accounting for beginners

8/13/2019 Accounting for beginners

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Level 1 Course Summary

Introduction to the Course

Accounting in just 8 principles

1. The 3 Basic Confusions

2. The 3 Basic Documents3. 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

Application of the 3 Documents

1. Application to the General Ledger

2. Application to the Journal3. Application to the Trial Balance

Test your knowledge

Download the 22tests

B

A

C

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We believe our course to be the most effective to learn accounting for beginners.We make the following 4 Recommendations before starting:

Browse through the slides one by one in the presentation order without trying to understandeverything 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 moreexplanations on how to post Booking Entries.

1

2

3

4

A.Introductionback to summary


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Along the course you should keep in mind 3 important concepts

1

A.Introduction

The universality of Accounting RulesAccounting followsBasic Rules valid throughout the world, but each country hasits own regulations, especially related to Corporate Income taxes (e g Tax charged on pre tax profit).

2

The globality of the Chart of Accounts

The charts of accounts enlists all the different accounts used to record all transactions initiated by acompany. Accounts are organized into8 Classes of Accounts: class n1 to class n8.

3

The interactivity of the 3 Accounting Documents

The General Ledger The Trial BalanceThe Journal

You will use 3interactive accountingDocuments

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Accounting in just 8 principlesB


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1. The 3 Basicconfusions most often seen with beginners

B.Accounting in just 8 principles

1 Accounting is a world of Numbers

2 53 1 674 continue

2

3

Accounting is about $ Expenses & $ Revenues

Debit & Credit on my Bank Statements

continue .

continue .

We should look at Accounting froma legal point of view.Who owes what to Whom & When

wrong

wrong$ $ $ $

debit credit- 200 +1200

wrong

The Accountant will first think inlegalterms, which is different from theAct ofPayment (IN or OUT).

A Bank statement is justan extractfrom the Banks books filled from theBankers point of view, not from theclients point of view (Inversion).

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B.Accounting in just 8 principles1 Confusion 1: A world of Numbers vs a world of Lawyers

In Accounting, we always need to know thelegal position in $ terms of a company towards otherparties on a given day.

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 companyglobal legal position in $ termsat the end of a given day, the last day of a given Month, Quarter, Semester or Year.

Shareholders Bank Objects Owned Clients Suppliers

$

1 52 3 4

A company has legal linkswith 5 types of third parties

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2 Confusion 2: $ Expenses and $ Revenues

People usually linkExpenses with Money paid out and Revenues with Money paid in.But the Accountant will consider first the Day aCommitment to Pay is born.Regardless of the day a payment is to be made (cash or delayed)

Each Commitment to Pay once born, will carrya Maturity Date (either cash or 30 days or 60 days or other).At maturity, a payment will have to be made ( IN or OUT), hence extinguishing the maturingCommitment toPay, which will no longer be due.

Commitment

to Pay

ContractualMaturity Date

Cash 30 days 60 days

No longerdue

More

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3 Confusion 3: Debit & Credit on a my Bank Statement

Most people discover the wordsDebit and Credit by reading their Bank statements.They associate the word Debit to a Negative Value (Debt) and Credit to a Positive Value (Cash).

Once you hold your own Accounting books, you will open an Account for each business party with whom yourcompany has a relationship, including the Bank. Accordingly, your booking entries will just be the reverse of the Banksbooking entries.

YOUR BANK BOOKS YOUR OWN BOOKS

A debit entry on the statement from your Bank will becomea credit entry on your own books inside your own accounting system.

YOUR BANK BOOKS YOUR OWN BOOKS

CREDIT

1,000

DEBIT CREDITDEBIT

1,000

DEBIT

1,000

CREDIT DEBIT CREDIT

1,000

We define this reversion asthe mirror factor.

To simplify,we shall use the words Left & Rightinstead of Debit & Credit andGreen for Left-Debit Entries & Red for Right-Credit Entries.

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2. The 3 basic Documents

1. The Journal of Booking Entries

The Journal of Booking Entries contains a short description of all business acts occurred andaccounted for upon a given day hence the name of Journalfrom the French word Journal(Daily).Consider the Journal as a preparation document listing all booking entries, defined here asDual Booking Entries made up of 2 Single Booking Items.

The Journal can be compared to a summary sheet filled by a librarian receivinga batch of new books, each morning, all of them in 2 copies, but delivered in bulk.

