UNSW Business School

School of Accounting
ACCT1501 Accounting and Financial Management 1A
Session 1 2017

Week 3

The Double Entry System

Student Handout

Lecturer:
Dr. Youngdeok Lim
School of Accounting
UNSW

Moodle: https://moodle.telt.unsw.edu.au

Session 1, 2017 ACCT1501

 WEEK 3: The Double Entry System

1. Introduction
Last week we discussed the importance of the balance sheet and income statement to
managers. It is therefore critical that every manager understand the impact of transactions
on these financial reports. This week covers those skills by extending transaction analysis,
which considers the impact of specific transactions on the accounting equation. The
double entry system involving debits and credits, which forms the basis of modern
accounting, is then addressed.

Learning objectives
At the end of this topic you should be able to:

Carry out transaction analysis and determine the impact of transactions on elements
of balance sheets and income statements
Describe how debits and credits work in the double entry accounting system.
Understand debits and credits in the context of transaction analysis

Required reading

Trotman, Gibbins & Carson Chapter 3

2. Tutorial Questions Week 4

Students should attempt these questions before the tutorial.

Preparation Questions:
DQ3.1, 3.2, 3.4,
P3.16, P3.18, P3.19, Case 3A
Tutorial Questions:
DQ3.3, 3.6, 3.9,
P3.5, P3.12, P3.20

Session 1, 2017 ACCT1501

3. Lecture example P3.6

Find the unknowns for LAP Ltd given the following information:

$m $m
Assets 1 July 2015 600 Assets 30 June 2016 ?
Liabilities 1 July 2015 ? Liabilities 30 June 2016 300
Share capital 1 July 2015 180 Share capital 30 June 2016 190
Retained profits 1 July 2015 200 Retained profits 30 June 2016 ?
Revenue for the year 800
Expense for the year 650
Dividends 50

Session 1, 2017 ACCT1501

 Billabong posts $126.3m half-year loss
Sue Mitchell
February 21, 2014

Troubled surf and skate wear retailer Billabong International is yet to see signs of a
turnaround, reporting a net loss of $126.3 million for the six months ending December
after booking another $132.6 million in asset writedowns and restructuring costs. The
loss compared with a bottom line loss of $536.6 million in the year-ago period. Before
one-off costs, underlying net profit fell from $19 million to just $1.8 million, falling short
of market forecasts around $6.5 million. Earnings continued to decline in North America
and Europe, offsetting gains in Australasia.

"This is a complex, difficult turnaround, said chief executive Neil Fiske. "We are not
daunted by challenges we face, but neither do we underestimate them." Mr Fiske
unveiled a major global restructuring of marketing, merchandising, sourcing and HR
functions and announced several key appointments. "This is just the beginning - we
reiterate the turnaround is difficult and complex and the lag effect of months of turmoil
will be with us for a while longer," he said. "But we have confidence in the potential of
the brands and know what we need to do and are getting on with it at an aggressive pace,"
he said.

Billabong shares went into a trading halt after the company launched its previously
announced $50 million rights issue. The funds will be used to repay existing debt. Mr
Fiske, who took the helm last September, hopes to restore profits by building Billabong's
three biggest brands - Billabong, RVCA and Element - as well as supporting emerging
brands and culling those that are cluttering the portfolio.

Mr Fiske also plans to reduce the number of products and stores, develop integrated
marketing strategies for each region, and improve Billabong's supply chain - moving to
fewer, bigger, suppliers - to reduce costs and improve the quality of its products. Last
month, Billabong shareholders approved a $386 million debt and equity rescue package,
which handed 41 per cent of the company to US hedge funds Oaktree Capital and
Centerbridge Partners. The company was in danger of collapse last year after posting a
$860 million loss and writing down the value of the Billabong brand to zero. Group sales
from continuing operations fell 2.4 per cent.

