Chapter #1

Introduction to Accounting

By
Saba Gulzar
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Business
Any activity undertaken with the
objective of profit is called a
business.
Forms of Business
There are three forms of business.
Manufacturing
Trading
Services
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Types
Types of
of Business
Business
Proprietorship

Partnership

Corporation

Generally owned by
one person.

Owned by two or
more persons.

Ownership divided
into shares

Often small servicetype businesses

Often retail and

service-type
businesses

Separate legal
entity organized
under state
corporation law

Owner receives any

profits, suffers any
losses, and is
personally liable for
all debts.

Generally unlimited
personal liability

Limited liability

Partnership
agreement
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Definitions of Accounting
The art of systematically recording, presenting
and interpreting the financial transactions of
enterprises.
Accounting is simply the mean by which we
measure and describe the results of economic
activities.
Accounting is an art of recording business
dealings.
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Book Keeping
The systematic recording of a company s
financial transactions.
Book keeping is usually performed by a
bookkeeper.

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Difference between Bookkeeping &

Accounting
Bookkeeping
1. Bookkeeping involves the
keeping of systematical
record of companys financial
activity.

Accounting
1. Accounting is the next
section, which analyze these
records to prepare different
reports and proposals.

2. Bookkeeping is the
2. Accounting justifies these
procedure, which helps the
financial actions and find
management to manage daytheir reasons.
to-day financial activity of
company.
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Purpose of Accounting
The basic purpose of accounting is to provide
decision makers with information useful in
making business decisions.
Provide information
Monitor Activities
Transparency
Reduce chance of fraud

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Objectives of Accounting
To keep systematic records
To protect business properties
To ascertain the operational profit or loss
To ascertain the financial position of
business
To facilitate rational decision making

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Accounting Standards

International Accounting Standards Board (IASB)

International Financial Reporting Standards (IFRS)

Financial Accounting Standards Board (FASB)

Generally Accepted Accounting Principles (GAAP)

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International Accounting
Standards Board (IASB)
The IASB engages closely with
stakeholders around the world,
including investors, analysts,
regulators, business leaders,
accounting standard-setters and
the accountancy profession.

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International Financial
Reporting Standards(IFRS)
International Financial Reporting
Standards(IFRS) are designed as
a common global language for
business affairs so that company
accounts are understandable and
comparable across international
boundaries.
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Financial Accounting
Standards Board (FASB)
The Financial Accounting Standards Board
(FASB)
has
been
the
designated
organization in the private sector for
establishing
standards
of
financial
accounting that govern the preparation of
financial reports by nongovernmental
entities. Those standards are officially
recognized as authoritative by the
Securities and Exchange Commission
(SEC)
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Generally Accepted
Accounting Principles(GAAP)
The common set of accounting principles,
standards and procedures that companies
use to compile their financial statements.
GAAP are a combination of authoritative
standards (set by policy boards) and
simply the commonly accepted ways of
recording
and
reporting
accounting
information.

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Heads of Accounts

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Assets
Assets are economic resources which are
owned by a business and are expected to
benefit future operations.
The commodities possessed by the business or
the thing the which are the ownership of
business. So that assets is also called
resources .

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Types of Assets

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Types of Assets

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Liabilities
An obligation that legally binds an individual or
company to settle a debt.
Liabilities are debts and obligations of a
business. Which are to be settled in future.

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Types of Liabilities

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Types of Liabilities

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Owners Equity
Owners equity in a business represents the
resources invested by the owner (or owners).
OR The equity of the owner is a residual claim.
Equity of corporation Shareholders Equity
Equity of Sole proprietorship Owner's Equity

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Expenses
Expenses are the cost of the goods &
services used up in the process of earning
revenue.
Any asset that has been used is expense.

Example:
Salaries Expense
Rent Expense
Advertising Expense
Transport Expense
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Revenue
Revenue is the price received of goods sold and
services rendered during given accounting
period.
Example:
Sale
Service Revenue
Interest
Fee revenue / Commission Revenue

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Class Exercise
Identify the Chart/Heads of accounts
Cash, Account payable, Building,
Account Receivable, Rent expense, Bank
Note payable, Bill Receivable,
Merchandise, Capital, Office Equipment,
Commission Revenue, Salaries Expenses,
Plants & Machinery, sale, Vehicles,
Unearned Rent, Bonds Payable,
Furniture, Prepaid Insurance, Transport
Expense, Service Revenue, Interest,
Mortgage payable

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Accounting Equation

Assets

=Liabilities + Owners Equity

Owners Equity = Assets Liabilities

Liabilities = Assets - Owners Equity
Net income = Revenue - Expenses

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Practice Questions
Assets= Liabilities + Owners Equity
? = Rs.116,200 + Rs.400,000
Rs.117,679,502= ? + Rs.5,118,511
Rs.3260000 = 271,000 + ?
Net income = Revenue Expenses
Rs.120,000 = ? - Rs.50,000
?
=Rs.160,000 Rs.60,000
Rs.200,000 = Rs.250,000 ?
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Debit & Credit