His job is to find the twin book for each book, then decide where each twin will go insidethe 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).

twinbook

Store

Record & allocatethe destination forthe 2 twins

Sort Out

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B.Accounting in just 8 principles2. The 3 basic Documents

2. The General Ledger (GL)

The General Ledger (GL) is the central document of all accountingsystems. Youneed to understand how it works before understanding the Journal& the Trial Balance .

The General Ledger holds all the T Accounts which will be used

to track the company legal position as it changes day after day.Such changes are triggered by a number of BusinessTransactions. They are measured in $ terms with $ amounts written inside theT Accounts. Each of these $ Amounts will be definedin this course as a Single Booking Item(SBI).

A Booking Entry is defined as a Set of 2 equal Single BookingItems..

Certain complex Booking Entries will hold more than 2 SingleBooking Items.In real life ,the GL does not use colors but only a vertical list in 4columns of $ numbers in black.

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B.Accounting in just 8 principles2. The 3 BasicDocuments

3. The Trial Balance

The Trial Balance is the compilation of all Single Booking Items (SBIs)of all accounts from the General Ledger (GL) as of a given day.

It starts with each individual T. Account where all Single Booking Items (SBIs)held by each column are reduced to TWO Totals :Total of left SBIs on the left column & Total of right SBIs on the right column.

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 somemistakes 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 offailure, try new entries to secure the absolute Left & Right equality.

Total of all Accounts opened inside the GL:

Total of all Left-Debit SBIs= Total of all Right-Credit SBIs

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B.Accounting in just 8 principles3. The Principle of the Legal Entity

You need to get familiar with the legal issues associated with Accounting Entries and see a company as alegal entity by its own right. Think of the company as a person, distinct from the founding shareholdersor from its management, clients, suppliers-vendors, bankers, employees, federal, state & local authorities, socialsecurity, tax authorities etc.

The company will enter into a combination of legal links, commitments, ownerships,responsibilities and obligations to third parties or through Titles of Ownership on objects (Plant, Cars,Trucks, Computers, Goods, etc.).

The company will also hold Titles of Receivables and be subject to Titles of Payables, Titles of Debt & Titles ofVotes & Dividends..

The Company

sourcesusagesTitles of receivableson Clients

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B.Accounting in just 8 principles3. The Principle of the Legal Entity

Company legal titles

Titles of usages Titles of sources

Clients Suppliers

Inventory

Plant

Tax Authority

Shareholders

Titles of Receivablesfrom clients

Titles ofPayablesdue toSuppliers

Titles of Ownershipon Goods

Titles ofDebts dueto others

Titles ofOwnership& Dividends

Titles of Ownershipon Assets

=

Each legal link has a given $value.

The Value of an item will varywith time.

The mission of accounting is toproduce a reliable $ valuationof such items as of the end of

each day

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B.Accounting in just 8 principles4. The principle ofDebit and Credit

The major difficulty for beginners is the concept of Debit & Credit.Instead of using these 2 confusing terms, we will use the Left & Right Positions.

T. Account n1for Assets will record all new Assets on the left of T. Account (here $ 20,000 ).If & when the $ value of one Asset decreases by $2,000 , a single SBI will be posted on the Right of the related T.Account ($2,000 )

Asset ownedT. Account- No1- Truck

2,000

20,000

Title ofOwnership

T. Account- No2- Debt Due

1000

2,000

Supplier

Commitment to Pay

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 SBIwill be posted on the Left of the T. Account (here 1,000).

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B.Accounting in just 8 principles5. The Sources and Usage of Funds

Source of funds

Usage of funds

S o u r c e o f f u n d

s

U s a g e o f f u n d s

The Company

As a rule of thumb, Sources of funds will be posted on the Right ofthe books and Usage of funds will be posted on the Left of thebooks.

If I want to buy a truck for $20,000 as Usage of Funds, I willneed first $20,000 in Source of funds.

The Sourcewill be either in Cash-Out from the Bank or inExtended Payment Terms from the Supplier who agrees to givesome time to his Client to pay him.20,00020,000

From a logical point, we all consider that we needto own Resources(Sources of Funds) before wemay own some Assets (Usage of funds).

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B.Accounting in just 8 principles6. The changes in the company legal positions

Any single change of a legal position triggers instantlyanother $ EQUAL change, in the same way a pendulumwould hit another pendulum of equal weight. If I becomethe legal Owner of a truck or a car, simultaneously I willneed to pay for it, since I just became the Debtor of theformer owner of the truck or the car (until I eventually payfor it).