Read more: http://www.smh.com.au/business/retail/billabong-posts-1263m-halfyear-loss-

20140221-335k7.html#ixzz3Tln74Eg7

Session 1, 2017 ACCT1501

 ACCT1501 Accounting and Financial Management 1A
Semester 1, 2017

Week 3
The Double Entry System

Lecturer: Dr. Youngdeok Lim

1
 Revisit the definition of an asset
To be reported on a balance sheet, assets must
(1) Meet definition criteria
And THEN
(2) Meet recognition criteria!
A resource that is controlled by an entity as a result of past events, and
from which future economic benefits are expected to flow to the
entity.
Assets recognition criteria:
(a) It is probable that any future economic benefit associated with
the item will flow to the entity, and
(b) The item has a cost or value that can be measured reliably

2
 Revisit balance sheet and income statement

Beginning period (t-1) Ending Period (t)

L t-1 Lt
A t-1 At
SE t-1 SE t
Incorporated into B/S

A t-1 = L t-1 + SE t-1 A t = L t + SE t

E R

Capture of income
R E = Profit for the period

Retained profits: the sum of net profits earned over the life of a company less dividends
declared to shareholders

3
Revisit the accounting equation expanded

Where:
SC = Share capital
RP = Retained profits
R = Revenue
E = Expenses
D = Dividend (declared)
t = time t (at the ending period)
t-1 = time t-1 (at the beginning period)
4
 Todays lecture objectives:
Carry out transaction analysis and determine the impact of
transactions on elements of balance sheets (i.e. A, L, and SE) and
income statements (i.e. R and E)

o transaction 1-7.
o LRM ltd (transaction 8-14).
Hot: Describe how debits and credits work in the double entry
accounting system.

Understand debits and credits in the context of transaction analysis

5
 I like accounting because it is like figuring out a
puzzle.
-Stephanie Chingkin,
Lead accountant, GE Capital Provident Trust
Group

6
Revision question 1 Lecture example (P3.6)

Find the unknowns given the following information:

$m $m
Assets 1 July 2015 600 Assets 30 June 2016 ?
Liabilities 1 July 2015 ? Liabilities 30 June 2016 300
Share capital 1 July 2015 180 Share capital 30 June 2016 190
Retained profits 1 July 2015 200 Retained profits 30 June 2016 ?
Revenue for the year 800
Expense for the year 650
Dividends 50

7
 Business Model
Investors (e.g. banks,
shareholders)
Financing

Purchase of inventory Sale of inventory

Suppliers Company Customers

(e.g. farmers) (e.g. Woolworths) (e.g. You)

Payment Payment
(Cash/Accounts (Cash/Accounts
Payable) Investing
Receivable)

Property Plant and Equipment,

financial securities etc

8
Consolidated Balance Sheet Woolworths group

As at 26 June 2016

Current Assets $7,427 M Current Liabilities $8,993 M

Noncurrent $16,075 M Noncurrent Liabilities $5,727 M

Assets
Total Liabilities $14,720 M
Equities $8,782 M

Total Assets $23,502 M Total Liabilities and $23,502 M

Equities

9
Consolidated Income Statement Woolworths group

For the 52 weeks ended on 26 June 2016

Revenue $58,275 M
- Cost of sales (Cost of goods sold) ($42,677 M)
Gross profit $15,598 M
+/- other revenue/expense ($17,946 M)
Net loss ($2,348 M)

10
 Transactions

Transactions are events that affect the operations or

finances of an organisation.
Analyze each transaction from the perspective of a company!
Accounting systems record transactions.

11
 Transaction analysis

Transaction analysis involves an examination of each

business transaction with the aim of understanding its effect
on the accounting equation (i.e. A=L+SE).

Example: Borrow $10 000 from the bank.

A liability (source) has increased Loan
An asset (resource) has increased Cash

After this transaction the accounting equation is in balance.

12
 Transaction analysis: The accounting
equation extended

The equation you were introduced to earlier is as

follows:
Assets = Liabilities + Equity
This is extended to:
A = L + SE
CA + NCA = CL + NCL + SE
What is SE made up of?

13
 Expanding the accounting equation
A = L + SE
CA + NCA = CL + NCL + SE
Where SE:
SC + Op. RP + profit dividends
SC = Capital contributions by equity holders (share capital)
Op. RP = Opening retained profits
Profit = R E
R = Revenue
E = Expenses
D = Dividends to equity holders

CA + NCA = CL + NCL + SC + Op. RP + R E D

14
 Link between the balance sheet and the income
statement

Balance sheet

CA + NCA = CL + NCL + SE

CA + NCA = CL + NCL + SC + Op. RP + R E D

Income statement

15
 Lets consider seven transactions.

16
 Transaction 1

Issued shares for $300 000 cash.

