1. The 3 Basic Confusions 2. The 3 Basic Documents 3. The Principle of Legal Entity 4. The Principle of Debit and Credit 5. The Sources and Usage of funds 6. The changes in the company legal positions 7. Double Entry Accounting 8. The T Accounts
1. Application to the General Ledger 2. Application to the Journal 3. Application to the Trial Balance
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A. Introduction
We believe our course to be the most effective to learn accounting for beginners. We make the following 4 Recommendations before starting:
1 Browse through the slides one by one in the presentation order without trying to understand everything on the first reading. Forget everything you were told on Debit & Credit. We start everything from scratch with Left & Right entries plus the Green & Red Color code.
Give it a try with confidence. We use very simple words & concepts. This will enable you to post your first simple booking entries in the T1 test. After the first reading,you are advised to take the 22 Simple T1 tests where you will find more explanations on how to post Booking Entries.
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A. Introduction
Along the course you should keep in mind
3 important concepts
Accounting follows Basic Rules valid throughout the world, but each country has its own regulations, especially related to Corporate Income taxes (e g Tax charged on pre tax profit).
The Journal
B
Accounting in just 8 principles
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3
2
1 5
6 wrong
We should look at Accounting from a legal point of view. Who owes what to Whom & When
continue
$ $ $
3
The Accountant will first think in legal terms, which is different from the Act of Payment (IN or OUT).
continue .
wrong
A Bank statement is just an extract from the Banks books filled from the Bankers point of view, not from the clients point of view (Inversion).
wrong
continue .
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given day.
Shareholders
1
Bank
2
Objects Owned
3
Clients
4
$
Suppliers
5
A company holds legal rights to things due from others and has legal duties to others holding claims against it. Such legal positions will change daily. Hence the importance to measure the company global legal position in $ terms at the end of a given day, the last day of a given Month, Quarter, Semester or Year.
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Commitment to Pay
No longer due
Cash
30 days
60 days
More
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DEBIT
CREDIT 1,000
DEBIT 1,000
CREDIT
A debit entry on the statement from your Bank will become a credit entry on your own books inside your own accounting system.
DEBIT 1,000 CREDIT DEBIT CREDIT 1,000
To simplify,we shall use the words Left & Right instead of Debit & Credit and Green for LeftDebit Entries & Red for Right-Credit Entries.
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Sort Out
Store
twin book
His job is to find the twin book for each book, then decide where each twin will go inside the Storage cabinet of the library: Which shelf, which Box & which side of said Box. He keeps a record of such allocation (what & where) on his summary sheet (Journal of Booking Entries).
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Transactions.
They are measured in $ terms with $ amounts written inside the T Accounts. Each of these $ Amounts will be defined in this course as a Single Booking Item(SBI). A Booking Entry is defined as a Set of 2 equal Single Booking Items.. Certain complex Booking Entries will hold more than 2 Single Booking Items. In real life ,the GL does not use colors but only a vertical list in 4 columns of $ numbers in black.
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(SBIs)
Total of all Accounts opened inside the GL: Total of all Left-Debit SBIs = Total of all Right-Credit SBIs
The rule has it that the Total of the Left must be equal to the Total of the Right. Checking such L&R equality in the past made all accountants nervous with their manual entries for fear of some mistakes leading to a Non-Equality between Total Left & Total Right. This explains the expression of Trial Balance = Try to balance the total of all GL Accounts altogether and in case of failure, try new entries to secure the absolute Left & Right equality.
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legal entity by its own right. Think of the company as a person, distinct from the founding shareholders
or from its management, clients, suppliers-vendors, bankers, employees, federal, state & local authorities, social security, tax authorities etc.
usages
sources
The Company The company will enter into a combination of legal Trucks, Computers, Goods, etc.). The company will also hold Titles of Receivables and be subject to Titles of Payables, Titles of Debt & Titles of Votes & Dividends..
responsibilities and obligations, to third parties or through Titles of Ownership on objects (Plant, Cars,
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Clients
Titles of Receivables from clients Titles of Payables due to Suppliers
Suppliers
Each legal link has a given $ value. The Value of an item will vary with time. The mission of accounting is to produce a reliable $ valuation of such items as of the end of each day
Inventory
Titles of Ownership on Goods Titles of Debts due to others
Tax Authority
Shareholders
Plant
Titles of Ownership on Assets Titles of Ownership & Dividends
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Commitment to Pay
T. Account- No2- Debt Due Supplier
T. Account n2 for Debt will record all new Debt on the Right of the related T. Account (here $2,000). When $ value of a Debt decreases by $ 1,000 a single SBI will be posted on the Left of the T. Account (here 1,000).
2,000
1000
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From a logical point, we all consider that we need to own Resources (Sources of Funds) before we may own some Assets (Usage of funds).
Usage of funds
As a rule of thumb, Sources of funds will be posted on the Right of the books and Usage of funds will be posted on the Left of the books. Source of funds If I want to buy a truck for $20,000 as Usage of Funds, I will need first $20,000 in Source of funds. The Source will be either in Cash-Out from the Bank or in Extended Payment Terms from the Supplier who agrees to give some time to his Client to pay him.