Any type of business is subjected to a suite of Changes of its Legal Positions towards the external world:It will hold legal claims on third parties and third parties will hold legal claims on it.The value of these legal positions will change with time depending on Payments made (In or out.)and/or on Market value of Post-Money Assets, such as Trucks, Cars, Machinery, Plants, Goods in warehouses etc.(Money converted in Non-Money upon purchase of a given Asset by the company)

The value of these legal positions will change. Such adjustedvalues will be computed according to specific accounting rulessuch as Amortization, Depreciation, Provision defined on Level2 of the full course.

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B.Accounting in just 8 principles7. Double Entry Accounting

Banker of Venice

Borrower Depositor

100Gold coins

200Gold coins

safe

100

Depositorbook

Borrowerbook

Safe book

200

100

200

Around 1400, a new Banker in Venice decides to start its

banking operations in his house. In a room, he places alarge table with a dark blue napkin and 3 Books openedon the table. He also has a small Vault/Safeto keep all gold coins brought in by depositors.He wants to accept deposits from rich individuals andlend same deposits to Borrowers.

He will have to pay interest on the deposits and he willcharge interest on his loans to borrowers. Now, his 3books will keep track of all transactions :

1. Deposits of Coins received from Depositors2. Coins held in the Safe/Vault 3. Loans of Coins to Borrowers

Lets assume a Depositor brings 200 coins which are firstplaced in the safe. The Borrower will then borrow 100coins.Question: how will the banker keep track of all

movements of coins betweenthe Depositor, the Safe & the Borrower?

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B. Accounting in Just 8 Principles7. Double Entry Accounting-The Banker of Venice

Banker of Venice

Safe

Around 1400, a new Banker in Venice decides to start itsbanking 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 coinsbrought in by depositors.

He wants to accept deposits from rich individualsand lend all or part of same deposits to Borrowers.

The Banker places one opened book on the upper left ofthe table (Book n1) called the Borrower Book to track allchanges 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 allchanges of legal position with the depositor.

Finally,Banker places a third book on the middle lowerpart of the table (Book no3) to track all changes of legalposition (ownership) on the Safe.

The depositor comes on the right side of the table

SafeBook

DepositorBook

BorrowerBook

Book 1 Book 2

Book 3

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B.Accounting in Just 8 Principles7. Double Entry Accounting-The Depositor,the Safe and the Borrower

Banker of Venice

Borrower Depositor

100Gold coins

200Gold coins

Safe

Story next: The depositor,in red, is shown on the right side of the table and he brings 200 Gold Coins with him asshown on the image.

The coins are placed inside the safe.

The borrower,in green , is shown on the left side of thetable and he takes with him 100 Gold Coins coming fromthe safe.

The banker wants to record these 2 business transactions

on his 3 books.

In the next 3 slides,we show the rules which definedouble entry accounting.

SafeBook

DepositorBook

BorrowerBook

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B.Accounting in Just 8 Principles7. Double Entry Accounting-3 Accounting Books on the Table

Banker of Venice

BorrowerDepositor

100Gold coins

200Gold coins

Safe

Depositorbook

Borrowerbook

Safe book

Note that the banker will have to repay the depositoraccording to the terms of the deposit agreement and hewill be reimbursed by the borrower according to theterms of loan agreement.

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 fromDepositors 2. Coins held in the Safe/Vault 3. Loans of Coins to Borrowers.

Question:How will the banker keep track of the 2 movements ofcoins between the Depositor, the Safe & the Borrower?

He wants to keep track of the different legal positionsrelated to the deposit,the safe & the loan.

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B.Accounting in Just 8 Principles 7. Double Entry Accounting-New Deposit

Banker of Venice

Depositor

200Gold coins

Safe

DepositorBook

Borrowerbook

SafeBook

200

200

The Depositor has brought in 200 coins which havebeen placed in the Safe. We record the arrival of these 200 coins by posting 2opposite SBIs:

Safe: One 200 SBI on the left side of B3 the bookopened for all legal changes taking place with the safe:

In this case,we record a New Asset (200 coins)ownedby the banker. This New Asset owned by Bankertriggers a New Debt due to the Depositor.

The New Debt is recorded by posting a 200 SBI

on the right side of B2 the book opened for all legal

changes taking place with the depositor (New Debt &Reimbursements of debt).

