double entry accounting. actimax learning, inc.2 key concepts purpose of accounting accounting...
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Double Entry Accounting
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Key Concepts Purpose of Accounting Accounting Methods Accounting Cycle Transactions Financial Statements Closing the Books
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Think about… How do you keep track of your
money? How do you know if your
records are accurate? How do you know if your
enterprises or activities are profitable?
How much you are worth financially?
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Keeping Track of Information Is important for businesses to determine
performance and be accountable
Bookkeeping is recording or posting the transactions of a businessvs
Accounting is the entire process of identifying, recording, and communicating financial information of a business
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Purposes of Accounting Summarize economic activity of
a business Internally (managers, employees) Externally (investors, regulators,
IRS)
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Accounting Methods Cash Method
Revenue is recorded when received Expense is recorded when paid Reap version of The Farming Game
Accrual Revenue and expense are recorded in
the year that the activity occurred More accurate representation
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Single-Entry vs. Double-Entry Single-Entry System
Accounting profession does not acknowledge; not good practice
“Shoebox” method – put all receipts in one box and all bills in another box
Double-Entry System Debit and credit sides of the
transaction must be equal
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Accounting Cycle Basic Accounting Equation
Assets = Liabilities + Owner’s Equity Assets
Property owned by a business Cash, accounts receivable, equipment, supplies
Liabilities Claims against business assets Accounts payable, notes payable, salaries
payable, interests payable Owner’s Equity
Remaining assets that go to owners after all liabilities are paid, if the business liquidates
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Accounting Cycle
General Journal(or T-Accounts)
Trial Balance
General Ledger
Financial Statements
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Accounts Assets, liabilities, income, expenses and
owner’s equity can be broken down into accounts
Each account has two sides (T-accounts) Debit = Left side Credit = Right side
Each account has a debit or credit balance Increase left side = Debit entry Increase right side = Credit entry
Asset Owner’s Equity# Debit Credit # # Debit Credit #
1/1
20,000
1 1 20,000
1/1
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Debit Account vs. Credit Accounts
Asset Cash Expense
Income Owner’s Equity Notes Payable
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Debits vs. Credits If you debit a Debit Account, it
increases the value of that account If you credit a Debit Account, it
decreases the value of that account
If you credit a Credit Account, it increases the value of that account
If you debit a Credit Account, it decreases the value of that account
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Illustration of Accounting Cycle Sample year is illustrated in Part 2 See sample year of
General Journal & T-Accounts General Ledger Trial Balance
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General Journal Historical record of transactions Chronological order
GENERAL JOURNALDate Account &
Description Debit Credi
tRef#
1/1 AssetEquity
Inherited 10 Acres of Hay
20,00020,00
0
1
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Posting from General Journal to Specific Accounts T-Accounts are done for
illustrations or educational purposes More graphic
Most business post to General Ledger More textual Order of accounts are the same as
the Balance Sheet
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General Journal to T-Accounts Done for educational purposes
Asset Owner’s Equity# Debit Credit # # Debit Credit #
1/1
20,000 1 1 20,000 1/1
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General Ledger No description of transactions (references
transactions in General Journal) Tracks rolling balances of each account
GENERAL LEDGER
AssetRef# Date Debit Credit Balance
1 1/1 20,000 20,000
Owner’s EquityRef# Date Debit Credit Balance
1 1/1 20,000 20,000
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Running a Trial Balance Completed at the end of a reporting
period Done to see if debits and credits equal
each other Helps identify possible errors from
journalizing or posting Adjusting entries can be made before
preparing financial sheets (not done in The Farming Game)
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Trial Balance
TRIAL BALANCE
Account Debit Credit
Asset 50,000
Owner’s Equity
40,000
Notes Payable 8,000
Income 16,300
Expense 6,000
Cash 8,300
TOTAL 58,300 58,300
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Reap’s Accounting Cycle Transaction Register replaces
General Journal & T-Accounts General Ledger Trial Balance
Transaction Register Financial Statements
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Preparing the Financial Statements Final trial balance provides the
figures for financial statements Balance Sheet Income Statement Statement of Owner’s Equity
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Closing the Books Temporary or nominal accounts are
closed when preparing the financial statements All accounts related to revenues and
expenses Closing temporary accounts resets them to
zero and they start afresh for the next accounting period
Permanent or real accounts keep a running total for the following year (rolling) All accounts related to the balance sheet **Ending balances become the opening
balances for the next accounting period
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Review Questions Why do businesses perform
accounting? What is the cash method? What is the accrual method? What is single entry accounting? What is double entry accounting?
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Review Questions What is the basic accounting formula? What is the comprehensive accounting
cycle? How does Reap adapt this cycle to a simpler system?
What are T-accounts? How are transactions entered in a
general journal?
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Review Questions What is a general ledger? What is a trial balance? What is reflected on an income
statement? What is an owner’s equity statement? What is reflected on the balance
sheet? What period of time does it cover?
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Review Questions What does ‘closing the books’ mean? What are 2 examples of nominal or
temporary accounts? What are 3 examples of accounts with
credit balances?
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Review Questions What factors can be used when making
finance decisions? Define credit and borrowing capacity;
leverage and profitability; leverage and risk; and repayment capacity.
How does marketing affect a business?
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Are you ready to track and manage information?
Reap with The Farming Game®
Ahhtomoney Learning Series