Professional Documents
Culture Documents
BY RICHARD A. PRICE
Table of Contents
INTRODUCTION .......................................................................................................................1 PART I THE BASICS
1. ACCOUNTING RULES ......................................................................................................3 2. CHECKING ACCOUNTS ...................................................................................................4 3. JOURNALS AND LEDGERS .............................................................................................6
1. INVESTING IN THE BUSINESS .......................................................................................7 2. LOANS .................................................................................................................................8 3. PURCHASE OF EQUIPMENT ...........................................................................................9 4. PURCHASE OF SUPPLIES WITH CASH .......................................................................10 5. PURCHASE OF SUPPLIES WITH CREDIT....................................................................11 6. PAYMENT OF A CREDIT PURCHASE ...........................................................................12 7. EXPENSES ........................................................................................................................13 8. SUPPLY EXPENSE ...........................................................................................................14 9. ACCRUED EXPENSE.......................................................................................................15 10. PAYMENT OF AN ACCRUED EXPENSE.......................................................................16 11. DEPRECIATION EXPENSE .............................................................................................17 12. SALE FOR CASH ..............................................................................................................18 13. SALE FOR CREDIT ..........................................................................................................19 14. RECEIVE PAYMENT FOR CREDIT SALE.....................................................................20 15. LOAN PAYMENT .............................................................................................................21 16. INTEREST PAYMENT ......................................................................................................22 17. PERSONAL DRAW ...........................................................................................................23
CHART OF ACCOUNTS ..................................................................................................25 COMPLETED JOURNAL .................................................................................................26 COMPLETED LEDGER ...................................................................................................28 BALANCE SHEET ............................................................................................................34 INCOME STATEMENT ....................................................................................................35 END OF PERIOD ADJUSTMENTS .................................................................................36
CONCLUSION ..........................................................................................................................37
INTRODUCTION
This is a book about accounting theory. It presents a new way of looking at accounting. I do not pretend to know the full depth of accounting. I am not an accountant and as such cannot guarantee everything here is accurate according to accounting protocol. Were I an Accountant I would probably be thrown out of every accounting organization and have my CPA license revoked for presenting such an idea. After all, the current ideas have been in place for millennia. I am, however, a Systems Analyst and as such have more than a marginal knowledge of accounting and bookkeeping principles. This presentation is my analysis of a better way of learning the basic principles of accounting. It is up to others to expand upon this theory, take the ball, and run with it.
As you can see, From and To work just ne in place of Credit and Debit and we did not have to use any accounting rules. We were not even concerned about which column was increasing and which column was decreasing. It all happened as a matter of course. To be consistent with present accounting procedure, we will use the left or debit column as the To column and the right or credit column as the From column.
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2. Checking Accounts
This column usage has always been confusing to the layman, as we are used to using the right column as the To column to record increases in our checking account, and the left column as the From column to record decreases in our checking account. This is the opposite of accounting procedures. Cash To From (Deposit) (Withdrawal) $50.00 Traditional Accounting Checking From To (Withdrawal) (Deposit) $50.00 Checking Account
The reason that this is done is because the bank is recording the deposits and withdrawals from their point of view. You are actually loaning the bank $50 and have a Credit on the books of the bank. Your checking account on the books of the bank
In traditional accounting recording increases on the left side of the Cash Account and decreases on the right side is the correct thing to do for your own books. Nevertheless, in a number of personal computerized accounting systems on the market, increases are recorded on the right side and decreases on the left side, because this is the way people are used to doing it in their own checkbook. Personally, I think that this just adds to the confusion. In this book we will stick to the traditional method.
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We would then post the individual entries into the Sales and Cash accounts in our ledger. Sales From (credit) $50.00 Cash From (credit)
To (debit)
To (debit) $50.00
In many modern computerized systems, only the journal entry is made manually. The posting to the individual ledger accounts is made by the computer automatically. This greatly simplies the bookkeeping procedure.