The 2 SBIs are part of a Dual Booking Entry (DBE). TheNew Asset is recorded by SBI no1 and the New Debt isrecorded by SBI no2.

SBI-2

B2

B3

SBI-1

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B. Accounting in Just 8 Principles7. Double Entry Accounting-New Loan

Banker of Venice

Borrower

Safe

DepositorBook

Borrowerbook

SafeBook

The Borrower has borrowed 100 coins which have beentaken from the safe. We record this Loan Transactionby posting 2 opposite SBIs:

One 100 SBIon the Right side of B3 , the book openedfor all legal changes taking place with the safe:In this case,we record a reduction in Asset (100 coins)owned by the banker. This Asset gone out triggers a New Asset owned by Banker:Loan on the Depositor.The New Asset is recorded by posting a 100 SBI on the

Left side of B1, the book opened for all legal changestaking place with the Borrower (New Loans & NewReimbursements of Loans).

The 2 SBIs are part of a Dual Booking Entry (DBE). The

100 Asset reduction is recorded by SBI no 3 on B3 (the100 coins have taken from the safe) and the New 100Asset-Loan is recorded by SBI no4 on the Borrower Book

B1.

100Gold coins

SBI-4

SBI-3

B1

B3

200

200

100

100

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B.Accounting in Just 8 Principles7. Double Entry Accounting-How to Compute Interest Revenues ?

Banker of Venice

100Gold coins

200Gold coins

Safe

Safe Book

DepositorBook

Content of the 2 AgreementsYou noted the banker signed 2 agreements :One with the depositor and One with the borrower.The Depositor Agreement says that a 10% interestwill apply on the 200 coin deposit. The BorrowerAgreement says that a 25 % interest will apply on the100 coins Loan.

Computing the RevenuesWe assume that a period of 12 months has just finishedand the banker wants to post the related Revenues onthe 100 coins loan to the borrower.

The computation is simple:25% of 100 coins equals 25 coins which are to invoicedto the borrower for the period. Accordingly, bankerholds a new Asset: A new legal claim of 25 coins onthe borrower.

Question:

How to post the booking entry on the Interest revenuesBook ?

T2

100

100

200

200

BorrowerBook

InterestCosts

InterestRevenues

B4

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B.Accounting in Just 8 Principles7. Double Entry Accounting-How to Post Interest Revenues ?

Banker of Venice

100Gold coins

200Gold coins

Safe

Safe Book

DepositorBook

Question:

How to post the TWIN booking entryon the Interest revenues Book ?

Answer:The banker holds a New Asset made up of a claim(Receivables) for 25 coins on the Borrower at the end of12 months,as per loan agreement.This New Asset will go on top of the initial loan of 100coins already reported on the Borrower book.SBI for 25 coins (SBI-5)will be posted on theleft side ofthe Borrower book, just under the 100 SBI..Accordingly,the banker total claim on borrower willadd up to reach 125 coins (100 & 25).

How do we post the twin SBI ?As a rule of thumb,the twin SBI (SBI-6)will be postedon the right side of the Interest revenues book.There is a logic behind this rule,which is explained inlevel 2..

T2

100

100

200

200

BorrowerBook

InterestCosts

InterestRevenues

25

25

SBI-5

SBI-6

B4

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B.Accounting in Just 8 Principles7. Double Entry Accounting-Computing Interest Costs

Banker of Venice

100Gold coins

200Gold coins

Safe

Safe Book

DepositorBook

You noted the banker signed 2 agreements:One with the depositor and One with the borrower.The Depositor Agreement says that a 10% interestper year will apply on the 200 coin deposit .We assume that a period of 12 months has just finished

and the banker wants to post the related Interest Costson the 200 coins Deposit by the Depositor.

The computation is simple:10% of 200 coins equals 20 coins which are to beinvoiced by the depositor for the period. Accordingly,banker has a New Debt :A new legal claim of 20 coins by the Depositor.

Question:How to post the booking entryon the Interest Costs Book

T2

100

100

200

200

BorrowerBook

InterestCosts

InterestRevenues

25

25SBI-8

SBI-7

20

20

B4

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B.Accounting in Just 8 Principles7. Double Entry Accounting-How to Post Interest Costs ?

