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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