KHATTAK
SUBJECT: FINANCIAL
ACCOUNTING
Definition of Accounting
PREPARED BY: MUKHTAR
Accounting is the language of
business.
TERMS
• When we study any subject some words
are used with their specific meanings,
these words are called terms.
ACCOUNTING TERMS
• When we study accounting subject some
words are used with their specific
meanings,these words are called
Accounting terms.
• e.g. Assets, Equity, Liability, Revenue etc
(1)BUSINESS
• All those economic and legal activities
which are operated for earning profit are
called business
TYPES OF BUSINESS
• (1).Trading or Merchandising business:
Trading or Merchandizing business are
those business in which we buy finished
products and resell them to the individual
and other business organization. e.g.
shoes shop etc.
TYPES OF BUSINESS
• (2). Manufacturing business:
Manufacturing business are those
business in which we buy raw-material,
transform into finished products by the use
of labor and machinery and then sell to the
individual and other business organization.
e.g. Bata Shoes Company.
TYPES OF BUSINESS
• (3). Services business: Services business
operate to provide in needed services for
fees.
• e.g. Doctors, Lawyers etc.
(2). TRANSACTION
• Buying and selling between two persons
are called transaction.
Kinds of Transaction: (a). Cash Transaction:
When Cash is paid or received as a result
of an exchange is known as cash
transaction.
(b). Credit transaction: When the payment or
receipt of cash is postponed for a future
date is known as credit transaction.
(3). BOOK-KEEPING
• It is concerned with the recording of
business transactions in a systematic and
prescribed manner.
•
The person engaged in this job is
called a book-keeper or record-keeper.
(4).MERCHANDISE(GOODS)
• The things or items bought or sold in an
enterprise in order to earn profit are called
merchandise or goods. e.g. books, cloth
etc.
(5).DRAWINGS
• Cash or goods taken away by the owner
from business for personal use are called
drawings.
(6).PURCHASES
• Goods purchased are called Purchases.
TYPES OF PURCHASES
• (1). Cash Purchases: Goods purchased on
cash is called cash purchases.
• (2). Credit Purchases: Goods purchased
on credit is called credit purchases.
(7). SALE
• Goods sold are called sale.
TYPES OF SALE
• (a). Cash Sales: Goods sold on cash are
called Cash sales.
• (b). Credit Sales: Goods sold on credit are
called credit sales.
(8).PURCHASE RETURNS
• When the merchandise purchased are
found defective and poor in condition
(quality ,weight ,size ,color ).They are sent
back to the supplier. This is called
Purchase Returns.
(9).SALES RETURNS
• When the merchandise sold to the
customers are found defective and poor in
condition(quality,weight,size,color), they
are sent back to the business. This is
called as Sales Returns.
(10).PURCHASE ALLOWANCE
• When the merchandise purchased are
found defective and are not returned to the
seller. The seller agrees to allow some
reduction from the price charged.This
reduction is called purchases allowance.
(11).SALES ALLOWANCE
• When the merchandise sold are found
defective and not returned by the
customers, but the business agree to allow
some reduction from the price charged.
This is called Sales Allowance.
(12).DISCOUNT
It is allowance from the price of goods sold
or purchased.
TYPES OF DISCOUNT
• There are two types of discount.
(1).Cash discount.(2).Trade discount.
1-Cash Discount: A discount which is
allowed or received at the time of cash
payment on credit sales or purchase is
called cash discount.
(a). Discount received.
(b). Discount allowed.
TYPES OF DISCOUNT
• 2-Trade Discount: When Concession is
given by seller to buyer on listed price of
goods at the spot of sale is called trade
discount.
(13). EXPENSES
Expenses are the cost of goods and
services
used up in the process of
obtaining revenue.
e.g. Salaries paid to employees, paid rent
etc.
(14).REVENUE
• Income earned from the sale of goods and
services are called revenue.
e.g. Interest earned, Rental Income, Donation
received, Commissioned earned etc.
(15).DEBTOR(ACCOUNTS
RECEIVABLE)
A person who owes money to another is
called a debtor.
(16).CREDITOR(ACCOUNTS
PAYABLE)
A person who pays out something or to
whom money is owing is called a creditor.
(17).VOUCHER
A written evidence in support of a
transaction is called a voucher.
(18).NOTES RECEIVABLES
A note-receivable is a written promise in
which the customer promises to pay the
obligation plus interest charges to the
business on or before a specified date.
(19).NOTES PAYABLE
Notes payable is a written promise to repay
the amount owed by a business at
particular date and usually calls for the
payment of interest as well.
(20).ASSETS
The things and properties possessed by the
business are called assets.
e.g. Cash, Accounts receivables ,notes
receivables, machinery, building, patents
etc.
GROUPS OF ASSETS
• 1-Current Assets: Current assets are those
assets which are either in cash or easily
convertible into cash.
e.g. Cash, Accounts Receivable, Notes
Receivables etc.
