The System of Account Vol III 262 Pages

Volume – III
WRITTEN BY:
SYED AQEEL RAZA
YEAR’ 2016
THE SYSTEM OF ACCOUNTING
Written by;
Syed Aqeel Raza
FATHER OF ACCOUNTING
Fra Luca Bartolomeo de Pacioli (1445–1517) was an Italian

mathematician and seminal contributor to the field now
known as accounting. He is referred to as the Father of
Accounting and Bookkeeping (he was the first to publish a
work on a double-entry system of bookkeeping). He was also
called Luca di Borgo after his birthplace, Borgo
Sansepolcro, Tuscany.
THE PREFACE
First and foremost, I thank Almighty Allah (swt) who
attached me to the Door-of-knowledge and encouraged
me to serve mankind by spreading education which made
the human supreme in creation.
The object of writing this book “The System of Accounting”
is to provide basic accounting concept in easy way of styles
and illustrations makes readers, students and business
executives acquainted with the concept of accounting.
This book is primarily written for the use of beginners on
this subject and for those who wish to have knowledge of
it to keep eyes on their finance applied in business.
At last in short, I shall say that this is my a little
contribution based on your suggestions.
I tried my best to avoid errors, but errors may be being
human then please notify and suggest anything for
improvement with liberty on my email addresses
aqeelraz@live.com.
ASSETS
LIABILITIES PROPRIETORSHIP
REVENUES EXPENSES
FORWARD
I am in great pleasure of presenting my Book

“The System of Accounting Volume III which I
think, will be proved different others because of
the reason that I tried utmost to select suitable
words with Urdu translation where necessary to
make it comprehensive to readers and the
students of commerce.
I hope my a little struggle for this noble cause

will be admirable with suggestions for
improvement.
COPYRIGHT
Copyright of this book goes to writer and not

allows others to use its contents to publish but
downloads for reading and study
All the best to my readers
DISCLAIMER
The name of the book “The System of Accounting”,
contents, definition, and written material of this
book is the writer not copied from any source but
taken guideline from many other sources to
complete thinking and saving errors. The name,
amount, addresses, and anything relating to private
in written materials are imaginary and thinking of
writer.
In the opinion of the writer, same views or
concepts of accounting being the same subject with
others may be resemblance but the difference in
the idea of writing and presentation.
All the best to readers
INDEX
CHAPTER – 1 THE BASIS OF ACCOUNTING
CHAPTER – 2 EMPLOYEMENT
CHAPTER – 3 BUDGETING
CHPATER – 4 DEPRECIATION
CHAPTER – 5 DEBTS
CHAPTER -6 PURCHASES
CHAPTER -7 SALES
CHPATER – 8 INENTORIES
CHAPTER - 9 TAXES
CAHPTER-10 IMPORT & EXPORT
CHAPTER -11 CONSIGNMENTS
CHAPTER -12 QUESTION AND ANSWER
Volume III
THE BASIS OF ACCOUNTING
WRITTEN BY:
SYED AQEEL RAZA
MASTER OF COMMERCE & POLITICS
CONTENTS
CHAPTER ONE THE BASIS OF ACCOUNTING
-----------------------------------------------------------------------------------------
Accounting for basis 1-1

Cash Base Accounting 1-1
- Cash accounting draw backs 1-2
- How to remove draw backs 1-3
- Advantage of Cash Accounting 1-3-4
- Profit & Loss Sharing Accounting 1-5
- Current Account 1-5-6
- Bank Interest and charges 1-6
- Bank Statement 1-7
- Bank Reconciliation 1-7
- Method of Bank Reconciliation Statement 1-8
- Procedure of Bank Reconciliation 1-8-16
Accrual Base Accounting 1-17
- Cash and Accrual Base mix accounting 1-17
- Cash Flow Statement 1-18
o Operating Expenses 1-19
o Investing Activities 1-19
o Financial Activities 1-20
o Direct Method 1-20-26
- Indirect Method 1-27-28
Funds Flow Statement 1-29
Writer’s View 1-30
THE BASIS OF ACCOUNTING 1-1
ACCOUNTING FOR BASES

All accounting system is based on payment and receipt by cash and bank which depends
on cash and accrual basis accounting and sometimes requires cash and accrual base mix
accounting to remove drawbacks of cash accounting.
CASH BASE ACCOUNTING

In general, any item which a bank accepts at the face valve of deposit or
which may be transferred to another party at face value may be considered
cash.
In cash basis accounting system, transactions are recognized on receipt and

payment of cash or a company records cash receipts in the period that they
are received and expenses in the period in which they are paid. Revenues
and expenses are reported in the income statement when the cash is
received and expenses occurred.
It is usually applied or followed by individual or small and non-

manufacturing businesses. If a business expands, it may move to the
accrual method of accounting.
Cash accounting is the opposite of accrual accounting wherein revenue and

expenses are recorded when they are incurred but controlled under cash
accounting because the revenue and expense which were recorded in their
respective accounts as they incurred and the effect in their accounts
receivable or payable is paid by cash or bank.
<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<aqeelraza@live.com>

Cash accounting has some drawbacks;
- Daley in recognition of income
If a cheque from the customer and a cheque to the supplier is received and
given on the 30th of the month but could not cash or deposited at the bank,
it will be recognized in next month.
- Delay in recognition of taxable income
A business receives a cheque from a customer near the end of its fiscal year
but does not cash it until the next year will make the cause of recognition
of taxable income in the current year.
- Delay of expenses in recognition of taxable income.
A business pays its suppliers early in order to recognize more expenses in

the current fiscal year which will reduce its taxable income in the current
year.
- Unable to present profitability
The delay in recording revenue and expenses will make the cause of
presenting accurate profitability which will also affect company’s budget.

How to remove drawbacks?
- As soon as the cheque from the customer and the cheque to the
supplier is received or given must be accounted for either cashed or not
in their accounts. The Invoices of sale and purchase must be accrued as
and when they incurred. As far as the expenses are concerned, they may
be taken or accrued at the end of the year enable account to show clear
picture somehow.
Hence, we can say that the drawbacks of cash accounting can be removed
by mix accounting system “cash and accrual accounting.”
Advantage of cash accounting;
- Cash accounting can also be cost-effective in the case of sole

proprietorship or partnership and for companies that conduct most cash
transactions.
- Cash accounting requires less staff, financial resources and easy to

understand.
- Cash accounting clearly represents cash flows and outflows in business

than the accrual method of accounting.
- Cash accounting provides tax benefits of payments received in 2015 for

the work of previous year would be counted as income for 2015 tax year
and reduced net income for the year 2015 tax year.

Many devices for cash and receipt has been described such as cash book,
petty cash book, General Journal, and special journals; cash receipt journal,
cash payment journal, purchase journal, sales journal, purchase return and
allowances journal, sales return and allowances journal etc. on which we
have discussed in our previous version.
All payments and receipt are done by cash with the company and the cash
with the bank. The cash in the company is applied to small cash payments
and small receipts in cash is also used in it but the payment to suppliers
from whom we purchase goods is paid by bank issuing cheque in the name
of supplier which goes in clearing and after processing the amount is
transferred to supplier account and so on the cheque we deposit of the
customer which we receive against sale or services rendered comes to our
account.
Therefore, cash and bank are two names of one thing “cash” must be
compared with company cash book and bank book and it is also necessary
to have a complete knowledge regarding the bank procedures and
documents used for banking.
There are many kinds of bank accounts used for keeping cash and operating
for personal and business but profit and loss sharing account (PLS) and
Current Account (CD) are mostly used in business which is described below
to have complete knowledge of them;
<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZAaqeelraza@live.com

PROFIT AND LOSS SHARING ACCOUNT (PLS A/C)
This kind of account can be operated by any person, firm or organization by

depositing minimum balance Rs.100/= or above which allows profit variable
on the amount deposited over a specified period and keeps in share the
loss as the case may be to the account holder. The account holder can
withdraw or deposit the amount up to the limit prescribed.
This account is operated under interest-free system but the interest is

under question.
CURRENT ACCOUNT (CD A/C)
This account is usually operated by the businessman and can be opened by

Rs.1000/= as an initial deposit at the time of opening the account. The bank
issues chequebook 25, 50, 100 leafs as per requirement.
There is no interest on this account.
Besides, profit and loss sharing account and current account, bank
introduces many other accounts like;
- Home safe accounts

- Student saving account
- Saving account
- Islami Banking account
- Fixed Deposit Account
- Credit card
- Debit card
- Visa card
Banks also issue certificates having interest on completion of the specified

period.
Bank uses many forms or documents to make the transaction from him but
the following forms are used mainly to operate any account or doing
transaction:
- Cheque book
- Pay-in-slip/deposit slip book
- Pay order/demand draft making form
- Online transfer Form
BANK’S INTEREST AND CHARGES
The bankers enjoy a higher rate of interest or profit and allow the small
rate of interest or profit to the account holder by whose money he enjoys
the big income. The bank deposit or transfer the amount of interest in the
account and informs the account holder by credit memo.
The bank also deducts charges of different nature from his account holders
in making transaction through bank from which some are mentioned here;
Cheque book charges

Minimum balance charges
Commission
Excise duty
Withholding tax – filler
Withholding tax- non-filler
Pay order making charges
Demand draft making charges
Online transfer charges
Postage charges
BANK STATEMENT
A copy of the account for a period, monthly, half yearly or annually is sent
by the bank to the account holder for checking of withdrawals, deposits,
and balance which is reconciled by company’s cash book.
BANK RECONCILIATION
The bank reconciliation is the matching statement of two balances at the

end of the month or year such as cash book balance and bank statement
balance. It is made to search the causes of disagreement in balances and to
test the accuracy of the transactions posted in cash book. In the case of any
unknown discrepancy or difference, the bank is informed within a
reasonable time.
The balance in cash book and in bank statement may differ;
- Cheques issued but not presented to the bank for payment on the end
date of the Bank Statement.
- Cheques deposited into the bank but not collected the amount un until
the end of the date of a bank statement.
- The interest of the bank is not recorded into cash book.
- Bank charges, the markup on overdraft are not recorded in the cash
book.
- Cheques issued but not recorded in the cash book.
- Wrong posting of the amount by the bank in the account.
- Wrong posting of the amount in the cash book.
- Unknown collection or credit is shown in the bank statement.
- Unknown payment or debit is shown on the bank statement.
- Bank commission, excise duty, cheque book charges, pay order charges,
demand draft charges, any instrument making charges, and tax on cash
withdrawn are ascertained on seeing the bank statement.
- Many other causes of disagreement with cash and bank.
- <THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<aqeelraza@live.com>
METHOD OF BANK RECONCILIATION STATEMENT

There are two methods are applied for bank reconciliation wherein;
o Correct method
o Adjusted method
In corrected method, the items which are shown in bank statement but not
in cash book will be recorded in cash book before making bank
reconciliation or on the way of finding out difference at once and in
adjusting method after making bank reconciliation statement but the main
object is to determine the correct balance of both cash book and the bank
statement.
PROCEDURE OF BANK RECONCILIATION
Keep two books before you and examine each other by ticking the amount,
cheque number, bank deposit slip number and any other reference match
with cash book and bank statement. The ticked items are agreed but un-
ticked items are under question and need clarification.
Following are the steps and points for making bank reconciliation
statement;
- At first, both the balances are written like balance as per cash book
(business record) and balance as per bank statement (Bank record) for
example;
Bank statement Cash book
Balances 24,750 18,000

1- Outstanding cheques, unpaid cheques, un-presented cheques
Outstanding cheques or unpaid cheques are the cheques which are issued
for payment but not presented or collected by the party to whom the
cheque is issued remained unpaid by the bank before the end of the month
or end date of bank statement June 30, 2015.
The out-standing cheques or unpaid cheques are reduced by the bank as

and when they are presented by the party. The Cashbook had already been
reduced by the cheques as and when they were issued and the bank book
would be reduced as and when they were presented in the bank.
Cheques issued for payment, but not presented for payment before June
30, 2015, as detailed below;
Cheque No. 500500 Rs. 1, 000

Cheque No. 500510 Rs.2, 000
Cheque No. 500515 Rs.3, 000
Cheque No. 500518 Rs. 5,000
Balances 24,750 18,000
Less: un-presented cheques

Cheque No. 500500 Rs. 1, 000
Cheque No. 500510 Rs.2, 000
Cheque No. 500515 Rs.3, 000
Cheque No. 500518 Rs. 5,000 (-) 11, 000
2- Deposit in transit, uncollected cheques

The deposit in-transit or uncollected cheques are the cheques which will be
added in bank book but added in cash book and as and when the amount
will be transferred from the bank or other branch or bank. Hence, the
cheques which are in-transit or uncollected are added in the column of a
bank statement. The reason of not showing in bank statement is deposit to
near date of the end date of statement or some reasons having objections
wherein insufficient balance, wrong date, amount difference in figures and
words and many other reasons.
Cheque deposited into bank but not shown in bank statement or bank
collection;
No.130025 dt: 28/6 Rs.3000/=

No.313454 dt: 29/6 Rs.2000/=
No. 505352 dt: 30/6 Rs. 1500/=
Balances 24,750 18,000

Cheque No. 500500 Rs. 1, 000
Cheque No. 500510 Rs.2, 000
Cheque No. 500515 Rs.3, 000
Cheque No. 500518 Rs. 5,000 (-) 11, 000
Add: deposit-in-transit
No.130025 DT: 28/6 Rs.3000/=
No.313454 DT: 29/6 Rs.2000/=
No. 505352 DT: 30/6 Rs. 1500/= (+) 6,500

3- Bank deductions such as collection charges, commission, excise duty,
withholding tax, postage, cheque book charges, etc.
On viewing bank statement, we ascertained that bank has deducted many

Charges in shape of collection charges, commission, excise duty,
withholding tax, postage, cheque book charges, pay order making charges,
demand draft making charges, online transfer charges, etc. etc. if these
charges are not recorded in cash book, we record them and they will
reduce the balance of cash book.
Bank deducted following charges during the month of June 2015 which is
not shown in cash book;
10/6 Cheque Book charges 150/=

15/6 Bank commission Rs.100/=
16/6 Tax on Cash withdrawn Rs.50/=
25/6 online transfer charges Rs.100/= (-) 400
Balances 24,750 18,000

Cheque No. 500500 Rs. 1, 000
Cheque No. 500510 Rs.2, 000
Cheque No. 500515 Rs.3, 000
Cheque No. 500518 Rs. 5,000 (-) 11, 000

No.130025 dt: 28/6 Rs.3000/=
No.313454 dt: 29/6 Rs.2000/=
No. 505352 dt. 30/6 Rs. 1500/= (+) 6,500
Less: Bank charges and Tax

4- Bank collection not recorded in cash book.
The bank collections such as bank interest on Deposit, notes receivable,

interest on notes receivable and bank interest on notes if shown in bank
statement but not shown in cash book shall increase the balance of cash
book.
Bank collected following but not recorded in cash book.
20/6 Bank interest on deposit 100/=

25/6 notes receivable 1000/=
25/6 interest on notes receivable 50/=

Balances 24,750 18,000

Cheque No. 500500 Rs. 1, 000
Cheque No. 500510 Rs.2, 000
Cheque No. 500515 Rs.3, 000
Cheque No. 500518 Rs. 5,000 (-) 11, 000
No.130025 dt: 28/6 Rs.3000/=
No.313454 dt: 29/6 Rs.2000/=
No. 505352 dt: 30/6 Rs. 1500/= (+) 6,500
Less: Bank charges and Tax (C. Book)

Add: Bank collection is not recorded in C. Book

25/6 interest on notes receivable 50/= (+) 1,150

5- Bank debit and credit not known
Because of having online most of the transactions, the amount could not be
identified by some reasons and needs to be settled later but made the
cause of increase and decrease in the balance of bank book, not in cash
book. The difference of two balances may keep on temporary in bank
reconciliation shortly and later on in suspense account as “unknown
parties” and find out the difference of the matter. As soon they are
identified must be moved to their right place.
Bank can also debit the amount of any cheque of the other party wrongly in
bank statement must be notified to the bank for correction immediately.
Less: unknown Debit (Cash Book)

Unknown debit is shown in bank book)
# 430449 18/6 Rs. 2000/=
Add: unknown credit (in cash book)

Unknown credit is shown in bank book
# 535383 28/6 Rs.1000/=
# 494693 30/6 Rs.1500/=
Balances 24,750 18,000

Cheque No. 500500 Rs. 1, 000
Cheque No. 500510 Rs.2, 000
Cheque No. 500515 Rs.3, 000
Cheque No. 500518 Rs. 5,000 (-) 11, 000
No.130025 dt: 28/6 Rs.3000/=
No.313454 dt: 29/6 Rs.2000/=
No. 505352 dt: 30/6 Rs. 1500/= (+) 6,500
Less: Bank charges and Tax (C .Book)

Add: Bank collection does not record in C. Book

25/6 interest on notes receivable 50/= 1,150
Less: unknown Debit (Cash Book)

Unknown Debit shown in bank book)
# 430449 18/6 Rs.2000/= (-) 2,000
Add: unknown credit (in cash book)

Unknown credit is shown in bank book
# 535383 28/6 Rs.1000/=
# 494693 30/6 Rs.1500/= 3,500
Corrected balance 20,250 20,250
BANK RECONCILIATION STATEMENT
Balance as per cash Bank Statement 24,750.-

Less: Un-present/out-standing cheques 11,000.-
Add: Deposit-in-transit 6,500.-
----------
Balance as per Bank statement 20,250.-
======
Balance as per Cash book 18,000.-

Less: Bank charges 350 + 50 Tax - 400.-
Add: Bank interest on deposit 100-
Notes receivable 1,000.-
Interest on notes receivable 50
Less: Unknown debit -2000
Add: Unknown credit 3500
--------
Balance as per Cash book 20,250
======
The journal entries of the amount that could not be shown in ledger
account must be recorded in order to match balances with cash book and
bank book and provide balance for issuing cheques.
Adjusting Entries;
Bank charges 350

Tax on cash withdrawn 50
Bank 400
Bank 1,150
Bank profit 100
Notes receivable 1000
Interest on notes receivable 50
Unknown parties 2000

Bank 2000
Bank 3500
Unknown parties 3500

ACCRUAL BASE ACCOUNTING
In accrual basis accounting, transactions are recorded in the ledger under

journalizing and as when they transact and reported in the income
statement when they earned or occurred to the period that closes
accounting. Now, the cash received or paid will have no concern with
revenues and expenses but receivable and payable which is the result of
accrual basis accounting.
As far as usually expenses are concerned, the accrual of them daily is not in
practice. Now, this question arises that will the profit cover the transaction
of the date? The answer will be no, then the accrual base accounting needs
to accrue all transactions on the accrual basis if we require profit and loss
and balance sheet on daily basis.
CASH AND ACCRUAL BASE MIX ACCOUNTING
In cash base accounting cash is received or paid against transactions as and

when they occurred and in accrual basis accounting, the journal entry of
the transactions are recorded as and when it occurred before cash receipt
and payment.
In cash and accrual mix base accounting, usually cash is received or paid
against transactions but the transactions related to receivable or payable
are journalized and remaining transactions of the date of the accounting
period are recorded at the time of closing accounts.
It is up to entity’s requirement that it adopts the system among cash,

accrual, and mix accounting system.

CASH FLOW STATEMENT
Generally, the income statement and balance sheet are

prepared under accrual basis of accounting but the cash
flow statement is one of the main financial statements
among balance sheet, income statement and statement of
stockholders’ equity which reports the cash generated or
actual cash-like assets from operating, investing and
financing activities used during the time interval.
The cash flow statement includes only inflows and

outflows of cash and excludes transactions that do not
directly affect cash receipts and payments.
The cash flow statement is the reconciliation of opening
balance of cash and closing balance of cash and cash
equivalent at the beginning of the period and ending of
the period.
The cash flow statement does base on cash report on
three types of financial activities: operating activities,
investing activities and financing activities.

