PRINCIPLES OF ACCOUNTING

Chapter 01
Introduction to Accounting
By: Muhibullah Zamani
Email: m.zamani@kardan.edu.af
Facebook: Muhibullah Zamani
YouTube: Smart Finance Academy
WhatsApp: 0093744542178
 Course Outline
Chapter 1: Introduction
Chapter 2: Financial statements
Chapter 3: Accounting cycle
Chapter 4: Adjusting entries
Chapter 5: Accounting for merchandizing
Chapter 6: Forms of business organizations
Chapter 7: Financial assets
Chapter 8: Bank reconciliation statement
 Course Outline
Chapter 1:
❖Definition of Accounting, Components of Accounting, Decision
Making by External Parties, Decision Making by Internal Parties.
❖ Definition of Business, Types of Accounting Basic Terminology.
❖Basic Accounting Principles, Book Keeping Vs Accounting,
 Topics Outcome

❖Identify different decision making criteria by internal and external

parties.
❖Understand the Qualitative accounting information.
❖Be familiar with the basic terms used in accounting.
❖Know the basic concepts of accounting.
 References
Chapter 1 of Accounting Principles12th edition by Weygandt, Kimmel and
Kieso (Wiley Publication).
Chapter 1 of Principles of Accounting 10th edition by Needles, Powers and
Crosson (Houghton Mifflin Company).
Chapter 1 of Financial Accounting 8th edition by Harrison, Horngren and
Thomas (Pearson Education).
Part A, Chapter 1 &2 of Fundamental of financial accounting, CIMA
Chapter 1 & 2 of F3, ACCA
 Class Rules
1- Every student must have a proper notebook.
2- Mobiles must be silent and no talking inside the class.
3- Don’t ask question during the lecture.
4- Fulfill your homework everyday and be Honest.
5- Be present continuously and on time.
 Introduction To Accounting

Accounting is the language of business.

Why language of business?????
It talks about business.

Legal Persons
 Definition of Accounting
Accounting is the process of identifying, recording,
classifying, summarizing, analyzing and interpreting of
financial character transactions and communicating the
results (accounting report) in the form of financial
statements to the users for decision making or judgment.
Accounting Process
Summarizing
Recording
Classifying
Rent 1 +
Rent Rent 2 -
Group1
Commission Rent 3 +
Rent
Bank account Summary +
Identifying Rent Financial Statements:
Rent ✓ Income Statement
Rent Commission 1 +
Financial Group2 ✓ Balance Sheet
Commission Commission 2 -
Transactions Commission ✓ Cash Flow Statement
Bank account Commission 3 -
Commission ✓ Owner’s Equity Statement
Non-Financial Commission Summary –
Rent ✓ Disclosure Notes
transaction Group3
Commission Bank account 1 +
Bank account
Bank account Bank account 2 +
Bank account
Bank account Bank account 3 -
Users Date wise Summary +

Analyzing and Interpreting

Financial reports ANALYSIS: Use ratios, percentages, graphs, and charts to highlight significant financial
Accounting reports trends and relationships.
INTERPRETATION: Explaining the uses, meaning, and limitations of reported data.
 Users or Decision Makers
.

1. Creditors 1. Management
2. Investors 1. Board of Directors
3. Government Agencies 2. Chief Executive Officers
4. Suppliers 3. Chief Finance Officer
5. Customers 4. Plant Managers
6. General Public 5. Store Managers
2. Owner
3. employees
1. Investors and Potential Investors
Potential Profits Security of Their Investment

Future Profits Financial Strength And

Solvency
Past Performance
Statement Of Financial Position
Statement Of Profit Or
Loss
2. Employees

✓Demand for wage hike, bonus, higher compensation, more fringe

benefits, better working conditions, financial condition, and future
growth.
 3. Lenders/Suppliers
Repayment Security

Future Profits Financial Strength And

Solvency
Past Performance
Statement Of Financial Position
Statement Of Profit Or
Loss

Cash flow Statement

4. Government Agencies

How The Economy Is Tax Authorities

Performing
Use Financial Statements

Plan Financial And Assessing The Amount Of Tax

Industrial Policies Payable
5. Customers
1. Continue To Supply and no danger of Closing Down:
If the customer is dependent on a company for specialized supplies.
2. Discount:
Discount allowed for customer in the last year.
3. Liquidity of the business:
More liquidity---business can sell on credit.
Less liquidity --- business may not be able to sell on credit.
4. Bad Debt:
Is it possible to commit fraud with the business?
6. The public
Assess the effect of the company:

