4ACCN002W

Introductory Financial
Accounting
Semester A
Lecture 2

Bookkeeping to trail Balance 1: The

Double-Entry System (assets,
liabilities, and equity)
 Indicative Content:
O Introduction to Accounting (primary qualitative)

O Bookkeeping to trail Balance 1: The Double-Entry System (assets,

liabilities, and equity)

O Bookkeeping to trail Balance 2 : The Double entry system for

expenses and revenues

O Capital and revenue expenditure items: accruals and prepayments.

O Accounting for Inventories and Treatment of Non-Current Assets

O Basic accounting concepts and Introduction to financial statements:

The Balance Sheet and The Income Statement

O Company accounts 1: Introduction to presentation of company

financial statements.
O Company Accounts 2: more challenging Adjustment

O Cash Flaws Statement

O Introduction to ratio Analysis and Interpretation of Financial

Statement
O Revision
2
 Lecture 2

Bookkeeping to trail Balance 1: The Double-

Entry System (assets, liabilities, and equity)

Reading:
Stangster and Gordon Chapter 1, 2
Lecture Outline
The Balance Sheet components
 Assets
 Liabilities
 Ownership interest or Capital (Equity)
The accounting equation explained
The income statement and the accounting
equation
Accounting equation and the double entry
bookkeeping
Stages of recording a transaction
Recording transactions in ledger (T) accounts

4
Balance Sheet Components: Assets
Resources available to the business

Major characteristics

A probable future benefit exists.

The business has an exclusive

right to control the benefit.

The benefit must arise from some

past transaction or event.

The asset must be capable of

measurement in monetary terms.
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Classification of Assets
Non-current assets: land,
buildings, motor vehicles and so on

Current assets: inventories

(stock), receivables (debtors),
bank, cash

6
The circulating nature of current assets

Inventories

Cash Receivables

7
 Q: what are tangible and intangible assets. Explain the
difference between them. Give examples of each of
them?

 Assets are economic resources expected to benefit

future activities. Assets are classified into:

Tangible assets are assets that have a physical

substance for example land and buildings,
machinery, furniture , etc

Intangible assets are assets that do not have a

physical substance for example brands, copyrights,
software, etc

02/01/24 8
Balance Sheet Components:
Liabilities
Amounts owed by a business.
Major characteristics:
a present obligation of the entity.
arising from past events.
the settlement of which is expected to result in
an outflow of resources from the entity.

9
Classification of Liabilities
Current liabilities (due within one
year): creditors (payables), bank
overdraft, short term loans,
outstanding items (e.g. unpaid
bills)

Non-current liabilities (due in

more than a year): long term loans

10
Balance Sheet Components: Ownership
Interest (Capital or Equity)
Owner(s) claims / ownership interest
Original contribution
Additional contributions
Withdrawals (a reduction to ownership interest)
Retained profits or losses (Revenues –
Expenses)

Recognition totally dependent on the

recognition of assets and liabilities.

11
The Accounting Equation
minus equal

Ownership
Assets Liabilities
interest

Assets – Liabilities = Ownership interest

(Capital)
 The ownership interest is the residual
amount found by deducting all of the entity’s
liabilities from all of the entity’s assets.
 The ownership interest is the residual claim
after liabilities to third parties have been
satisfied. 12
The Accounting Equation – Alternative Way

equals plus

Ownership
Assets Liabilities
interest

Assets always equal Liabilities + Ownership

interest
ALWAYS!!!!
Every transaction AFFECTS TWO ASPECTS of
the accounting equation
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 The accounting equation can be extended as follows:

+
Ownership Profit
Assets = interest (-) (Loss)
+ Liabilities

The above equation can be extended to:

Assets = Owners + Revenue - Expenses + Liabilities

hip
interest

14
Example 1
David started business on the 1st of
January 2021. He started by opening a bank
account and depositing £5,000 into it.

At this point the accounting equation will

be:
Assets (cash at bank) = Capital
£5,000 = £5,000

15
Example 1 - continued
The balance sheet can be presented as
follows (vertical form):
Balance Sheet as at 1 January 2021
£
Current assets
Cash 5,000
Capital (Equity)
Opening balance 5,000

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Example 1 - continued

If on 30 June 2021 David’s position was:

Assets: Cash £4,000, Land £2,000
Liabilities: Bank loan £1,000 (due in 2 years)

At this point the accounting equation will be:

Assets (cash and land) = Capital +
Liabilities
6,000 = 5,000 + 1,000

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Example 1 - continued
Balance Sheet as at 30 June 2021
£
Non-current assets
Land 2,000
Current assets Up to this
Cash 4,000 point the
Total assets 6,000
capital
did not
Capital (Equity)
change.
Opening balance 5,000 This
Non-current liabilities means
Bank loan 1,000 there
Total equity and liabilities was no
6,000 profit (or
loss)
during
the 18
Example 1 - continued
If on 31 December 2021 David’s
position was:

Assets: Cash £3,000, Land £2,000,

Machinery £1,000, Receivables £1,500

Liabilities: Bank loan £1,000

19
Example 1 - continued
Balance Sheet as at 31 December 2021
£
Non-current assets
Land 2,000
Machinery 1,000
Current assets
Receivables 1,500
Cash 3,000
Total assets 7,500
Capital (Equity)
Closing Capital (5,000 +1,500) 6,500
Non-current liabilities
Bank loan 1,000
Total equity and liabilities 7,500

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The Income Statement (Profit and Loss
Account)
The Income Statement measures changes in
owners’ equity between two balance sheets.

