Transcript Slide 1

Prepared by
Moeen Ahmad
Lecturer in Accounting
Kardan University, Kabul, Afghanistan
Accounting
Poineer:Italia
n merchant
“Luca Pacilio”
(Lacas Pacioli)
• The process of Recording , Classifying,
Summarizing the financial information
(Transaction) and Reporting and
interpreting the result.
• Accounting is called language of
business because it provide us
information regarding business to
internal and external users.
2
Transaction
• Any dealing, buying and selling
between two persons or business
enterprises is called Transaction.
• Purchased machinery for $500
• Started business with $15000
3
Parties interested in
Accounting information
•
•
•
•
•
Owners
Prospective investors and creditors
Employees
Management
Government agencies
4
The Basis of an Accounting System
Accounting consists of many rules and procedures. These rules (or
principles) and procedures guide the setting up and maintaining of
financial records. Each businesses sets up its accounting system
according to its specific needs, but all businesses follow the same
basic rules and procedures.
Accounting is based on four assumptions about business
operations. These assumptions underlie all reports are summarized
by the terms “business entity,” “going concern,” “unit of measure,”
and “time period.”
5
Business Entity
A business entity is an organization that exists
independently of its owner’s personal holdings. This
means that accounting records contain only the
financial information related to the business. The
business owner’s personal financial activities or
other investments are not included in the reports of
the business. For example, the personal residence
of a business owner, valued at $75,000, is not
reported in the accounting records of the business.
However, buildings owned by the business are
included in its financial records and reports.
6
Going Concern
In accounting, it is assumed that a business will
continue to operate in the future. In other words, a
business is said to be a going concern. Financial
reports are prepared on the assumption that the
business will operate long enough to carry out its
operations and meet future obligations.
7
Unit of Measure
The effects of business transactions are measured
in money amounts. In the United States, the
monetary unit of measure is the dollar. For
accounting records, the dollar is assumed to have a
fixed buying power. In other words, the effects of
inflation or deflation are not reflected in the financial
records of a business. Everything is recorded at
cost..
8
Time Period
Accounting reports are prepared for a specific
period of time. A period of time covered by an
accounting report is referred to as a fiscal period.
The fiscal period can cover any period of time –
such as one month or three months – but the most
common period is one year.
9
Voucher
• A written evidence in support of a
transaction.
• Five Types of Voucher
•
•
•
•
•
Receipt Voucher
Petty Voucher
Support Voucher
Payment Voucher
Adjustment/Journal Voucher
10
The Role of Accounting
Accounting plays a very important role in business system
because its function is to process financial information and
report on profits and losses. An accounting system is the
process of recording and reporting financial events, or
transactions. The steps involved in an accounting system are
illustrated as below:
Report
INTERPRETATION
Summarize
Classify
Record
Analyze
Verify
Collect
TRANSACTION DATA
11
The Accounting Cycle
Closing Entries
Transaction
Financial
Statement
Journal
Adjusted
Trail Balance
Adjusting
Entries
Trail Balance
Ledger
12
Accounting Cycle/Circle
• The process through which accounting
record is completed and repeated is
called Accounting Cycle/Circle
• Or the whole process of Accounting is
called Accounting Cycle.
13
The Accounting
Information System
The system of:
•Collecting and processing transaction
data and
•Communicating financial information
to decision makers.
14
Accounting Transactions
z are economic events that
must be recorded in the
financial statements
because they affect
y Assets,
y Liabilities
y and/or Stockholders’
equity.
15
Book Keeping
• Maintaining books of Accounts in a
proper and systematic way in terms of
money.
16
Book Keeping System
• Single Entry System
• Single effect of every transaction is
recorded)
• Oldest System, Incomplete, not acceptable
• Double Entry System
• Double effect of every transaction is
recorded
• Trail balance, Income Statement, Balance
sheet can be prepared.