Share capital
Cash

A = L + SE
Does the accounting equation balance?
YES! It must balance!

17
 Transaction 1

Issued shares for $300 000 cash.

Assets = Liabilities + Shareholders equity

Accounts Share Retained
Cash Receivable Equipment Bank Loan Capital Profits
1 +300,000 +300,000

18
 Transaction 2

Borrowed $50 000 cash from the bank.

Cash Bank Loan

A = L + SE

Does the accounting equation balance?

YES! It must balance!

19
 Transaction 2

Borrowed $50 000 cash from the bank.

Assets = Liabilities + Shareholders equity

Accounts Share Retained
Cash Receivable Equipment Bank Loan Capital Profits
1 +300,000 +300,000
2 +50,000 +50,000

20
 Transaction 3

Purchase equipment for $100 000 cash.

Equipment

A = L + SE
Cash

Does the accounting equation balance?

YES! It must balance!

21
 Transaction 3

Purchase equipment for $100 000 cash.

Assets = Liabilities + Shareholders equity

Accounts Share Retained
Cash Receivable Equipment Bank Loan Capital Profits
1 +300,000 +300,000
2 +50,000 +50,000
3 -100,000 +100,000

22
 Transaction 4

Signed six-month agreement to provide catering service for

a monthly fee of $2500 starting next month.

A = L + SE

23
 Transaction 4

Not a transaction:
no service provided.
no current right to receive.
no cash movement that needs to be recorded.

24
 Transaction 5

Catering services provided for an office function; billed

customer for $2500.

Accounts Revenue
receivable

A = L + SE
Does the accounting equation balance?
YES! It must balance!

25
 Transaction 5

Catering services provided for an office function; billed

customer for $2500.

Assets = Liabilities + Shareholders' equity

Accounts Share Retained
Cash Receivable Equipment Bank Loan Capital Profits
1 +300,000 +300,000
2 +50,000 +50,000
3 -100,000 +100,000
4
5 +2,500 +2,500 Revenue

26
 Transaction 6

Customer paid $2500 they owed on their account.

Cash

A = L + SE
Accounts
receivable

Does the accounting equation balance?

YES! It must balance!

27
 Transaction 6

Customer paid $2500 they owed on their account.

Assets = Liabilities + Shareholders equity

Cash Accs Equipment Bank loan Share Retained
rec. capital profits

1 +300,000 +300,000

2 +50,000 +50,000

3 -100,000 +100,000

5 +2,500 +2,500 Revenue

6 +2,500 -2,500

28
 Transaction 7

Paid the bank $5000 as part repayment of the loan.

A = L + SE

Cash Bank loan

Does the accounting equation balance?

YES! It must balance!

29
 Transaction 7

Paid the bank $5000 as part repayment of the loan.

Assets = Liabilities + Shareholders equity

Cash Accs Equipment Bank loan Share Retained
rec. capital profits

1 +300,000 +300,000

2 +50,000 +50,000

3 -100,000 +100,000

5 +2,500 +2,500 Revenue

6 +2,500 -2,500

7 -5,000 -5,000

30
 Transaction analysis complete

Assets = Liabilities + Shareholders equity

Cash Accs Equipment Bank loan Share Retained
rec. capital profits

1 +300,000 +300,000

2 +50,000 +50,000

3 -100,000 +100,000

5 +2,500 +2,500 Revenue

6 +2,500 -2,500

7 -5,000 -5,000

247,500 0 100,000 = 45,000 + 300,000 2,500

347,500 = 45,000 + 302,500

A = L + SE

31
 Balance sheet

ASSETS LIABILITIES
Cash 247 500 Bank loan 45 000
Equipment 100 000
SHAREHOLDERS EQUITY
Share capital 300 000
Retained profits 2 500
347 500 347 500

Assets = Liabilities + Shareholders equity

32
 Income statement

Revenue 2 500
Expense 0

Net profits 2 500

33
Revision Question 2

Inventory was purchased for cash, when:

1. an asset increased and another asset decreased

2. an asset decreased and an expense increased
3. an asset decreased and a liability decreased
4. a liability increased and an expense increased

