Double Entry Accounting
Key Concepts
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Purpose of Accounting
Accounting Methods
Accounting Cycle
Transactions
Financial Statements
Closing the Books
Actimax Learning, Inc.
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Think about…
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How do you keep track of your money?
How do you know if your
records are accurate?
How do you know if your enterprises or
activities are profitable?
How much you are worth financially?
Actimax Learning, Inc.
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Keeping Track of Information
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Is important for businesses to determine
performance and be accountable
Bookkeeping is recording or posting the
transactions of a business
vs
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Accounting is the entire process of
identifying, recording, and communicating
financial information of a business
Actimax Learning, Inc.
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Purposes of Accounting
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Summarize economic activity of a
business
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Internally (managers, employees)
Externally (investors, regulators, IRS)
Actimax Learning, Inc.
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Accounting Methods
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Cash Method
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Revenue is recorded when received
Expense is recorded when paid
Reap version of The Farming Game
Accrual
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Revenue and expense are recorded in the
year that the activity occurred
More accurate representation
Actimax Learning, Inc.
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Single-Entry vs. Double-Entry
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Single-Entry System
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Accounting profession does not
acknowledge; not good practice
“Shoebox” method – put all receipts in one
box and all bills in another box
Double-Entry System
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Debit and credit sides of the transaction
must be equal
Actimax Learning, Inc.
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Accounting Cycle
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Basic Accounting Equation
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Assets = Liabilities + Owner’s Equity
Assets
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Liabilities
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Property owned by a business
Cash, accounts receivable, equipment, supplies
Claims against business assets
Accounts payable, notes payable, salaries payable,
interests payable
Owner’s Equity
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Actimax Learning, Inc.
Remaining assets that go to owners after all liabilities are
paid, if the business liquidates
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Accounting Cycle
General Journal
(or T-Accounts)
General Ledger
Trial Balance
Financial Statements
Actimax Learning, Inc.
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Asset
#
Debit
1/
1
20,000
Credit
Accounts
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Owner’s Equity
#
#
1
1
Debit
Credit
20,000
Assets, liabilities, income, expenses and
owner’s equity can be broken down into
accounts
Each account has two sides (T-accounts)
Debit = Left side
 Credit = Right side
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Each account has a debit or credit balance
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Increase left side = Debit entry
Increase right side = Credit entry
Actimax Learning, Inc.
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#
1/
1
Debit Account vs. Credit Accounts
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Asset
Cash
Expense
Actimax Learning, Inc.
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Income
Owner’s Equity
Notes Payable
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Debits vs. Credits
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If you debit a Debit Account, it
increases the value of that account
If you credit a Debit Account, it
decreases the value of that account
If you credit a Credit Account, it
increases the value of that account
If you debit a Credit Account, it
decreases the value of that account
Actimax Learning, Inc.
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Illustration of Accounting
Cycle
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Sample year is illustrated in Part 2
See sample year of
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General Journal & T-Accounts
General Ledger
Trial Balance
Actimax Learning, Inc.
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General Journal
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Historical record of transactions
Chronological order
GENERAL JOURNAL
Date
1/1
Account & Description
Asset
Debit
Credit
20,000
Equity
Ref#
1
20,000
Inherited 10 Acres of Hay
Actimax Learning, Inc.
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Posting from General Journal
to Specific Accounts
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T-Accounts are done for illustrations or
educational purposes
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More graphic
Most business post to General Ledger
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More textual
Order of accounts are the same as the
Balance Sheet
Actimax Learning, Inc.
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General Journal to T-Accounts
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Done for educational purposes
Asset
#
1/1
Debit
20,000
Actimax Learning, Inc.
Credit
Owner’s Equity
#
#
1
1
Debit
Credit
#
20,000 1/1
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General Ledger
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No description of transactions (references
transactions in General Journal)
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Tracks rolling balances of each account
GENERAL LEDGER
Asset
Ref#
Date
Debit
1
1/1
20,000
Credit
Balance
20,000
Owner’s Equity
Ref#
1
Actimax Learning, Inc.
Date
1/1
Debit
Credit
Balance
20,000
20,000
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Running a Trial Balance
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Completed at the end of a reporting period
Done to see if debits and credits equal each
other
Helps identify possible errors from
journalizing or posting
Adjusting entries can be made before
preparing financial sheets (not done in The
Farming Game)
Actimax Learning, Inc.
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Trial Balance
TRIAL BALANCE
Account
Debit
Asset
50,000
Credit
Owner’s Equity
Notes Payable
Income
40,000
8,000
16,300
Expense
6,000
Cash
TOTAL
8,300
58,300
Actimax Learning, Inc.
58,300
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Reap’s Accounting Cycle
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Transaction Register replaces
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General Journal & T-Accounts
General Ledger
Trial Balance
Transaction Register
Actimax Learning, Inc.
Financial Statements
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Preparing the Financial
Statements
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Final trial balance provides the figures
for financial statements
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Balance Sheet
Income Statement
Statement of Owner’s Equity
Actimax Learning, Inc.
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Closing the Books
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Temporary or nominal accounts are closed
when preparing the financial statements
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All accounts related to revenues and expenses
Closing temporary accounts resets them to zero
and they start afresh for the next accounting
period
Permanent or real accounts keep a running
total for the following year (rolling)
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All accounts related to the balance sheet
**Ending balances become the opening balances
for the next accounting period
Actimax Learning, Inc.
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Review Questions
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Why do businesses perform
accounting?
What is the cash method?
What is the accrual method?
What is single entry accounting?
What is double entry accounting?
Actimax Learning, Inc.
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Review Questions
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What is the basic accounting formula?
What is the comprehensive accounting
cycle? How does Reap adapt this
cycle to a simpler system?
What are T-accounts?
How are transactions entered in a
general journal?
Actimax Learning, Inc.
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Review Questions
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What is a general ledger?
What is a trial balance?
What is reflected on an income
statement?
What is an owner’s equity statement?
What is reflected on the balance
sheet? What period of time does it
cover?
Actimax Learning, Inc.
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Review Questions
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What does ‘closing the books’ mean?
What are 2 examples of nominal or
temporary accounts?
What are 3 examples of accounts with
credit balances?
Actimax Learning, Inc.
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Review Questions
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What factors can be used when making
finance decisions?
Define credit and borrowing capacity;
leverage and profitability; leverage and
risk; and repayment capacity.
How does marketing affect a business?
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Are you ready to track and
manage information?
Reap
with The Farming Game®
Ahhtomoney Learning Series
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