Profit earned during period

= Revenue - Expenses

Revenues= Increases in Owners’ Equity

Expenses = Decreases in Owners’ Equity

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 The Income Statement and the
Accounting Equation

+
Profit
Assets = Equity (- (Loss)
+ Liabilitie
s
)

The above equation can be extended to:

Assets = Equity + Revenue - Expense +Liabilitie

s s

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The Accounting Equation & Double-Entry

Assets = Capital + Liabilities

Left-hand side = Right-hand side

DEBIT balances = CREDIT balances

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Stages of Accounting Cycle
Record transactions in day books or
journal
Record transactions in ledger
accounts
Prepare a trial balance
Make necessary end-of-period
adjustments
Prepare a further trial balance
Prepare final accounts
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Accounting Cycle
Basic transaction entries
Purchase
Cash Purchase
Dr. Assets (Trucks) xxx
Cr. Cash xxx
Purchase on account
Dr. Assets (Trucks) xxx
Cr. Accounts Payable xxx
Basic transaction entries
Sell
Cash Sell
Dr. Cash xxx
Cr. Assets xxx
Sell on account
Dr. Accounts Receivable xxx
Cr. Assets xxx
Basic transaction entries
Pay Your Dues
Dr. Accounts Payable xxx
Cr. Cash xxx
Collect Your Dues
Dr. Cash xxx
Cr. Accounts Receivable
xxx
Accounting Equation → ‘T’ Accounts

DEBIT (DR) CREDIT (CR)

Same principle applies to both accounting
equation and double-entry book-keeping (debits
and credits), i.e. in accounting, each transaction
affects at least two items/accounts.

EVERY DEBIT HAS A CREDIT

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The Ledger - ‘T’ Accounts
Date Details Page Amount Date Details Page Amount

Or simply

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The Ledger - ‘T’ Accounts

DEBIT (DR) CREDIT (CR)

IN OUT
RECEIVER GIVER
EXPENSES REVENUE
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The Ledger - ‘T’ Accounts
DEBIT (DR) CREDIT (CR)
Dr What comes in Cr What goes out
(e.g. Dr Cash when receive (e.g. Cr Cash when pay for
cash from sales) purchase of fixed assets)
Dr The receiver Cr The giver
(e.g. Dr Debtor when sold (e.g. Cr Capital when receive
goods on credit to customers) cash from owner)
Dr Expenses Dr Revenues
(e.g. Dr Rent when the (e.g. Cr Discount Received
expenses incurred) when the income received)
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The Ledger - ‘T’ Accounts
DEBIT (DR) CREDIT (CR)
+ Assets  (-) Assets
(-) Liabilities  + Liabilities
(-) Capital  + Capital
+ Prepaid expenses  + Accrued expenses

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Example 2
For each of the following transactions,
analyse the transaction to its debit and
credit sides and prepare the relevant ‘T’
accounts:
1 August 2021, Amanda started a new
business with £10,000 cash and a piece of
land worth £20,000
2 August 2021, bought a motor vehicle for
£6,000 on credit from Mr. Patel
3 August 2021, bought goods for £8,000 cash

34
1 August 2021, Amanda started a new business
with £10,000 cash and a piece of land worth
£20,000

Debit side Credit side

Cash 10,000 Capital 30,000
Land 20,000

This means we need 3 ledger accounts:

Cash, Land and Capital

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 Debit side Credit side
Cash 10,000 Capital 30,000
Land 20,000

Cash account
Debit Credit
1.8.21 Capital 10,000

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 Debit side Credit side
Cash 10,000 Capital 30,000
Land 20,000

Debit Credit
1.8.21 Capital 20,000

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 Debit side Credit side
Cash 10,000 Capital 30,000
Land 20,000

Debit Credit
1.8.21 Cash 10,000
Land 20,000

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2 August 2021, bought a motor vehicle for
£6,000 on credit from Mr. Patel

Debit side Credit side

Motor vehicles 6,000 Mr. Patel (payables)

6,000

This means we need 2 ledger accounts:

Motor vehicles and Mr. Patel (payables)

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 Debit side Credit side

Motor vehicles 6,000 Mr. Patel (payables)

6,000

Motor Vehicles account

Debit Credit
2.8.21 Mr. Patel 6,000

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 Debit side Credit side

Motor vehicles 6,000 Mr. Patel (payables)

6,000

Mr Patel account
Debit Credit
2.8.21 Motor vehicles 6,000

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3 August 2021, bought goods for £8,000 cash

Debit side Credit side

(Purchases) 8,000 Cash 8,000

This means we need 2 ledger

accounts:
Purchases and Cash

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 Debit side Credit side
(Purchases) 8,000 Cash 8,000

Purchases account
Debit Credit
3.8.21 Cash 8,000

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 Debit side Credit side
(Purchases) 8,000 Cash 8,000

Cash account
Debit Credit
1.8.21 Capital 10,000 3.8.21 Purchases 8,000

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Lecture Example 3: Sam Jonah
1st transaction: He opens a business bank account and deposits £80,000.
Capital = Assets – Liabilities
£80,000 = £80,000 - £0

Sam has supplied £80,000 of his own resources, and the business now has an asset (money in
the bank) of £80,000. At the same time the business ‘owes’ Sam £80,000.

2nd transaction: He borrowed £60,000 from the bank to buy shop premises.
Capital = Assets - Liabilities
£80,000 = (£80,000 +£60,000) - £60,000) - £0

3rd Transaction: On the same day he bought a shop for £60,000.

Capital = Assets – Liabilities
£80,000 = £(140,000 +£60,00 - £60,000) - £60,000
Homework & next week’s preparation

• Read : Chapters 2-4

• Exercises:
All exercises at the end of Chapter 2
Thank you