INTRODUCTION TO ACCOUNTING

FINANCIAL

ACCOUNTING

GROUP

Group Members

Naeem Riaz (1143)

M.Najam ul Ghani (1104)

Hassan Raza (1124)

Syed Abdullah (1108)

DEFINATION

According to AICP (American Institute of Certified Public Accountant)

“ The art of recording, classifying and summarizingin a specific manner and in term of money transactions and then interpreting the

results. ”

Recording: recording all the transactions for future userefers to as “Journal”.

classifying: all records are classified for the preparation of the main accounting book known as “Ledger”.

Summarizing: All records are summarize for “trail balance”.

Interpreting: After all the steps then we interoperates the results for final accounts and “Financial Statement”(1.income statement, retained earning 2. balance sheet 3.cashflow statement.) so that the interested parties can determine the future earning e.g. pay interest, dividend policy.

BRANCHES:

THERE ARE THREE TYPES OF ACCOUNTING:

FINANCIAL ACOUNTING

COST ACCOUNTING

MANAGEMENT ACCOUNTING

FINANCIAL ACCOUNTING

• Designed to help people outside and inside of the business make decisions (creditors, investors, suppliers, customers, governments, labor unions, management, owners etc)

• Multi purpose reports (one set of financial statements meets the need of all users outside inside of the business)

Cost Accounting

Function of cost accounting is to ascertain the cost of a product and to help the management in the control of cost.

Management Accounting

Accounting that provides necessary information to the management for discharging its functions, help management in

taking a decisions

and to control

activities.

Scope and Nature of Accounting

scope:It has very wide scope and area of

applications.

Accounting use all over the world as in business, institution, trading and non-trading area’s like schools, banks, colleges, hospitals, Co-operative society etc…

It is spread in all the sphere of the society and in all the professions.

Scope and Nature of AccountingNature:

systematic record of financial statements.1. Accounting is a process:

step by step process to performing any specific task.

2. Accounting is an art:art of recording, classifying, summarizing, and finalizing the financial data.

3. Accounting is an information system:characterized as a storehouse of information.

Terms using in Accounting

Business:

Any activity undertaken for the purpose of earning profit e.g. banking business, goods trading etc.

Proprietor:

Owner of the business. He invest for the business and bear loss and profit.

Voucher and Account

Voucher:

“Any written evidence in support of a business Transaction is called a Voucher.”

Account:

“A summarized record of transactions relating to a persons and things is called Account.”

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Debits and Credits

• Two of the most familiar accounting terms are “debits and credits.” In the double-entry system, if there anything is debit then on other side thing should be credit as well according to Dual aspect of accounting.

• Debit (from the Latin word debere) means “left.” It is often abbreviated as “dr.”

• Credit (from the Latin word credere)

• means “right.” It is often abbreviated

• as “cr.”

DEBITS AND CREDITS

• Recording $s on the left side of an account is debiting the account

• Recording $s on the right side is crediting the account

• For individual accounts:• If the total of debit amounts is bigger than credits, the

account has a debit balance

• If the total of credit amounts is bigger than debits, the account has a credit balance

Capital and Equity

The amount that is invested for the beginning of the business by the owner called it’s “CAPITAL”.

A claim which can be enforced against the company or product known as “EQUITY” .

It can be as:

* Owner equity * Customer equity

NORMAL BALANCE — OWNER’S

CAPITAL

Owner’s Capital

Decrease Increase Debit Credit

Normal Balance

Definition of an

• An asset is anything of value that is owned

• An asset may be something which is paid for in advance, like prepaid insurance or prepaidrent.

• Money you will receive later – Accounts Receivable

Asset – Accounts Receivable

I will receive the money later

•When a person owes YOU money, this is also an asset.

•The asset is called “Accounts Receivable”.

Asset

Check in the pictures below to see the value of the asset

Moving on…

Money you owe another person

• Great job! Money $ you owe another person would not be of value to you because you will eventually have to pay the person off.

• Money you owe is a LIABILITY

Moving onto Liabilities …

Examples of Liability Accounts

• Accounts Payable

• Notes Payable

• Federal Income Tax Payable

• Social Security Tax Payable

NORMAL BALANCES — ASSETS

AND LIABILITIES

Assets

Increase Decrease Debit Credit

Decrease Increase Debit Credit

Liabilities

•Normal

Balance

Normal

Balance

Good’s and stock

Good(merchandise):

Things that are purchased for business purpose of the selling.

Stock(inventory):

Goods on hand, that goods remaining unsold is called stock.

Debtor and Creditor

Debtor:

“A person (A) who owes money to another person (B) in this case (A) is a debtor”.

also termed as Account Receivable(R/A).

Creditor:

A person to whom money is owing is a creditor.

It is also termed as

Account Payable (A/p).

Expense and Expenditures

Expenditures:

when assets or services is acquired for long period.

Expense:

An expenditures whose

benefit is finished or enjoyed

Immediately such as salaries, rent etc.

Sales and Sales returns

Sales:“Selling of goods are called sales. If goods are

sold on credit called credit sale else if sold on cash called as cash sales.”

Sales Returns:“If sold goods find

defective or unsatisfactorythat are returns to the company back.”

