The accounting Equation and the Balance Sheet.

1. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.1
FRANK WOOD’S
BUSINESS ACCOUNTING 1
TWELFTH EDITION

2. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.2
CHAPTER 1
THE ACCOUNTING EQUATION
AND THE STATEMENT OF
FINANCIAL POSITION

3. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.3
LEARNING OBJECTIVES
After you have studied this chapter, you should be able to:
• Explain what accounting is about
• Briefly describe the history of accounting
• Explain the relationship between bookkeeping and accounting
• List the main users of accounting information and what
accounting information they are interested in

4. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.4
LEARNING OBJECTIVES (CONTINUED)
• Present and explain the accounting equation
• Explain the relationship between the accounting equation and
the layout of the statement of financial position (balance sheet)
• Explain the meaning of the terms assets, capital, liabilities,
accounts receivable (debtors) and accounts payable (creditors)

5. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.5
LEARNING OBJECTIVES (CONTINUED)
• Describe how accounting transactions affect the items in the
accounting equation
• Draw up statements of financial position after different
accounting transactions have occurred

6. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.6
QUESTION
• What do you think of when you read or hear the word,
‘accounting’?
• What do you believe it means or represents?
• If you were studying a new language, what strategy would
you employ?

7. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.7
WHAT IS ACCOUNTING?
Accounting can be defined as:
The process of identifying, measuring and communicating
economic information to permit informed judgements and
decisions by users of that information.

8. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.8
THE HISTORY OF ACCOUNTING
• Accounting has existed for at least 10,000 years, with early
records indicating its use in Mesopotamia.
• The “Pipe Roll” is the earliest system in England, which was an
annual description of rents, fines and taxes due to the King.
• Double entry bookkeeping was first used by an Italian firm in
Southern France in 1299.

9. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.9

10. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.10
ETHICS
The IFAC Code states that a professional accountant must
comply with the following fundamental principles:
• Integrity
• Objectivity
• Professional competence and due care
• Confidentiality
• Professional behaviour

11. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.11
WHAT ARE THE OBJECTIVES OF
ACCOUNTING?
• Is the business making a profit or a loss?
• What is the business worth?
• What is a transaction worth?
• How much cash is in the business?
• How wealthy is the business?
• How much is the business owed?
• How much does the business owe?
• Keeping a financial check on activities.

12. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.12
WHAT IS BOOKKEEPING?
Bookkeeping is the process of recording
data relating to accounting transactions
in the accounting books.

13. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.13
USERS OF ACCOUNTING
INFORMATION
• Managers
• Owner(s) of the business
• A prospective buyer
• The bank
• Tax inspectors
• A prospective partner
• Investors
• Creditors

14. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.14
THE ACCOUNTING EQUATION
Resources supplied by the owner = Resources in the
business
Capital = Assets
But if someone else has provided some of the assets:
Capital = Assets – Liabilities

15. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.15
Capital = Assets – Liabilities
25,000 = 35,000-10,000
35,000 = 25,000+10,000
Assets = L+c
10 = 6+4
6 = 10-4
4 = 10-6

16. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.16
THE BALANCE SHEET
• The balance sheet shows the financial position of an
organisation at a point in time. In other words, it presents a
snapshot of the organisation at the date for which it was
prepared.

17. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.17
THE STATEMENT OF FINANCIAL POSITION AND THE EFFECTS OF
BUSINESS TRANSACTIONS
On 1 May 2011, B. Blake started in business and
deposited £60,000 into a bank account opened
specially for the business
Statement of financial position as at 1 May 2011
Assets: Cash at bank £60,000
Capital £60,000

18. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.18
Assets = Liabilities + Owner's
Equity
Capital
Cash +
Accounts
inventory + Shop=
Accounts Capital
Receivable + Payable + Capital +
Bal. 60,000 60,000
a.
Bal.
b.
Bal.
c.
Bal.
d.
Bal.
e.
Bal.
f.
Bal.
g.
Bal.
h.
Bal.

19. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.19
THE STATEMENT OF FINANCIAL POSITION AND THE
EFFECTS OF BUSINESS TRANSACTIONS (CONTINUED)
On 3 May 2011, Blake buys a small shop for
£32,000, paying by cheque
Statement of financial position as at 2 May 2011
Assets £
Shop 32,000
Cash at bank 28,000
60,000
Capital 60,000

20. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.20
On 6 May 2011, Blake buys some goods for £7,000 from D.
Smith and agrees to pay for them some time within the next
two weeks
Statement of financial position as at 6 May 2011
Assets £
Shop 32,000
Inventory 7,000
Cash at bank 28,000
67,000
Less: Account payable (7,000)
60,000
Capital 60,000
The statement of financial position and the effects
of business transactions (Continued)

21. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.21
On 10 May 2011, goods which cost £600 were sold to
J. Brown for the same amount, the money to be paid later
Statement of financial position as at 10 May 2011
Assets £
Shop 32,000
Inventory 6,400
Account receivable 600
Cash at bank 28,000
67,000
Less: Account payable (7,000)
60,000
Capital 60,000
The statement of financial position and the
effects of business transactions (Continued)

22. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.22
On 13 May 2011, goods which cost £400 were sold to D. Daley
for the same amount. Daley paid for them immediately by
cheque
Statement of financial position as at 13 May 2011
Assets £
Shop 32,000
Inventory 6,000
Account receivable 600
Cash at bank 28,400
67,000
Less: Account payable (7,000)
60,000
Capital 60,000
The statement of financial position and the
effects of business transactions (Continued)

23. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.23
On 15 May 2011, Blake pays a cheque for £3,000 to D. Smith
in part payment of the amount owing
Statement of financial position as at 15 May 2011
Assets £
Shop 32,000
Inventory 6,000
Account receivable 600
Cash at bank 25,400
64,000
Less: Account payable (4,000)
60,000
Capital 60,000
The statement of financial position and the
effects of business transactions (Continued)

24. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.24
J. Brown, who owed Blake £600, makes a part payment
of £200 by cheque on 31 May 2011
Statement of financial position as at 31 May 2011
Assets £
Shop 32,000
Inventory 6,000
Account receivable 400
Cash at bank 25,600
64,000
Less: Account payable (4,000)
60,000
Capital 60,000
The statement of financial position and the
effects of business transactions (Continued)

25. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.25
SUMMARY OF
TRANSACTION EFFECTS
• .

26. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.26

27. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.27
LEARNING OUTCOMES
You should have now learnt:
1.Accounting is concerned with the recording,
classifying and summarising of data, and then
communicating what has been learnt from it
2.Accounting has existed for at least 10,000 years
but a formal, generally accepted method of
recording accounting data has only been in
existence for the last 500 years

28. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.28
LEARNING OUTCOMES (CONTINUED)
3. 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.
4. Accounting information can help the owner(s) of
a business to plan for the future.
5. The accounting equation is:
Capital = Assets − Liabilities
6. The two sides of the accounting equation are
represented by the two parts of the statement of
financial position.

29. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.29
LEARNING OUTCOMES (CONTINUED)
7. The total of one part of the statement of
financial position should always be equal to
the total of the other part.
8.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).
9.Every transaction affects two items in the
statement of financial position.

30. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.30
EXERCISES
• 1.2A
• 1.4A
• 1.10A
• 1.12A
• 1.14A

31. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.31
CHAPTER 2
THE DOUBLE ENTRY SYSTEM FOR
ASSETS, LIABILITIES AND CAPITAL

32. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.32
LEARNING OBJECTIVES
After you have studied this chapter, you should be able to:
• Explain what is meant by ‘double entry’
• Explain how the double entry system follows the rules of the
accounting equation
• Explain why each transaction is recorded into individual
accounts
• Describe the layout of a ‘T-account’

33. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.33
LEARNING OBJECTIVES (CONTINUED)
• Explain what is meant by the terms debit and credit
• Explain the phrase ‘debit the receiver and credit the giver’
• Prepare a table showing how to record increases and decreases
of assets, liabilities and capital in the accounts
• Enter a series of transactions into
T-accounts

34. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.34
THE DOUBLE ENTRY SYSTEM
• Every transaction affects two or more accounts.
• These effects need to be shown in the accounting books.
• This is double entry bookkeeping.

35. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.35
A DOUBLE ENTRY ACCOUNT

36. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.36
HOW RECORDING IN AN ACCOUNT
AFFECTS ITEMS

37. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.37
OR, TO SEE THIS IN THE ACCOUNTS

38. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.38
ACTIVITY
The owner starts the business with £10,000 in cash on 1 August
2012.

39. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.39
ACTIVITY (CONTINUED)

40. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.40
ACTIVITY (CONTINUED)
A van is bought for £4,500 in cash on 2 August 2012.

41. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.41
ACTIVITY (CONTINUED)

42. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.42
ACTIVITY (CONTINUED)
Fixtures (e.g. shelves) are bought on credit from Shop Fitters
for £1,250 on 3 August 2008.

43. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.43
ACTIVITY (CONTINUED)

44. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
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ACTIVITY (CONTINUED)
Paid the amount owing to Shop Fitters in cash on 17 August
2012.

45. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.45
ACTIVITY (CONTINUED)

46. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.46
ACTIVITY (CONTINUED)
Combining all four of these transactions, the accounts now
contain:

47. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.47
ACTIVITY

48. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
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Activity (Continued)

49. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
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Activity (Continued)

50. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.50
ACTIVITY (CONTINUED)

51. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.51
LEARNING OUTCOMES
You should have now learnt:
1. That double entry follows the rules of the accounting equation
2. That double entry maintains the principle that every debit has a
corresponding credit entry
3. That double entries are made in accounts in the accounting
books

52. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.52
LEARNING OUTCOMES (CONTINUED)
4. Why each transaction is entered into accounts rather than
directly into the statement of financial position
5. How transactions cause increases and decreases in asset,
liability and capital accounts
6. How to record transactions in T-accounts

53. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.53
ASSIGNMENT
• 2.2A
• 2.5A

54. Frank Wood and Alan Sangster, Frank Wood’s Business Accounting 1, 12th Edition, © Pearson Education Limited 2012
Slide 1.54
QUIZ 1
• SELF GRADED ON TEAMS – CHAPTERS 1 AND 2