AccountingAccounting

Week 1Week 1

AccountingAccounting

Purpose: of accounting is to provide financial Purpose: of accounting is to provide financial information about a business or other information about a business or other economic entity. This information is needed economic entity. This information is needed by management, creditors, investors and the by management, creditors, investors and the public.public.

AccountingAccounting

Functions of accounting:Functions of accounting: Recording (writing transaction in book-journal) Recording (writing transaction in book-journal)

further sub divided in subsidiary books cash further sub divided in subsidiary books cash journal ,purchase journal, sales journal etc.journal ,purchase journal, sales journal etc.

Classifying (grouping transactions or entries of one Classifying (grouping transactions or entries of one nature of one place).nature of one place).

Summarizing (classified information ).Preparation of Summarizing (classified information ).Preparation of two statements.1 Trading profit and loss account and two statements.1 Trading profit and loss account and 2balance sheet.2balance sheet.

AccountingAccounting

Functions of accounting:Functions of accounting: Deals with financial transactions: recording Deals with financial transactions: recording

transactions in term of money which are transactions in term of money which are financial character.financial character.

Interprets: The recorded financial data is Interprets: The recorded financial data is interpreted in a manner that the end users can interpreted in a manner that the end users can make a meaningful judgment about the make a meaningful judgment about the financial conditions and profitability of the financial conditions and profitability of the business operations.business operations.

Accounting Accounting Book Keeping :The science and art of correctly recording in Book Keeping :The science and art of correctly recording in

books of accounts all those business transactions that result in books of accounts all those business transactions that result in the transfer of money’s worth.the transfer of money’s worth.

Single entry Single entry Double entry book keeping: Every transaction involves two Double entry book keeping: Every transaction involves two

fold aspects e.g an aspect of receiving and an aspect of giving. fold aspects e.g an aspect of receiving and an aspect of giving. One who receives is a debtor (Dr) and one who gives is a One who receives is a debtor (Dr) and one who gives is a creditor (Cr). Under the double entry system both aspects of creditor (Cr). Under the double entry system both aspects of giving and receiving are recorded in terms of accounts. The giving and receiving are recorded in terms of accounts. The account which receives the benefit is debited and the account account which receives the benefit is debited and the account which gives the benefit is credited. which gives the benefit is credited.

AccountingAccounting

Advantages of double entry system.Advantages of double entry system.

1.1. Trial balance can be drawn up on any day to prove Trial balance can be drawn up on any day to prove the arithmetical accuracy of record.the arithmetical accuracy of record.

2.2. It helps to prepare trading p&l account from which It helps to prepare trading p&l account from which you can get gross and net profit figures.you can get gross and net profit figures.

3.3. It helps to prepare balance sheetIt helps to prepare balance sheet

4.4. It prevents fraud (alteration in accounts very It prevents fraud (alteration in accounts very difficult.difficult.

5.5. It helps to take managerial decisions.It helps to take managerial decisions.

AccountingAccounting

Disadvantages of double entry book keeping.Disadvantages of double entry book keeping.

1.1. The system requires the maintenance of a number The system requires the maintenance of a number of books which is not practical in small concerns.of books which is not practical in small concerns.

2.2. The system is costly.The system is costly.

3.3. There is no guarantee of absolute accuracy.There is no guarantee of absolute accuracy.

4.4. The system requires personal judgment of the The system requires personal judgment of the accountant.accountant.

AccountingAccounting

Accounting Equation:Accounting Equation: Assets= Liabilities + ProprietorshipAssets= Liabilities + Proprietorship Assets- liabilities= Proprietorship Assets- liabilities= Proprietorship Liabilities + Proprietorship =AssetsLiabilities + Proprietorship =Assets

AccountingAccounting

Rules of Debit and Credit:Rules of Debit and Credit: Asset accounts:Asset accounts: Increases are recorded by debitIncreases are recorded by debit Decreases are recorded by creditDecreases are recorded by credit Expense accountsExpense accounts Increases are recorded by debitIncreases are recorded by debit Decreases are recorded by creditDecreases are recorded by credit

AccountingAccounting

Rules of Debit and Credit:Rules of Debit and Credit: Owner’s equity:Owner’s equity: Increases are recorded by creditIncreases are recorded by credit Decreases are recorded by debitDecreases are recorded by debit Income accountsIncome accounts Increases are recorded by creditIncreases are recorded by credit Decreases are recorded by debitDecreases are recorded by debit