1- OPERATING EXPENSES
Operative activities include production, sales, and delivery of the

company’s product as well as collecting payment from its customers.
These activities usually deal with current assets and current liabilities and
include;
Cash receipts from customers

Cash paid to suppliers for goods and services
Cash paid to employees/Accrued wages
Interest paid (can be reported under financial activities in IAS 7)
Income tax paid
The receipts are reduced from payments.
2- INVESTING ACTIVITIES
The investing activities deal with sales and purchase of fixed assets and long-term
investment as well as any return of investment like dividend and interest receipt and
may include;
Purchase of fixed assets (actual cash paid)

Sale of fixed assets (accrual cash received)
Interest received on investments (actual cash received)
Dividend received (actual cash received)
Dividend paid (actual cash paid)

3- FINANCIAL ACTIVITIES
The financial activities involve in shareholder’s equity and long-term

liabilities as well as dividend received and interest paid on it and may have;
Issue of share capital (actual cash received)
Issue of debenture (actual cash received)
Cash received from long-term loans (actual cash received)
Payment of dividends (actual cash paid)
Payment of long-term loans (actual cash paid
The balance sheet and income statement are the sources of making cash
flow statement and enterprises can report cash flows from operating
activities using a direct method or indirect method.
1- DIRECT METHOD
Direct method reports major classes of gross cash receipts and gross
cash payments as actual.
DIRECT METHOD
Cash flow from operations xxxxx

Cash flow from investing (xxxx)
Cash flow from financing (xxxx)
--------
Net Cash flow xxxx
=====

EXAMPLE:
The cash flow statement under direct method is prepared as given balance
sheet and income statement.
BALANCE SHEET
ASSETS 2013 2014 LIABILITIES 2013 2014
Cash & equivalents 4000 5000 Accounts payable 13000 15000

Accounts Receivable 7000 10000 Accrued Wages 2000 3000
Inventory 12000 15000 Accrued taxes 3000 2000
------------------ ------------------
Total Current Assets 23000 30000 Total Current Liabilities 18000 20000
Net fixed assets 40000 40000 Long-term debts 20000 20000

Common Stock 10000 10000
Retained earnings 15000 20000
------------------ ------------------
63000 70000 63000 70000
============ ============

INCOME STATEMENT 2014

Sales 85000
Cost of goods sold 50000

Operating Expenses 15000
Depreciation 3000
Interest 2000 70000
------- --------
Net income before taxes 15000
Income tax -10000

---------
Net income 5000
=====
- Cash Flow statement direct method

- Find out net profit from balance sheet
- Cash Flow statement indirect method
- Statement of changes in working capital
- Funds Flow Statement

CASH FLOW STATEMENT - DIRECT METHOD
Cash flows from operating activities

----------------------------------------------------
Cash received from customers (C-1) + 82000
Less: Cash paid to creditors (C-2) - 51000
Less: Cash paid for expenses (C-3) - 14000
-------
Cash generated from operation 17000
Less: Income tax paid (C-4) - (11000)

-------
Net cash generated from operating activities 6000
Cash flows from investing activities
Purchase of fixed assets (C-5) - 3000
Net cash used by investing activities (3000)
Cash flows from financing activities
Interest paid -2000
Net cash used by financing activities (2000)
--------
Increase in net cash during the period 1000
Add: Cash and cash equivalent at beginning of period 4000
-------
Cash and cash equivalent at ending of period 5000
====
DIRECT METHOD
Cash flow from operations 6000

Cash flow from investing (3000)
Cash flow from financing (2000)
--------
Net Cash flow 1000
=====
Calculation 1 – Cash received from customer
Opening balance of a/c receivable 2013 7000

Add: Sales 2014 85000
---------
Total Credit sale 92000
Less: closing balance of a/c receivable 2014 10000
---------
Cash (balancing) 82000
======
Calculation 2 – Cash paid to creditors
Inventory account
Opening balance of Inventory 2013 12000

Less: Inventory 2014 15000
-------
Increase in inventory 3000
Add: Cost of goods sold 2014 50000
-------
Purchases (balancing) 53000
=====
Account payable account
Opening of account payable 2013 13000

Add: Purchases 53000
-------
66000
Less: closing of account payable 2014 15000
-------
=====

Calculation 3 - Cash paid for expenses
Opening of accrued expenses 2013 2000

Add: Operating Expenses 15000
-------
Total expenses 17000
Less closing of accrued expenses 2014 3000
-------
======
Calculation 4 – actual tax paid
Opening of accrued expenses 2013 3000

Add: tax paid for the year 2014 10000
-------
Total taxes 13000
Less: closing of accrued taxes 2000
-------
Cash (Balancing) 11000
=====
Calculation 5 – Fixed assets purchased or sold
Opening of fixed assets 2013 40000

Add: depreciation 3000
Less: Closing of fixed assets 2014 (-) 40000
-------
Cash (Balancing) 3000
=====
- Calculation 6- Net profit before
Retained earnings (closing) 20000

Less: Retained earnings (opening) (15000)
---------
5000
Add:
Interest expense for the period 2000
Income tax for the current period 10000
-------
Income before tax and interest 17000


INDIRECT METHOD
The indirect method converts actual basis net income or loss into cash
flow by using a series of additions and deductions changing in operating
activities reporting increase and decrease in assets and liabilities.
Operating Activities
o Net profit before interest and tax
o Adjustment (non-cash item)
Add in net profit
 Depreciation
 Bad debt expenses
 Amortization of goodwill, patent or intangible assets
 Amortization of discount on debenture or share
 Loss on sale of fixed assets
Less in net profit
 Gain on sale of fixed assets
 Dividend and interest received on investment
The result of addition and deletion in net profit (Assets & Liabilities
o Increase in current Assets (except cash/bank)

o Decrease in current assets (except cash/bank)
o Increase in current liabilities (except tax, interest & dividend p/a)
o Decrease in current liabilities (except tax, interest & dividend p/a)

Cash flows from operating activities

Net profit before interest & tax (C-1) 17000
Adjustment for: (non-cash items)
Add:
Depreciation 3000
-------
Operating profit 20000
Increase in Accounts receivable (3000)

Increase in inventory (3000)
Increase in accounts payable 2000
Increase in accrued wages 1000
-3000
-------- ------
Net cash generated from operating activities 17000
Less: Income Tax paid (C-2) -11000

---------
Net cash generated from operative activities 6000
Cash flows from Investing Activities

Purchase of fixed assets (3000)
Net cash used by investing activities (3000)
Cash flows from financing activities
Interest paid (2000)
Net cash used by financing activities (2000)
-------
Increase in net cash during the period 1000
Add:
Cash and cash equivalent at beginning of period 4000
Cash and cash equivalent at ending of period 5000

=====
FUNDS FLOW STATEMENT:
The prior use of fund flow statement has been converted into cash flow statement
under IAS 7 (Revised 1992) International standard of presenting financial statement.
The fund flow statement is based on accrual base accounting which represents the
cash and cash equivalent in funds flow analysis.
Fund = working capital = current assets - current liabilities
SOURCES OF FUNDS
Net profit before interest & tax (C-6) 17000
Adjustment of (non-cash items) Add:
- Depreciation + 3000
Income from business operation 20000
APPLICATION OF FUNDS
Tax paid -11000

Purchase of fixed assets (C-5) -3000
Interest paid -2000
Net increase in working capital -16000
Net increase in working capital 4000

=====

All accounting functions are based on payments and receipts and it is up to

the requirement of an entity to adopt cash base accounting system wherein
cash payments and receipt are made at same time and in accrual base
accounting system requires accruing all payments and receipts before
payment and receipt or payment receipt may differ in time but in cash base
accounting may require accruals at the time of finalization of accounts.
The cash flow and fund flow statements are made under comparison of the
balance sheet and income statement and they were prepared under
accrual base accounting based on paid and received cash.
The cash base accounting can be better for small businesses but in the
business like share business, partnership business etc. wherein the capital
of public is involved accrual base accounting may be adopted for the actual
position of funds to be paid or to be received.
WRITER’S VIEW
WRITTEN BY:
SYED AQEEL RAZA
Volume III
ACCOUNTING FOR EMPLOYMENT
WRITTEN BY:
SYED AQEEL RAZA
CONTENTS
CHAPTER TWO EMPLOYMENT
-----------------------------------------------------------------------------------------
Accounting for employment 2-1

Wages salaries & allowances 2-2 - 11
- Reconciliation of salaries 2-12
- Summary of salaries 2 - 13 - 14
- Accrual of Salaries 2- 15
- Payment of salaries 2 - 16
- Over time 2 – 17 -22
- Gratuity 2- 22
- Pension 2 - 23
- Provident Fund 2 - 24
- Bonus 2 - 24
- Leave encashment 2 – 25
- Workers Participation Funds 2- 25
- Writer’s View 2 - 26
ACCOUNTING FOR EMPLOYMENT 2-1
ACCOUNTING FOR EMPLOYMENT 2.1
The use of manpower in business is just like fuel to burn wood or spirit in the
body, because of the reason, if one thinks about doing business the question of
manpower comes into one’s mind. If he opens shop, he will give his power and
on expanding it, hires someone to share in power.
The nature of manpower may be different business wise but the force of a man
in business is not denied at all. There are three types of business named
services, trading and manufacturing wherein a businessman is an owner and the
man who employed him and is providing services to him in other words, the
employee who is providing services to a businessman is concerned with the
business of services.
The partnership of two businessmen employee and owner empowers any

business to run and make a profit.
This partnership is different a little wherein owner gives a share in capital to the
employee and responsible alone in profit and loss of business.
The manpower applied in business is given different names under group

employee like sale man, worker, supervisor, officer, manager, director, etc. who
were paid salaries daily, fortnightly, monthly besides other benefits as that
bonus, gratuity, provident fund, share in profit etc. etc.
The topic accounting for Employment discusses with employees relating to their
payments which they earned during the period of providing services of any
nature and these payments may be of their salary, wages, overtime, bonus,
gratuity and other benefits providing under rules of a company or state.
Now, we will discuss on payment and account for in books the salaries,
allowances and other related payments to employees which were earned during
the period;
WAGES, SALARIES, AND ALLOWANCES
The wages, salaries, and allowances may be defined as;
- Wages are paid work against cash basis Hourly, Daily, Weekly, Fortnightly,
Monthly and/or on a work basis.
- Salaries are paid monthly basis at the end of the month including all
allowances.
- Allowances are the part of salaries such as house rent allowance, medical
allowance, conveyance allowances and as well as special allowances like
dearness allowance, cost of living allowance, additional special allowance
and many other allowances announced by company or government from
time to time.
If a company wants to have the services of an employee, she hires employees

direct or indirect and offers a package of emoluments in the agreement of
services or employment.
The wages are paid on the spot as soon as work is completed for the outsider
and the wages of employees engaged in the process of business are paid
weekly, fortnightly and monthly according to the rate of wages or fixed amount.
The salaries paid monthly must have statement which I made it and it has
following segments and requires;
Name of Concern: ABC & Co.
Name of Statement: STATEMENT OF SALARIES FOR MAR 2016.

Segment I
Personal Information of an employee

- Serial Number: The serial number may be changed in adding and deleting persons.
- Employee’s Number: not changeable
- Name of employee: according to CNIC/C.V.
- Designation: As given in appointment letter or nature of work.
- Station: The person is deputed or the place of working.
- Date of birth: As given in CNIC.
- Date of Entry: The date employee joined services.
Segment II
Structure of pay and allowances
- Basic salary: basic salary does not include allowances

- House Rent Allowance: This allowance is given to live.
- Conveyance Allowance: Conveyance is given in the shape of allowance.
- Medical Allowance: Medial is also given in the shape of allowance.
- Ad hoc Relief: It is announced by State.
- Cost of living allowance: Employees are also relieved by COLA.
Segment III
Details of salaries including allowances and other earnings
- Gross Salary: gross salary includes allowances.

- Working days: working days include all holidays, Sunday but no excess leave.
- Working Salary: it based on working days.
- Other Allowances: other allowances or extra support do not belong to gross salary.
- Arrears if any: any amount which has not been paid previously may include.
- Expense Claim: the claim of an employee working out of central point.
- Total Gross: it has all sums of earning.
Segment IV
Details of deductions
- Tax: tax is deducted as per law.
- Transport: share in transport may be deducted.
- Advance: the advance taken from salary is deducted.
- EOBI: the deduction of funds for a pension at the age
which is paid to EBOI.
- Loan: the loan is deducted by monthly installments.
- Others: any other deductions like loss/damage etc.
Total Deductions: it includes all deductions from gross
salary.
Segment V
Salary after deductions

- Net salary: net salary becomes by deducting total deductions
into gross salary.
- Net salary (rounded): The salaries may have coins which are
better to round by minimum rupee.
Segment VI
Signature of Employee: Requires State fee or revenue
stamp at value.
Segment I
Employe
S.NO e NAME OF DESIGNATIO STATIO Date of DATE OF
. # EMPLOYEE N N Birth ENTRY

1 1 Employee 1 Manage Admin KARACHI 1970 1.1.2012
2 2 Employee 2 Admin Asst. KARACHI 1965 10.3.2013
3 3 Employee 3 Peon KARACHI 1970 15.4.2013
4 4 Employee 4 Accountant KARACHI 1975 18.3.2014

1.1.198
5 5 Employee 5 Assistant KARACHI 5 19.5.2014
1.1.198
6 6 Employee 6 Supervisor KARACHI 5 21.6.2015
1.1.198
7 7 Employee 7 Operator KARACHI 5 05.6.2015
1.1.198 01.01.201
8 8 Employee 8 Worker KARACHI 5 6
1.1.198
9 9 Employee 9 Supervisor KARACHI 5 5.1.2011
1.1.198
10 10 Employee 10 Worker KARACHI 5 3.1.2010
1.1.198
1.1.198
1.1.198
1.1.198
1.1.198
15 15 Employee 15 S.O. KARACHI 5 1.3.2015
1.1.198
16 16 Employee 16 S.P.O. LAHORE 5 1.1.2016
1.1.198
17 17 Employee 17 S.P.O. MULTAN 5 1.1.2016
TOTAL
Segment II
SALARIES & ALLOWANCES
HOUSE MEDICA ADOC
BASIC RENT CONVEYANCE L RELIEF COLA

9,999 3,999 2,000 2,000 1,000 1,000
5,000 2,000 1,000 1,000 500 500
5,000 2,000 1,000 1,000 500 500
5,000 2,000 1,000 1,000 500 500
5,000 2,000 1,000 1,000 500 500
5,000 2,000 1,000 1,000 500 500
5,000 2,000 1,000 1,000 500 500
5,000 2,000 1,000 1,000 500 500
5,000 2,000 1,000 1,000 500 500
3,000 1,000 500 500 500 500
3,000 1,000 500 500 500 500
3,000 1,000 500 500 500 500
3,000 1,000 500 500 500 500
3,000 1,000 500 500 500 500
3,000 1,000 500 500 500 500
3,000 1,000 500 500 500 500
3,000 1,000 500 500 500 500

73,99
9 27,999 14,000 14,000 9,000 9,000
Segment III
GROSS WORKING WORKING Other Arrears Expense TOTAL
Allows
SALARY DAYS SALARY . if any Claim GROSS
30
19,998
19,998 30 500 - - 20,498
10,000
10,000 30 200 - - 10,200
10,000
10,000 30 200 10,200
10,000
10,000 30 200 10,200
10,000
10,000 30 200 10,200
10,000
10,000 30 200 10,200
10,000
10,000 30 200 10,200
10,000
10,000 30 200 10,200
10,000
10,000 30 200 10,200
6,000
6,000 30 200 6,200
5,000
6,000 25 200 5,200
5,200
6,000 26 200 5,400
5,400
6,000 27 200 5,600
5,600
6,000 28 200 5,800
5,800
6,000 29 200 6,000
5,600
6,000 28 200 500 2,000 8,300
5,400
6,000 27 200 2,000 7,600
147,99 143,998 3,700 500 4,000 152,198

8
Segment IV
DEDUCTIONS TOTAL
Advanc Other
Tax Transport e EOBI LOAN s DEDUCTIONS
Openin
g Ded. Closing
400 200 - 130 5,000 500 4,500 50 1,280
100 100 130 3,000 300 2,700 100 730
100 100 500 130 - 830
100 100 1,000 130 - 1,330
100 100 130 - 330
100 130 2,000 300 1,700 530
100 130 - 230
100 130 - 230
100 130 - 230
130 - 130
130 - 130
130 - 130
1,000 130 - 1,130
130 - 130
130 - 130
2,000 130 - 2,130

130 - 130
1,200 600 4,500 2,210 10,000 1,100 8,900 150 9,760

Segment V
NET
NET SALARY
SALARY ROUNDED
19,218 19,220
9,470 9,470
9,370 9,370
8,870 8,870
9,870 9,870
9,670 9,670
9,970 9,970
9,970 9,970
9,970 9,970
6,070 6,070
5,070 5,070
5,270 5,270
4,470 4,470
5,670 5,670
5,870 5,870
6,170 6,170
7,470 7,470
142,438 142,440
Segment VI
SIGNATURE
VIEW OF PAYROLL

RECONCILIATION OF SALARIES
The salaries which are paying must be reconciled from previous gross salaries by
deletion and addition of employees into current salaries like;
SUMMARY OF SALARIES
The columns may be hidden or unhidden and added or deleted
according to requirement and the required columns from segments
mentioned above may be printed.
The statement of salaries may be made by computer in Excel wherein
wide range of columns allow users to filter salaries by location wise,
department wise, category wise, payment wise by coding.


ACCRUAL OF SALARIES
The salaries are accrued head wise before payment.
March 30, 2016
Salaries – Admin 40,898
Salaries – Accounts 20,400
Salaries – Production 69,000
Salaries – Sales/Dist. 6,000
Salaries – Sales/Pro 15,900
TAX 1,200
Transport 600
Advance 4,500
EOBI 2,210
Loan 1,100
Salaries – Admin 150
Salaries Payable 142,438
Misc. expense 2
(To record salaries for March 2016)

PAYMENT OF SALARIES
After accrual of salaries, the payment is made by cheque, by
cash and by demand draft as per the statement filtered;
April 05, 2016

1- Salaries Payable 19,220
Bank 19,200
2- Salaries Payable 9,470.

Bank 9,470
3- Salaries payable 100,110.-

Cash 100,110
4- Salaries payable 13,640

Bank 13,640
When salaries are accrued, the credit balance in Salaries payable

account is shown and on payment salaries payment wise, it will be
zero.

ACCOUNTING FOR EMPLOYMENT 2- 17
2- OVERTIME
According to the law, the normal working hours per

day are 8 hours and these should not be more than
48 hours per week. By including the lunch and pray
time in hours of work, working hours should not be
greater than 9 hours a day.
After working hours, if an employer wants to take
work overtime, he must give overtime according to
labor laws by giving rest interval of an hour after
every six hours of work and on the formula below;
ACCOUNTING FOR EMPLOYMENT 2 - 18

In order to meet the emergency of work, the departmental head who wants to
take work from his subordinates after working hours will fill the request form of
overtime and send it to administration department or human resources
department as prescribed below;

The separate record of overtime as in overtime form may be maintained in the Department of
Administration or human resources and after the closing of the month will be submitted to
accounts department for payment.

