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Financial Accounting Chapter # 1 Special Course

GUL NAWAZ INSTITUTE OF SUSTAINABLE DEVELOPMENT & TECHNOLOGY

Introduction

Definition of Accounting & Book Keeping


Special field of accounting Parties interested in Accounting information

Book keeping system


Basic Terminology

GUL NAWAZ INSTITUTE OF SUSTAINABLE DEVELOPMENT & TECHNOLOGY

Introduction
The basic objective of commerce Education is to produced skilled worker for various business concern. As such this field includes Economic, Banking, Insurance, information Technology etc. All these subjects are related with various activities of business organization. Accounting is one of the most important subjects of this field.

GUL NAWAZ INSTITUTE OF SUSTAINABLE DEVELOPMENT & TECHNOLOGY

Definition of Accounting
The art of recording, classifying, and summarizing all the business transaction and events of financial character to prepare financial statement. In other words, Accounting is an art of systematically, recording, classifying, summarizing and interpreting the Business transaction and finally to prepare financial GUL NAWAZ INSTITUTE OF SUSTAINABLE statement, i.e. DEVELOPMENT & TECHNOLOGY

From this definition, we come to know that there are four steps involved in the accounting process; 1.Recording Recording means making written records of financial events. 2. Classifying It relates to the process of grouping of accounts together.
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3. Summarizing It is the process of bringing together various items of information to explain the accounting results. Combining written records into periodic reports 3. Interpreting Using the information in reports to make judgments and decisions.
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Definition of book keeping


The word book or books means books of accounts and keeping implies maintaining in proper form and order. Thus book-keeping may be defined as the art of recording business transactions in books in a regular and systematic manner. It has been defined by different experts as:1. Book-Keeping is an art of recording in books of GUL NAWAZ INSTITUTE OF SUSTAINABLE account TECHNOLOGY DEVELOPMENT & all those business transactions that result

2. The systematically recording of financial transactions of an enterprise is known as book-keeping. 3. The science and art of correctly recording business dealings in a set of books with a view to having a permanent record of transactions and the financial result thereof. It should be noted from the above definitions that Book GUL NAWAZ INSTITUTE OF SUSTAINABLE DEVELOPMENT & TECHNOLOGY Keeping primarily deals in the art of recording

Special field of accounting


Financial Accounting This is the field of accounting in which we record business transactions and prepare various periodic reports from such records. These reports provide useful information for owners, managers, creditors, Government agencies and general public.
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IT IS ALSO KNOWN AS A GENERAL PURPOSE ACCOUNTING.

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COST Accounting The main objective of this branch is to control the cost of production, and distribution . It checks the efficiency of producing, selling and administrative departments by applying actual and pre-determined cost techniques. It also show the effects on cost with changes in the volume of production and GUL NAWAZ INSTITUTE OF SUSTAINABLE sales. DEVELOPMENT & TECHNOLOGY

Management Accounting Management accounting is the use of accounting information by the management for the purpose of decision making. A company's managers and employees constantly need such information in order to run and control daily business operations.
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Tax Accounting Tax accounting is the arrangement of business transaction in such a way that should minimize the tax burden of business. Auditing It is the examination of accounting records. The purpose of examination is to check the accuracy of accounting records with the prescribed policies and procedure. GUL NAWAZ
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Parties interested in Accounting information


Owner of the Business: Owner wants to know the result of the activities i.e. Profit and loss of the business. Creditors: Creditors are interested to know the profitability and financial status of the business. Employees: Employee wants to know the stability, GUL NAWAZ prospects future INSTITUTE OF SUSTAINABLE DEVELOPMENT & TECHNOLOGY and scope of the business.

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Managers: Management needs various kinds of classified information for decision making technique. Government Agencies: Various Govt. agencies are interested in firms activities and income.

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GUL NAWAZ INSTITUTE OF SUSTAINABLE DEVELOPMENT & TECHNOLOGY

Book keeping system


During the earlier part of civilization, when business activities were very small, there were no define principles for recording of business transaction. A person may depend upon his memory for his business dealing, he may keep a record of his dealing in any form. The development of business activities, GUL NAWAZ INSTITUTE OF SUSTAINABLE the recording of business transaction has become DEVELOPMENT & TECHNOLOGY

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Single entry system It is the oldest form of recording the business transaction. It is very simple and easy. No professional knowledge is required to use this system. There is no defined rule or principles of this system. The small trader use this system to meet their need.
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Double entry system The double entry book keeping system can be defined , as the system under which the double effect of every transaction is recorded. It means that all cash and credit transaction of the business are recorded indicating the two fold effect of each transaction. For example, when goods is sold for cash, the GUL NAWAZ INSTITUTE OF SUSTAINABLE increase in DEVELOPMENT & TECHNOLOGY

BASIC TERMINOLOGY In every field of study, some words are used with their specific meaning. These are called terms. In accounting also some terms are used. These terms are explain as below:

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Business Any legal activity undertaken for the purpose of earning profit is called business. Such as buying and selling goods , rendering services or manufacturing goods. Types of businesses.
Merchandising or trading concerns business. Services concern Business Manufacturing concern Business
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Transaction:

Any dealing between two persons is

a transaction. It may relate to purchase and sale of goods, receipt and payment of cash and rendering of service by one party to another. Transaction is of two kinds: Cash Transaction Credit Transaction. When cash is paid or received as a result of an exchange, theNAWAZ transaction is said to be a cash transaction. When GUL the INSTITUTE OF SUSTAINABLE DEVELOPMENT & TECHNOLOGY payment or receipt of cash is postponed for a future

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Proprietor : He is the owner of a business. He invests capital in it, gives his time and attention to it. He is entitled to receive the profit or bear loss arising out of it. Drawings: The cash or goods taken away by the proprietor from the business for his personal use are called his drawings. GUL NAWAZ
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Account: A summarized record of transactions relating to a person or thing is called an account. Or a device which contain a systematic records of increase or decrease in a item during a particular period of time.