Purchases and Purchase

ReturnsPurchases:

“purchasing of goods are called purchases. If goods are purchased on credit called credit purchase else if purchased on cash calledas cash purchase.”

Purchases Returns:“If purchased goods

find defective or unsatisfactorythat are returns to the person or company from whom you purchase goods.”

Trade Discount and Cash

DiscountTrade Discount:

“It is allowance from the scheduled price granted by the seller to the buyers.”

Cash Discount:

“It is a discount allowed by a creditor to a debtor if he

pay’s before due date known

Cash Discount.”

Transaction and Commission

Transaction:“Any dealing between two parties called

Transaction.”*Cash Transaction *Credit Transaction

Commission:“Involvement of third party provide

services to both parties , In this case the third party charges called commission.”

Drawing and Dividend:

Drawing:

“Cash or Goods taken away from the business by the owner for his personal use.”

Dividend:

“A sum of money paid regularly by the company to it’s shareholders out of it’s profit according to their invested amount.”

Depreciation

“A reduction in the value of an asset over time,.”

Dep =Cost – scrap valueuseful life/est life

Interested parties

Parties interested in Accounting Information:

Owner:

“provide capital for organization so they

need to know accounting information for profitability and financial position.”

Management:

it is an art of getting things done through others. So check the managerial position of the company Accounting.”

Interested parties…

Creditor:

“person who supply goods to the company on credit e.g. banks. They need accounting information to know about financial position.”

Employees:

payment of bonus depends upon size of the profit earned.

Interested parties:

Investors:

“persons want to invest their money want to know the financial position before investing.”

Government:

“Interested for the purpose of

taxation.”

Consumer:

For establishing good accounting control so that cost of production may be reduced with resultant reduction of price of good they buy.”

GAAP (Generally Accepted

Accounting Principles)

Refers to standard framework of guidelines for

financial accounting used in any given jurisdiction;

generally known as accounting standards or standard accounting practices.

Consist Of Two Parts

* Accounting CONCEPTS

* Accounting CONVENTIONS

ACCOUNTING CONCEPTS:

DEFINATION:

The term ‘concept’ include those basic assumptions or conditions up

on which accounting is based

1.Business Entity Concept:

In accounting, “Business” and “Owner” are taken as two separate entities. All the transactions of the business are recorded in the books of the business from point of view of the business as an entity and even the proprietor is treated as a creditor to the extent of his capital.

e.g. In the Joint Stock Company, the business

has a separate legal entity than the

shareholders.

CONCEPTS…

Money Measurement:– All transactions of the business are recorded in terms of

money

– It provides a common unit Of measurement

e.g. If business has got a team of dedicated and trusted

employees, it is definitely an asset to the business, but since

their monetary measurement is not possible, they are not

Shown in the books of the business.

Matching concept:

• Matching principle defines that we must charge

the expenses for any particular period against the revenues of that particular period.

purpose of every business to earn profit.

Expenses 2011 Revenues 2011

CONCEPTS…

Dual Aspect Concept:This is the basic concept of accounting. Modern a

ccounting system is based on dual aspect concept. Dual concept may be stated as “For every debit there is a credit”

For example. If A starts a business with capital of 10,000RS.There are two aspects of the transaction .On the one hand the business has assets of 10,000RS while the other hand the business has to pay the proprietor a sum of 10,000RS which is taken as proprietor capital.

Accounting Period:According to this concept the life of the business is

divided into appropriate segments for studying the results shown by the business after each segment. Its necessary that after each segment or

time interval the businessman must stop and see, how things are going

on. In accounting such segment or time intervals is called accounting

period. It is usually of a year.

Historical Cost Concept:

It means that fixed assets must be reported in financial statements on the cost on which they were purchased.

Fixed assets should not be recorded on their market value.

Book Value + Depreciation = Cost

Realization concept:

According to this principle revenues are

recognized if realized or realizable or if goods

transferred or services rendered, no matter cash is received or not.

Accounting conventions:

Definition:

“Term convention those customs or tradition

which guide the accounting while preparing the

accounting statements.”

Convention of disclosure:

Accounts should be prepared in such a way that all material information is clearly disclosed to the

reader. Anybody who wants to study the financial

statement should not be mislead.

Convention…

Convention of materiality:

according to this only those events or

items should be recorded which have a significant

bearing and insignificant things should be ignored.

There is no formula in making a distinction b/w

material or immaterial events. It is matter of judgment and is left to the accountant for taking decisions.

Convention of consistency:

“Accounting practices should remain

unchanged from one period to another.”

Convention…

Convention of consvertism(prudence):

Means that the policy of ‘safe play’ this convention ensures that uncertainties and risks

inherent should in business be taken into account at

the earliest.

System Of Accounting:

Two types of system accounting:

CASH BASIS SYSTEM

Recognizing the revenue

when cash is received.

Expenses are recognized

when cash is paid, is called

Cash basis system of

accounting.

System Of Accounting:

ACCRUAL BASIS SYSTEM

The policy of recognizing

revenue in the accounting

record when it is earned

and recognizing expenses

when the related goods are

used is called accrual basis

system of accounting.