The Accounts Department will prepare the statement of overtime as
designed below for payment:

The overtime may be accrued so that the expenses of the month may come in
accounts under journal entry;
March 30, 2016

ACCRUAL OF OVERTIME
Overtime xxxx
Overtime payable xxxx
Later on, the payment may be made by cash or cheque which will contra to Overtime payable
account;
April 5, 2016
PAYMENT OF OVERTIME
Overtime payable xxxx
Cash/Bank xxxx
3- GRATUITY
Gratuity in private sector employment comes under retirement benefits payable in a lump sum
to the permanent employee on leaving service.
In accordance with the provisions of law, the rate of gratuity is “thirty (30) days gross
salary/wages last drawn for every completed year of service for any period in excess of six
months”.
The gratuity is charged in expense account is the part of earning of an employee.
PAYMENT OF GRATUITY
Gratuity xxxx
Cash/Bank xxxx

4- PENSION (EOBI)
Pension is another retiring benefit given to workers in private sector employment

through Employees’ Old-Age Benefits Institution (EOBI) and under EOBI Scheme,
Insured persons are entitled to avail benefit like, Old Age Pension (on the event of
retirement), invalidity pension (in case of permanent disability), old age grant (an
insurance person attained superannuation age, but does not possess the
minimum threshold for pension), survivor’s pension (in case an insured person is
expired).
A contribution equal to 5% of minimum wages has to be paid by the Employers of

all the Industrial and Commercial Organizations where EBO act is applicable and
contribution equal to 1% of minimum wages by the employees of the
Organizations.
The rate of pension is minimum Rs.5, 250 and maximum as per formula;
(Avg. monthly wages x No. of yrs of Insurable Employment)

50
The contributions from employees which were deducted from their salaries
reduce the payment of EOBI Expense account.
Salaries & Allowances (debit) xxxx

EOBI (credit) xxxx
PAYMENT OF EOBI
EOBI Expense A/c (Debit) xxx

Cash/Bank (Credit xxxx
ACCOUNTING FOR EMPLOYMENT 2 -24
5- PROVIDENT FUND
A provident fund is a form of social safety wherein employees/workers contribute

a portion of their salaries and employers contribute on behalf of their
employees/workers and it provides financial support for retirement age.
The matter of accounting on provident fund depends on the system adopted for
according to law and is a separate discussion.
6- BONUS
The bonus is the share of employees in the profit of an employer. The

minimum qualifying employment period is 90 days or above whether
permanent or temporary employee.
Many companies give bonus or bonuses on religious events but according to

the law, bonus is paid on the profit and its distribution would be;
- 15% of the profit, if the profit is less than total/aggregate of one-

month wages all workmen.
- 30% of the profit, if the profit is equal to the total/aggregate of one-
month wages of workmen.
- 30% of the profit, if the profit is greater than the total/aggregate of

one-month wages of all workmen.
The bonus is charged to the expense account.
Bonus account (Dr.) xxx

Cash/Bank xxxx

ACCOUNTING FOR EMPLOYMENT 2 -25
7- LEAVE ENCASHMENT
Fourteen days paid annual leave on full wages/salary is allowed

under Factories Act and Shop & Establishments Ordinance to
permanent workers/employee.
The leave encashment being part of the salary is charged to the

expense account.
Leave Encashment A/c (Dr.) xxxx

Cash/Bank(Cr.) xxxx
8- WORKERS’ PARTICIPATION FUND
According to Companies Profits (Workers’ Participation) Act, 1968,

every company is required to pay five percent of its profits to
Workers’ participation fund every year as per audited financial
statements before charging such WPPF (Workers' Profit Participation
Fund) under Workers’ Participation Fund.
Besides above, the employment has many other paying benefits in

like workers welfare funds, maternity leave, social security, health,
and safety, etc. etc. which are accounted for according to companies
paying what benefit.
The employment relates to services and services to services business

applied in all businesses or alone and without it the concept of
business is just like a dream.
The employment may be controlled by Human Resource Department

who appoints or disappoints employees, all matters relating to
salaries i.e. increment, attendance, transfer, evaluation of
employees/workers etc., keeps records of employees, prepares
statements relating to salaries and benefits and sends them to
accounts department for payment.
Where there is no Human resources department, the accounts

department has to prepare statements relating to salaries and
benefits of employees.
WRITER’S VIEW
WRITTEN BY:
SYED AQEEL RAZA
ACCOUNTING FOR BUDGETING

CONTENTS
CHAPTER THREE BUDGETING
-----------------------------------------------------------------------------------------
Budget 3-1
Budget work sheet 3-2
- Picture 2 3-3
- Picture 3 2-4
- Picture 4 3-5
- Writer’s view 3-6

Budgeting 3-1
BUDGET:
The planning of spending and saving money from the income about to earn in near
future and/or the planning of expenditures for keeping them under the shade of
revenues comes under budgeting based on defined period which describes if the
spending in budget is less than income, it means the estimation is under budget and
if the total income is below than expenditure, it indicates the need of reduction in
expenditures immediately otherwise debt will increase to fill the gap or will have
to increase the source of income.
A good monthly budget ensures helps in overcoming unexpected emergencies and

in reaching financial goals in comparison to revenues and expenses or may include
assets and liabilities.
We may say that budget is the name of cash inflow and cash outflow rounding in
assets, liabilities, proprietorship, revenue, and expenses.
In order to create your monthly budget, you may follow the simple steps as in
picture I;
Your monthly income includes salary, investment, interest and other sources
The budget includes total income which may be from salary, investment, interest
and other sources provide finances to expenditures and to debt payment.
The expenditure will have two segments as flexible expenses and fixed expenses.
The flexible expenses are not of permanent nature like hospitality, entertainment,
repairs, clothing, incidentals etc. and fixed assets are the expenses which are
necessary to pay for housing, grocery, utilities, transportation, health, and others.
The total expenditures flexible, nonflexible and debt are paid by monthly income
and the balance remains unpaid may be saved or invested.
Budgeting 3-2

Budgeting 3-3
Picture 2 is showing budget of a business doing trading;

Budgeting 3-4
Besides the whole budget of individual or company, we can make budget partially; sales budget
in value and in unit, expenses budget wholly or departmentally as in picture 3

Budgeting 3-5
Picture 4

Budgeting 3-6
Actually, the plan of spending from the sources of income and saving
something from income and spending may call budget either written or
kept in mind because nobody wants to go in debt because of this it is
said that cut your coat according to your cloth.
In these busiest days, the most of the individuals and businessmen think
the budget is useless, waste of time, waste of paper and waste of labor
and do work according to cash flow but the concept of the budget;
spending against revenues is in its place.
The estimation values shown in the budget may be journalized to keep in

control the budget under accrual system and/or on meeting the purpose,
the estimation values can be reversed to keep them in actual position.
The budget is based on estimation values based on spending against

sources of income.
WRITER’S VIEW
WRITTEN BY:
SYED AQEEL RAZA
CONTENTS
CHAPTER FOUR DEPRECIATION

-----------------------------------------------------------------------------------------
Depreciation 4.1
Cost of Depreciation 4.1
- Salvage value/residual value of the asset 4.2
- Estimated useful life of the asset 4.2
The Method of computing depreciation 4.2
- Straight line method 4.3-4
- Sum of year digit method 4.4
- Sum of output depreciation 4.5
- Production hours method 4.6
- Diminishing/declining balance method 4.8
- Further for depreciation 4.9
- Writer’s view 4.10
DEPRECIATION 4-1
The depreciation in accounting is an income tax deduction that allows

recovering the cost of an asset used in a trade or business or for the
production of income under depreciation expense allowed annually
allowance for the wear and tear, deterioration, or obsolescence of the
asset.
Most types of tangible assets except land such as building, machinery,

vehicles, furniture, equipment etc come under depreciation and likewise,
the certain intangible asset like patent, copyright, computer software etc. is
depreciable.
Therefore, the decrease in value of tangible/non-current assets or the

allocation of the cost of assets to the period in which they are used for
accounting or tax purposes comes under depreciation involves in;
- Cost of the asset

- Expected salvage value/residual value of the asset
- Estimated useful life of the asset
- The method of calculating the cost over such life.
COST OF ASSETS
Examples of fixed assets are building, furniture, plant, and machinery, office
equipment, vehicles, etc. that can be depreciated when the land is non-
current assets but does not depreciate because of its natural value. The
cost of the fixed asset is declined by depreciation as depreciation expense
which affects revenue and the declined amount is shown by accumulated
depreciation as a contra asset.
The cost of an asset contains purchase price excluding trade discount, cash
discount, and direct expenses like insurance in transit, transporting,
installation charges, the foundation of the plant, additional part as
replacement etc.
DEPRECIATION 4-2
SALVAGE VALUE/RESIDUAL VALUE OF THE ASSET
When the estimated life of an asset is timed out, the company disposes of
and sells it for some reduced amount which is salvage value based on asset
cost, less any estimated salvage value and if the salvage value is expected
to be quite small, it is generally ignored for the purpose of calculating
depreciation.
ESTIMATED USEFUL LIFE OF THE ASSETS
The depreciation is recognized over the estimated useful life of an asset

and the estimated useful life of an asset is expected to be productive and
on ending useful life of the asset is expected to be disposed of.
THE METHOD OF COMPUTING DEPRECIATION

There are several methods for calculating depreciation but most common;
Straight line depreciation

Sum of years digits method
Units of output depreciation
Production hour’s method
Diminishing/declining balance method
Double-declining balance method

DEPRECIATION 4.3
STRAIGHT LINE DEPRECIATION
The straight line depreciation method is the simplest method used widely.
In this method, an equal portion of the cost of an asset is allocated to each
year or month and may call it constant annual depreciation.
The annual depreciation according to this method is calculated as under;

Depreciation = cost - Salvage/Residual value / useful life.
Or depreciation = cost-salvage/residual value
Useful life
Assume that on April 2010, a company purchased furniture at the cost of

Rs.100, 000/=. The useful life of the furniture is estimated for five years. At
the end of useful life, the salvage value or residual value will be Rs.20,
000/=.
Suppose that the furniture includes on list price Rs. 100,000/= at 10% trade
discount, 5% cash discount and direct charges amounting to Rs.3,960/=
including insurance in transit, transportation, labor charges, fixing charges
etc.
= LIST PRICE 100,000
LESS: 2% trade discount 2,000
----------
98,000
Less: 2% cash discount 1,960
---------
96,040
Add: direct expenses 3,960
---------
Net cost of the furniture 100,000
======

DEPRECIATION 4.4
STRAIGHT LINE DEPRECIATION CALCULATION
Depreciation for April 2010; = (100, 000 - 20,000 = 80,000) x 1/5 = 16,000 x 9/12 = 12,000
Depreciation 2011; = (100, 000 - 20,000 = 80,000) x 1/5 = 16,000 x 12/12 = 16,000
Depreciation 2012; = (100, 000 - 20,000 = 80,000) x 1/5 = 16,000 x 12/12 = 16,000
Depreciation 2013; = (100, 000 - 20,000 = 80,000) x 1/5 = 16,000 x 12/12 = 16,000
Depreciation 2014; = (100, 000 - 20,000 = 80,000) x 1/5 = 16,000 x 12/12 = 16,000
Depreciation Jan-Mar 2015 = (100, 000 - 20,000 = 80,000) x 1/5 = 16,000 x 3/12 = 4,000
Sum of years digit method
In this method, the depreciation rate is used as to the life of an asset is 5

years which fraction is 1+2+3+4+5=15 which means that 5 years is the
remaining life of the asset and 15 is the sum total of its useful life.
Assume that an asset was purchased at Rs.5000/= which has estimated

residual value Rs.500/= and estimated life 5 years. Under the method of
sum of year digit method, it is computed as under;
Depreciation Schedule: Sum of year digits method

Year Computation depreciation Accumulated Book Value
Expense Depreciation
Cost 5000
1st 5/15 x 4500 1500 1500 3500

2nd 4/15 x 4500 1200 1200 2300
3rd 3/15 x 4500 900 900 1400
4th 2/15 x 4500 600 600 800
5th 1/15 x 4500 300 300 500

DEPRECIATION 4.5
Units of output depreciation

In this method, a more equitable distribution of the cost of some assets can be obtained by dividing the
original depreciation cost with the estimated life in units rather than the year of useful life. This method
states the capacity of machinery to produce units.
Suppose that a machine was purchased at Rs.100,000 when its residual value is estimated by Rs.10,000
and production capacity by 100,000 units with normal repair and maintenance. In this method, the
depreciation can be made as;
Depreciation rate per unit = cost – salvage value

Estimated life in units
Depreciation rate per unit = 100,000 – 10,000 = 90,000
------------------------ ----------
100,000 100,000
= 0.90 Paisa per unit/depreciation expenses
DATA FOR DEPRECIATION BY UNITS OF OUTPUT METHOD
COST OF DEPRECIABLE ASSET 100,000

LESS: ESTIMATED SCRAP VALUE 10,000
TOTAL AMOUNT TO BE DEPRECIATED 90,000
ESTIMATED USEFUL LIFE IN UNITS 100,000
DEPRECIATION EXPENSE PER UNNIT = 90,000/10000 = 0.90 PAISA
SCHEDULE OF DEPRECIATION ON MACHINERY
Life Depreciation Units depreciation Accumulated Written down

Rate Produced Expense Depreciation Value
Cost………………………………………………………………………………………………… 100000
1 0.90 8000 7200 7200 92800
2 0.90 8000 7200 14400 85600
3 0.90 8000 7200 21600 78400
4 0.90 11000 9900 31500 68500
5 0.90 10000 9000 40500 59500
6 0.90 15000 13500 54000 46000
7 0.90 15000 13500 67500 32500
8 0.90 10000 9000 76500 23500
9 0.90 15000 13500 90000 10000
DEPRECIATION 4.6
PRODUCTION HOURS METHOD
In this method, plant or machinery is depreciated by hourly underestimated

life in hours.
Suppose that; Machine cost Rs.30000, salvage value Rs.10, 000, estimated
life for 50,000 hours with normal maintenance
Production hours rate = cost – scrap value
Estimated life in hours
Production hours rate = 30000 – 10000 = 20000 = 0.40

50000 50000
SCHEDULE OF DEPRECIATION
Life Depreciation Hours depreciation Accumulated Written down

Rate/hour worked Expense Depreciation Value
Cost………………………………………………………………………………………………… 30000
1 0.40 5000 2000 2000 28000
2 0.40 5000 2000 4000 26000
3 0.40 5000 2000 6000 24000
4 0.40 5000 2000 8000 22000
5 0.40 5000 2000 10000 20000
6 0.40 5000 2000 12000 18000
7 0.40 5000 2000 14000 16000
8 0.40 5000 2000 16000 14000
9 0.40 10000 4000 20000 10000

DEPRECIATION 4.7
DIMINISHING/DECLINING BALANCE METHOD
In this method a certain percentage is determined to fix rate of calculating

the depreciation on any asset which applied to the total cost of asset of the
amount kept in balance year wise or in other words the rate will be applied
to the total cost of asset and in the second year the same rate will be
applied to the total cost reduce the first year depreciation and so on.
Assume that if the cost of an asset is Rs.100, 000 and the fixed percentage
applicable to this asset 10%, the depreciation will be as shown in schedule;
SCHEDULE OF ASSET DEPRECIATION
Life Rate Depreciation Accumulated Written down

Depreciation Expense Depreciation Value
Cost………………………………………………………………………………………………………… 100000
1 10% 10000 10000 90000
2 10% 9000 19000 81000
3 10% 8100 27100 72900
4 10% 7290 34390 65610
5 10% 6561 40951 59049
6 10% 5905 46856 53144
7 10% 4214 51070 48930
8 10% 4893 55963 44037
DOUBLE DECLINING/DIMINISHING BALANCE METHOD
The double declining balance method also is known as diminishing balance method is the same
method as declining or diminishing balance method but in this method, the
percentage as of diminishing balance method will be double to calculate
depreciation of an asset. If the rate of depreciation is not known the
straight line method help to find out the rate with the formula;
Amount of yearly depreciation x 100
Depreciation amount

DEPRECIATION 4.8
The rate will be multiplied by 2 to make it rate double which will be applied
in this method to depreciate an asset;
Suppose that a company purchased equipment which cost to Rs.200000

and estate its life for 10 years and salvage value Rs.20000 and used them
used double declining balance method for this equipment.
COMPUTATION OF DEPRECIATION
STEP 1
Straight line depreciation = Cost-Salvage value = Depreciation per year
Estimate life in year
= 200000-20000 = 200000 = 20000 depreciation per year

10 10
STEP 2
COMPUTATION OF RATE OF DEPRECIATION
Depreciation per year x 100 = rate of depreciation

Depreciable cost
20000 x 100 2000000 = 10%

200000 200000
STEP 3
DOUBLE RATE
Depreciation rate 10% x 2 = 20% double rate
STEP 4
COMPUTATION OF DEPRECIATION
Cost 200000
First year depreciation @ 20% -20000
W.D. Value 180000
2nd year depreciation @ 20% -36000
W.D. value 144000

DEPRECIATION 4.9
The depreciation expense account is debited and the accumulated

depreciation account was credited. The accumulated depreciation is a
contra account to the non-current asset or the conversion value account of
an asset from where the amount reduced from an asset migrates into it
which appears in the balance sheet as a deduction from the original
purchase price of an asset.
On disposing of an asset, the fixed asset account in which the asset was
originally recorded is credited and debit the account accumulated
depreciation which will remove the amount shown in shown in balance
sheet.
If an asset not fully depreciated at the time of its disposal, it will be

recorded as a loss on un-depreciated portion and on the sale of the asset,
the loss will be reduced.
A taxpayer must use Form 4562, Depreciation and Amortization, to report

depreciation on a tax return.

DEPRECIATION 4.10
WRITER’S VIEW
Suppose that the life of an asset is expected for ten years
and was purchased one hundred thousand rupees but
after ten years it sells one hundred twenty-five thousand
rupees when the life of it was ten years and would be
scrapped according to depreciation rules but increase in
rates even though scraped tells us that the asset will work
for further years and if sells give profit. So, it comes to
mind that the depreciation is allowed to reduce income by
income tax to businessman to save income tax and does
not mean to live because the depreciation expense
reduces to gross profit and after ten years the depreciation
expense relief would be ended. If the value of the asset
comes to income and/or remains in business will give
benefit to it but do not apply on depreciation.
Therefore, the depreciation is the relief to operate the
business reducing income which saves income tax.
WRITTEN BY:
SYED AQEEL RAZA
ACCOUNTING FOR DEBT

Volume III
WRITTEN BY:
SYED AQEEL RAZA
CONTENTS
CHAPTER FIVE ACCOUNTING FOR DEBTS
-----------------------------------------------------------------------------------------
ACCOUNTING FOR DEBTS 5.1-2

Trade debtors and creditors 5.2-4
- Accounts Receivable 5.4-8
- Accounts payable 5.8-11
THE AGING 5.12-13
- Account payable aging report 5.14-15
- Accounts receivable aging report 5.16
- Notes payable & notes receivable 5.16-19
THE BILL OF EXCHANGE 5.20-21
Accounting for debt 5.1

ACCOUNTING FOR DEBT
The debt is an amount of money which is borrowed by one party from
another party under the condition to pay back at a later date with or
without interest and it may be borrowed by individual, bank for personal
loan like auto loan, house loan, credit card loan etc. and for business loan
on markup, debt against selling of goods or services with or without
interest. It may have a mortgage, personal and assets’ guarantee.
Most of the companies are operating them to take a loan from the financial
institution for meeting their financial demands or increasing their volume.
This is right that the debt or loan may increase the efficiency of any
business in many ways one side as to increase production, to purchase
assets; plant and machineries, equipment, raw materials, and to purchase
finished goods for trading; to pay the salaries of employees, bills of
suppliers and to get the rid of many other financial difficulties in the
operation of any business but on the other side may become the cause of
financial troubles in future because of paying huge amount in shape of
markup or interest. The profit is generated by investment involves more
investment more profit and less investment less profit and if the
investment of his own, the profit is of his own but the investment acquired
from other sources, the profit is distributed among others. The result is
same means profit earned that amount of his own but change of growing
and loss of his own assets are under questions.

All debts involve cash and other than trade are considered as a loan or
sometime sundry debtors as the trade involves goods which are given to
sellers on credit or cash, the seller is bound to pay the debt of goods to the
party time to time revolving sales and purchase. The seller who took goods
on credit is called trade debtor.
Trade debtors and creditors
A trade debtor is an entity that owes a debt to another entity during the
course of business in the shape of goods or services. The trade debtor
credits the account of the entity that supplied goods or services to him
under account payable controlled by trade creditors and the entity who
supplied goods and services to the debtor must debit his account under
account receivable which is controlled by trade debtor’s account.
Generally, the account of individual party’s receivable is opened in general

ledger but in the case of various parties, another ledger called subsidiary
ledger is created named trade debtors under controlled by account
receivable or debtors ‘control account in general ledger account.
The subsidiary ledger is sub-book of the particular account involving

journals like sales journal, sales return, and allowances journal, cash
receipts journal, and adjustments through journal voucher.
The subsidiary ledger for sale either on cash or credit may be useful to
control the variety of units sold under control account sale.
Trade debtors relate to goods or services for doing business.

The trade debtors are who they purchased goods for doing business and
the party from whom the trade debtor purchased goods is called trade
creditors. The goods sold on cash to parties doing trade are also considered
debtors because the goods are supplied on taking an advance against sale
come in advance from customers under debtors account.
Then, the trade creditor will have to maintain accounts of the parties to
whom the goods sold on credit.
We know that all individual debtor’s account go in the debtor’s ledger and
creditor’s account in creditor’s ledger under control general ledger account
receivable and account payable or debtors and creditors control account and for
making subsidiary ledger of accounts receivable or debtor accounts, we
have to maintain journals like sales journal, sales return and allowances
journal, cash receipt journal and adjustments through journal vouchers of
those transactions that do not belong to journals or come after posting of
entries from journals as shown in our volume II Chapter III Ledger Making.
And for this, Accounts payable refers to creditors who deliver goods for
business and get payment after some time. The amount of invoice is
journalized as inventory account debit and party’s account credit in ledger
account directly or through purchase journal. The purchases in business
may be from different persons or firm may require a separate account of
the separate book of accounts like subsidiary ledger which provide detailed
information about each person or firm to an accountant. It is controlled in
general ledger by Account payable control account as referred to our
volume II Chapter III Ledger Making.

Therefore, debtors are ascertained by accounts receivable and

creditors by account payable.
ACCOUNTS RECEIVABLE:
Account receivable means to receive the amount from parties to
whom the goods sold on credit or from the purchaser of goods
and have to maintain parties’ ledger account individually as well
as sales journal and sales return journal as illustrated below;
Jan 1. 2015 Sold merchandise to Hakim & Co. Rs.4, 000/= vide Invoice
No1003.
Jan 5. Sold merchandise to Jasco Traders for Rs.5, 000/= vide invoice
No.1004.
Jan 10. An Invoice No.1005 for Rs.10, 000/- was issued against merchandise sold to Star
G/Store.
Jan 15. Sold merchandise to Usman Brothers on credit for Rs.6, 000/- against Invoice
No.1006.
Jan 30. Merchandise consigned to Wali Brothers Rs.6, 000/= vide Invoice
No. 1007.

