debits and credits

Views:
 
Category: Entertainment
     
 

Presentation Description

introduction to debits and credits

Comments

Presentation Transcript

PowerPoint Presentation:

www.parkbenchtutors.com

Debits and Credits:

Debits and Credits parkbenchtutors.com

PowerPoint Presentation:

Current accounting system started over 500 years ago. Bankers needed to make records of the money they were lending Merchants needed to record the loans they had taken out

PowerPoint Presentation:

The banker loans £1000 to the merchant The cash account is £1000 lower He needs to record what is owed. To be owed or what is due is expressed in Latin by “ debitum ” From this we have taken the word DEBIT

PowerPoint Presentation:

The merchant has received £1000 The cash account for the merchant is now £1000 better The merchant has been entrusted with the £1000 by the banker The Latin to be entrusted with is “ creditum ” From this we have taken the word credit.

PowerPoint Presentation:

The banker records: Cash Account decreasing Money owed increasing The merchant records Cash account increasing Money entrusted with increasing The transaction has two effects for the banker and two effects for the merchant This is the dual nature of a transaction This led to the double entry method of accounting

PowerPoint Presentation:

Bankers set out accounts to show money collected and being paid out. They also had an account to show money owed and being paid back. Entries on the left became known as debits and the entries on the right became known as the credits So the banker recorded the £1000 as: Bank Account Debit Credit 1000 Debtors account Debit Credit 1000

PowerPoint Presentation:

The merchant recorded the double entry in the following manner: Bank Account Debit Credit 1000 Creditors account Debit Credit 1000

PowerPoint Presentation:

A person that owed you money became known as a debtor A person that you owed money to became known as a creditor Merchants needed a more comprehensive system. They needed to record the amount they paid for goods They needed to record the sale of the goods Pacioli came up with an extension of the dual effect system to accommodate this Pacioli became known as the ‘inventor’ of double entry accounting.

PowerPoint Presentation:

Recording a purchase of inventory using a double entry system. A merchant has used the £1000 to purchase goods intended for sale for this amount. Bank Account Debit Credit 1000 1000 Inventory account Debit Credit 1000

PowerPoint Presentation:

The merchant then sold the goods for £2000. The sale is recorded as a double entry. Bank Account Debit Credit 1000 1000 2000 Sales account Debit Credit 2000

PowerPoint Presentation:

The merchant now repays the banker. Here are the entries for the merchant. Bank Account Debit Credit 1000 1000 2000 1000 Creditors account Debit Credit 1000 1000

PowerPoint Presentation:

If we look at the accounts for the merchant we still have a problem. There is £1000 in inventory, but clearly the goods are no longer in the possession of the merchant. The goods have passed to the customer. Creditors account Debit Credit 1000 1000 Bank Account Debit Credit 1000 1000 2000 1000 Sales account Debit Credit 2000

PowerPoint Presentation:

The solution was an account to record the cost of goods sold. Inventory Account Debit Credit 1000 1000 Cost of goods sold account Debit Credit 1000

PowerPoint Presentation:

The merchant has to pay a ship’s captain for transport of the goods. He pays the ship’s captain £200. The £200 is regarded as an expense. The transaction is recorded by creating an account for the expense. Bank Account Debit Credit 1000 1000 2000 1000 200 Shipping expense account Debit Credit 200

PowerPoint Presentation:

The picture that emerges is that there are accounts of different types. There are accounts which show what the merchant has. These are the bank account and the inventory account. This type of account became known as an asset account. Asset accounts represent what a business owns or has

PowerPoint Presentation:

There is an account to represent what the merchant owes. This is the creditors account. What a business owes is called a liability. Liabilities accounts represent what a business owes others.

PowerPoint Presentation:

This leaves the sales, the cost of goods sold account and the shipping expense. How can we make more sense of these? If we take the sales account and subtract the cost of goods sold we are left with £ 1000, if we then subtract the £200 we are left with £800

PowerPoint Presentation:

So sales – cost of goods sold = £1000 Now subtract the £200 expense. We are left with £800 The balance in the bank is also £800

PowerPoint Presentation:

This represents money the merchant has made. The money made is termed a profit. So sales, cost of goods sold and expenses are associated with profit and loss. A profit increases the value of the business .

PowerPoint Presentation:

The idea behind accounting became: What a business has – What is owes = What it is worth The term for what a business is worth is called equity What a business has is an asset What a business owes is a liability ASSETS – LIABILITIES = EQUITY This is known as the accounting equation

PowerPoint Presentation:

facebook.com/david.hopcoft.9 parkbenchtutors.com Narrated by David Hopcroft

authorStream Live Help