Banker of Venice

100Gold coins

200Gold coins

Safe

Safe Book

DepositorBook

Question:How to post the TWIN booking entries on the InterestCosts Book ?Answer:The banker has a New Debt made up of a claim(payables) for 20 coins by the Depositor at the endof 12 months,as per Deposit agreement. ThisNew Debt

will go on top of the initial Debt of 200 coinsalready reported on the Depositor book.The SBI for 20coins (SBI-7)will be posted on theRight side of theDepositor book, just under the 200 SBI..Accordingly,the banker total Debt to Depositor will addup to 220 coins (200 & 20).

How do we post the twin SBI ?As a rule of thumb,the twin SBI (SBI-8)will be postedon the Left side of the Interest Costs book.

There is a logic behind this rule,whichwill be explained in Level 2..

T2

100

100

200

200

BorrowerBook

InterestCosts

InterestRevenues

25

25SBI-8

SBI-7

20

20

B4

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B.Accounting in Just 8 Principles7. Double Entry Accounting-The Yellow Double Arrow

Banker of Venice

100Gold coins

200Gold coins

Safe

SafeBook

DepositorBook

How T Accounts are linked ?To symbolize the relationship between the lower darkblue table and the upper light blue table,we use a double arrow.

This is a way to visualize the twin SBIs related toRevenues 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 socalled Balance Sheet Accounts which keep the recordof the $ value of all Assets and all Debts as of the end

of any day.

All books on the light blue table represent the so calledIncome statement accounts which keep the record ofall Revenues & Costs over a past period of time(usually the last 12 months).

T2

100

100

200

200

BorrowerBook

InterestCosts

InterestRevenues

25

2520

20

B4

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B.The 8 principles of Accounting8. The T Accounts

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 berecorded by a Dual Booking Entry (DBE) made up of 2 SingleBooking Items (SBI).

Each SBI symbolize a specific Change of Legal Position for thebanker. Deposit of 200 coins from the depositor means 1 DualBusiness Act between Banker & the Depositor, with 2 Changes ofLegal positions which are recorded by 2 SBIs, hence making 1DBE.

Borrower T account Depositor T account

Safe T account

100 200

spreadspread

200100

spread

DBE 1

DBE 2

DBE n

Total of all SBIs sent to GL*

SBIs* descriptions & T accdestinations (GL*numbers) left right

200200

300 300

100 100

200 - SBI 1 description200 - SBI 2 description

100 - SBI 3 description

100 - SBI 4 description

Journal of Booking Entries In the Journal, we show 2 DBEs, each one with the full details,such as the Amounts, the targeted Accounts Names & No & thedestination side of each SBI (left or right) inside each of the 2Targeted T Acc.

Total of all Left SBIs must be equal to the Total of all RightSBIs. The Journal is the only way to post a DBE inside theGeneral Ledger.

The General Ledger

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B.The 8 principles of Accounting8. The T Accounts

SBI

SBI

SBI

SBI

SBI

Total Left Total Right

Spread Balance-=

Balance of one AccountTotal Left minus Total Right

A T. Account over the life of the company will recorda large number of SBIscoming from the Journal.The life of the company is divided into accounting periods of 12months often starting on January 1st and ending on december31 st.

From time to time and at the end of regular periods, weproceed to the addition of all SBIsof the left side & of all SBIsofthe right side inside each T Account of the General Ledger.

Then, we compute the spread between the 2 totals. We definethe 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 isposted into another T. Account as indicated on the Journal.

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Application of the 3 DocumentsC

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C.Application of the 3 Documents1. Application to the General Ledger : Replacing 5 Books by 5 T. Accounts

The example of the banker of Venice and his 2 tableswith 5 books (3 & 2) will serve as an introduction tothe GL shown here in a semi-vertical format asopposed to the standard full vertical format as shownon previous slide.You can see on the other half of this sliderepresentation of the so called SBI-poster design..

You can recognize the light blue upper table forincome statement accounts (Revenues & Costs)and thedark blue lower table for the the balance sheetaccounts. Each of the 5 Books used by the Bankerhas been replaced by a T Account.

Between the 2 tables/Rectangles,we have placedthe double yellow arrow for the guidance of SBIs

between Income Statement accounts and BalanceSheet accounts. We have inserted the 8 SBIspreviously shown on the 2 tables.

Int. Cost Acc.

Depositor AccBorrower Acc

Int. Rev. Acc.

Safe Account

200

25

100

100

200

2025

20

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1. Application to the General Ledger: Class/SubClass Numbers.