SALES JOURNAL
Page No.1
POST
DATE ACCOUNT DEBITED INVOICE NO. AMOUNT
Ref.
1.1.2015 Hakim & Co. 1003 _/ 4,000

5.1.2015 Jasco Traders 1004 _/ 5,000
10.1.2015 Star G/Store 1005 _/ 10,000
15.1.2015 Usman Brothers 1006 _/ 6,000
30.1.2015 Wali Brothers 1007 _/ 6,000

TOTAL 31,000
Accounts receivable (Dr.) 31,000.-

Sales (Cr.) 31,000.-
The entry of sales journal will be recorded through journal voucher as to

account receivable debit and sales credit narrating to record sales for the
month of January 2015 and to individual parties’ account or debtors
account in subsidiary ledger making reference sales journal.

In case of sold goods returns, the following sales return journal is made to
record sales returns from the selected transactions below;
Jan 20. Merchandise returned from Jasco Traders Rs.500/- Vide credit
memo No.1050.
Jan 30. Received merchandise from Star G/Store vide
credit memo No. 1055 for Rs.1000/=
SALES RETURNS AND ALLOWANCES JOURNAL

Page No.1
CREDIT POST
DATE ACCOUNT CREDITED AMOUNT
MEMO Ref.
20.1.2015 Jasco Traders 1050 _/ 500

30.1.2015 Star G/Store 1055 _/ 1,000

TOTAL 1,500
Sales Return & Allowances (Dr.) 1500

Accounts Receivable (Cr.) 1500

The entry of sales return and allowances journal will be made by journal
voucher narrating to record sales return for the month of January 2015 and
to individual accounts of the party.

The total of carrying forward balance of customer accounts must be equal
to the carry forward balance of account receivable as shown below;
Hakim & Co. 4,000

Jasco Traders 4,500
Star G/Store 9,000
Usman Brothers 6,000
Wali Brothers 6,000
TOTAL 29,500.-
ACCOUNT PAYABLE
Accounts payable means to pay the amount to the parties who

supplied goods on credit or to the seller of goods.
Account payable account is made like account receivable account
as illustrated below’;
PURCHASES
Jan 1. Purchased merchandise from Aftab Traders Rs.10, 000/= vide Invoice
No. 3201.
Jan 10. Purchased merchandise from Iqbal & Co. Rs.5000/= vide Invoice
No.1312.
Jan 15. Merchandise purchased on account from Jamshed Brothers for Rs.5000/= vide
Invoice No. 4242.
Jan 20. Received an invoice No.2323 for purchase of Rs.5000/= from Azad
Traders
Jan 30. Goods purchased for Rs.10000/- against Purchase Inv. # 1035 from Amjad
Brothers.

Account payable is recorded by journal voucher narrating to record
purchases for the month of January 2015 making reference purchase
journal.

PURCHASE RETURN
Jan 15. Debit Note Issued to Aftab Traders for Rs.1000/- against damaged
goods returns and received credit memo No.4322.
Jan 30. Damaged goods returned to Jamshed Brothers for Rs.500/- with
Debit Note No.3343 and received credit Note.4633.
Purchase returns are recorded by journal vouchers narrating to record

purchase return and allowances for January 2016 making reference PRJ-1.

The total of carrying forward balance of parties account must be equal to the carry
forward balance of account payable as shown below;
Aftab Traders 9,000

Iqbal Brothers 5,000
Jamshed Brothers 4,500
Azad Traders 5,000
Amjad Brothers 10,000
TOTAL 33,500

THE A G I N G
An aging schedule has to design which shows invoices and its due dates and
enables to settle or receive on maturity. It can be made for both accounts
payable and accounts receivable.
In accounts payable aging, the analysis of payment to suppliers from whom

the goods purchased on credit for business indicates which supplier is paid
first in order to avoid any credit or supply problem or the maturity of
invoice date.
ACCOUNT PAYABLE AGING REPORT
Accounts payable is the result of all purchases made by a business from

regular vendors on a credit basis. Many businesses pay for services and
materials 30, 60, 90 or 120 days after receipt of invoice for controlling their
cash flow. With this information, a company can decide which items can be
paid on time based on the amount of cash the company has on hand and
which invoices the company may need to pay late.
An account payable aging report lists the due date of payments that a
company owes to vendors and has generally set up with 30 days time but
consists of;
 00 to 30 days old
 Older than 90 days
The report helps the user in determining which invoices are overdue for
payment and assumes that all invoices are due for payment within 30 days.
The aging of account payable schedule shows that the company

had purchased goods on credit from customer1 and customer2 and
paid them within the credit limit of 30 days when customer3,
customer4, and customer5 were not paid older than 45, 40 and 90
days.
In the case of paying the part amount into the bill, the balance will
be treated older than the date of purchase as shown in customer1.

ACCOUNTS RECEIVABLE AGING
This report directs management’s attention to accounts that are slow to

receive first by the customer and then by the date of the sales invoice. It is
also useful in determining Allowance for doubtful accounts.
AGING OF ACCOUNTS RECEIVABLE
If we assume the credit terms are net 30 days and invoices are within 30
days will be classified as current and;
Any unpaid invoices in April are classified as 1-30 days past due.
Any unpaid invoices in March are classified as 31-60 past due and so on.

The aging of accounts receivable is used to calculate the estimation of allowance for
uncollectible bad debts like;
The estimated amount of uncollectible is recorded in the ledger by debiting allowance for
uncollectible bad debt and crediting accounts receivable.
The individual account will also affect.
In the case of collection some part of the uncollectible amount, the balance of accounts
receivable and allowance for doubtful accounts will increase by reversing the entry above.

NOTES PAYABLE AND NOTES RECEIVABLE
In order to enjoy maximum benefit from the business, firms or persons

borrow money from banks, financial institutions, friends or relative and
mostly against notes which may be interest bearing or non-interest bearing
depends on the receiver and the payer. Interest-bearing notes will be paid
on the due date of the note along with the actual amount.
A promissory note is an instrument in writing unconditional undertaking,

signed by the maker to pay a certain amount only to, or to the order of, a
certain person, or to the bearer of the instrument.
The firm or person who gave amount on promissory note would enjoy the
interest at the rate specified in the notes which called interest income and
the firm or person who took the amount of promissory notes would pay the
interest on notes payable called interest expense.
The note is treated as an asset by the holder and liability by the giver.
NOTE PAYABLE
The note payable is current liability taken in any of the following cases;
- To receive cash as a loan

- To clear the liabilities
- To purchase assets
- To pay for expenses

Suppose that;
- To receive cash as loan;

Cash xxx
Notes Payable xxx
- To clear the liability by notes for 90 days at 5% interest;
Accounts payable xxxx

5% Notes payable xxxx
- Purchase machinery against notes for 60 days
Machine xxxx
Notes payable xxxx
- The payment of expenses;
Advertising expenses xxxx

Notes Payable xxxx
At the time of maturity or due date, the money lender pays the liability, if the note is
non-interest bearing as;
Notes Payable xxx

Cash/Bank xxxx
If the note is interest bearing means face value of note along with interest for the cost
of furniture Rs.10000 issued a note for 3 months @ 6% p.a. interest;
Furniture 10000
6% Notes payable 10000
6% notes payable 10000

Interest expense 150
Cash/bank 10150

NOTES RECEIVEABLE
The principal amount of notes receivable is a current asset and the interest
on interest-bearing notes is interest income under calculation; principal
amount x interest rate x time period = interest earned.
The payee is the party who receives the amount of the note and the maker
is the party who give notes to the payee. The principal amount is to be paid
on the maturity date of the note.
The notes receivable are given in the following cases;
- To pay cash as loan

- To receive acceptance of note in payment of an account
- To sell assets
- A loan provided to others against a note

Notes receivable
Cash/bank
- Received a note in payment of an account

Notes receivable
Account receivable (customer)
- A sale of asset/merchandise against a note

Notes receivable
Sales
A note can be endorsed to others in payment of his liabilities, it means that

the holder can transfer /endorse notes to others, the entry will be;
Account payable (party)
Notes receivable
The holder of the note may keep it till maturity, and collect the amount on
the due date
1- In cash of non-interest bearing note t

a. Cash
i. Notes receivable
In case of interest-bearing note;

Cash/bank
Notes receivable
Interest income
THE BILL OF EXCHANGE
A bill of exchange is unconditional duly written and signed

order form given one to another directing to pay the
certain sum of money to a person or firm, either on
demand or at a fixed or future date and time.
The bill of exchange is similar to cheque and promissory
note is drawn able by an individual or bank and/or
transferable by endorsement. If the bill is issued by the
bank, it can be referred to as bank draft and by individual
as trade draft.
BILLS RECEIVABLE/PAYABLE
Like account receivable and account payable, the account

of bill of exchange is maintained as explained below;
On May 1, 2015 – Hameed sold goods to Karim on credit for
Rs.3000/= and sent him a draft of a bill for 3 months after date.
Karim accepted the bill and returned duly signed it to Hameed on
May 10. Hameed presents the bill for payment and met the bill.

JOURNAL ENTRIES OF HAMEED - RECEIVER
May 1, 2015 – Hameed sold goods on credit to Karim for Rs.3, 000/=
Accounts Receivable (Karim) 3,000
Sales 3,000
May 10, Hameed received a bill for Rs.3, 000/=
Bills Receivable 3,000/=

Accounts Receivable (Karim)
July 10, 2015 – Hameed received cash against bill
Cash
Bills receivable
JOURNAL ENTRIES OF KARIM (PAYER)
May 1, 2015 – Karim goods on credit from Hameed for Rs.3, 000/=
Purchases 3,000
Accounts Payable (Hameed) 3,000
May 10, Karim paid a bill for Rs.3, 000/=
Account payable (Hameed) 3,000/=

Bills payable 3000/=
July 10, 2015 – Karim paid cash against bill

Bills payable
Cash
The accounting for debts involves two parties receiver and payer
wherein who gives money will receive and who takes it will pay
with or without interest as agreed mutually. The receiver will
maintain account receivable and payer account payable.
In trade, the debt is given to increase sales volume in the shape of
goods and services as well as for paying liabilities and purchasing
assets against negotiable instruments with or without interest.
The businessman is forced to work more and more to gain profit
to pay the debt of borrowed money. One side the debt increases
the volume of business and another side opens the door of
employment but sometimes caused the trouble in business due to
mismanagement.
WRITER’S VIEW
WRITTEN BY:
SYED AQEEL RAZA
Volume III
WRITTEN BY:
SYED AQEEL RAZA
CONTENTS
CHAPTER SIX PURCHASES
-----------------------------------------------------------------------------------------
Purchases 6.1-2
- Personal purchases 6.2-3
- Purchases for business 6.4
o Merchandise for trading 6.4
o Materials for manufacturing 6.4
o Assets for business 6.5
o Direct expenses 6.5
o Work against services 6.5
o Direct purchases 6.7
- Purchase for expenses 6.7
- Type of purchases 6.7
Cash Purchases 6.8
Credit purchases 6.8-9
- The procedure of purchasing and recording 6.10-24
- Accounts payable aging 6.25
- Kind of stores 6.26-27
- Maintaining of businesses records 6.28-32
PURCHASES 6.1
ACCOUNTING FOR PURCHASES
The purchase is the result of exchanging values for

material and work by means of money or its equivalent for
the satisfaction of need and for generating profit in
business by the process of purchasing and selling. There
are three types of businesses involve purchases and sells
as in trading business, the person purchases goods and
sells it in anticipation of gain, in manufacturing business,
the concern purchases materials, gives it any shape and
sells and in services business which has no purchase
apparently but actually the services which are given to
service provider are the purchases for which the concern
who does purchase the services pays money to service
provider.
The purchases for business is considered a kind of
temporary asset involve in profit and loss under income
statement. It may also be said a kind of expense because
of purchasing for goods or expense for goods involves in
the cost of goods sold and can also say it the helping tool
for generating profit.
Purchase plays an important role in accounting.

PURCHASES 6.2
The purchase is debited to purchase account which

increases in expense or temporary asset and cash does
credit to a cash account which decreases the assets of an
entity.
There may be following three kinds of purchasing in
accounting;
1- PURCHASE FOR PERSONAL
2- PURCHASE FOR BUSINESS
3- PURCHASE FOR EXPENSES
PURCHASE FOR PERSONAL

No purchase is allowed in business for personal use and if
the proprietor does purchase something or takes anything
from the purchased goods, he will be withdrawing his
capital or goods at value.
If the owner or partner draw cash, the drawing is debited
to drawing account; drawing is a contra capital account,
and cash is credited which is a current asset and asset is
decreasing as;
Purchase moves accounting cycle.
PURCHASES 6.3
Drawing (Cash)/debit
Cash (credit)/asset
In case of drawing goods by owner, the drawing reduces

merchandise at the value to Inventory account.
Drawing (Stock) /debit

Inventory (credit)
At the end of the period or in balance sheet the drawing

account is reduced by owner’s equity or capital account as;
Capital (Cash)/debit
Drawing (Cash)/credit
Capital (Stock)/debit
Drawing (Inventory/Credit
No purchase is allowed in business for personal use.

PURCHASES 6.4
PURCHASES FOR BUSINESS:

- Merchandise for trading
- Materials for manufacturing
- Assets for business
- Work against services
- Direct purchases
- Goods Receipt Note (GRN)
- Debit Note
- Account payable aging
Merchandise for Trading
In trading business, merchandise is purchased for sale against

profit. The trading business involves a person or persons who buy
products and sell to customers and links with manufacturers and
service providers.
Materials for manufacturing
The manufacturing business deals with materials wherein
manufacturer do purchases materials for making goods which he
wants to make something and then sells to traders, whole sellers
and also to retailers. The manufacturing business requires
manpower which is provided by services business in the shape of
employees. Thus, manufacturing business needs the help of
trading and services. It also requires land, building, plant and
machinery for operation.
The purchase is made for sale against profit.
PURCHASES 6.5
Assets for business

In order to operate any business, assets are purchased like
land, building, plant, machinery, furniture, office
equipment, air conditioners, etc. etc. The depreciation
does contra to the most of the assets.
Direct Expenses
Most of the purchases involve in cartage wages, labor,
customs duty, octroi, taxes etc. are the direct expenses
which we can say that the direct purchase is because of
adding in the price of goods purchased and add in the
purchase in the income statement.
Work against services
The plant, machinery, furniture, office equipment or any
asset requires services for installation, inspection, fixing
and like these works the services are purchased for the
time being and the cost included in the asset purchased. It
does not belong to profit and loss but become the part of
the asset.
Direct expenses are involved in the business purchase.
PURCHASES 6.7
PURCHASES FOR EXPENSES

Actually, the expenses which are paid for operating
business activities decrease income or increase less than in
other words we can say that the expenses belong to profit
and loss as low expense high profit or high expense low
income.
The purchases are made for operating business activities
as to works and goods, reduce income and do not belong
to merchandise.
TYPES OF PURCHASES
All purchases revolve around cash purchases and credit
purchases and any purchase can be made in cash or on
credit.
- Cash Purchases
- Credit Purchases
The purchase against expense is the part of income.

PURCHASES 6.8
Cash Purchases
The cash purchase is the purchase which is made on

payment against getting anything on the spot or exchange
of value on the spot.
When a cash purchase is made, the following double entry
is made;
Purchases (Debit/Income Statement)
Cash (Credit/Asset)
The purchase is debited to purchase account which
belongs to the cost of goods sold and cash is credited to
cash account decreases assets of an entity.
Credit Purchase
Credit purchase is the purchase which is made later under
an agreement or mutual understanding of seller and
purchaser. Like this purchase, goods are obtained without
paying cash and cash is paid later.
Cash purchase orders payments on the spot but credit on later.
PURCHASES 6.9
The credit purchase is the liability of purchaser and asset

of seller when it made, the following double entry is made;
Purchase (Debit)/Income Statement

Account Payable (Credit) Liability
When the liability is paid, the balance in payable account

will be reduced and to zero as;
Account payable (Debit)/Liability

Cash (Credit)/Asset
The result of purchase is to increase in purchase account

or expense account and decrease in an asset of the entity.
A purchase also results in the increase of inventory
requires further discussion.
The result of purchase is to pay money.

PURCHASES 6.10
THE PROCEDURE OF PURCHASING AND RECORDING

The following documents or formats for purchasing and
maintaining purchases are simply made depend on the
nature of purchase;
- Purchase Requisition
- Indent
- Requisition
- Job Order
- Purchase Order
- Delivery Order
- Goods Receipt Note (GRN)
- Debit Note
- Account Payable Aging
The formats work like ladder to support recording the
system of accounting
The formats are designed to reach the desired result and

the desired to reach the balance of quantity and cost of
the item which identified in summary of stock.
The purchase requires a procedure to control it.

PURCHASES 6.11
PURCHASE REQUISITION
In case of having no store for consumable items, the

purchases for departments are made by purchase
requisition and the purchase requisition is the document
which is prepared before purchasing of anything either on
cash or on credit. It is an internal document which is made
by the person who wants to require the item for his
department and sends it to purchase manager. The
purchase manager submits it to chief executive officer for
approval and on approval; he arranges to buy the items
required.
The purchase requisition may contain serial number,

description, quantity, and cost approximately which is
prepared by the person who wants to require the item or
items for machinery, repair, maintenance, etc. for the
department and sends it to purchase department duly
signed by the departmental head. The Purchase requisition
will be checked by purchase department. The purchasing
department also ascertains the cost of the item or items
approximately and submits gets it approved for purchase.
PURCHASES 6.12
The purchase requisition is designed below or may be

designed according to the requirement;
The Purchase requisition is an order to purchase in cash.

PURCHASES 6.13
INDENT
Indent means to ask for consumable items use-able in
offices like printing, stationery, and general items. It will be
required in case of having a store for these items.
The indent for issuing consumable items may be specified

below;
Indent means to ask for consumable items.

PURCHASES 6.14
REQUISITION
The requisition may relate to production which requires

raw materials, packing materials and plant, machinery and
building require repair and maintenance.
The requisition may be designed as;
Requisition relates items required for production and building use.

PURCHASES 6.15
JOB ORDER
Job order is a written instruction to provide a

particular goods or services in order to perform
a work according to specified requirements,
time frame, and cost estimates.
Generally, the Job order relates to services

business and for manufacturing business
wherein services or goods required.
The following kinds of formats for job order or

work order may be made;
- Material issue for production

- Acquiring services from customer
- Issuing materials to engineers for outside clients;
It is also known as a work order form.

PURCHASES 6.16
Material issue order form;

PURCHASES 6.17
Job order for acquiring services from customer;

PURCHASES 6.18
PURCHASE ORDER:
The purchase order is an agreement

between purchaser and seller and states
that the purchaser indents to purchase
goods and confirm the legal identity of the
purchaser. It also helps in comparison with
purchase invoice because of having column
quantity, description, unit price and the
value of goods. The deduction of sales tax
or any other instruction is known by
purchase order.
The purchase order is placed to buy goods

on credit subject to the delivery order.
Purchase order means the agreement of purchase.

PURCHASES 6.19
PURCHASES 6.20
DELIVERY ORDER
The delivery order is a document
which confirms the delivery of goods
as per purchase order. It requires the
receiving and checking of goods by
the purchaser.
The seller sends an invoice, a copy of

purchase order and delivery challan
duly checked and received by the
purchaser.
The delivery order confirms the receipt goods ordered.

PURCHASES 6.21
The form or format means to cover any transaction.
PURCHASES 6.22
GOODS RECEIVED NOTE (GRN)
The Goods Received Note (GRN) indicates that

the goods which were ordered have been
received by the purchaser. On receiving the
goods, the purchaser does a signature on Goods
Received Note as a receipt of goods.
The goods received note contains serial

number, description of goods, pack size, price,
ordered quantity, delivered quantity, and
remarks.
This document is very important for payment of

invoice which confirms the transaction.
The goods receipt note works like delivery order.

PURCHASES 6.23
The form or format is made according to requirement.
PURCHASES 6.24
DEBIT NOTE
If any defect in commodities is found, the purchaser will inform
the supplier for deduction of the amount payable by debit
memorandum. If the supplier accepts the request, he will issue a
credit memorandum for the deduction of the amount receivable.
The debit memorandum reduces the liability to vendor and credit
memorandum reduces accounts receivable to the vendor.
Debit note is issued for deduction against the claim.