17
Difference b/w
Accounting & Book Keeping
•
•
•
•
Scope of work
Nature of Work
Knowledge and skill
Decisions
18
Account...
an individual accounting record of
increases and decreases in a specific
Asset, Liability, or Stockholders’
Equity, Revenue & Expense item.
Summarized form a transaction is
called Account
19
• Increase and Decrease in items
(+)
Generally
(-)
20
• But systematically are written as
•
Left side ( Debit) Dr.
•
Right Side (Credit) Cr.
21
Types of Accounts
1)Real Accounts “Balance Sheet A/c
2)Nominal Accounts“Profit & Loss A/c
1)Existence even after close of a year,
Assets, Liabilities & Owner’s Equity
2)At the end of year closed to
Income/Exp account, Exp, Revenue
22
Types of Accounts
•
1.
2.
3.
4.
5.
There are 5 types of accounts
Capital
Liabilities
Expenses
Assets
Revenues
23
Assets
• Any thing valuable possessed
by a firm which have monetary
value. E.g cash, building,
machinery, A/R etc
24
Liabilities
It is the claim of the outsiders
against the assets of the
enterprise, also called external
equities. E.g Account Payable
(A/P) etc
25
Owner’s Equity
• The amount invested in the business by the owner
is called Owner’s equity or
called internal equities)
Capital. (Also
• It is the capital invested by the proprietors/ owners
of the business. It is the claim of the owners on the
assets of the business organization. It is internal
equities or owner fund.
26
Expenses
• To active the objectives of business,
certain payments or obligation are
expenses of business.
E.g salaries, rent, electricity etc
27
Revenue
• All sort of income received or
accrued is called as Revenue.
The revenue may be earned
from sales of merchandise or
by rendering services for
the customer.
28
Golden Rules
of
Debit & Credit
29
Debit Credit Rules for Assets
Accounts
• Increase in assets will be debited
• Decrease in assets will be credited
30
Debit Credit Rules for Expanses
• Increase in expenses will be debited
• Decrease in expenses will be credited
31
Debit Credit Rules for Liabilities
• Decrease in liabilities will be debited
• Increase in liabilities will be credited
32
Debit Credit Rules for Capital
• Decrease in Capital will be debited
• Increase in Capital will be credited
33
Debit Credit Rules for Revenue
• Decrease in Revenue will be debited
• Increase in Revenue will be credited
34
Permanent Accounts
Assets
Liabilities Owners’ Equity
To Increase:
Debit
Credit
Credit
To Decrease:
Credit
Debit
Debit
Credit
Credit
Normal Balance: Debit
35
Temporary Accounts
Revenues
Expenses
To Increase:
Credit
Debit
To Decrease:
Debit
Credit
Normal Balance:
Credit
Debit
36
Slide 4.13
Normal Balances
Illustration 3-8
Illustration 3-6
Illustration 3-10
37
NEW ART
Normal Balances
Illustration 3-11
Illustration 3-13
38
NEW ART
Total the Entries to
Each Side
TITLE
Debit
Credit
Total Debits Total Credits
If the greater sum is on the left,
the account has a Debit Balance.
39
Total the Entries to
Each Side
TITLE
Debit
Credit
Total Debits Total Credits
If the greater sum is on the right,
the account has a Credit Balance.
40
Terminologies used in
Accounting
• Proprietor:
A person who invests the money or things in
the business is called owner/Proprietor.
41
Accounts Receivable
(A/R)/Debtor
• A person to whom goods are sold on credit by a
business organization is called Account
Receivable/Debtor
• Accounts Payable A/P (Creditor)
• A person from whom a business organization or
individual purchases goods on credit is called
creditor, A/P
42
Drawings
• The cash or commodities withdrew by the
owner for his personal use from business
are known as Drawings.
43
Discount
• It is a deduction, reduction, grant or an
allowance from the price of goods or any other
asset purchased sold or from the amount
payable or receivable in order to attract the
customers.