20,000
20,000
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The value of these legal positions will change. Such adjusted values will be computed according to specific accounting rules such as Amortization, Depreciation, Provision defined on Level 2 of the full course.
Any single change of a legal position triggers instantly another $ EQUAL change, in the same way a pendulum would hit another pendulum of equal weight. If I become the legal Owner of a truck or a car, simultaneously I will need to pay for it, since I just became the Debtor of the former owner of the truck or the car (until I eventually pay for it).
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Borrower
Borrower book
Depositor book
Depositor
100
200
Safe book
200 100
safe
Lets assume a Depositor brings 200 coins which are first placed in the safe. The Borrower will then borrow 100 coins. Question: how will the banker keep track of all movements of coins between the Depositor, the Safe & the Borrower?
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Borrower Book
Depositor Book
Book 1
Book 2
Around 1400, a new Banker in Venice decides to start its banking operations in his house. He set up a large table with a dark blue napkin and places 3 opened Books on the table. He also has a small Vault/Safe to keep all gold coins brought in by depositors. He wants to accept deposits from rich individuals and lend all or part of same deposits to Borrowers. The Banker places one opened book on the upper left of the table (Book n1) called the Borrower Book to track all changes of legal positions with the borrower. He places another Book on the upper right side of the table (Book no2)called the Depositor Book to track all changes of legal position with the depositor. Finally,Banker places a third book on the middle lower part of the table (Book no3) to track all changes of legal position (ownership) on the Safe. The depositor comes on the right side of the table
Safe Book
Book 3
Safe
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Depositor
The coins are placed inside the safe. The borrower,in green, is shown on the left side of the table and he takes with him 100 Gold Coins coming from the safe.
Safe Book
In the next 3 slides,we show the rules which define double entry accounting.
Safe
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Depositor
Also,the Banker will be charged interest on the deposits and he will charge interest on his loans to borrowers. Now, his 3 books will keep track of all transactions : 1. Deposits of Coins received from Depositors 2. Coins held in the Safe/Vault 3. Loans of Coins to Borrowers. Question: How will the banker keep track of the 2 movements of coins between the Depositor, the Safe & the Borrower? He wants to keep track of the different legal positions related to the deposit,the safe & the loan.
Safe book
Safe
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The Depositor has brought in 200 coins which have been placed in the Safe. We record the arrival of these 200 coins by posting 2 opposite SBIs:
Borrower book
Depositor Book
200 B2
Safe Book
SBI-1
200 B3
The 2 SBIs are part of a Dual Booking Entry (DBE). The New Asset is recorded by SBI no1 and the New Debt is recorded by SBI no2.
Safe
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Borrower SBI-4
Borrower book
Depositor Book
100 B1
Safe
Book
200
200 100
100 Gold coins
B3
Safe
B1.
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Interest Costs
Interest Revenues
T2
Borrower
B5
Borrower Book
B4
Depositor Book
Depositor
In addition to the 1st table (T1), Banker decides to use T2 another table (T2) with a light blue napkin (compared to the other table T1 with a dark blue napkin). The banker places 2 opened books on this T2 Table 1 opened book (B4)on the right side B5 B4 & 1 opened book (B5) on the left side. This is to record Interest Revenues (on 100 loan) on the Book (B4)placed on the right side of the table and Interest Costs (on 200 deposit) on the other Book (B5)placed on the left side of table.
100
200
Safe Book
100 Gold coins
200 100
Safe
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Interest Costs
Interest Revenues
B4
Borrower Book Depositor Book
100
200
Safe Book
100 Gold coins
200 100
Safe
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Interest Costs
Interest Revenues
25
Borrower Book
Depositor Book
100 SBI-5 25
Safe Book
100 Gold coins
200
200 100
Safe
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Interest Costs
Interest Revenues
B4
SBI-8
20
Borrower Book
25
Depositor Book
100 25
Safe Book
100 Gold coins
200 20 SBI-7
200 100
Safe
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Interest Costs
Interest Revenues
B4
SBI-8
20
Borrower Book
25
Depositor Book
100 25
Safe Book
100 Gold coins
200 20 SBI-7
200 100
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Interest Costs
Interest Revenues
B4
How T Accounts are linked ? To symbolize the relationship between the lower dark blue table and the upper light blue table, we use a double arrow. This is a way to visualize the twin SBIs related to Revenues and Costs. Revenues trigger new Asset-Claims on Clients. Costs trigger new Debt due to Suppliers. All books on the Dark Blue table (T1) represent the so called Balance Sheet Accounts which keep the record of the $ value of all Assets and all Debts as of the end of any day.
20
25
Borrower Book
Depositor Book
100 25
Safe Book
200 20
200 100
All books on the light blue table represent the so called Income statement accounts which keep the record of all Revenues & Costs over a past period of time (usually the last 12 months).