34
 An illustrative example: Prepare transaction analysis

LRM Ltd: Balances as at 1 April 2016

Cash 140 000
Inventory 55 000
Land and buildings 300 000
Equipment 90 000
Accounts payable 15 000
Notes payable 70 000
Loans 300 000
Share capital 200 000

35
 Transactions for April 2016

8 Cash sales of $30 000; Cost of goods sold = $12 000.

9 Credit sales of $40 000; Cost of goods sold = $16 000.
10 $8000 payments to suppliers on the account.
11 $20 000 wages paid for first 2 weeks of April.
12 Received invoice for $2000 for an advertisement on
April 5.
13 Received $25 000 from accounts receivable.
14 At end of month: $18 000 wages is owing for last 2
weeks of the month. Due to be paid on May 1.

36
 LRM Ltd: Exhibit 3.3, page 90

Accounts Land and Accounts Notes Wages Share Retained

Transaction Cash receivable Inventory building Equipment payable payable payable Loans Capital profits
Opening 140,000 0 55,000 300,000 90,000 15,000 70,000 0 300,000 200,000 0
balance
8 30,000 30,000 Revenues
-12,000 -12,000 Expenses
9 40,000 40,000 Revenues
-16,000 -16,000 Expenses
10 -8,000 -8,000
11 -20,000 -20,000 Expenses
12 2,000 -2,000 Expenses
13 25,000 -25,000
14 18,000 -18,000 Expenses

Closing
balance 167,000 15,000 27,000 300,000 90,000 9,000 70,000 18,000 300,000 200,000 2,000
Stockholder's
Assets 599,000 Liabilities 397,000 equity 202,000

A=L+SE

37
 LRM Ltd: Exhibit 3.4, page 91
LRM Ltd
Income statement for the month ended 30 April 2016

$ $
Sales 70 000
Cost of goods sold 28 000
Gross profit 42 000
Operating expenses
Wages 38 000
Advertising 2 000 40 000
Net profit 2 000

38
 LRM Ltd: Exhibit 3.5, page 91
LRM Ltd

Balance sheet as at 30 April 2016

Assets Liabilities and shareholders equity

$ $
Current assets Current liabilities
Cash 167 000 Accounts payable 9 000
Accounts receivable 15 000 Notes payable 70 000
Inventory 27 000 Wages payable 18 000
209 000 97 000

Non-current assets Non-current liabilities

Land and building at 300 000 Loans 300 000
cost
Office equipment at 90 000 Total liabilities 397 000
cost
390 000
Shareholders equity
Share capital 200 000
Retained profit * 2 000
Total shareholders
equity 202 000
Total liabilities and
Total assets 599 000 shareholders equity 599 000

* Retained profit = opening retained profits (0) + profit (2000)

dividends declared (0) = 2000
39
Revision Question 3

Additional credit sales of $2m (cost of sales

$1.5m) are made on credit. This transaction will:
1. increase net profit, increase cash, and increase
total assets
2. increase net profit, increase total assets but not
affect cash
3. increase net profit, and not affect cash or total
assets
4. increase net profit, increase cash.

40
 Double entry accounting

A = L + SE
The Golden Rule:

The accounting equation must always balance

It means Debits = Credits.

In accounting we use debit (Dr) and credit (Cr) to describe

changes in accounts

41
 Debitcredit convention

Remember the equation:

Assets = Liabilities + Equity
We define increases in Assets to be debits (DR)
decreases in Assets therefore must be credits (CR).
DR = CR, therefore increases in Liabilities (and Equity)
must be credits, decreases must be debits.

42
 Basic orientation of the double-entry bookkeeping system

Always record on the Uses of Funds Sources of Funds Always record on the
left-hand side right-hand side

Assets (+A) Liabilities (+L)

Capital (+SE) Simultaneous

recording of the use of
funds and the source of
funds

Expenses (+E) Revenues (+R)

43
Double entry system: Debit and Credit

Debit Credit
+A +L
+SE
+E +R
-L -A
-SE
-R -E

44
 Remembering debits/credits

Type Normal Incr. Decr.

Assets Debit Debit Credit
Liabilities Credit Credit Debit
Shareholders equity Credit Credit Debit
Revenues Credit Credit Debit
Expenses Debit Debit Credit

45
 Debit and credit (Critical thinking)

Company record v.s. Bank statement

46
 Journal entries

Journal entries are, essentially, a shorthand version on

transaction analysis.
They are prepared using the rules of debit and credit.
Debits must always equal credits.