1. On the economy--- Employment

2. Local environment---corporate responsibility programs
3. Local community---patronizing local suppliers
7. Owner (Shareholder, Partners and Proprietors)
1. Profitability
2. Increase turnover
3. Stable or rising dividend rate
4. Sound financial position
5. Constantly growing and expanding business volume
6. Increasing net assets value
7. Future earning potential and growth prospects
8. Risk and Uncertainty in the business.
8. Management
1. Is the rate of return to the owners adequate?
2. Does the company have enough cash (Investment, loan repayment etc.)?
3. Which product line is the most profitable? Should any product lines be
eliminated?
4. What is the cost of manufacturing each product or providing each service?
5. What price should charge for a product to maximize the company's net
income?
6. Can the company afford to give its employees pay raises this year?
8. Management cont…

7. Formulating Strategy

8. Planning And Controlling Activities

9. Decision Making

10. Optimizing The Use Of Resources

 Types of Accounting
.

Financial Cost
Accounting Accounting
Inflation accounting
Corporate accounting
Public accounting
Managerial Human resource accounting

Accounting
Financial Accounting:
Financial accounting is mainly concern with preparation of financial
statements and communication of accounting information to the external
users including shareholders, employees etc. its aim is to ascertain the
profit or loss and to show the financial position of the business.

Profit or Loss statement Position statement/Balance sheet

Revenues (‫)عواید‬ 2000 1. Assets (‫(دارایی‬

Less: expenses(‫)مصارف‬ -1000 2. Liabilities)‫(قروض‬
3. Capital)‫(سرمایه‬
Profit(‫)فایده‬/loss(‫)نقص‬ +1000 Assets = Liabilities + Capital
4000 = 3000 +1000
Cost Accounting:
Cost accounting is the process of determining and controlling cost of
products.
Cost accounting is the process of classifying, recording, allocating,
ascertaining , comparing, controlling, and reporting costs.
Let’s assume that we want to Calculate the cost of Markers produced?
Let’s also assume that the company produced 100 units of each.

Material cost for marker $ 10

Material cost for eraser $ 6
Labor cost for eraser $ 5
Labor cost for marker $ 5 Marker:
Other expenses for eraser $ 3 Materials $ 10
Other cost for marker $4 Labor $5
Other $4
Total = $ 19
No. of units = 100
Classifying Cost per unit = 19/100 =$ 0.19
Recording Actual vs Standard
Allocating $0.19 VS $ 0.15
Ascertaining Actual is more than standard
Comparing Because of xyz issues, we didn’t
Controlling meet the standard
Reporting
Managerial Accounting:

It is the processes of collecting, collating (sorting) and converting the data

from financial accounting as well as cost accounting systems into
meaningful information for managerial use such as policy and decision
making.
Basic Accounting Terminologies)‫(اصطالحات علمى يافنى‬

Any legal activity undertaken for the purpose of earning profit such as buying and
selling of goods & services.
An economic system where goods and services are exchanged for one another or
for money.
• Any dealing or buying and selling between two persons and business enterprise is
called transaction.
• Examples:
• A- Ahmad purchased a machine from Ali amount $.5000.
• B- Kardan University charged $.100 fee on each student.
• C- Krishma Jan deposited $.200 to her bank account.
• D- Goods sold on credit to xyz ltd. amount $.300.
• E- Furniture bought from Turkish Bazar on cash $.500.
• F- Rent paid amount $.400.
• G- Salary received amount $.1000.
• H- Owner started business with amount $.10000
Types Of Transaction:
Cash Transaction ( ‫(معامله نقدی‬
When cash is paid or received as a result of exchange, called cash transactions.
Credit transaction (‫(معامله اعتباری‬
When the payment or receipt of cash is postponed for future date, called credit transaction.
How to Identify cash and credit transactions:

1- It is a cash transaction if:

The terms cash, paid or received are mentioned in a transaction.
Examples: C, E, F, G and H

2- It is a credit transaction if:

The term credit is mentioned or the above terms are not mentioned in a transaction.
Examples: A, B and D
Goods are those articles which are purchased for resale or for producing the finished
products which are meant for sale.
Examples:
1- Raw materials purchased for production purpose.
2- Kardan University purchased 4 Cars, out of them, two cars are for resale(
goods) and two are for office use( Car).

It refers to buying of goods/assets in which business deals, for cash or on credit basis.