As initially told on the first slide, there are 8 classes ofaccounts inside a GL. The classes range from Class 1 toClass 8.Each T Account carries a Name and a Number.The Number starts with the class Number. It mayinclude many digits.The second digit indicates the subclass number asdefined by the Chart of Accounts specific to a given

company.

Obviously a small company (say a grocery store)will not use the same type of Chart of Accounts as aBank or a Car manufacturer. However,each companywill stick to the same basic accounting rules,as appliedby CPAs(Certified Professional Accountants).

The rules give some freedom for classes definitionswhich may vary from one company to another,especially for Revenues & Costs. We have chosen themost frequent class allocation with class 1 for Asset,class 2 for Debts, class 3 for Shareholders,class 4 forRevenues & class 5 for Costs..

Int. Cost Acc.


Int. Rev. Acc.

Safe Account

200

25

100

100

200

2025

20

5.1 4.1

2.11.2

1.1

C.Application of the 3 Documentsy

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Int. Cost Acc.


Int. Rev. Acc.

Safe Account

200

25

100

100

200

2025

20

5.1 4.1

2.11.2

1.1

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.

SBI-Poster

C.Application of the 3 Documents1. Application to the General Ledger: Semi-vertical GL versus Full-Vertical GL

First 200 Coins In Safe

First Inter Receivable-12 months

First 100 Coins loan to Borrower

First 100 Coins out of Safe

First 200 Coins Deposit

200 100

100

25

2002.1

1.2

1.2

1.1

1.1

Total of all SBIs at year end in GL

2.1 First Interest Payable-12 months

Int.Costs incurred over 12 months

Int. Rev. earned over 12 months4.1

5.1

20

25

345 345

20

Vertical list of all SBIs after 12 months Left Right

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

y

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1. Application to the General Ledger: New legal Entity & New Shareholder

Int. Cost Acc.


Int. Rev. Acc.

Safe Account

200

25

100

100

200

2025

20

5.1 4.1

2.11.2

1.1

Foundation of a New legal EntityWe assume that the banker has now made thedecision to run his bank as distinct legal entity,underthe name of Bank of Venice.

He decides to bring 900 coins as New Capital.The 900 coins are placed inside the Safe.

9003.1

New House1.3

900

How to post booking entry for New Capital ?

First,900 coins have been brought in the safe.This will be recorded by a 900 SBI (no9) posted onthe left side of the T Account allocated to the Safe.(History of the safe coin content over time)

The twin 900 SBI (no10) will be posted on the rightside of the T Account allocated to the Shareholder.

(History of all capital brought in by Shareholder).This T. Acc is also defined as paid up capital.More explanations on Level 2.

SBI-9

C.Application of the 3 Documents

Shareholder

y

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1. Application to the General Ledger: New House T. Account

Int. Cost Acc.


Int. Rev. Acc.

Safe Account

200

25

100

100

200

2025

20

5.1 4.1

2.11.2

1.1

Foundation of a New legal EntityWe assume that the banker has now made the decisionto run his bank as distinct legal entity,under the nameof Bank of Venice. He decides to bring900 coins as New Capital . He then decides to buy at aprice in cash of 400 coins a New House for thecompany business instead of using his own house.

How would you post the related booking entries ?

900 Shareholder

New House1.3

900

How to post booking entry for a New House ?

First the new bank has taken ownership of the newhouse,recorded by a 400 SBI (no 11)posted on the leftside of the T Account allocated to the House.

The twin 400 SBI,(no13)recording the 400 coins takenout of the safe,will be posted on the right side of the TAccount allocated to the Safe.The money value of the house will be adjusteddownwards over time.This will be done with SBIsposted on the right side.

400

400SBI-11

SBI-12

3.1

C.Application of the 3 Documentsy

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2. Application to the Journal: How to fill the Journal of DBEs

Once you know how to fill a GL under the SBI-posterformat,it becomes easier to fill the Journal of BookingEntries (or DBE for Dual Booking Entries).

Each Business transaction will be recorded by a DBEEntry made up of at least 2 Twin SBIs posted on 2different T Accounts.

As defined on slide,the accountant needs to identifythe Twin SBIs for each transactions..He needs to knowthe $ amount,the names and numbers of the 2 TAccounts and on which sides to post each SBI.

Int. Cost Acc.


Int. Rev. Acc.

Safe Account

200

25

100

100

200

2025

20

5.1

4.1

2.11.2

1.1We have designed a sample of a Journal with the firstDBE posted inside the GL.