Title
Left side
Debit

Right Side
Credit

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Rules of Debit & Credit

Description

Increase

Decrease

Assets

Debit

Credit

Liabilities

Credit

Debit

Owners Equity

Credit

Debit

Expenses

Debit

Credit

Revenue

Credit

Debit
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Description

Increase

Decrease

Purchases

Debit

Credit

Purchases
Returns/Discount

Credit

Debit

Sales

Credit

Debit

Sales
Returns/Discount

Debit

Credit

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Other terms used in

Accounting
Merchandise / Goods: The goods in which a firm deals OR goods
(commodities) which are purchased in a business for the purpose
of reselling them at a profit are known as Merchandise.
Prepaid Expense:
When payment of expense is made in advance this payment
recorded as Prepaid Expense.
Accounts Receivables:
On account of credit sales an amount is due from purchaser, that
amount is known as receivable amount and recorded as Account
Receivable.
Purchases:
Purchase of merchandise is recorded as purchases.
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Merchandise Return Allowance: Merchandise return to supplier is

recorded as purchase return & allowance.
Sales: Sale of merchandise is recorded as sale.
Sales Return & Allowance: Merchandise return from customer is
recorded as sale return & allowance.
Accounts Payable: On account of credit purchases an amount is
payable to seller, that amount is known as Payable amount and
recorded as Account Payable.
Capital: Investment of owner into business is recorded as Capital.
Drawings: Proprietor (Owner) withdraws values in cash or
merchandise from the business for his private use is recorded as
drawing.
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Notes Payable: The amount of principal due on a formal written promise

to pay. Loans from banks are included in this account.
Bill Payable: A bill payable is a document which shows the amount owed
for goods or services received on credit. Examples of a bill payable
include a monthly telephone bill, electricity bill, a bill for repairs or
maintenance, the bill for merchandise purchased by a retailer on credit,
etc.
Mortgage Payable: The longterm financing used to purchase property is
called a mortgage. The property itself serves as collateral for the
mortgage until it is paid off.
Bonds Payable: Bonds payable are a form of long term debt.
Bonds are issued by corporations, hospitals, and governments. For
example, public utilities will issue bonds to help finance a new electric
power plant, hospitals issue bonds for new buildings, and governments
issue bonds to finance projects, cover deficits, or to pay for older debt
that is now maturing.
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Introduction to
Financial Accounting

Accounting Process
The accounting process can be
summarized as follows:
Origination of the Transactions
Recording the transaction in General
Journal
Posting to Ledger Accounts
Preparation of the Trial Balance
Preparation of The Financial
Statement

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THE TRANSACTION
Any exchange of values is called
transaction
CLASSIFICATION OF
TRANSACTION
Cash Transaction
Credit Transaction
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ACCOUNTING CYCLE
The Accounting procedures described
the accounting cycle may be
summarized in eight steps:
Journalize Transaction or recording the
transaction in General Journal
Posting to Ledger Accounts
Prepare a Trial Balance
Adjusting Entries
Adjusted Trial Balance
Prepare Financial Statements
Post closing Entries
Prepare after closing Trial Balance
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ENTRY
The posting of business transaction
in a book or in a set of books with the
sequence of date and with two kinds
of financial changes is known as entry.
DOUBLE ENTRY
The double effect of each transaction
is recorded in the books of accounts is
known as Double Entry System.

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 JOURNALIZE TRANSACTION OR
RECORDING THE TRANSACTION IN
GENERAL JOURNAL
A journal is a book of original entry
containing a chronological record of
transactions. Each transaction is
recorded first in the journal; this
recording indicates the accounts to be
debited and credited and also includes a
brief explanation of the transaction.

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 POSTING TO LEDGER ACCOUNTS

Post debit and credit from the
general journal to the proper
Ledger Accounts, thus creating a
record classified by accounts.
Ledger contains a separate page
for each account. It is also called T
Account.

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POSTING
The process of the transferring the debits
and credits from the general journal to the
proper ledger account is called Posting.
FOOTING
When it is desired to close the books of
accounts, certain actions are to be
recorded. Therefore, the accountant will
extract the total of debit and credit of
each and every account. This process is
known as Footing
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BALANCING
Compute the difference of the total of
the two sides. If the debit side total is
more, put the difference on the credit
side amount column, by writing the
words in particulars column by
Balance c/d. If the credit side total is
more, put the difference on the debit
side amount column by writing the
words in particulars column to
balance c/d.
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Narration:
The suitable and appropriate explanation
or reason that is written below an entry in
the ledger which provides details of the
transaction recorded in the journal is
called narration.
Ledger :
Aledger is the principal book or computer
file for recording and totaling economic
transactions measured in terms of a
monetaryunit of accountby account type,
with debits and credits in separate
columns and a beginning monetary
balance and ending monetary balance for
each account.
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