$10,000.00
To (debit) $10,000.00
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2. Loans
When our own funds and those of our co-investors are insufcient, the business needs to borrow money from someone else. This is a protable thing to do providing our prots are higher than the interest paid on the loan. We decide that we need to borrow an additional $15,000 in order to set up our business. The money comes From an account called Loans Payable and goes To our friend, the Cash Account Journal To (debit)
$15,000.00
To (debit) $15,000.00
3. Purchase of Equipment
One of the rst things that most businesses need to do before they commence operations is purchase some equipment. We decide to purchase a computer system worth $6,000. The money is withdrawn From our Cash Account and the purchase goes To Equipment. Journal To (debit)
$6,000.00
To (debit)
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$1,000.00
To (debit)
To (debit) $1,000.00
$1,100.00
To (debit) $1,100.00
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To (debit)
7. Expenses
The items we have been purchasing thus far, equipment and supplies, are items that retain their value. Such items are called Assets. When we spend money for something that is consumed right away, it is called an expense. We pay $500 for Utility charges. The money goes To an expense account called Utility Expense. Journal To (debit)
$500.00
To (debit)
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8. Supply Expense
Expenses also occur as we use up our supplies. This is the effect on our accounts if we use up $200 of our paper supplies. Journal To (debit)
$200.00
9. Accrued Expense
Sometimes a business needs to charge an expense to a period of time before the money is actually paid out. This is called an Accrued Expense. It is treated as if the future expense is a loan. The From account is called Accrued Expense and the To account is the expense. This type of accounting is frequently done for items like taxes when it is desirable to charge, say, this years portion to this year, while the taxes are not actually payable until next year. It may also be done for items like insurance or labor expenses where the accounting periods overlap. The property taxes due next April for our business is $3,000. We want to charge $1,500 of that expense to this year. Description From Accrued Taxes To Tax Expense $1,500.00 Journal To (debit) From (credit) $1,500.00
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$1,500.00
To (debit)
To Depreciation Expense
$2,000.00
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$7,000.00
To (debit)
To (debit) $7,000.00
$7,600.00
To (debit)
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Description
To (debit) $5,000.00
$3,000.00
To (debit)
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$1,050.00
$2,000.00
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2. Completed Journal
The following is a completed Journal for all of the transactions in this example. Date Item Description 1 2 3 4 5 John Jones Initial Investment Valley Bank Business Loan Oneida Computers Computer System Account From 300-Capital To 100-Cash From 200-Loans Payable To 100-Cash From 100-Cash To 120-Equipment To (debit) 10,000.00 15,000.00 6,000.00 1,000.00 From (credit) 10,000.00 15,000.00 6,000.00 1,000.00 1,100.00 1,100.00 550.00 550.00
Stern Business Forms From 100-Cash Purchase Paper To 120-Supplies Stern Business Forms From 210-Accounts Paper on Credit Payable To 120-Supplies Stern Business Forms From 100-Cash Pay for Paper To 210-Accounts Payable Municipal Utilities Pay for Utilities Use of Paper Prorate Taxes Pay Accrued Taxes* (Payment to be made in next period) From 100-Cash To 330-Utility Expense From 120-Supplies To 340-Paper Expense From 220-Accrued-Taxes 370-Tax Expense To
7 8 9 10
12
7,000.00 7,600.00
7,000.00 7,600.00
13
14
15 16 17
* You will note that we did not include the payment of the accrued expense in this list, since the payment of an accrued expense always occurs in a subsequent period.