The Journal list the first SBI (SBI-1)with informationrelated to this Item (200 coins placed in the safe).The Safe T. Acc number is indicated (1.1) and the 200amount is inserted on the left column.

The twin SBI (SBI-2) record the new debt due to theDepositor (T Acc. nber 2.1) & the 200 amount is insertedon the right column.

SBI-1

SBI-2

DBE1


DBE 1

left right

200

200

200 in safe (1.1)SBI-1

SBI-2 200 on depo (2.1)

List of DBE and T acc destinations

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3. Application to the Trial Balance: The connection between GL and Trial Balance

The 3 Accounting Documents General Ledger

Trial Balance

We have seen on slides no 9-10-11 the first presentation of the 3accounting documents:The Journal is a preparation document used to define each DualBooking Entry made up of at least 2 twin SBIs.Each SBI is then sent to its destination inside the GL,that is thecorrect T. Account and the correct side of such T. Account.

Over the accounting period (usually 12 months),the companywill experience a number of business transactions,each of themrecorded by 2 twin SBIs. SBIs are stored into T Accounts insidethe GL.

At the end of these 12 months,the accountant will try tobalance all the SBIs held inside the GL.This means that the totalof all left SBIsmust be equal to the total of all right SBIs.

The Difference between a GL and a Trial balance

The GL lists all SBIs which will have been posted over a givenperiod of time (usually 12 months).The Trial balance will only show the totals of SBIs(Total Left & Total Right ),Account after Account, as well asthe Spread Balance.(Left minus Right)

Journal

The GL will show a largeNumber of lines for eachT Account.

The Trial Balance willshow only one linefor each T Account.


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3. Application to the Trial Balance: The 4 Columns (SBIs & Spreads)

The Next slide will show the GL of the Bank of Venice atthe end of a 12 months accounting period,including the New Capital and the New Investment(new house).GL is shown according to the SBI-poster format instead ofthe standard full vertical format. In the Trial Balance, theT. Accounts will be listed vertically by numerical order(from 1. 1 to 5. 1).

Each T. Account will be represented by a single line with3 Total Amounts shown on 3 columns:

1.The total of all left SBIs represented by a small Green Box2.The total of all right SBIs represented by a small redBox.3.The difference between these 2 totals. also called thespread balance which will be symbolized by a triangle(green or right).

A complete GL & Trial balance should list T Accountsfrom 8 different classes. Here the Bank only uses 5 classes(1-2-3-4-5)


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3. Application to the Trial Balance: How to fill the Trial Balance.

Int. Cost Acc.


Int. Rev. Acc.

Safe Account

200

25

100

100

200

20025

200

5.14.1

2.11.2

1.1

900 3.1

New House1.3

900

400

400

5.1.Int.Cost Ac

4.1.Int.Rev.Ac.

3.1.ShareH.Ac

2.1.Deposit.Ac

1.3. House Ac.

1.2. Borrower Ac.

1.1. Safe Ac.

0

0

20

0

0

0

400

125

6005001.100 nap

nap125

400 nap

220 nap 220

900 nap 900

25 nap

0

List of all Acc.

1,1451,145

20 nap

25

1,6451,645

All SBIs (L&R) Spread Balance

Totals 4 Col.


Shareholder

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3. Trial Balance: Comments at the end of 12 months

We are now making some comments on thissimplified Trial Balance.

This GL held only 7 T Accounts, while a normal GLinside a normal Bank would hold thousands of TAccounts.

This chart of accounts covers only 5 classes of

accounts (1 to 5) while a normal chart of accountswould hold accounts belonging to 8 classes ofaccounts.

We note that certain T Accounts have a naturaltendency to show a Left Spread Balance while otherhave a natural tendency to show a Right SpreadBalance.

The spread balance for a given account is either leftor right, it can not be both. If the spread balancehappen to be zero,it means the account carries noresidual value at the end of the day the GL wasclosed. In level 2, you will be shown how to computethe profit (or loss) as well as how to draw thefinancial statements.

5.1.Int.Cost Ac

4.1.Int.Rev.Ac.

3.1.ShareH.Ac

2.1.Deposit.Ac

1.3. House Ac.

1.2.Borro Ac.

1.1. Safe Ac.

0

0

20

0

0

0

400

125

6005001.100 nap

nap125

400 nap

220 nap 220

900 nap 900

25 nap

0

List of all Acc.

20 nap

25

All SBIs (L&R)Spread Balance