Groups of Assets
2-Non-Current Assets: These are the assets
which are acquired with a view to hold
them and earn income other than the
business income. Such as Share of other
companies, Govt.securities etc.
Groups of Assets
3-Fixed Or plant Assets: These assets are
acquired to retain and use in business
operation. E.g. Land, Building, plant &
Machinery, Furniture &
Fixture, Motor vehicles etc.
Groups of Assets
4-Intangible Assets: These are the assets
which are not physically touchable, but still
valuable for business operation. e.g. good
will, patents,copy rights etc.
(21).EQUITIES
The claims of the owners or outsiders in the
assets of the business are called equities.
Categories: (1). Owner equity: The claims of
the owner in the assets of the business
are called owner equity.
(2).Liabilities:The claim of the
outsiders in the assets of the business are
called liabilities.
Types of liabilities
• (a). Short Term/Current liabilities: The liabilities
which are payable within one year are called as
short term or current liabilities. e.g. Accounts
payable, Notes payable, expenses payable,
Bank overdraft etc
• (b). Long Term Liabilities: The liabilities which
are not payable within one year are called as
long term liabilities. e.g. Long period bank loans,
Debentures issued, mortgage loans etc.
(22).COMMISSION
Remuneration for services performed by one
person to another normally on the
percentage basis is called commission.
(23).ACCOUNT
A summarized record of all the business
transactions is called an account.
Elements of Accounts: (i). Title: The head of any
account is called an Title.
(ii). DEBIT: The left-hand side of any account is
called Debit (Dr).
An amount entered in the debit side of any
account is called debit entry.
(iii). CREDIT: The right-hand side of any account
is called Credit (Cr).
An amount entered in the credit side of any
account is called credit entry.
RULES OF DEBIT AND
CREDIT
Assets increase will be recorded on the Debit side.
Assets decrease will be recorded on the Credit side.
Expense increase will be recorded on the Debit side.
Expense decrease will be recorded on the Credit side.
Liabilities increase will be recorded on the Credit side.
Liabilities decrease will be recorded on the Debit side.
Owner Equity increase will be recorded on the Credit side
Owner Equity decrease will be recorded on the Debit side
Revenue increase will be recorded on the Credit side.
Revenue decrease will be recorded on the Debit side.
HOW TO FIND DEBIT AND
CREDIT
1-Find out the two accounts.
2-Classification(Assets,O.E(Capital),Liabiliti
es, Revenue and Expenses.
3-Increase&Decrease.
4-Apply Debit & Credit rules.
Accounting Cycle or Accounting
Circle
The order of recording the business
transactions in the various books of
accounts is called Accounting cycle or
Accounting circle.
MAPS OF ACCOUNTING
CYCLE
Financial Statements
(Income statement and
Balance sheet)
Trial Balance
Transactions
(Vouchers)
Journals
Original records
Ledger
classification
JOURNAL
“A book in which all the transactions of a
business are recorded first is called
Journal.”
It is also known as a book of
Original Record, a book of Original Entry.
Journal
Date
Description
L.F
2009
June
Cash
10 10000
15
10000
10000
10000
01
Capital (O.E)
Dr.
Cr.
“Owner started business”
03
Total
Recording the Transactions in
Journal
(A). Assets Purchased for cash
1-Purchased Building for cash Afs.5000
2-Purchased Furniture for cash Afs.3000
3-Purrchased Machinery for cash Afs.2000
4-Purchased Motor Vehicle for cash Afs.2500
5-Purchased Equipments for cash Afs.2000
6-Purchased Patents for cash Afs.3000
7-Purchased Land for cash Afs.4000
Journal
Date
2009
June
Description
01
L.F
Dr.
Cr.
5000
Building
5000
Cash
“Purchased Building for cash”
02
3000
Furniture
Cash
3000
“Purchased furniture for cash”
03
Machinery
2000
Cash
04
2000
“Purchased Machinery for cash”
Motor Vehicle
Cash
“Purchased Motor Vehicle for Cash”
2500
2500
ASSETS PURCHASED ON
ACCOUNT
1-Purchased Building on account Afs.1000
2-Purchased Furniture on account Afs.500
3-Purchased Machinery on account Afs.600
4-Purchased Motor Vehicle on account Afs.1000
5-Purchased Equipments on account Afs.3000
6-Purchased Land on account Afs.5000
7-Purchased Furniture from Qureshi Furniture Afs.2000
Journal
Date
2009
June
Description
01
L.F
Dr.
Cr.
1000
Building
1000
A/P
“Purchased building on account”
02
Furniture
500
A/P
500
“Purchased building on account”
03
Machinery
600
A/P
600
“Purchased Machinery on account”
04
Motor Vehicle
1000
1000
A/P
“Purchased Motor Vehicle on account”
05
Equipments
3000
3000
A/P
“Purchased equipments on account”
06
Land
5000