Sales are total revenues from goods or services provided to customers. Sales may be in
cash or on credit.
If the goods are not according to sample, and returned back to supplier, is known as purchase
return from purchaser’s perspective.
If the purchaser informs the supplier about the defect that are not according to sample and the
supplier agreed to reduce the price of such goods, is called as purchases allowance.
Examples:
1- Ahmad bought 4 computers from City Plaza each for $.300 on 1/1/2019. he returned back 1
computer to supplier/seller on 2/1/2019.
Interpretation:
4 computers >>>>>> purchase
1 computer >>>>>> purchase return
2- If in the above example, Seller agreed to reduce the price of the computer from $.300 to
$.280 instead of returning back.
Interpretation:
Here, the amount of $.20 is called purchase allowance
If the goods returned back by purchaser to the seller. It is called sales returns from
seller’s perspective.
If the seller gets the information about defects, damaged supplies etc. and the seller
agrees to allow some rebate in price of the merchandise, it is called sale allowance.
Examples:
1- City Plaza sold 4 computers to Ahmad each for $.300 on 1/1/2019. It received 1
computer back from Ahmad on 2/1/2019.
Interpretation:
4 computers >>>>>> sales
1 computer >>>>>> Sales return
2- If in the above example, Seller agreed to reduce the price of that computer from
$.300 to $.280 instead of returning back.
Interpretation:
Here, the amount of $.20 is called sales allowance from City Plaza’s Point of view.
It is a deduction, reduction, grant or an allowance from the price of goods or any other
asset purchased, sold or from the amount payable or receivable. Discount may be two
types.
1. Trade Discount 2. Cash Discount
TRADE DISCOUNT)‫تخفیف عمده از طرف تولید کننده به خریدار یا تخفیف صنفى‬، ‫(تخفیف تجارى‬
This is an allowance or deduction made from the list price of a merchandise / asset at the
time when it is being purchased or sold. No entry is passed for trade discount.
Example:
Ahmad purchased 2 machines for $.290 each on 1/1/2019. but the listed price of each
machine was $.300.
Here, Ahmad received a trade discount of 10 dollar for each machine.
 CASH DISCOUNT)‫(تخفیف نقدى یا تخفیف مخصوص خریدارى که وجه را در موعد مقرر بپردازد‬

When a person pays his debt before date, the receiver of cash may allow him certain
amount as concession for prompt payment. This deduction is called as cash discount.
This discount will be in the form of percentage (e.g. 2%), or in the form of net amount
(e.g. 200).
There are two types of cash discount.
Discount Allowed
Discount Received
When discount is granted / given to others, it is called discount allowed. This is an expense.

When discount is earned, it is called discount received. This is an income.

Discount in the form of: -

10 means, pay within 10 days and get 2% discount
N/30 means, payment will be due in the 30- days. And no discount will gain
5%/15-net/70 …….50000….= 50000*5/100 = 2500----47500
Example:
Mr. Ali is liable to pay $.5000 to Mr. Rahim after 6 months. But Rahim calls him to pay $.4800
today instead of 6 months later.

Here, Ali receive and Rahim allow discount of 200 dollar.

Net purchase = total purchase -trade discount- purchase return/allowance
Net purchase= 10000-2000-1000 = 7000

Net sales = total sales – trade discount -sales return/allowance

Documentary evidence of business transaction is called voucher. It can be cash memo,

invoice, etc.

Office supplies means various articles bought for consumption in office like letterheads,
envelops, pencils, carbon papers, typewriters, etc.

it is a summary of various business transaction relating to a particular person, asset,

expense or income for a given period of time.
When we sell merchandise or any other asset with a promise to receive money at some
future date, it is called as credit sale. All the persons to whom credit sale is made are
collectively known as Debtors or Account Receivable.

When we sell some goods or asset with promissory notes to receive the money at
future date called Notes Receivable.

These are the claim of the outsiders for services or merchandise received or any other
asset purchased on credit. This is called Account Payable. Creditor

When we purchase some goods, asset with promissory notes to pay at future date
called Notes Payable.
When Owner withdraws cash or commodities for his personal use from the
business, is known as drawings.

It includes the monetary value of raw materials, semi-finished goods and finished goods
meant for resale.

it is the value of finished goods lying unsold on a particular date.