AccountingAccounting

Rules of Debit and Credit:Rules of Debit and Credit: LiabilitiesLiabilities Increases are recorded by creditIncreases are recorded by credit Decreases are recorded by debitDecreases are recorded by debit

AccountingAccounting Capital: amount and property invested in business.Capital: amount and property invested in business. Drawing :amount/merchandise withdraws by owner for Drawing :amount/merchandise withdraws by owner for

personal use.personal use. Merchandise inventory or stock: Goods unused or not sold .Merchandise inventory or stock: Goods unused or not sold . Bad debts or uncollectable: when amount receivable is un Bad debts or uncollectable: when amount receivable is un

collectable.collectable. Equity: A claim enforceable against asset or right to properties Equity: A claim enforceable against asset or right to properties

are called equity. are called equity. Owner equity : capital or proprietor shipOwner equity : capital or proprietor ship Creditors equity: Debts of business or liabilities.Creditors equity: Debts of business or liabilities.

AccountingAccounting

Advantages of a journal.Advantages of a journal. Journal shows the complete story of transaction in Journal shows the complete story of transaction in

one entry.one entry. It helps to locate and prevent errors.It helps to locate and prevent errors. Journal provides a data wise record of all the Journal provides a data wise record of all the

transactions.transactions. A mistake in ledger can be easily detected with the A mistake in ledger can be easily detected with the

help of journal.help of journal. It provides an explanation of the transaction.It provides an explanation of the transaction.

Post. Ref.

JOURNAL

Date Description Debit Credit

Page 1

1

2

3

4

Nov. 12005

Cash 25 000 00

Capital Stock 25 000 00

Issued capital stock for cash.

(A)(A) On November 1, Chris Clark On November 1, Chris Clark deposits $25,000 in a bank account deposits $25,000 in a bank account in the name of NetSolutions in in the name of NetSolutions in exchange for capital stock.exchange for capital stock.

(A)(A) On November 1, Chris Clark On November 1, Chris Clark deposits $25,000 in a bank account deposits $25,000 in a bank account in the name of NetSolutions in in the name of NetSolutions in exchange for capital stock.exchange for capital stock.

AccountingAccounting Problem: On july 1, Ahmed traders started a business with a cash Problem: On july 1, Ahmed traders started a business with a cash

investment of Rs 95,000. He completed the following transactions investment of Rs 95,000. He completed the following transactions during the month of July.during the month of July.

JulyJuly 04 Purchased goods on account from Zafer Rs 20,000.04 Purchased goods on account from Zafer Rs 20,000. 07 Purchased office furniture on credit from Moin furniture Rs 15,000.07 Purchased office furniture on credit from Moin furniture Rs 15,000. 10 Sold goods for cash Rs 12,000 and on account Rs 9,000 10 Sold goods for cash Rs 12,000 and on account Rs 9,000 17 Paid Zafer Rs 11,000.17 Paid Zafer Rs 11,000. 22 Collection from customer Rs 4,000.22 Collection from customer Rs 4,000. 26 Purchase office supplies for cash Rs 2,500.26 Purchase office supplies for cash Rs 2,500. 30 Paid office salaries Rs 13,000.30 Paid office salaries Rs 13,000.

AccountingAccounting Exercise:Exercise: Transactions of Razzaq & CompanyTransactions of Razzaq & Company1.1. Razzaq started business with a cash investment of Rs 45000 and Razzaq started business with a cash investment of Rs 45000 and

equipment in the shape of calculator and computer valued at Rs 80,000equipment in the shape of calculator and computer valued at Rs 80,0002.2. Purchased merchandise on account from Qadir Rs 16,000 and for cash Purchased merchandise on account from Qadir Rs 16,000 and for cash

Rs.24,500Rs.24,5003.3. Sold mechandise for cash Rs 21000 and on account Rs 6,800.Sold mechandise for cash Rs 21000 and on account Rs 6,800.4.4. Returned merchandise to Qadir Rs 900.Returned merchandise to Qadir Rs 900.5.5. Merchandise returned by customer Rs 1300.Merchandise returned by customer Rs 1300.6.6. Cash deposited into the bank Rs 14,700Cash deposited into the bank Rs 14,7007.7. Paid rent Rs 3000 and commission Rs 2,200.Paid rent Rs 3000 and commission Rs 2,200.8.8. Withdrew from bank Rs 5,100 for personal use.Withdrew from bank Rs 5,100 for personal use.9.9. Paid to qadir Rs 4,900 (discount Rs.100).Paid to qadir Rs 4,900 (discount Rs.100).