PURCHASES 6.25
ACCOUNT PAYABLE AGING
Account payable aging is made to pay the amount which is

payable to supplier against purchase on credit under the
agreement of time for payment.
Account payable aging controls payments payable.

PURCHASES 6.26
KIND OF STORES
There may be required many kinds of stores in

businesses dealing with materials or goods relating
to trading and producing. The manufacturing
business has wide expansion involves in materials
and finished goods so that; it must have stores for
consumable and materials in finished and unfinished
forms when the trading business must have Storage
for trading goods.
1 - Consumable Store
- Stationery
- Machinery, Building Materials
2- Production Materials
- Materials
- Finished goods
Goods require stores.

PURCHASES 6.27
CONSUMABLE STORES
In case of having Store for consumable items, it must

require stores where all general items relating to building,
plant and machinery, office equipment and others in store
1 and stationery or office supplies in store 2 must be
maintained. It depends on the volume of business.
The benefit of maintaining stores for consumable is to

save time and money because of purchasing small items in
need requires person to purchase it, the person requires
time and money, and time and money can be wasted for in
shape of conveyance and purchase from retailers for tiny
items and time which can be utilized in other works.
Besides time and money, the risk of handling cash is
minimized.
In order to purchase for stores, the purchase will be made

in cash or credit from whole sellers against cheques
instead of cash.
The items are of daily use in business come under consumable store.
PURCHASES 6.28
The purchase order and delivery order may be used for
consumable stores in case of purchasing items on credit as
they are mostly used for purchasing goods for business on
credit.
STORE I
In case of maintaining store for general items relating to

plant, machinery, office equipment and building, the
procedure of keeping record must be considered.
STORE II
The office supplies and stationery are frequently used in
business communication and maintaining records. The
store for office supplies can be maintained which saves
time, money and risk of cash.
The stores depend on the nature of the business.

PURCHASES 6.28
MAINTAINING OF BUSINESS STOCK

In order to maintain stock of any kind either of
consumable or of business, a device is required to
Stock register
The stock register
- Consumable items
- Business stock
1- Trading
2- Manufacturing
3- Services
CONSUMABLE ITEMS
The stock register which contains pages of every item
could work like ledger is required to control consumable
items store one and store two which I have designed
below. The format is designed to reach the desired result
and the desired for them is a balance of quantity and cost
of the item which identified in summary of stock.
The business stock must have store and recording.

PURCHASES 6.30
The designing of format is to focus the transaction.

PURCHASES 6.31
PURCHASES 31
The stock register controls stock received and issued.

PURCHASES 6.32
The summary of stock register facilitates in making the
cost of goods sold statement.
The result of stock is a summary of stock.

PURCHASES 6.33
WRITER’S VIEW
The purchase involves transactions and transaction is

made through payment on cash on the spot or on later. As
soon as the purchase occurs, the accounting cycle starts.
The purchase relates to the cost of goods which is made
after passing through many processes of purchasing. The
profit or loss is generated by sale and purchase and
purchase is the part of profit and loss. In the services
business, the purchase is the service of a person acquired
for completing the job just like employees, repairers etc.
The stock maintaining is because of purchasing.
Then we can say the purchase pays an important role in
accounting because of which no concept of sale is created
and the stock maintaining is because of purchasing.
WRITTEN BY:
SYED AQEEL RAZA
Volume III
WRITTEN BY:
SYED AQEEL RAZA
CONTENTS
CHAPTER SEVEN SALES
-----------------------------------------------------------------------------------------
Accounting for Sales 7.1

- The Types of sales 7.2
o Cash sales 7.2
o
Credit Sales 7.2
- The Procedure of Sales 7.3
o Sales Return 7.4
o Sales Discount 7.5
o Bad Debt expenses 7.6
Sales 7.1
ACCOUNTING FOR SALE

The sale in accounting means the commodities or services
of economic value are purchased by someone and
someone must receive the commodities or services in
good condition underpayment in cash or in credit.
Although the sale is confirmed after receiving the cash
when in business some parties pay cash against goods and
some parties take goods and pay later but in accounting
the profit is confirmed when a sale occurs and the goods
delivered and the matter of payment is between the seller
and the purchaser. If the purchaser does not pay the debt,
the seller will do credit party’s payable account and
considers it expense under debiting bad debt expense
account.
The commodities which were sold may be returned in case
of any defect under mutual understanding. The return of
goods does contra effect on sale.
No business is made without a sale.
Sales 7.2
THE TYPES OF SALE
All sales transactions require exchanging value in shape of cash.

The cash which receives on the spot on account of selling goods
comes under cash transaction and that cash which was not
received in the time of handing over goods comes under credit
sales and they record under double entry system create following
two type of sales as to cash sales and credit sales.
Cash sales may offer a discount for quick sales but credit sales
may have a discount but increase in price and many legal
conditions under the agreement.
CASH SALES:
Cash (debit)
Sales (Credit)
(To record sales as cash)
Cash increases in liquid asset accounts of the entity and sales increases in
the income.
CREDIT SALES:
Accounts Receivable/Party name (Debit)

Sales (Credit)
The accounts receivable/party name account increases in liquid asset

accounts and sales increases in the income.
Cash sale and credit sale are both the technique of sale.
Sales 7.3
THE PROCEDURE OF SALE:
On receiving a purchase order, the seller issue sales

invoice to purchase and deliver it to the place of Purchaser
along with the delivery order. In case of any defect in
goods, the purchaser informs to the seller about the
defect under debit memorandum and seller credit the
account of purchaser issuing him credit memorandum.
The cash sale does not require Many formalities like credit
sale in which the matter of giving and take is occurred on
the spot and in case of warranty or guarantee of the
product the condition of sale applies either credit or on
cash payment.
The credit sales are recorded under sales journal and
transferred to in subsidiary ledger parties’ account under
control account in general ledger account as accounts
receivable;
Accounts receivable (debit)
Sales (Credit)
The minimum procedure and maximum sale must be the aim of the seller .
Sales 7.4
SALE RETURN:
The sale return in case of a defect in goods from purchaser

reduces the amount in the balance of Purchaser account in
seller’s ledger. The sales return and allowance journal are
for recording sales return and allowances and at the end
of the month sales returns and allowances are transferred
to the subsidiary ledger of parties under reference sales
journal and the total amount of sales returns and
allowances is transferred to control account of accounts
receivable;
Sales return & allowances (debit)
Accounts receivable (credit)
The sale return may apply on credit sale and on cash sale
as;
Sales return (debit)
Sales return (debit)

Cash (credit)
The sale return is contra revenue account and reduces the

sale in the income statement.
Return in the sale is under question for the seller.

Sales 7.5
SALES DISCOUNT:
In order to increase sales or to sell old stock or for early

payment, the sales discount or reduction in the price of a
product is given to the Purchaser. The Sales discount is a
contra revenue account and reduces the sale in the
income statement.
The sales discount is used in place of sales which reduce

the amount of balance in account receivable of party when
the sales discount is given, the journal entry is recorded as;
Sales Discount (debit)

The discount in sales shows the stability of the product.

Sales 7.6
BAD DEBT EXPENSES

The cause of bad debt expense is of credit sale wherein
the seller sells products to all parties wherein some pay
the debt in time and some pay after time and some do not
pay the debt because of many reasons thus the category
of customer is made as to find customers, good customers,
the best customers and bad customers.
Then we can say the bad debt is the debt which
recoverable chance is equal to not receive and in case of
receiving the bad debt, the entry of bad debt and reversal
entry are made as;
Bad debt Expense (debt)
Account receivable (debit)

Bad debt (credit)
The bad debt is an expense which reduces gross income in

the income statement.
The result of sale war is bad debt expense.
Volume III
WRITTEN BY:
SYED AQEEL RAZA
CONTENTS
CHAPTER EIGHT INVENTORIES
-----------------------------------------------------------------------------------------
Inventories 8.1
- Periodic System 8.1-2
- Perpetual system 8.2-4
- Average cot 8.5
o Simple Average 8.5
o Simple Moving Average 8.6-7
o Weighted Average 8.7
o Weighted Moving Average 8.8
INVENTORIES 8.1
Inventory is the most important item on the subject of

accounting which indicates status of merchandise and in
manufacturing business and it says the actual position of
materials or stock held by the producer as finished goods
or unfinished goods or raw materials or we can inventory
is an asset kept by a business for the purpose of sale
includes raw materials, work in process and finished
goods.
The inventory does up and down profit as low inventory
low profit and high inventory high profit.
There are two main systems of inventory in accounting;
PERIODIC SYSTEM
Small organizations update their inventory records at the
end of an accounting period or when financial statements
are prepared which is called periodic inventory method.
Under this method, the revenue from sale is recorded
when sale is made and no credit entry is made in inventory
account or purchase account and at the end of the
accounting period, the inventory is determined by the cost
of goods sold statement as;
INVENTORIES 8.2
Cost of merchandise on hand at the beginning of the period xxx xxx
Add: Cost of merchandise purchased during the period xxx xxx
---------
Cost of merchandise available for sale during the period xxx xxx
Less: Cost of merchandise sold during the period. xxx xxx
----------
Cost of merchandise on hand at the end of the period xxx xxx
=====
PERPETUAL SYSTEM
Big organizations have to maintain up to date records of the cost and

quantity of each item of inventory in finished or unfinished forms and
maintain a subsidiary ledger of each item show increase or decrease in
material and the balance of the account.
The perpetual system requires method and method has many has many
kinds for calculation of inventories wherein some kind of methods in
perpetual system are described;
First in first out (F.I.F.O) method
Under this method, the items bought first are used or sold first or in other
words, the item or material which was purchased or received first would be
used or issued first.
This method covers the cost price of material and the stocks remain near to
the recent market price. The closing stock of materials may be valued at the
cost of market price as shown in illustration 1;
INVENTORIES 8.3
INVENTORIES 8.4
Last in first out (L.I.F.O) method
Under the LIFO method, the items bought last are used or sold
first which also means that the items still in stock are the oldest
ones.
INVENTORIES 8.5
Average cost
The average cost method is based on mixing materials and the material
cannot be issued from any particular lot of stock.
Average cost method may be of four types;

- Simple average
- Weighted average
- Simple moving average
- Weighted moving average
Simple Average
In simple average method, the price of every material is calculated by

dividing the purchase price of different materials as shown under;
500 units purchased at price Rs. 11/=
The simple average price will be calculated Rs.12 as calculated below:
11 + 12 + 13 = 36/3 = 12
INVENTORIES 8.6
Weighted average
A price which is calculated by dividing the total cost of

materials in the stock from which the materials to be priced
could be drawn, the total quantity of materials in that stock
as;
1,000 x 15 + 2,000 x 17 + 3,000 x 19 = Rs.17.67
1,000 + 2,000 + 3,000
Simple moving average
Under the simple moving average inventory method, the

average cost of each inventory item in stock is re-calculated
after every inventory purchase under FIFO or LIFO methods.
The calculation is the total cost of the items purchased

divided by the number of items in stock. The cost of ending
inventory and the cost of goods sold are then set at this
average cost as shown in the table below:-

INVENTORIES 8.7

INVENTORIES 8.8
Weighted Moving Average
The weight average method just work same as simple

average method but it is better to issue the materials at
weighted average price method because it recovers the cost
price of the materials from production as shown in table
below;

INVENTORIES 8.9
The inventory plays an important role in accounting and

without it, the concept of accounting is incomplete because
it helps in ascertaining the profit and loss.
The increase or decrease have an effect on profit or loss

and we can say that more stock more loss and less stock
more profit and this is the separate talk the stock is an asset
but the sale converts stock to profit and the profit covers
expenses which have already been consumed on achieving
the stock and the expenses are also the part of profit.
WRITER
Volume III
WRITTEN BY:
SYED AQEEL RAZA
CONTENTS
CHAPTER NINE TAXES
-----------------------------------------------------------------------------------------
Accounting for taxes 9.1

- Income tax 9.2-5
o Income Tax Slab salaried persons 9.6
o Income tax salaries 9.7-8
o Income Tax W/H on goods and services 9.8
o How to maintain Income Tax on goods and services 9.9
o What is National Tax Number NTN? 9.10
- Sales Tax 9.11-15
o What is value-added tax (VAT)? 9.16
o What do you mean by F.B.R. & S.R.B.? 9.16.18
o
Maintenance of Sales Tax record 9.19-22
Accounting for Taxes 9.1
ACCOUNTING FOR TAXES
In accounting, no one can deny the importance of

taxes and taxes involves various stages of various
kinds end to the result covering the period of
Accounting. Therefore, all accounting process
revolves around taxes and taxes force to owners to
keep a complete set of the book of accounts audited
by the chartered accountant or may be required to
tax offices for verification of the purity of tax
matters.
Besides other taxes, there are mainly two kinds of
taxes are involved in the business of manufacturing,
trading, and services wherein taxes on sales and
income are under discussion.

INCOME TAX
INCOME TAX
Taxation according to a person’s ability to pay is universally accepted the principle.
Income Tax is, therefore, generally recognized as a highly equitable from taxation. Tax
rates and method of calculating taxable income varies with the fiscal status of the
taxpayer.
Following are the broad categories of taxpayers:-
- Companies
- Association of Persons (AOP)
- Non-salaried Individuals
- Salaried individuals
Companies
A company is a person who encompasses all legal rules and regulations for businesses
under registered with the security and exchange commission of Pakistan (S.E.C.P.) The
SECP checks financial and corporate entities to ensure stakeholder’s interest.
The corporate sector in Pakistan is governed by the Companies Ordinance 1984 which
was promulgated on 8th October 1984 and repealed the Companies Act, 1913.
There are two kinds of companies;

 PRIVATE COMPANY -Private Company has the following restriction while these restrictions do
not apply to other companies.
 (1) It cannot have members more than 50 excluding those are the employees of the company.
 (2) It cannot invite the general public to subscribe the share of the company.
 (3) It restricts freely transfer of share.
PUBLIC COMPANY - Companies Ordinance define the public company as a company that is not a
private company. It means every company that is registered in Pakistan either it is a private
company or a public company.

Association of Persons (AOP)
An association of persons (AOP) under the Income Tax Act is an entity

or unit of assessment. It means two or more persons who join for
a common purpose with a view to earning an income. The term
Person includes any company or association or body of
individuals, whether incorporated or not.
Non-salaried individual
Non-salaried individual means the total earnings of a
person from wages, investment, interest and other
sources. This kind of individual is not employed in any
business concern but we say him the self-employed who
works himself by means of performing services or he
generates income with his investments and other sources
which become the cause of earnings from him.
Salaried individual
The salaried individual means a person who is employed in
the business concern. Actually, he sells his knowledge and
efforts and the amount which he gets comes under
services business. If he comes under the specified limit of
income tax, the concern where he works deducts his
income tax because of having withholding agent; a
withholding agent is responsible for deducting income tax
and deposit to bank on behalf of income tax.
Capital Value Tax
It is payable by individuals, firms, and companies which

acquire an asset by purchase or a right to use for more
than 20 years.
Corporate Asset Tax
It is levied under section 12 of the Finance Act, 1991. This
is one-time levy payable by a company as defined in
Companies Ordinance, 1984, on the value of fixed assets
of the company on the “specified date”.
The withholding agent is who that deducts taxes on

salaries and goods/services on behalf of the government
and deposit them to the bank under the specified rates
declared from time to time. The taxes which it deducts are
chargeable in returns or shown in return as to employee
when he shall fill his return shows the amount which has
been deducted by his behalf and like this, the entity shall
adjust the deducted amount at the time of filing income
tax or sales tax returns.
The rates which are presently declared are shown below;
Income Tax Slabs 2016-17 Salaried Persons Finance Act 2016
Where the income of an individual chargeable under the head “salary” exceeds fifty
percent of his taxable income, the rates of tax to be applied are as follows:
Z
INCOME TAX SALARIES:
The withholding agent means the employer who is liable to deduct tax from
salaries of his employees according to the declared slab from government
and the employee whose tax was deducted is bound to fill his return
wherein he will show his incomes from salaries or any other source. Now a
day, the government has introduced electronic e-filing of return where
anyone can easily register himself and fill the required fields within the
given time.
The employer is only responsible for deducting tax from salaries and
deposit into the bank. He is also responsible for filing the return
electronically monthly, quarterly and annually.
P-1: M/s. Moon Light is a manufacturing concern involves in making

Electrical items has 30 employees and from which 6 persons including
director come under the taxable limit of salary as below;
1 Employee 1 Rs.456, 000/= per annum
5 Employee 5 Rs. 1,416,000/= per annum
6 Director 6 Rs.1, 860, 000/=per annum
S-1: TABLE
TABLE2
INCOME TAX WITHHOLD ON GOODS AND SERVICES
The Income tax withholding rates W.E.F. 01.07.2014;
- Supply of goods by Companies = 4%

- Supply of goods by other than companies 4.5% (Previously 4%)
- Services rendered by Companies 8% (Previously 6%)
- Services rendered by other than companies 10% (Previously 7%)
- Execution of contract by Companies 7% (Previously 6%)
- Execution of contract by other than companies 7.5% (Previously 6.5%)
- Export-oriented services 1% (Previously 0.5%)
- Commission (Excluding advertising agents) including Petrol Pump
operators 12% (Previously 10%).
- Advertising agents 7.5% (Previously 10%) U/S233
- The rate of tax to be deducted under section 155, in the case of
company shall be 14% of the gross amount of rent (Previously 15%)
The above rates are in respect of payment u/s 153, 155, 233.
How to maintain income tax withholding on goods and services?
The withholding agent has the responsibility to deduct tax according to the nature of
the business transaction and deposit it into Bank and gives the proof of its deduction
and deposition to the party and submits the return monthly, quarterly or annually.
The withholding agent has to keep the summary of taxes withheld for quick reference as
in table;
There are some parties are exempt from the deduction of income tax which will also be
summarized. The parties who are exempted from the deduction of withholding tax are
also required to show in e-filing.
The statement for summarizing the record of non-deduction parties;

What is income Tax number NTN?
Income tax number is the number which is allotted by Income Tax

Department and the certificate of it is issued to the person who is eligible
for paying income tax. Nowadays, the CNIC number of a person works as
Income Tax number which is registered in taxpayer portal sites which
government has introduced in most recent years.
Who is Withholding Agent?
The withholding agent is the entity whose responsibility is to withhold tax

and deposited into the treasury of government. It works on behalf of
another and is responsible under laws. The benefit of making withholding
agent is to ensure the increase in taxes and transparency in checking
system of taxes.
Do you mean by Income tax withholding?
The income tax withholding may be called the advance system of taxes and
who deduct taxes is called withholding agent. The tax which is withheld
may be adjusted or refunded. The income tax withholding may be on the
salaries of employees and of material or services.
What is an advance tax?
The tax which is deducted by the purchaser comes under the advance tax.
This kind of tax is for purchaser withholding income tax which he shall
deposit into the bank and deliver the copy of the paid challan. The
purchaser shall debit his account as account receivable debit and credit to
income tax withholding parties and like this seller
The purchaser does debit his account as an advance income tax and credit
to party account and seller does debits account receivable and does credit
advance

SALES TAX

SALES TAX
The Sales tax is a tax which is paid to a governing body for the
sales of certain goods and services. Usually, laws allow the seller
to collect tax from the consumer at the point of purchase. Often
laws provide for the exemption of certain goods or services from
sales.
A system of licensed manufacturers and wholesalers was
instituted whereby they were allowed to purchase goods free of
sales tax from each other and pay tax on sales to unlicensed
traders. Imports were chargeable to sales tax but the licensed
manufacturers and wholesalers were allowed to import goods
without the payment of sales tax. Later on, Sales Tax became
chargeable on locally produced & imported goods at the time of
their sales & import, respectively. The sales tax was collected
under the Finance Ordinance, 1956, on goods which were
chargeable to Central Excise Duty, as if it were a duty of Central
Excise. In April 1981, by virtue of an amendment to the Sales Tax
act, 1951, the collection of Sales Tax on non-excisable goods was
also entrusted to the Central Excise Department.
In the late eighties, the government decided to replace Sales Tax

with the Value Added Tax in the country as a part of its structural
adjustment program which was undertaken to correct anomalies
& distortions both in our tax & non-tax regimes. Accordingly, new
enactment titled Sales Tax Act 1990 replaced Sales Tax Act 1951
with effect from 1-11-1990.