Safe
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Each T. Acc. records all transactions made with the 3 external parties: The Depositor, The Safe, and the Borrower. Each T. Acc. has a specific ID Number & a Name. Each transaction is defined as a Dual Business Act which will be recorded by a Dual Booking Entry (DBE) made up of 2 Single Booking Items (SBI).
100
200
spread spread
Safe T account
100
spread
Each SBI symbolize a specific Change of Legal Position for the banker. Deposit of 200 coins from the depositor means 1 Dual Business Act between Banker & the Depositor, with 2 Changes of Legal positions which are recorded by 2 SBIs, hence making 1 DBE. In the Journal, we show 2 DBEs, each one with the full details, such as the Amounts, the targeted Accounts Names & No & the destination side of each SBI (left or right) inside each of the 2 Targeted T Acc. Total of all Left SBIs must be equal to the Total of all Right SBIs. The Journal is the only way to post a DBE inside the General Ledger.
Journal of Booking Entries SBIs* descriptions & T acc destinations (GL*numbers) DBE 1 DBE 2 DBE n Total of all SBIs sent to GL*
300
left
right
200 100
200 - SBI 1 description 200 - SBI 2 description 200 100 - SBI 3 description
100
300
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A T. Account over the life of the company will record a large number of SBIs coming from the Journal. The life of the company is divided into accounting periods of 12 months often starting on January 1st and ending on december31st. From time to time and at the end of regular periods, we proceed to the addition of all SBIs of the left side & of all SBIs of the right side inside each T Account of the General Ledger. Then, we compute the spread between the 2 totals. We define the Spread Balance as the Balance of the account. It is symbolized by a small triangle, either green or red. Each SBI in a given T. Account is linked to its twin SBI which is posted into another T. Account as indicated on the Journal.
Total Left
Total Right
Spread Balance
C
Application of the 3 Documents
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20
25
Borrower Acc
Depositor Acc
200 20
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1.2
Borrower Acc
Depositor Acc
2.1
200 20
100
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Left 200
Right 100
1.2
Borrower Acc
Above is the Semi-Vertical GL Format called the SBI-poster in this course .Each T. Acc. has a predefined position inside. This Format is designed for learning purpose with colors.
Above is the Full Vertical GL Format in B&W as used by CPAs & accounting Softwares. All accounts and all SBIs are listed vertically. Standard GLs are often confusing for beginners
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100
900
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1.2
200
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4.1
Once you know how to fill a GL under the SBI-poster format,it becomes easier to fill the Journal of Booking Entries (or DBE for Dual Booking Entries). Each Business transaction will be recorded by a DBE Entry made up of at least 2 Twin SBIs posted on 2 different T Accounts. As defined on slide,the accountant needs to identify the Twin SBIs for each transactions..He needs to know the $ amount,the names and numbers of the 2 T Accounts and on which sides to post each SBI. We have designed a sample of a Journal with the first DBE posted inside the GL. The Journal list the first SBI (SBI-1)with information related to this Item (200 coins placed in the safe). The Safe T. Acc number is indicated (1.1) and the 200 amount is inserted on the left column. The twin SBI (SBI-2) record the new debt due to the Depositor (T Acc. nber 2.1) & the 200 amount is inserted on the right column.
2.1 SBI-2
100
left
200
right
200
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We have seen on slides no 9-10-11 the first presentation of the 3 accounting documents: The Journal is a preparation document used to define each Dual Booking Entry made up of at least 2 twin SBIs. Each SBI is then sent to its destination inside the GL,that is the correct T. Account and the correct side of such T. Account. Over the accounting period (usually 12 months),the company will experience a number of business transactions,each of them recorded by 2 twin SBIs. SBIs are stored into T Accounts inside the GL.
Trial Balance
At the end of these 12 months,the accountant will try to balance all the SBIs held inside the GL.This means that the total of all left SBIs must be equal to the total of all right SBIs.
The GL will show a large Number of lines for each T Account. The Trial Balance will show only one line for each T Account.
The Difference between a GL and a Trial balance The GL lists all SBIs which will have been posted over a given period of time (usually 12 months). The Trial balance will only show the totals of SBIs (Total Left & Total Right),Account after Account, as well as the Spread Balance.(Left minus Right)
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4.1
200 1.2
Borrower Acc
25
Depositor Acc
500
600
nap
2.1
125
125
nap
100 25
Safe Account
200 200
400
400 nap
nap 220
220
1.1
3.1.ShareH.Ac
0 900
nap
900
100 400
Shareholder
3.1
4.1.Int.Rev.Ac.
25
nap 20
25 nap
5.1.Int.Cost Ac
20
400
900
Totals 4 Col.
1,645
1,645
1,145
1,145
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125 400 0
0 0 220
400 nap
nap 220
3.1.ShareH.Ac
900
nap
900
4.1.Int.Rev.Ac.
0 20
25 0
nap 20
25 nap
5.1.Int.Cost Ac
Totals 4 Columns
1,645
1,645
1,145
1,145