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Voucher: Any written evidence in support of a business transaction is called a voucher. When a ream of GUL NAWAZ paper SUSTAINABLE INSTITUTE OFis
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Goods(Merchandize): It includes all merchandize commodities which are purchased by the business for the purpose of reselling them in same condition are called merchandise or goods.
Examples. In stationary shop stationary is merchandise. In medicine shop medicine is merchandise. etc

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Stock/ Inventory Goods or merchandise on hand at any time GUL NAWAZ is called as INSTITUTE OF SUSTAINABLE DEVELOPMENT & TECHNOLOGY stock or inventory.

Income/Revenue Income is the value of goods or services that a business charges from its customers. Or All sorts of income received or receivable are called revenue. This revenue may be earned from sale of merchandise or by rendering service for the customer. It is also earn in shape of commission, interest or discount etc. GUL NAWAZ
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Expenses Expenses are the costs incurred to earn revenue. In order to earn revenue, one has to spend some money such as the cost of goods that are sold or The money paid to the individuals who are providing services to the business, e.g. salaries, rent, advertisement, carriage etc.
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Profit or Net Profit Net income or Net Profit is the amount by which the income exceeds expenses in a specific time period. OR Profit is what is left of the income after all expenses, paid and incurred, have been deducted from it. Net Profit = Income Expenses Commission GUL NAWAZ Remuneration for service performed by one INSTITUTE OF SUSTAINABLE person & TECHNOLOGY DEVELOPMENT to

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Trade Discount Any concession or allowance or rebate given by seller to buyer on listed or schedule price of goods is called trade discount. Trade discount is deducted from the price and net price is recorded in the books of account. Cash Discount A discount which is allowed or received at the time of cash GUL NAWAZ INSTITUTE OF SUSTAINABLE DEVELOPMENT & TECHNOLOGY receipt or cash payment before the due date, is

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Account Receivable A person to whom goods are sold on credit is called account receivable. It is treated as current assets and recorded on the asset side of balance sheet. Account payable A person from whom goods are purchase on credit is called account payable. It is treated as short term liability and GUL NAWAZ INSTITUTE OF SUSTAINABLE DEVELOPMENT & TECHNOLOGY side of balance sheet. recorded on liability

Bad debts The amount which is finally written off as un collectable is called as bad debts. It is treated as business loss. Doubtful debts The estimated amount of account receivable which are expected to become bad debts during the coming year is called GUL NAWAZ as doubtful debts. INSTITUTE OF SUSTAINABLE
DEVELOPMENT & TECHNOLOGY

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Outstanding Expense It means those expenses which have been incurred but Actually not paid. These are called accrued expenses or unpaid expenses. Prepaid expenses It means expenses which have been paid in advance, but GUL NAWAZ expired. It also called unexpired expenses. not yetOF SUSTAINABLE INSTITUTE
DEVELOPMENT & TECHNOLOGY

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Accrued income The income, that is earned during the period but not yet has been received. Unearned income Any amount which has been received in advance, but not earn in the current year is called unearned income.
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Assets Anything which has a value and possessed by a business organization with the following three features is assets. 1.The legal title of ownership. 2. Right to use 3. Right to sale The example of assets is cash, account receivable, stock, land, building, furniture, Machinery, investment etc. According to the feature of their liquidity and GUL NAWAZ purpose of their INSTITUTE OF SUSTAINABLE
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Current assets Which are either cash or easily convertible into cash? In fact they are acquire or create with a view to convert or sell them for cash. Example of current assets are cash in hand, cash in bank, account receivable and stock etc. Non-current assets These are the assets, which acquire with a view to hold GUL NAWAZ INSTITUTE OF SUSTAINABLE DEVELOPMENT & TECHNOLOGY other then business income. them and earn profit

Fixed assets These assets are acquire to retain and use in business operation e.g. Land, building, plant and machinery, furniture, vehicles etc. Intangible assets The assets, which are not physically touchable, but still GUL NAWAZ valuable SUSTAINABLE for business, e.g. Goodwill, Trademark, INSTITUTE OF DEVELOPMENT & TECHNOLOGY Preliminary

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Liabilities The right possessed by the outsider against the assets of business is called liability. Or it the claim of outsider against the assets of firm. The liabilities are also called external equities. It may be of the following types; Current liabilities The liabilities which are payable in short period of time (within one year) are called short term or current GUL NAWAZ INSTITUTE OF SUSTAINABLE liabilities. DEVELOPMENT & TECHNOLOGY

Long term liabilities These are the loan which is raised for permanent finance of the firm. These are payable after a number of years. The examples of long term liabilities are Bank loan, debenture issued etc. Capital or owner equity GUL NAWAZ The investment of owner is called capital. It is INSTITUTE OF SUSTAINABLE DEVELOPMENT & TECHNOLOGY the claim of

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Chapter End

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