47
 Journal entries

Example
Machinery is purchased for $10 000 cash.

Journal entry:

Dr Machinery 10 000
Cr Cash 10 000

48
Revision Question 4

Which of the following accounts does NOT normally have a

credit balance?

1. accounts payable
2. retained profits
3. tax payable
4. prepaid expenses.

49
Revision Question 5

Identify the journal entry required to correctly record the following

transactions.

Cash received from accounts receivable

1. Dr Accounts Receivable Cr Cash

2. Dr Cash Cr Accounts Payable
3. Dr Cash Cr Accounts Receivable
4. none of the above

50
Revision Question 6

Identify the journal entry required to correctly record the following

transactions.

Cash dividends of $20,000 declared and paid.

1. Dr Retained profits 20,000 Cr Dividends payable 20,000

2. Dr Cash 20,000 Cr Retained profits 20,000
3. Dr Retained profits 20,000 Cr Cash 20,000
4. none of the above

51
 Appendix - Dividends
The dividends recommended by directors are authorised by shareholders at an
annual meeting: (Declaration)

Dr Retained profits 20,000 (-SE)

Cr Dividends payable 20,000 (+L)

When the final dividends are paid: (Payment)

Dr Dividends payable 20,000 (-L)

Cr Cash 20,000 (-A)

52
Revision Question 7

Which of the following are debits?

1. contributions of capital
2. increases in revenues
3. increases in liabilities
4. decreases in owners equity.

53
Depreciation
Allocation of the cost of a noncurrent asset to
expense over the life of an asset
To recognise the consumption of the assets
economic value.
Dr Depreciation expense xxx (+E)
Cr Accumulated depreciation xxx (-A)
Accumulated depreciation (a contra asset account,
B/S) shows all depreciation charged against an
asset to date.
Depreciation expense (I/S) shows only this years
depreciation allocation.

54
 Depreciation - example
Asset costs $10 000 with a life of 4 years and no
estimated salvage value. Straight line depreciation each
year:

Dr Depreciation expense $2 500

Cr Accumulated depreciation $2 500

After 3 years, book value is:

Asset $10 000
Accumulated depreciation ($7 500)
Book value $2 500

55
Link transaction analysis and journal entries

Back to the previous transactions.

Prepare journal entries for transaction 1-7.
Prepare journal entries for LRM ltd.

56
Transaction 1-7

1: Issued shares for $300 000 cash.

2: Borrowed $50 000 cash from the bank.
3: Purchase equipment for $100 000 cash.
4: Signed six-month agreement to provide catering
service for a monthly fee of $2500 starting next month.
5: Catering services provided for an office function; billed
customer for $2500.
6: Customer paid $2500 they owed on their account.
7: Paid the bank $5000 as part repayment of the loan.

57
Solution: Transaction 1-7

1.
2.
3.
4.
5.
6.
7.

58
 Transactions for April 2016

8 Cash sales of $30 000; Cost of goods sold = $12 000.

9 Credit sales of $40 000; Cost of goods sold = $16 000.
10 $8000 payments to suppliers on the account.
11 $20 000 wages paid for first 2 weeks of April.
12 Received invoice for $2000 for an advertisement on
April 5.
13 Received $25 000 from accounts receivable.
14 At end of month: $18 000 wages is owing for last 2
weeks of the month. Due to be paid on May 1.

59
Solution: LRM ltd case

8.

9.

10.
11.
12.
13.
14.

60
Wrap-Up
Double entry system: Debits and Credits
Debits Credits
+A +L
+SE
+E +R
-L -A
-SE
-R -E
Relationship between transaction analysis and journal
entries
Negative values in transaction analysis mean the abnormal side in
journal entries.

61
 Next Lecture

Record-Keeping

Please bring comprehensive class example from

the moodle.

62
 Appendix
Accounts payable (AP)

Accounts payable are dollar amounts owed to others

for goods, supplies, and services purchased on open
account.

Notes payable (NP)

Notes payable is evidenced by a promissory note or
bill of exchange. (e.g. credit purchase of equipment)

The interest-bearing characteristic and the written

documentation distinguish NP from AP.

63