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Luca Pacioli- The Father of Luca Luca Paciol

LUCA PACIOLI-the Father of Accounting 1494

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Black plc SOCI €mRevenue 120.0Cost of Sales ( 78.0)Gross Profit 42.0Marketing Expenses 12.5

Administrative Expenses 24.0

Depreciation 1.0Total Operating Expenses 37.5

Operating Profit 4.5Interest payable 0.5Profit before Taxation 4.0Taxation 1.0Profit for the Year 3.0

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BLACK plc SOFP 31.12.2008 31.012.2007€m €m

Non-current assetsEquipment 20 20

Less: Accumulated Depreciation 1 --

19 20Current assetsInventories 26 10

Trade receivables 50 --

Cash 1 30

Total Current Assets 77 40Total Assets 96 60EquityOwners equity 43 40

Non-current liabilitiesBorrowings 10 10

Current liabilities

Trade payables 15 10

Accrued wages 3 --

Other current liabilities 25 --

43 10

Total equity and liabilities 96 60

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The double entry system

The double entry system of accounting is characterised by the following features:

• Each transaction requires two entries to be made.

• Each transaction requires– One debit entry– One credit entry.

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A double-entry account

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What does the account show?

• Account name• Date of transactions• Details of corresponding entry ie what is the other

side of the transaction?• Totals on each side• Opening balance (if applicable) and closing balance

It is critical that you understand how to write up and balance a T account.

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• Increases in Asset accounts Debit

• Increases in Expense accounts Debit

• Increases in Liability accounts Credit

• Increase in Revenue accounts Credit

• Increases in Capital accounts Credit

In the context of limited companies, we can read Equity for Capital

Rules for double entry bookkeeping

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Balancing-off accounts An example of a customer’s account

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Inventory movements

For systems where there is a periodic method of dealing with inventory-there is no single inventory account to record movements in inventory levels. This is because:• Purchases of inventory are recorded at cost.• Sales of inventory are recorded at selling price.• Selling price is unlikely to be the same as cost.• The debits and credits in a single inventory account would be recording different values even if the volume of inventory movement was the same.

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The four accounts for inventory

1. Purchases: for purchases of inventory

2. Sales: for sales of inventory

3. Returns inwards or sales returnswhen a customer returns inventory to the firm

4. Returns outwards or purchases returnswhen the business returns inventory to the supplier

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Returns inwards and returns outwards

Both the returns accounts are involved in the calculation of gross profit, which becomes:

Sales less Returns inwards

Minus Opening Inventory+ Purchases-Returns outwards-Closing Inventory

Equals Gross profit

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Cash and credit transactions for sales

Cash sales

Complete entry:

• Debit cash account• Credit sales account.

Credit sales

First part:• Debit debtor’s account• Credit sales account.

Second part:• Debit cash account• Credit debtor’s account.

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Cash and credit transactions for purchases

Cash purchases

Complete entry:

• Debit purchases account

• Credit cash account.

Credit purchases

First part for initial transaction

• Debit purchases account• Credit creditor’s account.

Second part for payment• Debit creditor’s account• Credit cash account.