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3. Completed Ledger
Now we will list all of the accounts in the ledger. We will place them in Asset, Liability and Net Worth Order. An Asset is any property owned by the business or owed to it. You will note that To entries in an asset account increases the assets balance, while From entries decrease an assets balance. Asset Accounts Date Item Description 1 2 3 4 6 7 12 14 100-Cash To (debit) 10,000.00 15,000.00 From (credit) Balance 10,000.00 25,000.00 6,000.00 19,000.00 1,000.00 18,000.00 550.00 500.00 7,000.00 5,000.00 17,450.00 16,950.00 23,950.00 28,950.00
John Jones From 300-Capital - Initial Investment Valley Bank - Business Loan From 200-Loans Payable Oneida Computers To 130-Equipment - Computer System Stern Business Forms To 120 Supplies - Purchase Paper Stern Business Forms - Pay for Paper To 210-Accounts Payable Municipal Utilities - Pay for Utilities To 330-Utility Expense Northwest Realty From 320-Sales - Sale for Cash Charlies Market - Cash for Sale From 110-Accounts Receivable
Valley Bank - Loan Payment To 200-Loans Payable Valley Bank - Interest Payment To 350-Interest Expense John Jones To 310-Personal Draw 110-Accounts Receivable To (debit) 7,600.00
From (credit)
Balance 7,600.00
5,000.00
2,600.00
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Asset Accounts (continued) Date Item Description 4 5 8 120-Supplies To (debit) 1,000.00 1,100.00 200.00 From (credit) Balance 1,000.00 2,100.00 1,900.00
Stern Business Forms From 100-Cash - Purchase Paper Stern Business Forms - Purchase Paper From 210-Accounts Payable Use of Paper To 340-Paper Expense 130-Equpment
To (debit) 6,000.00
From (credit)
Balance 6,000.00
Oneida Computers From 100-Cash - Computer System Expense Depreciation To 360-Depreciation Expense
2,000.00
4,000.00
Valley Bank To 100-Cash - Business Loan Valley Bank From 100-Cash - For Loan Payment 3,000.00
From (credit)
Balance
Stern Business Forms To 120-Supplies - Paper on Credit Stern Business Forms From 100-Cash - Pay for Paper 550.00
Balance 1,500.00
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Net Worth is what is left over when Liabilities are subtracted from Assets. Net Worth is also the total of the Capital, Personal Draw, Sales and Expense Accounts. From entries increase the balances in the Capital and Sales Accounts while To entries increase the balances in the Personal Draw and Expense Accounts. Overall From entries increase Net Worth and To entries decrease Net Worth. Net Worth Accounts Date Item Description 1 300-Capital To (debit) From (credit) Balance
10,000.00 10,000,00
From (credit)
Balance 2,000.00
To (debit)
Balance 7,000.00
Northwest Realty To 100-Cash - Sale for Cash Charlies Market - Sale for Credit To 110-Accounts Receivable
7,600.00 14,600.00
From (credit)
Balance 200.00
From (credit)
Balance 1,050.00
From (credit)
Balance 2,000.00
To (debit) 1,500.00
From (credit)
Balance 1,500.00
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4. Balance Sheet
The Balance Sheet is a recap of the Ledger Accounts. It gives the total of Assets, the total of Liabilities and the total of Net Worth. The Assets always equals the Liabilities plus the Net Worth. The Balance Sheet is useful in determining what the business owns, moneys owed, and the value of the business to the owners. To Assets (debit) 100-Cash 110-Accounts Receivable 120-Supplies 130-Equipment Total Assets Liabilities 200-Loans Payable 210-Accounts Payable 220-Accrued Taxes Total Liabilities Net Worth 300-Capital 310-Personal Draw 320-Sales 330-Utility Expense 340-Paper Expense 350-Interest Expense 360-Depreciation Expense 370-Tax Expense $22,900.00 2,600.00 1,900.00 4,000.00 $31,400.00 $12,000.00 550.00 1,500.00 $14,050.00 $2,000.00 500.00 200.00 1,050.00 2,000.00 1,500.00 $7,250.00 Total Net Worth Total Liabilities + Net Worth $10,000.00 14,600.00 From (credit)
5. Income Statement
The other common useful summary information for a business is the income or prot and loss statement. It tells what a business has earned or lost during the current operating period. Basically, Income is Sales and other earnings less the Expenses of operating the business. Income 320-Sales Total Income Expenses 330-Utility Expense 340-Paper Expense 350-Interest Expense 360-Depreciation Expense 370-Tax Expense Total Liabilities Net Income (Sales less Expenses) To (debit) From (credit) $14,600.00 $14,600.00 $ 500.00 200.00 1,050.00 2,000.00 1,500.00 $ 9,350.00
$ 5,250.00
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CONCLUSION
The reason that I wrote this book is that through my study of accounting and the keeping of my own books, I discovered that when an entry was recorded on the right or credit side of an account, it was describing that account as a source of funds; and when an entry was recorded on the left or debit side of an account, it was describing that account as a destination of funds. I have never seen this written in any book on accounting or bookkeeping, but it has certainly helped in my mind to keep my debits and credits straight. Whenever I hear the word Credit, I think of From. When I hear the word Debit, I think of To. Well, there you have it. Accounting for the New Age. Traditional accountants may not like the ideas that we have been discussing, but as they say, it works for me. I hope that it works for you too! For additional information, please contact the author at richardalanprice@gmail.com