Understand Accounting   From How to Why
Agenda <ul><li>Double Bookkeeping System </li></ul><ul><li>Balance Sheet and </li></ul><ul><li>Profit Loss Statement  </li...
History of Accounting  Renaissance Yoshi pays $100 Receives $200  Paragraph:  Formulation:  100 200 Abstraction:  200 – 10...
Double Bookkeeping  System <ul><li>Recording  </li></ul><ul><li>Tracking </li></ul><ul><li>Calculating </li></ul><ul><li>R...
Account Origin (1) Ancient Rome (Account : Personal) Slave Master Investment Master Own Money Segregation ! Investment Ass...
Account Origin (2) Post – Industrial Revolution (Account : Impersonal) Equity Cash Factory Material Labour Process Product...
Book Structure Account A Account B Ledger  X Account C Account D Ledger  Y Books Journal / Day Book  (Diaries) Posting Pos...
Journal /  Day Book Posting To SL: Sales Ledger One Source to One Posting =  Traceability !! Source Documents 100 SL 15 10...
 
 
Posting Rules <ul><li>Post Same Amount to both Debit and Credit </li></ul><ul><li>e.g.  Dr C Knight  A/c  300  </li></ul><...
Five Accounts (Cycle) (Introduction to Financial Statements) Liability Equity 1 2 Expense Income 3 4 Profit Asset
Which Account ? (1) Liability Equity Expense Income Out  In Stock Flow Asset
Which Account ? (2) - B/S P/L + Debit Credit Asset - + Debit Credit Expense - + Debit Credit Income - + Debit Credit Liabi...
Which Account ? (3) B/S P/L Asset Expense Income Liability/Equity • Account Payable • Borrowing  • Capital, etc • Cash/Ban...
Profit Calculation Start End Liability Asset Profit = - Income - Expense = Profit Income - Expense = Profit Income - Expen...
Accounting Equation   (1) <ul><li>Balance Sheet  (BS)  Accounts: </li></ul><ul><li>Asset  –  Liability  =  Equity </li></u...
Accounting Equation (2) <ul><li>Profit and Loss  (PL)  Accounts: </li></ul><ul><li>Income  –  Expense  =  Profit ( Loss ) ...
Accounting Equation (3) <ul><li>B/S and P/L: </li></ul>Equity Liability Asset Income Profit Expense Equity Liability Asset...
Posting for Allocation (1) Cash Outflow Cash Inflow Accrual Deferral A B C D Depreciation Provision (Payables) Unbilled In...
Posting for Allocation (2) A C D B Income  Asset Income  Liability Inflow Expense  Liability Expense  Asset  Outflow Accru...
Posting for Disclosure Asset Asset Income Expense Asset No Cash flow !! Market Value
Accounting Evolution/ Profession <ul><li>18 th  - 19 th  Century </li></ul><ul><li>South Sea Bubble  > >  Audit </li></ul>...
Key Questions <ul><li>Equity is Corporate Value ? </li></ul><ul><li>Profit is distributable ? </li></ul><ul><li>Does Asset...
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Understand Accouting (Mechanical Approach)

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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.html

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Understand Accouting (Mechanical Approach)

