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Introduction
1What is a firm
2History of firms
3History of accounting
  
II Example of a small firm
4A workshop making toys (1)
5A workshop making toys (2)
6Production of large quantities of information
7First principles taught by the example
8Most of the main concepts of accounting are in the toy example
  
III From single-entry to double-entry accounting
9Why single-entry accounting, like in our checkbook, is insufficient
10A page to record debtors, a page to record creditors: the emergence of double-entry accounting
11The basic concept of transaction: the "atom" of activity of a firm
12Posting transactions into accounts (1): general principles, the apparent paradox of "value coming in is a debit"
13Posting transactions into accounts (2): posting simple transactions, traditional vs real time inventory control
  
IV A complete accounting cycle up to the Trial balance
14The yearly accounting cycle: journal → accounts → Trial Balance → adjustments → Income Statement & Balance Sheet
15Posting a complete cycle of journal entries (1)
16Posting a complete cycle of journal entries (2)
17Balance of each account and Trial Balance (TB)
18Revenue accounts and Capital accounts in the TB
  
Adjustments to the Trial balance
19Why the TB needs to be adjusted to compute the Income Statement (IS)
20Adjustment for inventory
21Adjustment for amortization
22Provisions for bad or doubtful clients
23Prepayments and accruals
  
VI The Income Statement and the Balance Sheet
24From adjusted Trial balance to Income Statement (IS)
25From adjusted Trial balance to Balance Sheet (BS)
26IS and BS: a higher view
  
VII General principles of accounting and miscellaneous topics
27General rules and guidelines of double-entry accounting
28Stock valuation: FIFO, LIFO and other methods
29Impact of a series of transactions on the IS and BS: a complete exercise
30Alternate way to compute the COGS
  
VIII Money
31Money (1): what is money? 
32Money (2): how to get rich?
  
IX Accounting over several years
33Difference between the first accounting year and the following years
34From one BS to the next, and the IS in between
35Income tax and dividends
36Accounting documents over several years
  
A deeper look at the Balance Sheet
37Big measures in a balance sheet: equity, debt, capital employed, fixed assets, current assets, working capital
38The notion of liquidity
39The list of assets is fundamentally heterogeneous
  
XI Cash flow statement
40Cash flow statement (1): what is cash?
41Cash flow statement (2): reconciling cash evolution with the main accounting measures
  
XII Ratios
42Return on Capital Employed (ROCE)
43Other ratios
44Stock management
  
  
  
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General accounting

IV. 17. The balance of each account and the Trial balance

 

Video

Text

 

 

We posted all the transactions of a complete accounting cycle into accounts. In our example we had 19 transactions in the Journal of the whole accounting cycle. They were posted (with double-entries) into 15 accounts.

Here are the 19 transactions:

transactions

 

and the 15 accounts into which they were posted:

accounts

 

These 15 accounts form the Ledger of the accounting system of the firm.

Let's look at the accounts one by one, in alphabetical order.

 

 

Bank account.

bank account

The bank account "received" 17000€ (recorded in the debit column), and "gave" 14500€ (recorded in the credit column).

So we say that it has a balance, in debit, of 2500€. And we write it like this (below):

balance

 

 

Balance carried down and balance brought down.

Actually accountants have a way to compute the balance:

  1. they compute the total of each column, debit and credit
  2. they enter in the smaller column the difference with the bigger one, and call it the balance carried down
  3. then, they enter the same figure at the bottom of the other column (like I did above), and call it the balance brought down

Balance carried down:

balance

 

And, then, balance brought down:

balance

In this way, the two balances correspond to a double-entry which does not alter the accounting system.

Remember that accounting was invented at a time, the XIIIth and XIVth centuries in Western Europe, when calculations with arabic numbers were quite new and abstract, and the signs + and - had not been invented yet. They were invented around 1500.

This today-fancy-looking procedure was the way, in the Middle Ages, to "close" an account (i.e. "complete it" with the balance carried down entered in the smaller column), and write again the same figure (now the balance brought down) in the other column of whichever account we wanted (including the same) to make balanced entries in the accounting books.

When we speak with no further precision of "the balance" of an account, we mean the balance brought down.

 

 

Capital account.

capital account

The capital account records the shares given to the owner(s) in exchange for the initial money put into the firm (called the "initial capital").

Usually the capital account has few entries. In this example, it has only one. Therefore its balance is simply 10000€ in credit.

 

 

Cash account.

cash

The cash account is, with the bank account, one of the two accounts which have a lot of entries.

Here the cash account "received" 16000€ (the total of the debit column), and "gave" 15000€ (the total of the credit column).

So its balance is 1000€ in debit.

Remember: a cash account cannot have a balance in credit, since it cannot have less than 0€ in banknotes and coins.

 

 

Deirdre account.

Deirdre is our supplier of goods.

supplier

We could have put these entries into a general "suppliers account", which would also have got entries for our purchase of a van and of machinery on credit. But we decided to split our suppliers from whom we get credit into separate accounts: Deirdre's, James's, and Jules's.

We purchased for 7000€ worth of goods from Deirdre (175 items at 40€ apiece), and we paid her only 1500€. So the account has a balance in credit of 5500€. This means that we still owe Deirdre 5500€.

Until we pay her, this remains a liability of the firm.

 

 

James account.

James is the firm from which we bought machinery. We bought it on credit, therefore an account had to be opened to record the IOU we sent James.

machinery

We obtained a credit of 5000€.

And we settled it the next day. So the account has a balance of zero.

Let's not list all the accounts, but go directly to the loan account.

 

 

Long term loan account.

loan

We contracted a loan for 2000€ from a lender, our bank, another bank, or a lender of one sort or another. Later on we shall see how we can even get money directly from the bond markets.

And we haven't begun to pay it back. So the long term loan account has a balance in credit of 2000€.

It is a liability of the firm. And this kind of liability has a yearly cost, called the "financial charges", or "interest charges". But in this accounting cycle we supposed that there were no charges for the loan yet. (These charges would not appear in the long term loan acc. but in a "financial charges acc." and "cash" or "bank".)

 

 

Machinery account.

machinery

This account records an asset which arrived in our firm.

Be sure to understand that it is not here that we record the money owed to James and the payment we actually made to him.

 

 

Mini accounting software.

We shall not look at all the accounts one by one, but you are strongly encouraged to do so with the help of the mini accounting software which accompanies this lesson

https://www.lapasserelle.com/online_courses/accounting/trial_balance/mini_accounting.xls

 

 

The Trial balance.

Finally we prepare the list all the accounts and their balances.

This document is called "the Trial balance" of the end of the accounting period.

trial balance

The two columns, debit and credit, must add up to the same figure, because all the postings into accounts had one entry in debit and one entry in credit with the same numbers.

If the two columns do not have the same total, something is wrong in the accounting.

But if the two columns are equal, it is not a proof that the accounting is right. (We could have made two mistakes which compensate each other.)

 

 

Progression in the accounting process over a complete accounting cycle.

We reached the Trial balance in the figure below:

trial balance

In subsequent lessons, we shall study the adjustments which we will make to this Trial balance (to take into account special consumptions which do not appear naturally in the Journal of transactions). And we shall see how from the "adjusted Trial balance" we go to the Income statement and the Balance sheet.

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