LIABILITY OF SALES TAX
Following sectors are required to get registration for sales tax and charge
sales tax on their supplies/services;-
- Manufacturing
- Import
- Services
- Distribution, Wholesale and Retail stage
Previously it was being charged at the manufacturing and import stage, and
its scope has been extended now to remaining sectors.
Sales tax is chargeable on all locally produced and imported goods except
computer software, poultry feeds, medicines and unprocessed agricultural
produce of Pakistan and other goods specified in Sixth Schedule to the
Sales Tax Act, 1990.
REGISTRATION
Every person in sectors mentioned above, who makes a taxable supply in

Pakistan is required to be registered under the Sales Tax Act. However,
manufacturers having taxable turnover below five million rupees and also
utility bill below rupees seven hundred thousand during the last twelve
months are exempted from registration and payment of sales tax. Similar
exemption is also available to retailers having total turnover below rupees
five million in the last twelve months.
The rate of sales tax is 16% of the value of supplies. However, there are some items
which are chargeable to sales tax at 18.5% or 21% of the value of supplies (see SRO
644(I)/2007 as amended by SRO 537(I)/2008 dated 11th June 2008.

The Registration Form(s) are submitted to the Central Registration Office,
FBR, or Sales Tax Collect-orates/ RTOs for the allotment of a Registration
Number by the persons liable to be registered under the Sales Tax Act. The
taxpayer has then issued a Certificate of Registration.
RETURNS
As per law, each registered person must file a return by the 15th of each
month regarding the sales made in the last month.
All registered persons are required to file returns electronically and in such
cases, the payment is to be made by the 15th and return can be submitted
on FBR’s e-portal by 18th.
A detailed procedure in this respect is given in Sales Tax General Order no.
04 of 2007.
There are some sectors which are required to file returns on a quarterly
(tri-monthly) basis e.g. retailers including dealers of specified electric goods
and CNG dealers.
MAINTENANCE OF RECORDS
All registered persons are required to maintain records at their business

premises of the goods purchased and supplied made by them. All the
records are required to be kept for a period of 5 years.
REFUNDS OF SALES TAX
In cases where the Input Tax exceeds the Output Tax due from the
registered person in respect of a tax period because of exports or other
zero-rated supplies, the excess amount of input is refunded back to the
taxpayer within 45 days. In all other cases of excess input tax, the Board can
specify the procedure for refund.
ADDITIONAL TAX
If a registered person does not pay the tax within the specified time or
claims a tax credit or refund which is not admissible to him or incorrectly
applies the rate of zero percent to the supplies made by him, he has to pay
the additional tad at the following rates:
One and a half percent of tax due or the part thereof per month;
However, in case of tax fraud, the rate of additional tax shall be two
percent per month.
ARREARS
The work regarding Arrears gets initiated in the following cases:
 Late or no submission of the Returns

 Amount paid is less than the tax amount payable
A demand is raised after an audit/ scrutiny is upheld after adjudication.
SALES TAX WITHHOLDING
Sales tax withholding means some portion of sales tax as declared by

Federal Board of Revenue from time to time is retained by the sales tax
withholding agent; the sales tax withholding agent refers to the party which
purchased goods/services, and that amount is adjusted by the entity whose
tax was withheld.

What is value-added tax (VAT)?
A value-added tax (VAT), known in some countries as a goods and services tax (GST),
is a type of general consumption tax that is collected incrementally, based on the
value added, at each stage of production and is usually implemented as a
destination-based tax, where the tax rate is based on the location of the customer.
Therefore, sales tax, general sales tax, and value-added tax work same with the
procedures and regulations of the country where it enforced.
What do you mean by F.B.R. & S.R.B.?
FEDERAL BOARD OF REVENUE
FBR means Federal Board of Revenue formerly known Central Board of Revenue
under enactment of FBR Act 2007. The Federal Board of Revenue is a federal agency
of Pakistan responsible for enforcing fiscal laws and collecting revenue for the
government of Pakistan.
FBR has two major wings; Inland Revenue and Customs. The Inland
Revenue Services formerly known as Income Tax Department administers
domestic taxation including Sales Tax, Income Tax, and Federal Excise
Duties. The Pakistan Customs service administers import duties and other
taxes collected at import stage as well regulates international trade with
regard to prohibitions and restrictions imposed by the government. For the
purpose of collection of revenue and pursuing tax evaders, FBR’s powers
and functions also include but are not limited to; carrying out inquiries and
audits/investigations into the tax affairs, commanding arrests, attachment
as well as a public auction of movable and immovable assets of non-
compliant.

SINDH REVENUE BOARD
SRB means Sindh Board of Revenue controlled under provincial

government Sind, Pakistan is responsible for collecting all tax revenues for
the government of Sindh. Sindh Board of revenue is the controlling
authority in all matters connected with the administration of Revenue
collection including land taxes, land revenue, preparation of land record,
sales tax on services, and other matters relating thereto. The Ministry of
Revenue is the minister responsible for Board of Revenue, Sindh.
P-1: Print Tech packages (Pvt.) Ltd. supplied 4500 cartons of Rs.
33,750/=involving 17% sales Tax Rs.5, 738/= to Umair Enterprises (Pvt.) Limited
vide Invoice # 1560 dated 2.2.2017.
In this problem, Print Tech is the seller and Umair Enterprises is purchaser. The
purchaser is liable to withhold 20% on sales tax under head Sales Tax
Withholding purchase F.B.R. being a sales tax withholding agent.
The purchaser Umair Enterprises will record journal entry in his ledger as;
Purchase Dr 33,750.-
Sales Tax on Purchase (FBR) Dr 5,738.-

Print Tech Packages Dr 1,147.-
Sales Tax withholding Purchase FBR Cr 1,147.-
Print Tech Packages Cr 39,488.-
At the time of payment to Print Tech Packages, Umair Enterprises debit the
liability account of Print Tech as;
Print Tech Packages Dr 38,341.-

Income Tax payable 1,724.-
Cash/Bank Cr. 36,617.-

We have to deduct withholding tax on sales tax as soon as we receive invoice or
at the time of creating liability account of seller because the sales tax department
has no concern the payment of invoice but involves in deduction resulting in e-
filing of sales tax return of that month.
The amount which was withheld will be paid or adjusted in sales automatically in
sales tax return by purchaser.
The seller Print Tech Packages (Pvt.) Ltd will record journal entry as;
A/c Receivable Umair Dr 38,341.-

Advance Sales Tax W/H 1,147.-
Sales Tax Payable Cr 5,738.-
Sales 33,750.-
On receiving the amount in balance, Print Tech Packages will record the
transaction as;
Cash/Bank Dr 38,341.-
A/c Receivable Umair Cr 38,341.-
The Sales tax payable account will be reversed on payment of tax as;
Sales Tax payable Dr 5,738.-

Advance Sales Tax W/H 1,147.-
Cash/Bank 4,591.-
The sales tax and advance tax which was withheld by the purchaser will be
adjusted automatically in the sales tax return of the seller.
The income tax which the withholding agent withheld will be journalized as;
Advance Income Tax 1,724.-

Print Tech Packages 1,724.-
The advance income tax is the asset of the company may be claimed from
Income Tax Department or adjustment in finalizing the return.
MAINTAINANCE OF SALES TAX RECORD
Sales tax is the main issue of any concern dealing with business. The product
which the seller sells and the purchaser buy include sales tax.
It is the requirement of sales tax to have accurate records of the sales and all
transactions made to each customer up to 5 years as evidence of the transaction.
Additionally, proper upkeep of electronically stored data on accounting or sales
tax programs is essential to stay compliant with these rules and regulations.
OUTPUT TAX
Output tax means the supplies of products which include sales tax to registered
or unregistered persons who may be a distributor, whole seller, person etc.
The output tax requires Tax Invoice Section 23 of sales tax act 1990 containing;
- Senior number and date

- Name, address and registration number of the supplier
- Name, address and registration number of the recipient
- Description and quantity of goods
- Value exclusive of tax
- Amount of sales tax
- Amount of further tax as specified, if the supplies are made to an unregistered
person.
- Value inclusive of tax.
KIND OF SUPPLIES
1- Taxable supplies
2- Exempt supplies
3- Zero-rate supplies
TAXABLE SUPPLIES
Taxable supplies mean a supply of taxable goods made by an importer,
manufacturer, whole seller, distributor or retailer.
Exempt supplies
Exempt supplies mean a supply which is exempted from levy of the sales tax by
the Federal Board of Revenue as in the list of sixth schedule.

ZERO RATE SUPPLIES
It means a taxable supply, which is charged to tax of zero percent under section
4. In other words, where a supply is exported to a foreign country, tax is charged
at the rate of 0% on that supply and the output tax becomes zero. In case of zero
rate supply the person making the supply is entitled to refund of all input tax paid
on raw materials used in the manufacturing of the product.
INPUT TAX
Purcahse made by registered persons for busienss purposes are nown as inputs
and the tax which includes in it is called input tax.

ADJUSTMENTS:
The seller adjusts input tax which he pays on purchasing of goods, electricity,
telephone, and service in taxable supplies and can carry forward or refund the
excess amount under the provisions of sub-section (2).
In case of cancellation of supply or return of goods or a change in the nature of

supply or change in the value of supply or some such event, the amount shown in
the tax invoice or the return needs to be modified, the registered person may
issue a debit or credit note and make the corresponding adjustment against input
tax in the return.
E-FILING
E-filing is an automatic system of maintenance of records relating to sales
tax which may be studied under user guide for sales tax on taxpayer
facilitation portal of FBR.
The Accounting for taxes does not matter to say that the concept of debit
and credit are the same as its basic but the creation of the head of accounts
according to the situation is a separate matter. The party whose tax will be
deducted by someone will create a receivable account as an advance tax
which perhaps returns or adjusted from tax departments and the party who
will withhold tax will create liability account and respond to deposit into
government treasuries and deliver the evidence of deposition to the party
whose tax was withheld.
The tax chapter is an essential to businesses for operation any business and
then it is very necessary to care to keep clean in taxes. The rules and
regulation of government are being changed from time to time which may
be studied and applied.
Everything has no end and the change is the end but for the time being.
Writer’s view

ACCOUNTING FOR IMPORT & EXPORT
Volume III
WRITTEN BY:
SYED AQEEL RAZA
CONTENTS
CHAPTER TEN IMPORT & EXPORT
-----------------------------------------------------------------------------------------
Accounting for Import & Export 10.1

o Procedure for Import & Export 10.2-3
o Import Accounting Transactions & Solution 10.3-11
o Export 10.17
o Writer’s view 10.18
Import & Export 10.1
ACCOUNTING FOR IMPORT AND EXPORT
The Import and export involve in all types of businesses like this a manufacturing
concern requires materials which are not available in the country of its own for
making products for his home country and the material which he acquires from
abroad is called Import purchase and the purchaser of the material is called
importer and like this the seller is called exporter and the import and exporter are
both involved each other, mostly traders purchase products from manufacturers and
sometimes buys them from abroad to do business and as far as the service
providers are concerned, they involve in solving problems of importer or exporters
having import and export license.
In order to buy goods from foreign countries, the state issues license to importer
and exporter and in case of having no license, the importer and exporter hire
services of clearing agents who are providing services for them and the role of
clearing agent is important in import and export business.
Therefore, we say that the following entities are involved in import and export
business;
Import;
Buyer
Seller
Clearing Agent
Export
Seller
Buyer
Clearing Agent

Procedure for import and export of goods:
An importer or export has to follow the procedure for import;
- Must have a valid license to import and export or clearing agent services.
- The importer places the purchase order to the exporter.
- On receiving the purchase order, the exporter exports the goods through
road, sea or by air as per the required situation.
- The exporter then sends the Invoice for the material to the importer either
directly or through a banker.
- After receiving the bill, the importer pays the invoice either directly or
through L/C letter of credit.
- After the arrival of goods, the importer pays the customs duty and taxes to customs
department.
- All clearance work is done by clearing agent.
- On imported goods arrival, loading and unloading charges are paid by the importer.
Import duty and taxes are due when importing goods into Pakistan
whether by a private individual or a commercial entity. The
valuation method is CIF (Cost, Insurance, and Freight), which means
that the import duty and taxes payable are calculated on the
complete shipping value, which includes the cost of the imported
goods, the cost of freight, and the cost of insurance. However,
import duty can also be charged per unit of measure. In addition to
duty, imports are subject to sales tax (VAT), excise on some
products, and import regulatory duty.

The goods or products which are imported may have the following payments;
- Cost of materials
- Customs duty
- Sales Tax
- Advance Income Tax
- Central Excise Duty
- Import Regulatory Duty
- Other charges
- Clearing Agent services charges

- Sales tax on clearing agent services charges
- Freight and cartage expenses
- Other incidental charges
- Security deposit
IMPORT ACCOUNTING TRANSACTIONS AND SOLUTION
Transactions
1- M/s. Noor Corporation imported goods from M/s. XYZ Company China
on 1.1.2107. The Exporter XYZ Company China issued an Invoice No.
3404 dated 1.1.2017 for US # 1000/=.
2- M/s. Noor Corporation instructed his bank to pay the above bill on
10.1.2017 to XYZ Company, China. The bank paid Rs.99, 000/= against
the US $ 100 on the same day. The bank deducted Rs.1500/= as bank
charges.

3- In connection with the import of goods, M/s. Noor Corporation also

made the following payments. The Company hired the services of
clearing agent named Cargo Linker and because of this he had paid
clearing expenses including sales tax, income tax, customs duty, excise
duty, freight charges, income tax regulatory duty, insurance and all
other expenses as;
o On 15.1.2017, M/s. Noor Corporation paid Rs.50, 000/= for import

expenses during clearance of goods as to customs duty, excise
duty, sales tax, income tax and other charges to M/s. Cargo
Linker;
o On 15.1.2017, M/s. Noor Corporation also paid 10,000/= as a

security deposit for import to Cargo Linker and he paid it to
Shaheen Shipping Corporation.
o On 20.1.2017, The clearing agent sent the detail of expenses of Rs.50, 000/=
which had been paid in advance for clearance of goods;
Customs duty 15,000.-

Sales Tax 10,000.-
Income Tax 5,000.-
Central Excise duty 5,000.-
Regulatory duty 7,000.-
Other charges 8,000.-
o On 25.1.2017, after clearing of goods, Cargo Linker sent a cheque

to Rs.10, 000/= which was paid as security deposit by Cargo Linker
to Shaheen Shipping Corporation.
o 26.1.2017, the clearing agent sent a bill # 202 of Rs.10, 000/= to

Noor Corporation against its services charges for the import of
product as detailed below;
Services charges 8, 300.-

Sales Tax 1,700.-
o 28.1.2107, Noor Corporation paid the bill # 202 dated26.1.2017 to

Cargo Linker.
Solution;
1- M/s. Noor Corporation imported goods from M/s. XYZ Company

China on 1.1.2107. The Exporter XYZ Company China issued an
Invoice No. 3404 dated 1.1.2017 for US # 1000/=.
The invoice of XYZ Company, China will be journalized by the

importer for creating liability of the amount of Invoice No. 3404
dated 1.1.2017 which will be used on the import of goods. It is
assumed that the foreign exchange rate for US $ 1 is Rs.100/=.
Import Purchase Account (Dr.) 100,000.-
XYZ Company, China (Cr.) 100,000.-
(To record Invoice No. 3404 dated 1/1/2107)

2- M/s. Noor Corporation instructed his bank to pay the above bill on 10.1.2017 to
XYZ Company, China. The bank paid Rs.99, 000/= against US $ 100 on same day.
The bank deducted Rs.1500/= as bank charges.
XYZ Company, China (Dr.) 99,000

Bank A/c (Cr.) 99,000
(To record the payment of US $ 1000 to XYZ Company, China @ 99/dollar)
Bank Charges A/c (Dr.) 1,500

Bank (Cr.) 1,500.-
(Being bank charges for currency exchange deducted by bank)
3- In connection with the import of goods, M/s. Noor Corporation also

made the following payments. The Company hired the services of
clearing agent named Cargo Linker and because of this he had paid
clearing expenses including sales tax, income tax, customs duty,
excise duty, freight charges, income tax regulatory duty, insurance
and all other expenses as;
o On 15.1.2017,M/s. Noor Corporation paid Rs.50, 000/= for import

expenses during clearance of goods as to customs duty, excise
duty, sales tax, income tax and other charges to M/s. Cargo
Linker.
Cargo Linker (Dr.) 50,000/=
Bank (Cr.) 50,000=
(Being the payment of clearing expenses on account)

o On 15.1.2017, M/s. Noor Corporation also paid 10,000/= as a security deposit

for import to Cargo Linker and he paid it to Shaheen Shipping Corporation.
Cargo Linker (Dr.) 10,000.-

Bank (Cr.) 10,000.-
(To record the payment of security deposit to Cargo Linker)
o On 20.1.2017, the clearing agent sent the detail of expenses of

Rs.50, 000/= which had been paid in advance for clearance of
goods;
Customs duty 15,000.-

Sales Tax 10,000.-
Income Tax 5,000.-
Central Excise duty 5,000.-
Regulatory duty 7,000.-
Other charges 8,000.-
.
In this situation, sales tax and advance income tax are adjustable
from sales tax and income tax head of accounts because they are
receivable and customs duty, central excise duty, regulatory duty and
other charges related to the cost of import belong to import
purchase as;
Import Purchase (Dr) 35,000.-

Sales Tax (Dr.) 10,000.-
Income Tax (Dr.) 5. 000.-
Cargo Linker (Cr.) 50,000.-
(To record sales tax, income tax and other import cost expenses)

o On 25.1.2017, after clearing of goods, Cargo Linker sent a cheque to Rs.10,

000/= which was paid as security deposit by Cargo Linker to Shaheen
Shipping Corporation.
Bank (Dr.) 10,000.-

(To receive the amount of security deposit by Cargo Linker)
o 26.1.2017, the clearing agent sent a bill # 202 of Rs.10, 000/= to Noor
Corporation against its services charges for the import of product as detailed
below;
Services charges 8, 300.-

Sales Tax 1,700.-
The bill will be journalized as;
Sales Tax (Dr.) 1,700.-

Import Purchase (Dr.) 8,300.-
(To record Bill No.202 dated 26.1.2017)
o 28.1.2107, Noor Corporation paid the bill # 202 dated26.1.2017 to Cargo

Linker.
Cargo Linker (Dr.) 10,000.-

Bank 10,000.-
(Paid to Cargo linker bill # 202 DT: 26.1.2017)

The ledger account of buyer will show a credit balance Rs.1, 000/= because of foreign
exchange rate shortage or excess. The amount was journalized on the basis of invoice
received from buyer and may be adjusted as on 30.1.2017;
Foreign Exchange Shortage/excess a/c (Dr.) 1,000.-

Import Purchase A/c (Cr.) 1,000.-
The difference is kept under separate account as foreign exchange shortage or excess
account or difference in exchange rate account and at the end of the year, it will be
transferred to trading account so as to reflect the true picture of the import sale
account. This account contra to export sales account just like purchase discount in
purchase account.
SUMMARY OF LEDGER BALANCES
Head of Accounts Debit Credit

Import purchase A/c 143,300.-
XYZ Company, China
Bank A/c 160,500.-
Cargo Linker A/c - -
Sales Tax 11,700.-
Income Tax 5,000.-
Bank charges 1,500.-
Foreign Exchange Shortage/Excess 1,000.-

From the above example it is clear;
That all expenses relating to Import Purchase shall be debited to

Purchase account or we can say the expenses involved in
importing the goods concern directly with the cost of goods
imported as;
- Customs duty, central excise duty, Import regulatory duty and

other taxes and charges are deducted by Customs Office link to
the cost of imported goods and will include directly importing
purchase account. As far as the sales tax and income tax which
is deducted by Customs Office are recoverable from sales tax
and income tax departments or this matter relates to
accounting process.
- The services charges of thirty party’s involvement such as

clearing agent or anyone involved in importing are directly
concerned with the cost of goods imported.
- Bank fee/commission in connection with exchanging values is

normally chargeable as bank charges under profit and loss
account.
- As far as the receivable and payable concern, they affect

party’s debtors and creditors account and do not belong to the
cost of goods imported.
EX P O R T
The export of finished goods increases the
profitability of any country by means of applying raw
material and labors of its own and the return of
money in foreign currency grows any country’s
future.
Export sales are just like any other sales but it
involves drawing of bills in foreign exchange and
realizing the same from the bank and the actual
amount of sales is known only when the bill is
realized. The difference of foreign exchange is
debited or credited to Foreign Exchange Shortage or
Excess Account or different in Exchange Rate
Account and at the end of the year it will be
transferred to Trading Account where the shortage
or excess will decrease or increase the sale of export
just like in sales, the sale discount reduce sale in
Trading Account at the end of the year.
We can adjust the shortage or excess amount into

export sales and buyer accounts for reaching the
true position of the export sale at the moment but it
is better to show the fluctuation in the foreign
exchange rate in Trading account and it is the rule of
accounting.
Suppose that A Company; exporter, exports goods to B Company;
importer, and received a bill No.002 from B Company for the US $
1000 on 1.2.2017. He sends the bill for collection to his bank the
same day. The exchange rate on that date is 100 per dollar.
The Exporter A Company will journalize his export sale as;
B Company (Buyer’s A/c) Dr………………………. 100,000.-
Export Sales A/c (Cr.)…………………………………………..100,000.-
(To record bill 002 dated 1.2.2016 of B. Company, Importer)
The bill realized on 10.2.2017 when the exchange rate was Rs.99
per dollar. The bank deducts its collection charges Rs.500/= and
advance income tax Rs.500/= and then credits the balance
amount to exporter’s account means A company under credit
advance.
On receipt of credit advice from bank, the A company; Exporter

records the payment entry under bank payment system as;
Bank Dr. 99,000.-

B Company (Buyer’s A/c) Cr 99,000.-
Bank Charges (Dr.) 500.-

Bank (Cr.) 500.-
Advance Income Tax Dr. 500.-

Bank (Cr.) 500.-
The compound entry of this credit advice may be as;
Bank Dr. 98,000.-