  1. 1. Understand Accounting From How to Why
  2. 2. Agenda <ul><li>Double Bookkeeping System </li></ul><ul><li>Balance Sheet and </li></ul><ul><li>Profit Loss Statement </li></ul>Slide No. 3-11 Slide No. 12-22
  3. 3. History of Accounting Renaissance Yoshi pays $100 Receives $200 Paragraph: Formulation: 100 200 Abstraction: 200 – 100 =100 Math Account summa de arithmetica geometria proportioni et proportionalita By Luca Pacioli Picture Source : http://en.wikipedia.org/wiki/Luca_Pacioli
  4. 4. Double Bookkeeping System <ul><li>Recording </li></ul><ul><li>Tracking </li></ul><ul><li>Calculating </li></ul><ul><li>Reporting </li></ul><ul><li>Validating </li></ul><ul><li>In one format ! </li></ul>
  5. 5. Account Origin (1) Ancient Rome (Account : Personal) Slave Master Investment Master Own Money Segregation ! Investment Asset Liability Asset Liability
  6. 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
  7. 7. Book Structure Account A Account B Ledger X Account C Account D Ledger Y Books Journal / Day Book (Diaries) Posting Posting
  8. 8. Journal / Day Book Posting To SL: Sales Ledger One Source to One Posting = Traceability !! Source Documents 100 SL 15 10004 15 C Knight 200 SL 21 10003 10 D Mike 100 SL 15 10002 5 C Knight 100 SL 15 10001 1 C Knight Amount $ Folio Invoice No 2010 August Sales Day Book (Page 10)
  9. 11. Posting Rules <ul><li>Post Same Amount to both Debit and Credit </li></ul><ul><li>e.g. Dr C Knight A/c 300 </li></ul><ul><li>Cr Sales 300 </li></ul><ul><li>or </li></ul><ul><li>Dr C Knight A/c 300 </li></ul><ul><li> D Mike A/c 200 </li></ul><ul><li> Cr Sales 500 </li></ul><ul><li>That is why, Trial Balance (TB) should balance </li></ul><ul><li>( XXX =XXX ) </li></ul>Bal of A/c 11 Bal of A/c 12 Bal 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
  10. 12. Five Accounts (Cycle) (Introduction to Financial Statements) Liability Equity 1 2 Expense Income 3 4 Profit Asset
  11. 13. Which Account ? (1) Liability Equity Expense Income Out In Stock Flow Asset
  12. 14. Which Account ? (2) - B/S P/L + Debit Credit Asset - + Debit Credit Expense - + Debit Credit Income - + Debit Credit Liability/Equity
  13. 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
  14. 16. Profit Calculation Start End Liability Asset Profit = - Income - Expense = Profit Income - Expense = Profit Income - Expense = Profit Voyage, Caravan (Before Industrial Revolution) On-Going (After Industrial Revolution)
  15. 17. Accounting Equation (1) <ul><li>Balance Sheet (BS) Accounts: </li></ul><ul><li>Asset – Liability = Equity </li></ul>Asset Liability Equity Liability Equity Asset Liability Equity Asset
  16. 18. Accounting Equation (2) <ul><li>Profit and Loss (PL) Accounts: </li></ul><ul><li>Income – Expense = Profit ( Loss ) </li></ul>Income Profit Expense Expense Loss Income
  17. 19. Accounting Equation (3) <ul><li>B/S and P/L: </li></ul>Equity Liability Asset Income Profit Expense Equity Liability Asset Income Expense Year 2009 Year 2010 Yr 2009 Profit = $100 Yr 2009 Equity = $500 Yr 2010 Equity = $600
  18. 20. Posting for Allocation (1) Cash Outflow Cash Inflow Accrual Deferral A B C D Depreciation Provision (Payables) Unbilled Income (Receivables) Unearned Income
  19. 21. Posting for Allocation (2) A C D B Income Asset Income Liability Inflow Expense Liability Expense Asset Outflow Accrual Deferral
  20. 22. Posting for Disclosure Asset Asset Income Expense Asset No Cash flow !! Market Value
  21. 23. Accounting Evolution/ Profession <ul><li>18 th - 19 th Century </li></ul><ul><li>South Sea Bubble > > Audit </li></ul><ul><li>East Indian Company > > Yearly Profit / Loss </li></ul><ul><li>Railway /Canal > > Fixed Asset /Depreciation </li></ul><ul><li>Industrial Revolution >> Cost Concept </li></ul><ul><li>20 th Century </li></ul><ul><li>Financial Markets >> Mark to Market </li></ul><ul><li>21 th Century </li></ul><ul><li>WorldCom >> Sarbanes–Oxley Act (SOX) </li></ul>
  22. 24. Key Questions <ul><li>Equity is Corporate Value ? </li></ul><ul><li>Profit is distributable ? </li></ul><ul><li>Does Asset have “reality“ ? </li></ul>
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