• Cash Discount
• Trade Discount
44
Purchase Return
• When the merchandise purchased are
returned back to the supplier for some
defect or delay or for any other reason,
they are called purchase return or return
outward or return to supplier
45
Sales Return
• When the merchandise sold are returned
by the customers for some defect or for
any other reason, they are called Sales
returns or Return in ward or Return from
Customers
46
The Journal...
is an accounting record where the
transactions are recorded in chronological
order. Or
The book in which all the transactions are
recorded first is called Journal. Also
called Book of original entry or Day book
47
Types of Journals
•
•
•
•
•
Cash receipts
Cash disbursements
Sales
Purchases
General
48
The Recording Process
• Analyze each transaction
• Enter information in a journal
• Transfer the information to the
appropriate accounts
• Example
• Bought Furniture for cash $5000
• Paid salaries to employees $1000
49
Started business with cash Rs1000
Purchased goods for Rs 50
Paid salaries to employees Rs100
Paid rent of the building Rs50
Sold good for Cash Rs150
Sold goods on account Rs70
Date
Particular
Folio
1 Cash
Capital
(Started business with
cash)
2 purchases
Cash
Goods purchased
3 Salaries
Cash
paid salaries
4 Rent
Cash
Paid rent
5 Cash
Sales
Cash Sales
6 Account Receivable
Cash
Credit Sales
Dr
1000
Cr
1000
50
50
100
100
50
50
150
150
70
50
70
Ledger
• A book which contains the
condensed and classified
record of all the transactions of
a business in shape of
accounts.
51
The General Ledger
52
Posting
Transferring information from the
Journals to the General Ledger
Accounts
53
Standard Form of Ledger
Account ……….
Account No
Dr
Date
Description
Ref.
Dr.
Cr.
Balance
Cr
Bal C/d
54
LEDGER
Account………..
Account No…
Dr.
Date
Cr
Particular
Total
Folio
Amount
Date
Particular
Folio
Amount
Total
55
Cash account
Account No 1
CR
DR
Date Particular
Ref Amount Date ParticularRef Amount
1 Capital
1000
5 Sales
150
2 Purchases
50
3 Salaries
100
4 Rent
50
Balance c/f
Total
1150
950
Total
1150
56
Capital account
Account No2
DR
CR
Date Particular
Ref Amount Date Particular Ref
Amount
Balance c/f
1000
1 Cash
1000
Total
1000
Total
1000
Purchases account
Account No 3
DR
CR
Date Particular
Ref Amount Date Particular Ref
Amount
Cash
50
Balance c/f
50
Total
50
Total
50
57
Salaries account
DR
Date Particular
Cash
Total
Account No 4
CR
Ref Amount Date Particular Ref Amount
100
Balance c/f
100
100
Total
100
Rent account
Account No 5
DR
CR
Date Particular
Cash
Total
Ref Amount Date Particular Ref
50
Balance c/f
50
Total
Amount
50
50
58
Sales account
DR
Date Particular
Balance c/f
Account No 6
CR
Ref Amount Date Particular Ref Amount
220
Cash
150
A/R
70
Total
220
Total
220
Account Receivable account
DR
Date Particular
Sales
Total
Account No 7
CR
Ref Amount Date Particular Ref Amount
70
Balance c/f
70
70
Total
70
59
Trial Balance
A list of all the accounts and their balances at
a given time.
It serves to prove the
mathematical equality
of debits and credits
after posting.
It aids in the
preparation of financial
statements.
60
Preparing a Trial Balance
• When? At the end of an accounting
period.
• Why? “Getting ready” to prepare a set
of financial statements.
• What? Two-column listing of all account
balances.
Slide 4.22
61
MR.A
Trail Balance
As at 6th January 2008
Sr.#
Items
Cash
Capital
Purchases
Salaries
Rent
Sales
A/R
Total
DR
950
Cr
1000
50
100
50
220
70
1220
122062