Bank Charges 500.-
Advance Income Tax 500.-
B Company (Buyer’s A/c) Cr 99,000.-
After realizing the amount of the bill, the amount receivable in

buyer’s account will show a debit balance with a sum of Rs.1000/=
and like this, the export sale which is just for 99,000/= will show
Rs.100, 000/= therefore, it needs an entry where the difference is
recorded. We open a new account naming Difference in Exchange
Rate Account or Foreign Exchange/Excess account as;
Difference in Exchange Rate a/c Dr. 1,000/=

B Company (Buyer’s A/c (Cr.) 1,000/=

For our purpose or in a short way, we can see the actual picture of
export sale by decreasing or increasing the accounts of Export
Sales and Buyer.
The difference in the exchange rate may be shown separately as

making account difference in exchange account or foreign
exchange shortage or excess account. This new account will do up
and down the profit and loss account as it is in Debit will reduce
export sales account or in credit means it will increase the export
sales. Then we can say, this situation will increase or decrease the
profit or loss account.
In connection with the export, the exporter has to send the goods
at a seaport or via land resulting it has to face transportation
charges, loading, and unloading charges. In case of export by land,
he will send his goods via Transport Company and Transport
Company will charge transportation charges as freight charges
from the exporter.
The exporter has paid Rs.3000 as transportation charges up to
seaport, Rs.1000/= as loading and unloading the goods at the
seaport to labors. The entry of cash payment is made as;
Export Expenses (Dr.) 4,000.-

Cash (Cr.) 4,000.-
The transportation charges or maybe freight charge and loading

and unloading charges concern with the export expenses. The
export expenses vary the profit and loss of export sales mean
minimum expense maximum profit.
The clearing agent for export clearance at seaport will be required
by the exporter and suppose that A company hired the services of
export clearing agent named D company who will help in the
export of goods from the port and be using his export license.
Therefore, A company gives the clearing agent Rs.10, 000/= to D
Company for port expenses.
The exporter will record entry as;
D Company 10,000/=
Bank 10,000/=
The exporter debits the account of clearing agent after paying

cash and the clearing agent sent the detail of the amount which
the exporter paid him in advance for meeting export expenses;
Freight Charges 4,500/=

Service Charges 2,000/=.
Sales tax 1,500/=
Income Tax 1,000/=
Documentation charges 500/=
Incidental charges 500/=
The exporter records the detail under journal voucher as;
Export Expenses 8,000/=

Sales Tax 1,500/=
Income Tax 500/=
D Company Account 10,000/=
In order to promote exports, the government allows

various incentives to the exporters as to duty drawback
account, the premium on Import/Export License account
which is recovered only when the claim is received or the
premium on the license is realized. It may be accounted
for as Bank account debit, duty drawback account credit
and premium on import License account credit which is
transferable to Profit and Loss account at the end of the
financial year.
The sales tax and income tax on the services which are
hired by clearing agent are recoverable from the
departments concerned because of this they are kept in
the current asset account.
In import, goods or materials are purchased via seaport or

dry port by a foreign country and who buys is called
importer and the importer either has import license or the
services of an agent. The importer has to pay customs
duty, freight, insurance, and sales tax, and income tax,
etcetera for clearing his goods or materials. The cost of
import includes all expenses which are directly involved in
import and some payments are recoverable or adjustable
from departments concerned.
In export, goods or materials are sold via seaport or dry

port to a foreign country and who exports is called
exporter. An exporter has to face freight charges, loading
unloading charges and agent service charges as well sales
tax and income tax therein.
An import refers to receive and export to sell.
Writer’s view
CONTENTS
CHAPTER ELEVEN CONSIGNMENT
-----------------------------------------------------------------------------------------
Consignment 11.1
o Consigning 11.2
o Consignee 11.2
o Commission 11.3
Procedure of consignment 11.3
o Writer’s view 10.18

VOLUME III
WRITTEN BY:
SYED AQEEL RAZA
CONSIGNMENT 11.1
CONSIGNMENT
The consign is a verb which means to send and the consignment
of its noun which means sending goods to another person or
agent for the purpose of sale or introducing goods in another city,
place or country.
Then we can say that the consignment is an agreement between
the owner and agent wherein the goods or materials are given
over to another person’s charge, custody or care on the risk of the
sender but the owner retains the legal ownership or title until the
goods or materials are sold.
The agent sells the goods on behalf of the sender according to his
instructions. The agent is authorized to incur all expenses to
receipts, storage, and sale of goods or materials.
The following terminologies are used in consignment accounting;
CONSIGNMENT:
The consignment is an agreement of sending goods on
commission basis under sender’s risk and expenses. The sender is
the owner of goods and retains the legal ownership of the
materials which he sends to commission agent.
CONSIGNMENT 11.2
In consignment, the consign searches a suitable party in another

city or country and settles the terms and conditions of sale.
Suppose that Mr. A is the manufacturer of watches and making
them in Karachi if wants to increase his sale or popularity of his
product, he will go another city suppose that Lahore and where
he will find the dealer or shops they are involved in selling
watches. Mr. ‘A’ found Mr. D who are doing this business and will
say him that he is making watches in his city and wants to keep
them in his shop under his risk and expenses and will pay
commission over the sale. The mutual agreement with A and D
will make the agreement which will be called consignment.
CONSIGNING:
The act of sending goods by the owner of the goods to his agent
in another city or place for the purpose of increasing sale under
commission is consigning. The owner bears all expenses and
losses of the goods.
CONSIGNOR:
The word consigner is used in place of the seller in consignment
agreement. The consigner is the principal party who sends the
goods on consignment.
CONSIGNEE: The consignee is another name of the buyer or the
party to whom the goods are sent for sale on commission by the
consignor.
CONSIGNMENT 11.3
COMMISSION:
The agreement of consignment refers to the commission to the
consignee on which he was agreed to keep the goods of consignor
on his shop and generally it is worked out on the agreed
percentage of the gross proceed of sales.
THE PROCEDURE OF CONSIGNMENT
The procedure of consignment discusses on;
DISPATCHES
The consignor dispatches or ships the agreed quantity of goods or
materials at his own risk and expenses his agent called consignee
under invoice which is called pro-forma invoice.
PRO-FORMA INVOICE:
The pro-forma invoice is an estimated invoice which is sent by the
consignor in advance of a shipment or delivery of goods. The pro-
forma invoice describes the kind and quantity of goods, their
value, and other important information like weight and
transportation charges. The pro-forma invoice differs from a
normal invoice and which does not demand or request for
payment.

CONSIGNMENT 11.4
DEL CREDERE COMMISSION

The consignor expects the sale of goods from consignee at as high a
price as he can procure and for this service he pays to consignee the
commission at an agreed percentage of the gross sale. If the consignee
undertakes to bear losses and bad debts in respect of credit sales, the
consignee is paid an extra remuneration known as DEL CREDERE
commission.
DEL CREDERE AGENT
The DEL CREDERE Agent is a sale agent to whom the goods are given
under the agreement of consignment and who undertakes the
guarantee of his customers and gives them the consigned goods on
credit and in case of any loss or bad debt, he compensates to the
consignor and for this work he charges extra remuneration or
commission higher than normal rates.
AUTHORIZATION;
The consignee is authorized to do all necessary expenses against

receipts, storage, and sale of consigned goods which are usually met
out of sale proceeds.
ACCOUNT SALES
It is a statement which is prepared and sent by the consignee to the

consignor periodically showing him to the goods sold, sale proceeds,
the expense incurred, commission payable and the net amount due to
the consignor. This statement is called Accounts Sales as in the
following form;
CONSIGNMENT 11.5
ACCOUNTS SALE
Sale (Unit sold x Sale price) xxxxx
Less: Expenses:
Freight xxxx
Insurance xxxx
Storage and custody xxxx
Advertising xxxx
Brokerage xxxx
Commission xxxx xxxx
-------------
--------
Less: Advance already sent xxxx
Bank Draft enclosed for the balance =====

CONSIGNMENT 11.6
On receipt of Account Sale from the consignee, the consignor

records the detail of sale and expense incurred by the consignee
as well as the commission payable to the consignee, the sale
proceeds against consignment and the amount received from the
consignee.
ACCOUNTING FOR CONSIGNMENT:
The Consignor makes three accounts in respect of each
consignment which are;
1- Consignment account
2- Goods sent to consignment account
3- Consignee’s personal account
In case of having more than one consignee or agent, the

consignor has to prepare separate account for each consignee or
agent each consignment account is identified with the place,
name or name and place of the consignee as;
Consignment to Lahore A/c or
Consignment to Mr. XYZ A/c or
Consignment to Mr. XYZ, Islamabad A/c
CONSIGNMENT 11.7
CONSIGNMENT ACCOUNT
This account is made to show profit and loss on each
consignment, in other words, it is a sort of profit and loss
account wherein the credit side shows sale and debit side;
the cost of goods consigned, all expenses, commission
payable to consignee and profit or loss on the
consignment.
GOODS SENT ON CONSIGNMENT ACCOUNT
It is an inventory account and its balance is transferred to profit
and loss trading account.
CONSIGNEE’S PERSONAL ACCOUNT

When goods are sent to the consignee, there is no entry is made
on this account. The expenses on sending goods to consignee are
not recorded in consignee’s personal account.
CONSIGNMENT 11.8
ASSESSMENT OF CONSIGNMENT:
The consignment sale is the other name of transferring stock from one
place to another place and when the sale is confirmed the stock is assessed
as;
VALUATION OF UNSOLD STOCK
Consignment stock must be priced at cost price plus a relevant portion of

the expenses or direct expenses incurred by the consignor and the
consignee as;
Value of closing stock = Total cost of goods sent on consignment
+ Direct expenses incurred on them X unsold units
Units received by consignee
LOSSES IN CONSIGNMENT
In case of loss on consignment, there may be different reasons such as;
NORMAL LOSS
The normal loss may be due to natural causes such as evaporation, dry age, breaker age in bulk etc. and
then the cost of the product that is lost should be adjusted by closing stock as under:
+ Direct expenses incurred on them x unsold units
Units received by consignee – units lost

CONSIGNMENT 11.09
ABNORMAL LOSS
Sometimes abnormal losses come on consignment as to loss of goods-in-transit, thefts, damaged or

destroyed goods by fire and these may be recorded in the book of consignor as;
Abnormal Loss account debit
Consignment account credit
(To record abnormal loss)
Insurance Company/Bank debit
P & L A/c (balancing figure) debit
Abnormal Loss A/c credit
(Loss partly recovered by the Insurance Company and the balance transferred to P&L Account.

CONSIGNMENT 11.10
Suppose that Aleem and KALEEM agreed on consignment deal and result of
this deal Mr. Aleem who is consignor sends goods worth Rs.200, 000 to
KALEEM who is consignee. Aleem is doing business in Karachi and KALEEM
in Islamabad.
ALEEM’S BOOK (CONSIGNOR) - JOURNAL ENTRY

Consignment /KALEEM A/c (Dr.) 200,000/=
Goods sent on consignment A/c (Cr)
200,000/=
(To record goods sent to consignee/KALEEM)
- The consignment to KALEEM account shows that the inventory is in the

custody of consignee, KALEEM.
- Goods sent on consignment account describes that the inventory of
consignor, Mr. Aleem moves to the consignee, KALEEM account. This
account is opened in place of inventory or stock or purchase account which
do contra inventory account in profit and loss trading account.
The transfer of stock from one account to another account describes the
ownership of consignor.
CONSIGNMENT 11.11
KALEEM’S BOOK (CONSIGNEE) - JOURNAL ENTRY
- No entry –
When goods sent on consignment to consignee describes that the inventory has moved
only under consignee’s custody who is not the owner of the goods for which he will be
paid commission, salary, extra commission as well as all the expenses to be incurred
during the period of inventory kept under consignee’s custody.
Aleem incurred expenses of Rs.2000/= on sending the goods as freight and insurance.
Consignment Kaleem A/c (Dr.) 2000/=
Bank (Cr.) 2000/=
(Freight and insurance incurred by consignor)
The expenses which are concerned with the consignor, not to consignee will be
recorded in the book of a consignor under consignment account. This expense is paid
directly by the consignor at the time of shipping goods to the consignee and these
expenses are not concerned with consignee’s account.

- No entry -
The reason for no entry in the book of consignee is that the expenses of freight and
insurance which are paid by consignor, not consignee. The consignee is not concerned
with this type of expense in account summary because it is not paid by him.
CONSIGNMENT 11.12
KALEEM sent Account Sale Statement which he had recorded in his book as;
KALEEM at Islamabad
Account Sales
(In the book of consignee)
Sale 250,000.-
Less: Expenses
Salary (1 month salary x 5,000) 5,000.-
Expenses 10,000.-
Commission (250,000 x 5%) 12,500.-
----------
27,500.-
-----------
222,500.-
Less: Draft enclosed 122,500.-
------------
Balance due 100,000.-

========
CONSIGNMENT 11.13
Mr. KALEEM is allowed by Mr. Aleem a salary of Rs.5000/= per month

till the stock is sold.
Consignment Kaleem A/c (Dr.) 5000/=
KALEEM A/c (Cr.) 5000/=
(To record salary of consignee)
The consignee Mr. KALEEM is also given salary for introducing or

selling the consignor’s goods. The salary to consignee is the technique
to force the consignee to give an output of the consigned goods and
because of salary; the consignee will be more responsible and will
consider the employee of the consignor.
Aleem A/c (Dr.) 5000/=
Salary A/c (Cr.) 5000/=
(To record salary from consignor)

CONSIGNMENT 11.14
The consignee records consignor’s account debit means the salary is

receivable from consignor which will be treated as expense in account
sale statement which the consignee will send to the consignor and
records salary as credit means the consignee will record salary from
consignor in his books of accounts as salary account credit means
salary is an extra income of the consignee which is given by the
consignor.
Expenses incurred by KALEEM during the sale of consignment

stock were Rs.10, 000/=.
Consignment Kaleem A/c (Dr.) 10,000

KALEEM Account 10,000
(To record expenses incurred by consignee)
CONSIGNMENT 11.15
Aleem A/c Dr. 10,000/=

Cash/Bank a/c cr. 10,000/=
All the goods were sold in 1 month at Rs.250, 000/= on which

Aleem allowed 5% commission to the consignee KALEEM.
Consignment A/c dr. 12,500/=

Kaleem A/c Cr. 12,500/=
(To record commission of consignee)
CONSIGNMENT 11.16
Aleem A/c Dr. 12,500/=
Commission A/c Cr. 12,500/=
(To record commission on sale by consignor)
In the account sale, KALEEM shows a sale of Rs.250, 000/=.
Kaleem A/c Dr. 250,000/=
Consignment Kaleem A/c Cr. 250,000/=
(To record sale made by consignee)
Bank A/c dr. 250,000/=
Aleem A/c Cr. 250,000/=
(To record sale made by consignee)

CONSIGNMENT 11.17
In order to consignment sale, the profit came as Rs.20, 500/=
Consignment A/c 20,500/=
P & L A/c 20,500/=
(To record the profit on consignment)
Consignment /Kaleem A/c
(In the book of consignor/Aleem)
Goods sent on Kaleem

consignment 200,000 A/c 250,000
Bank A/c - expenses 2,000
Kaleem A/c - salary 5,000
Kaleem A/c - expenses 10,000
Kaleem A/c - commission 12,500
P & L A/c (balancing

figure) 20,500
250,000 250,000
CONSIGNMENT 11.18
Suppose further that;

1) Muneer dispatched to Bashir 500 shirts costing of 200/each.
2) Muneer pays Rs.5000/= for insurance in transit, 2000/= on
packing and 2000/= for cartage from consignor to consignee.
3) On the receipt of goods, Bashir had to paid Rs.5000/= on freight,
Rs.1000/= on octroi and Rs.1, 000 on cartage.
4) Bashir sales 400 shirts at Rs.350/= each.
5) Bashir was allowed two-month salary @ Rs.3000/month.
6) The consignor allowed 5% commission on the sale.
7) 100 pieces of shirts remained unsold on 31.12.2016 at the closing
of the accounting year.
8) Bashir sends Account sale to Muneer with the draft.
9) If 50 pieces of shirts had destroyed during transit and 50 shirts
remained unsold on 31.12.2016
10) The consignee returned unsold stock to the consignor.
11) Bashir sent a draft of Rs.100, 000/= to Muneer. The balance
amount will be paid later.

CONSIGNMENT 11.19
1- ACCOUNT SALES
BASHIR (CONSIGNEE)
Account Sales
(In the book of consignee)
Sale (400 shirts @ Rs.350/= each) 140,000.-
Less: Expenses
Freight charges 5,000.-
Octroi 1,000.-
Cartage 1,000
Commission (140,000 x 5%) 7,000.-
Salary (3000 x2 months) 6,000.-
-20,000.-
-----------
120,000.-
Less: Draft enclosed 120,000.-
------------
Balance due -
------------

CONSIGNMENT 11.20
2- VALUE OF STOCK:
+ Direct expenses incurred on them X unsold units
Units received by consignee
Cost of goods on consignment (500 shirts x 200/=) = Rs.100,000/=
EXPENSES INCURRED BY COSIGNOR:
Insurance in-transit 5,000
Packing Charges 2,000
Cartage 2,000 Rs. 9,000/=
EXPENSES INCURRED BY COSIGNEE:
Freight 5,000
Octroi 1,000
Cartage 1,000 Rs. 7,000/=
Total cost of goods consigned (500 units) Rs.116,000/=
Total cost of goods = Rs.116,000/=
Per unit cost (116,000/500) Rs.232/= per unit
Value of unsold stock (100 units) = unsold units x total cost per
unit
= 100 units x Rs.232
= Rs.23,200/=
CONSIGNMENT 11.21
3- CALCULATION OF CLOSING STOCK
Cost of unsold units (Rs.232/per unit x 50 units unsold) Rs.11,600/=
Add: Expenses incurred by the consignor =
(5,000 + 2,000 + 2,000 /500) X 50 Rs. 900/=
Add: Expenses incurred by the consignee =
(5,000 + 1,000 + 1,000 /500) x50 = Rs. 700/=
Cost of closing stock (50 shirts) Rs.13,200/=
4- VALUE OF ABNORMAL LOSS
Cost of 50 destroyed shirts Rs.10,000/=
Expenses incurred by consignor

(5,000 + 2,000 + 2,000 /500) X 50 Rs. 900/=
Cost of abnormal loss on 50 shirts Rs.10,900/=
The consignment sale is the technique of sale.

VOLUME III
QUESTIONS AND ANSWERS
WRITTEN BY:
SYED AQEEL RAZA
Q&A 1
1- Is budget necessary for business?

The budget relates to planning for saving and spending
money from the income expected to come.
The planning for controlling the finances of an enterprise,
a plan is prepared given name it to the budget which
consists on facts and figures which can belong to the
previous year and if it is made the first time, it will be on
estimation.
The example of the budget is like the proverb “Cut your
coat according to your cloth” means someone should
spend the money which he has in hand keeping in limit
then the budget tells the same to the businessman that he
spends money according to revenues.
Most of the companies do not make the budget but the
spending of money is definitely in view of the budget or
saving in mind then I am of the opinion that the budget is
necessary for business either in written or on verbal.
Cut your coat according to your cloth is the example of the
budget.
Q&A 2
2- Is account receivable and account payable cash?
Account receivable is the form of cash which is receivable

from time to time and the amount which has been
received in cash and the balance which is in party’s
account is still receivable but expected to come in cash.
Like account receivable, the account payable is also the
form of cash which is payable in shape of cash to the
parties from whom the goods purchased.
Account receivable relates to current asset and account
payable to current liabilities.
Account receivable and accounts payable related to asset and liability.

