by cheque ↑ Increase asset (Bank) ↓Decrease asset (Accounts receivable)
(8) Owner takes money out of the ↓Decrease asset (Bank) ↓Decrease capital
business bank account for own use
(9) Owner pays creditor from private ↓Decrease liability ↑ Increase capital
money outside the firm (Accounts payable)

The last two types of transactions do cause the totals of each part of the balance sheet to change (as did 18
the very first, when capital was introduced to the business by the owner.) When the capital changes, the
totals of the two parts of the balance sheet both change.



● More detailed presentation of the balance sheet

19



● Learning outcomes
• Accounting is concerned with the recording, classifying and summarizing of data and then communicating
what has been learnt from it.
• It may not only be the owner of a business who will need the accounting information. It may need to be shown
to others, e.g. the bank or the Inspector of Taxes.
• Accounting information can help the owner(s) of a business to plan for the future.
• The accounting equation is : Capital = Assets – Liabilities.
• The two sides of the accounting equation are represented by the two parts of the balance sheet.
• The total of one part of the balance sheet should always be equal to the total of the other part.
• Every transaction affects two items in the accounting equation. Sometimes that may involve the same item
being affected twice, once positively (going up) and once negatively (going down).
• Every transaction affects two items in the balance sheet.
• Capital will be reduced if a business makes a loss. The loss means that assets have been reduced and
capital is reduced by the same amount so as the maintain the balance in the accounting equation.
• In accounting, we always use brackets to indicate negative numbers.
20



● Review questions
1. Complete the gaps in the following table:

Assets Liabilities Capital
$ $ $
(a) 12,500 1,800
(b) 28,000 4,900
(c) 16,800 12,500
(d) 19,600 16,450
(e) 6,300 19,200
(f) 11,650 39,750

21



2. Which of the items in the following list are liabilities and which of them are assets?

(a) Loan to Yan Lin Aung

(b) Bank overdraft

(c) Fixtures and fittings

(d) Computers

(e) We owe a supplier for inventory

(f) Warehouse we own

(g) Cash in hand

(h) Loan from Thura Minn Minn

(i) Machinery

22



3. State which of the following are wrongly classified:

Assets Liabilities

_____________________________________________________________________________

Loan from Aung Thu Hein Inventory

Cash in hand Accounts receivable

Machinery Money owing to bank

Accounts payable

Premises

Motor vehicles

23



4. Ye Naing Tun is setting up a new business. Before actually selling anything, he bought a van for
$4,500, a market stall for $2,000 and an inventory of goods for $1,500. He did not pay in full for his
inventory of goods and still owes $1,000 in respect of them. He borrowed $5,000 from Kaung. After the
events just described, and before tradeing starts, he has $400 cash in hand and $1,100 cash at bank.
Calculate the amount of his capital

5. Draw up Toyota's balance sheet from the following information as at 31 December 2011:

$
Capital 9,700

Accounts receivable 1,200

Van 3,800

Accounts payable 1,600

Fixtures 1,800

Inventory 4,200

Cash at bank 300

24



6. Complete the columns to show the effects of the following transactions:

Effect upon
Assets Libilities Capital
(a) We pay a creditor $70 in cash.
(b) Bought fixtures $200 paying by cheque
(c) Bought goods on credit $275
(d) The proprietor introduces another $500 cash into the business
(e) Htun Lin lends the business $200 in cash
(f) A debtor pays us $50 by cheque
(g) We return goods costing $60 to a supplier whose bill we had not
paid
(h) Bought additional shop premises paying $5,000 by cheque.

25



7. Zaw Myo Htet has the following items in his balance sheet as on 30 April 2012: Capital $18,400:
Accounts payable $2,100; Fixtures $2,800; Car $3,900; Inventory $4,550; Accounts receivable $2,780;
Cash at bank $6,250; Cash in hand $220.

During the first week of May 2012

(a) He bought extra inventory for $400 on credit.

(b) One of the debtors paid him $920 by cheque.

(c) He bought a computer by cheque $850.

You are asked to draw up a balance sheet as on 7 May 2012 after the above transactions have been
completed.

26



● Glossary
• Account payable (Creditor) : A person to whom money is owned for goods is known in accounting language
as a creditor.
• Account receivable (Debtor) : A person who owes the business money is known in accounting language as
a debtor.
• Assets : Resources owned by a business.
• Balance sheet : A statement showing the assets, liabilities and capital of a business.
• Bookkeeping : The process of recording data relating to accounting transactions in the accounting books.
• Capital : The total of resources invested and left in a business by its owner.
• Equity : Another name for the capital of the owner.
• Inventory : Goods in which the business normally deals that are held with the intention of resale. They may
be finished goods, partly finished goods or raw materials awaiting conversion into finished goods which will
then be sold.
• Liabilities : Total of funds owed for assets supplied to a business or expenses incurred not yet paid.

27



● Glossary
• Non-current assets (fixed assets) : are assets which have a long life bought with the intention to use them
in the business and not with the intention to simply resell them, e.g. buildings, machinery, fixtures, motor
vehicles.
• Current assets : are assets consisting of cash, goods for resale or items having a short life (i.e. no more than
a year remaining on the date of the balance sheet). For example, the value of inventory in hand goes up and
down as it is bought and sold. Similary, the amount of money owing to us by debtors will change quickly, as
we sell more to them on credit and they pay their debts. The amount of money in the bank will also change as
we receive and pay out money.
• Current liabilities : are those liabilities which have to be paid within no more than a year from the date on the
balance sheet, e.g. accounts payable for goods purchased.

28



● Reference
• Frank Wood's BUSINESS ACCOUNTING 1 eleventh edition

29

Introduction to double entry bookkeeping.ofp

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