The amount received or receivable from the persons to whom goods are sold or
services rendered. It also includes, rent, interest, dividend and other revenue receipts
excluding capital receipts. It is the monetary measure of output.
1) Revenue receipts: revenue from sales of goods or services---recurring P/L
2) Capital receipts: revenue from sales of fixed assets---Non-recurring B/S
Example of Revenues: Interest on drawing
Sales
Interest received
Dividend received
Rent received
Discount received
Profit on sales of fixed assets
Profit on sales of investments
Insurance claim
Duty drawback
Bad debt recovered
Sales of scrap
Donation received
Miscellaneous receipts, etc.
Money value paid or payable for goods or services in the course of business operations.
Expenses is the cost of the use of things or services for the purpose of generating revenue.
It is the monetary value of inputs.

Money value paid or payable in exchange for an asset, goods or services.

1) Capital expenditure: purchase of fixed assets…Non-recurring B/S
2) Revenue Expenditure: purchase of goods or services…recurring P/L

It is the measure of expenditure. It may be expired or unexpired.

1) Expired Cost: it is that part of expenditure which is used up while generating revenue
during the accounting period.
2) Unexpired Cost: it is the unutilized cost which remain unconsumed at the end of
accounting period.
Example of expense: Audit fees Discount allowed
Purchase Royalty fees
Repairs & maintenance
Interest on loan
Carriage inward Legal expenses Interest on capital
Carriage outward Electricity/power Discount on bill
Wages Bank charges
Depreciation
Freight Loss by fire/accident/theft
Commission
Octroi Loss on sales of fixed assets
Traveling expenses donation
Packing
Brokerage Loss on exchange of currency
Salary
Trade expenses Free sample
Rent
Excise duty
Printing and stationery Advertisement
Custom duty
Postage and telephone Promotion BRT (business receipt tax)
Insurance premium Bad debt Establishment expenses
Income)‫(فایده یا مفاد‬ = revenues > expenses
Loss)‫( نقص یا ضرریا خسارت‬ = revenues < expenses

Assets are valuable things, resources or properties owned by a business. It also

includes the amount due to the business by others.

1) Current Assets
2) Non-Current Assets(plant assets)
Tangible Plant Assets (Fixed Assets)
Intangible Assets
Current Assets are those assets which are easily convertible into cash within one
financial year.
Example:
▪ Cash
▪ Bank balance
▪ Accounts Receivable
▪ Inventory/stock/merchandise
▪ Prepaid expenses
▪ Outstanding/accrued income
▪ Short term investment
Tangible Fixed Assets ) ‫(دارائى هاى ثابت مرئى و قابل لمس‬
Tangible Fixed Assets are those assets which can be utilized for more than one financial
year and have physical substances.
Example:
▪ Land and Building
▪ Plant and Machinery
▪ Vehicle
▪ Furniture and fixture
▪ Tools and equipment
Intangible Assets are those assets that do not have any physical
substance and are non-current in nature. (utilized for more than one
financial year)

▪ Trade Mark
▪ Goodwill

▪ Copyright
Liabilities are debts or obligations of the business or these are the claims of outsiders
on the assets of the business.

▪ Current Liabilities
▪ Long Term Liabilities
Current Liabilities are those debts or obligations that business has to pay within one
accounting period/ financial year.
Example:
▪ Accounts Payables
▪ Note payables
▪ Outstanding expenses
▪ Income received in advance
▪ Overdraft
▪ Short term loan
• Long Term Liabilities are those debts or obligations that are long term and business
has to pay after one accounting period.

▪ Long Term Debts

▪ Bonds

Represents the owners claim on the assets of the business.

Capital:
Investment by the owner in his business.
In a running business, the excess of assets over liabilities is known as capital.
Assets= capital +liabilities
Capital = Assets - Liabilities
 GAAP
GAAP (Generally Accepted Accounting Principles)
In order to maintain Uniformity and Consistency in accounting records
throughout the world, certain rules and principles have been developed
which are generally accepted by the accounting profession, are known as
GAAP

IFRS = International Financial Reporting Standards

 GAAP
Some Of The Principles Are As Following:
1. Business Entity Concepts
2. Money measurement concepts
3. Cost Concepts
4. Dual aspect Concepts
5. Accounting Period Concept
1. Business Entity Concepts: This means that in accounting the business and owner
must be treated separately.
2. Money measurement concepts: Accounting records only those transactions which
are expressed in monetary terms.
3. Cost Concepts: According to this concept, all transactions are recorded in the books
of accounts at actual price involved.
4. Dual aspect Concepts: according to this concept, every transaction has two aspects.
These two aspects are receiving aspect and giving aspect. These two aspects have to be
recorded.
5. Accounting Period Concept:
The period of 12 months, within which the performance of a business is measured is
called accounting period.
 Book Keeping Vs Accounting
. Recording
Classifying
Summarizing
Analyzing
reporting
Thank You