Q&A 3
3- What is the accounting fraud?

Fraud means in accounting is to conceal facts or to alter in
financial statements by overstating its revenue or assets,
not recording expenses and under recording liabilities
because of doing up and down them caused changes in
facts in financial statements.
Another fraud inside is to change figures, date and in
particulars as well as fake invoice or bill or cash memo,
and the amount charged but has no receiver’s signature.
The frauds in financial statement and by employee both
are not right in accounting.
Honesty is the best policy for employer and employee.

Q&A 4
4- What is the difference between cash in hand and cash

at the bank?
Cash is cash either on hand or on another hand. The cash

in hand is ready to cash in paying at once on the spot but
cash in bank is the cash which is met by presenting cheque
to bank if in cash it will be paid by bank on submission of
cheque and if in the named account only it will be
transferred in the account of the holder of cheque.
The cash in hand is used to pay petty cash expenses of the
concern and the cash at bank is for payment of parties
from whom the goods purchased or the limitation of the
amount in paying the cash.
The cash in hand and cash at bank relate to a current asset
of the concern and shown in the balance sheet as the
balance at the end of the accounting period.
The cash and bank are the same in nature but not in physical.
Q&A 5
5- What is the inventory and does it involve the business

of services?
The inventory relates to goods or stock for doing business

and the inventory of assets besides the inventory of goods
or stock may also come under inventory because the
inventory means a list of items. Then the inventory
belongs to a current asset which in trading is the
purchased merchandise for doing business and in
manufacturing, it relates to materials and goods.
In the services business, there is no involvement of stock
or material like trading and manufacturing businesses but
the assets like a chair, table, and many other things which
are used in providing services may be the inventory of
service provider. The business of services does not belong
to cost of goods sold but relates to payment and receipt as
in income statement preparation; income/loss = gross
revenue – total expenses.
The inventory in service is the efforts of the service provider.
Q&A 6
6- What is purchase?
The purchase in general means to get something from
someone on paying money which may be in cash or credit.
In business, merchandise purchased is an inventory of a
businessman to which he sells adding the margin of profit
and expenditure.
The purchase involves purchase return and allowances,
discounts and many other reductions in the purchase as
well as credit in the purchase.
The purchase is a temporary asset but considered as an
expense and can be said the helping tool for generating
profit as; beginning inventory + net purchases + direct
expenses = cost of goods available for sale – merchandise
inventory ending = cost of goods sold and cost of goods
sold is reduced by sale = gross profit – expenses = net
profit and the net profit is transferred to capital account.
Then we can say the purchase links to capital.
The purchase relates to payment.

Q&A 7
7- The Import and Export is necessary for any country explain?
The import and export is necessary for any country because of different
reason;
The import becomes necessary for any industry which is producing the
product requires the material or services not available in the country. The
material can be imported in raw form and the services in the technical form
like machinery involve in producing the product and the manpower or
technical staff who have knowledge and education for machinery and
product.
It is the import that breaks the monopoly of industries and compels them
to falling prices in their products because of import, the product of a kind is
available in various shape, size and price and because of which everyone
can afford to buy them and not for a specific person.
The import helps to control unemployment in the country one imports

goods from abroad cannot do anything himself and has to employ some
ones and to employ someone becomes the cause of employment.
The country which is importing has to pay money in foreign currency which
affects country’s monetary system.
Like import, the export plays contra role in any country’s economy, because
of export foreign currency comes against the export of surplus materials
and services to foreign currency. The export of finished goods is better for
any country and to export raw material is not favorable for any country. If
the raw material is used in the country, the unemployment will reduce, the
export money will increase against raw materials and many other benefits
will be better for the economy of any country.
Import and export increase the relationship between two countries.
Q&A 8
8- Describe the difference between sales and consignment sales?
In sale, the goods are given to purchaser with ownership rights in exchange for
value and in consignment; a seller/consigner sends goods to a
buyer/consignee/reseller who pays the seller only as and when the goods are sold
and differ as;
SALE
- The possession and ownership of the goods or title are transferred to the
purchaser by the seller.
- The purchaser is called debtor until the settlement of his account.
- The damage to the goods of any kind is the loss of the purchaser.
- Goods once sold are generally not returned.
- All expenses after and before delivery of the goods are borne by the
purchaser.
- The goods are sold by sales invoice.
CONSIGNMENT
- The consignee does not hold the possession and ownership of the goods or
title, it remains with the consignor.
- The possession and ownership of the goods or title are not transferred to
the consignee and remains with the consigner.
- The relationship between consignor and consignee is of principal and agent.
- The damage to the goods or any kind is the loss of consignor.
- The consignee can return the goods to the consignor if the goods are not
sold.
- All expenses after and before delivery of the goods are born by the
consignor.
- The goods are sent by Performa invoice.
The sale gives ownership rights and the consignment does not it.
Q&A 9
9- How to make consignment account for one consignee

and other than one consignee?
There are three types of accounts are used in consignment

account which is; 1- consignment account, 2- goods sent to
consignment account and consignee personal account and
in case of having more than one consignment, the
accounts are identified by the name or place or name and
place of consignee as; consignment to Mr. ABC, Lahore
and goods sent on consignment Mr. ABC, Lahore as far as
the consignee personal account as consignee’s name; Mr.
ABC, Lahore will work for both purposes.
The consignee’s accounts are just like receivable accounts.

Q&A 10
10- What is the difference between credit

sale and consignment?
In a credit sale, the seller gives the goods to buyer or
reseller on credit wherein the buyer is responsible for all
expenses and risk of bad debts resulting in credit sale. The
seller records the sale of goods and debits the account of
buyer under accounts receivable and he belongs only to
buy, not of his customers and when in consignment, the
consigner records the consignment inventory under
consignment inventory debit and inventory account credit
and on receiving the details of expenses and sale under
account sale
The responsibility does separate credit sale and consignment.

Q&A 11
11- How to records consignment inventory?

In consignment, the consigned goods are journalized under
inventory transfer system. The consigned inventory is moved from
inventory account to consignment inventory account consignee
wise;
Consignor Accounts:
Account Debit Credit
Consignment inventory 2000

Inventory 2000
Or consignment account (Dr.)

Goods sent on consignment (Cr.)
The movement of normal inventory account to separate

consignment inventory account represents the consigned goods is
the property of consignor not of the consignee and we can say
this process is the transfer of stock which is kept under
consignee’s custody in place of the consignor. The place is
changed but not the ownership.
Q&A 12
12- What do you mean by consignment sale?
In consignment, a consignor sends goods to the consignee who

pays the consignor only as and when the goods are sold. The
consignor remains the owner or holds the title of goods. The
consignor continues to own the goods until they are sold, so the
goods appear as an inventory in the accounting records of the
consignor, not the consignee.
Here are two purposes are working one is to increase sale and
other is to introduce goods out of place. Because of this, the
owner undertakes the risk and expenses of the consigned goods
and if the consignee does it himself, he will be given an extra
amount of commission which is called DEL CREDERE Commission.
The consignment inventory keeps on sale on other hand is a
strategy of supply chain management in which the consignee
store goods in his business place without paying the consignor
until after the goods are sold.
Q&A 13
13- Will the consignee record consignment inventory

account?
The consignee receives the stock from the consignor of

which is not the owner of it as the consignee does not
purchase the goods but kept the goods under consignment
agreement then he will not record this in his book. He will
record the goods or stock in a Memorandum Book –
Consignment Inward Book. An inward consignment is
the receipt of goods by the consignee from the consignor
for the purpose of sale on a commission basis.
Q&A 14
14- What is the definition of an employee?

An employee is a service provider of his kind and the
service is a term of business then the employee is a
businessman and the inclusion of his in any business as an
employee comes under business definitely but the concept
of employment our here does not fully define the term of
service business because, in a business, a man has power
of hire and fire when that the employee has no like this.
In employment, the employee works under the employer
who hires the services of the man against an agreement
and the agreement bound him to do so whatever the
employer wants.
Hence, we can say the employment is a different branch of
business but relating to service business wherein the
services of an employee are given on hire or on rent
against an agreement.
Therefore, it is concluded the employee comes under
hiring business wherein the things or services are not of
the hirer but for payment of rent against their needs.
An employee is a service provider but under an employer.
Q&A 15
15- What is the classification of an employee in employment?

Generally, employees are classified on time basis or number of hours
worked and according to job the responsibilities; they are given benefits
and fall into three major categories; full time, part-time, and temporary
employees
- FULL-TIME EMPLOYMENT
A full-time employee is defined as one who works in normal works as

defined in laws. He is the employee that is eligible for benefits defined by
company’s rules and labor laws. The full-time employment requires
agreement between employer and employer under conditions mutually
agreed. In full-time employment, the employee works for 90 days or more
on a probationary period. The probationary period does not consider the
period of temporary employment.
- PART-TIME EMPLOYMENT
The part-time employees are the employees who work for irregular hours
and receive some benefits than a full-time employee but many employers
provide part-time employees with a pro rata share of benefits such as
vacation, sick leave, and other paid absences based on the number of hours
worked.
- TEMPORARY EMPLOYMENT
An employee is a temporary employee who is hired part-time or full time

directly or indirectly for the task of temporary nature and because of being
a temporary employee, generally, does not get any benefits than
permanent employees. The temporary employees are paid daily, weekly,
fortnightly and monthly or on lump sum agreed amount.
Q&A 16
16- What is the connection of human resources

department with accounts department?
The human resources department is a department who
keeps personal records of employees. It helps to recruit
staff and is responsible for solving problems between
employee and employer. It keeps eyes on employee’s
performance and gets them rights under their cadre.
Because of having personal records and watching activities
of employees, the human resources department is
responsible to make salaries statements and move them
to accounts department for payment. It is also responsible
to make any other statement or calculation relating to
employee’s account and sends to accounts department for
payment.
Human resources also pay the role of helping employees
for pension, medical, health and safety and other works
belong to them.
Therefore, the human resources department pays an
important role between employee and employer.
Q&A 17
17- What is the difference between worker and

officer?
There is no difference between worker and officer

because a workman is defined that who has hire and
firepower is officer otherwise worker. This is the
style of taking work to make grades in workman skill
and unskill wise.
A manager is a worker who has been working with
the man has hire and firepower and if the man has
hire and fire power delegates to a manager and this
means is not that he will be the person who has hire
and firepower because he can be fired by the man
who delegated the powers for the time being or for
taking his work on behalf of him.
The hire and fire power differ between worker and
officer.
Q&A 18
18- What is the function of Accounts and Finance Departments?

The accounting is the department which covers all the
departments of business and because of the reason from director
to labour is connected by accounts department and the
accounting is the language of business which concerns to
monetary system and monetary system involves in investment in
business and control money by means of payment and receipt of
any nature and in result of them, accounts are made according to
nature of transaction.
The accounting is only the department which can be sub-divided
in order to make easy and systematical working;
ACCOUNTS DEPARTMENT:
The accounts department is a department which has accounts in black and

white of any nature relating to business and these accounts are made by
business transactions for example a company invest money in business, the
capital account and cash account will come into being and move under
debit and credit rules wherein the capital account will show credit balance
and cash account debit balance and now all transactions will be affecting
cash account directly or indirectly within the cash balance. According to the
requirement or nature of the transaction, accounts are generated
automatically as and when the transaction occurred and the result of them
comes to an end or on the balance showing payment and receipt. Every
account relating to receivable and payable tells us to pay it or to receive
and because of payment and receipt all accounts are made possible.
Q&A 19
The need of this talk remains that the collection of accounts may
be represented in a manner which could show the actual picture
of the business which is required to proprietor and others is called
managerial accounts which are prepared in the accounts
department.
The inventory in business may be raw material, work in process

and finished goods or the goods purchased for trading and these
are considered as the current assets of any business. The
inventory is a complete department in it which is the subsidiary of
accounts department and without it the concept of accounting is
incomplete. The cost of goods sold is obtained by inventory
system from which the gross profit of an organization is calculated
and it requires management directly.
The inventory department enables accounts and finance
department to function properly because of the profit conversion.
The inventory department does purchases for business, keeps
goods and issues goods for sale or consumption and it connects
directly to accounts department.
Q&A 20
FINANCE DEPARTMENT:
The finance department is the department which work is to create
funds from the possible sources from which it suggests
investment in businesses, borrows money from financial
institutions and make policies from collection from debtors and to
search ways of economy in finances for which it makes budget,
control in and out cash flow and makes policies goes to economy
in expenditures.
The finance department controls sales department which
concerns to generate funds for business.
The finance department also looks taxes in any business as the
matter of taxes in any business has importance because
nowadays, the state is imposing many taxes like income tax,
general sales tax, withholding tax and many other taxes on import
and on finances doing transactions from bank or parties.
Q&A 21
19- What is a sale?
The sale in general means is to give something for something

against the value of the thing or service on demand. The sale
relates to business but it can be for personal like a man sells his
old things to someone against money and in business the sale
passes from many processes in generating profit because the
profit is the main objective of a businessman because of which he
purchases goods and adds extra amount in the purchased price
keeping in view all expenditures which may come during the
process of sale.
The sale involves sale return and allowances, discounts and many
other reliefs in the sale as well as credit in the sale.
The sale is a temporary revenue but profit is because of sale as;
net sale – the cost of goods sold = gross income – expenses = net
income. The net income is transferred to the capital owner. Then
we say the sale is the part of the capital.
The sale relates to receipt.
Q&A 22
20- How to get the new password of iris?

The IRIS is the taxpayer portal covering all business process of
income tax and sales tax which you can access the link
https://iris.fbr.gov.pk/infosys/public/taxlogin.xhtml on Google
Chrome browser. The new taxpayer can easily register himself by
following provided steps.
In case, the registered person forgets his password, he can get
new password by doing the step below;
- Open iris portal
- Click on forgot password
- Fill dialogue box and then submit
- Do not close dialogue box until new password
- A verification code will be received on mobile number and
email.
- New window will open in dialogue box
- Apply verification code and get the new password of your own.
Q&A 23
21- What are FBR and SRB?
The FBR and SRB are the abbreviations of Federal Board

Revenue and Sind Board Revenue. The purpose of both is
to collect taxes for state and province.
The Federal Board of revenue is the successor and
controlling authority of Central board of revenue and is
responsible for enforcing financial laws and policies and
collecting revenue in the form of federal duties, taxes and
other levies for the government of Pakistan. It has EBR
taxpayer portal for facilitating to his taxpayers to pay tax,
file return against the income tax and sales tax.
The Sindh Board of Revenue is the controlling authority
and responsible for collecting all revenues from land taxes,
land revenue, sales tax on services and other matters
relating thereto for the government of Sind. It has also
taxpayer portal for its taxpayers.
Q&A 24
22- What is the difference between personal loans than a

business loan?
Personal loan is the loan which is obtained for personal

needs and it does not relate to business and in case the
owner takes the personal loan showing his personal assets
or his goodwill in business but uses it in business, the use
in of his personal loan in business will reduce his drawing
or increase his investment in business.
The business loan is borrowed for buying machinery or any
other assets and for paying debts and it cannot be used for
personal use. The business loan will increase the assets of
the business or reduce the debt which is because of
business operation.
An owner can take for him or give to other loans which are
repayable to business in installment and the loan takers
shall increase the liability of the business.
Q&A 25
23- Is drawing another form of a loan?
The drawing is ahead of the account in accounting which is

made for the owner who draws money or material at the
time of need and some time he returns some money and
this way of in and out is not the form of a loan. In a small
business, the drawing can be made and the balance of
drawing at the end will reduce the capital account.
The drawing is not good for any business because of which
the owner eats the investment and the investment
requires money not drawing.
Therefore, instead of drawing, the money which requires
in need to the owner may be given in his personal account
which is receivable or adjustable from his remuneration
and benefits which are allowed to him in-laws.
Q&A 26
24- What is the character of depreciation in accounting?
The assets which we purchase for operating business have no role in

generating profit directly but indirectly, these have a major role in the
operation of the business and because of having no asset, the concept of
business cannot be considered because the assets become the cause of
helping and supporting all business operation.
There are two kinds of assets used in business in which current assets
which are cash, bank, accounts receivable etc and non-current assets like
machinery, furniture, office equipment, plant, land, building, and etcetera.
As far as the current assets are concerned, they are used directly in
business but the non-current assets are not used directly in the operation
of any business. For example, a product which is manufactured passes away
from many stages wherein machinery and all possible facilities are used to
make it and current assets support it to make a profit from it.
The machinery and all facilities excluding land and building decrease their
values gradually and the decreasing of them is calculating yearly
percentage-wise. The value what is decreased is the value which has
consumed during the operation of business does lessen the actual value of
the assets. Therefore, it will be an expense of manufacturing which reduces
the profit in profit and loss account and the account against depreciation
expenses is made as accumulated depreciation which does contra to the
relevant asset account in the balance sheet.
Because of depreciation in accounting, the businessman takes two types of

advantages one is treating depreciation as expenses by which profit and
loss fluctuate and other is adding the cost of the depreciation in his product
by which the price of product fluctuate resulting in increasing profit of the
businessman.
Q&A 27
25- What is amortization?
The debt and the depreciation on intangible assets are

paid back in regular installments over a period of time by
which the debt in the shape of loan is amortized or paid off
under the schedule of payment based on principal and
interest and the depreciation on intangible assets under
the schedule of depreciation chargeable based on principal
and expense.
In accounting, amortization or depreciation is used to
write off an intangible asset’s cost of operating expenses
over its estimated useful life which reduces the taxable
income of the entity.
Amortization is an operating expense account just like
depreciation expense account for intangible assets and in
the loan; it is used to pay off loan under schedule as the
loan is payable in installment and when the loan is taken it
increases the liability and when it is paid then decreases
the liabilities.
I feel pressure to write my book “the system of accounting”

volume III wherein I have written all the materials relating to the
field which I knew and known. I think some differences with
others and some drawbacks of mine in writing this book may be
occurred but I want to say a little that what I knew I transmitted
to others.
With best regards
WRITER

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Volume – III

Fra Luca Bartolomeo de Pacioli (1445–1517) was an Italian

I am in great pleasure of presenting my Book

I hope my a little struggle for this noble cause

Copyright of this book goes to writer and not

THE BASIS OF ACCOUNTING

Accounting for basis 1-1

ACCOUNTING FOR BASES

CASH BASE ACCOUNTING

In cash basis accounting system, transactions are recognized on receipt and

It is usually applied or followed by individual or small and non-

Cash accounting is the opposite of accrual accounting wherein revenue and

<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<aqeelraza@live.com>

Cash accounting has some drawbacks;

- Daley in recognition of income

- Delay in recognition of taxable income

- Delay of expenses in recognition of taxable income.

A business pays its suppliers early in order to recognize more expenses in

- Unable to present profitability

<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<aqeelraza@live.com>

THE BASIS OF ACCOUNTING 1-3

Advantage of cash accounting;

- Cash accounting can also be cost-effective in the case of sole

- Cash accounting requires less staff, financial resources and easy to

- Cash accounting clearly represents cash flows and outflows in business

- Cash accounting provides tax benefits of payments received in 2015 for

<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<aqeelraza@live.com>

THE BASIS OF ACCOUNTING 1-4

<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZAaqeelraza@live.com

THE BASIS OF ACCOUNTING 1-5

This kind of account can be operated by any person, firm or organization by

This account is operated under interest-free system but the interest is

CURRENT ACCOUNT (CD A/C)

This account is usually operated by the businessman and can be opened by

There is no interest on this account.

- Home safe accounts

<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<aqeelraza@live.com>

THE BASIS OF ACCOUNTING 1-6

Banks also issue certificates having interest on completion of the specified

BANK’S INTEREST AND CHARGES

Cheque book charges

<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<aqeelraza@live.com>

THE BASIS OF ACCOUNTING 1-7

The bank reconciliation is the matching statement of two balances at the

The balance in cash book and in bank statement may differ;

THE BASIS OF ACCOUNTING 1-8

METHOD OF BANK RECONCILIATION STATEMENT

PROCEDURE OF BANK RECONCILIATION

Bank statement Cash book

Balances 24,750 18,000

<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<aqeelraza@live.com>

THE BASIS OF ACCOUNTING 1-9

The out-standing cheques or unpaid cheques are reduced by the bank as

Cheque No. 500500 Rs. 1, 000

Bank statement Cash book

Balances 24,750 18,000

Less: un-presented cheques

<THE SYSTEM OF ACCOUNTING < VOLUME III< SYED AQEEL RAZA<aqeelraza@live.com>

THE BASIS OF ACCOUNTING 1-10

2- Deposit in transit, uncollected cheques

No.130025 dt: 28/6 Rs.3000/=

Bank statement Cash book

Balances 24,750 18,000

Less: un-presented cheques