Professional Documents
Culture Documents
Principles of Acconting
Principles of Acconting
Principles of Acconting
Shafquat Ali
An art of recording, classifying, summarizing, interpreting and communicating the financial information
of an entity for a period.
BUSINESS
Any legal activity to earn profit. Business is legal, profit oriented, and is regular in nature.
FORMS OF BUSINESS
1) Sole Trader ship or Single proprietorship:
Unincorporated business owned by one person.
Decisions are made by owner solely
No legal formalities are required
Accounting may or may not be performed
Business entity principle is applied
Short lived and unlimited liabilities
2) Partnership:
Business is owned by two or more people as partners
Decisions are made by owners
No special legal requirements are required
Partners enters into an agreement (contract) to operate the business as partners
Business is treated as a separate entity
Financial accounting may be or may not be performed
Unlimited liabilities
IMPORTANT CONCEPTS
SALES: When salable goods are sold, it is said that sales have been made.
PURCHASES RETURNS/OUTWARDS
SALES RETURNS/INWARDS
DEBTORS/ACCOUNTS RECEIVABLE: The person to whom goods are sold on credit. E.g. Naveed
sold goods on credit to Sohail. (here Sohail is debtor to Naveed)
CREDITORS/ACCOUNTS PAYABLE: The person from whom goods are bought on credit. (Naveed
is creditor to Sohail)
[A L C E R]
Real/Permanent Accounts,
Income Statement
Financial Statement
ASSETS
Assets are economic resources/properties/claims that are owned by a business and are
expected to benefit future operations.
i. Tangible assets: [depreciable] assets which have a physical existence and be felt and
touched.
I.e. Cash, plant and machinery, vehicles, building, stock, equipment etc.
ii. Intangible assets: [amortized] assets don’t have physical existence and cannot be
touched or felt.
Example: goodwill (cost or reputation of business), patent, copyright, trademark, company’s
brand name etc.
Classification of Assets
a) Current Assets
b) Non-Current Assets [ 1 Fixed Assets 2 Long term Investment]
Current Assets: (Consumable, expire able) those economic resources in the form of cash and
others, exclusively acquired and available to be converted into cash within shorter period of
time.
Current Assets [Features]
i. Liquidity ii. Services/benefits for shorter period of time
1. Liquidity: it refers to ease with which an asset, or security can be converted into ready
cash without affecting its market price.
Liquidity: assets are converted into cash and then cash is used for paying short liabilities.
Examples: Cash: most liquid asset while tangible items are less liquid.
Notes receivables: Promissory note/written promise acceptable by the firms in
acknowledgement of debt for a shorter period of time.
Accounts receivable: verbal promise (Debtor)
Merchandising inventories (Stocks): Material/goods/products exclusively
acquired/purchased for the purpose of sell.
LIABILITIES
Liabilities are financial obligation/debt/the claim of creditor’s payable in future.
Classification of Liabilities
I. Current/Short term Liabilities: liabilities payable in short period of time (Maximum one
year)
Accounts Payable: an amount owed (to be paid) to a creditor.
Notes Payable: amount owed because of promissory notes given to creditors.
Bank overdraft: Bank loan for short period of time.
II. Long Term Liabilities: liabilities payable in long period of time (more than one year)
Bonds Payable
Debentures Payable
Mortgage Payable: long term debt for which the creditor has a secured prior claim
against some one or more of the debtor’s assets.
CAPITAL/OWNER’S EQUITY
The claims of owner/owners on the properties of business is known as owner’s equity.
Owner’s equity is essentially the owner’s rights to the assets of the business. It’s what left over
for the owner after you have subtracted all the liabilities from the assets.
The amount of money needed to start and run the business.
Owner’s Equity include:
2. Retained Earnings (Joint Stock Companies): amount of net income left over for the
business after it has paid out dividends and its shareholders.
Transactions decreasing the owner’s equity
1. Drawings/Dividends:
o Drawings are any asset taken out by the owner from the business for his/their
personal use. (Sole Trader ship and Partnership)
o Dividends are distribution of profit among the shareholders (Owners) in
proportionality of their investment. (Joint Stock Companies)
In companies profit distribution decisions are made by BOD.
2. Losses: Loss is a decrease in net income that is outside the normal operations of the
business or business loss occurs when business has more expanses than earnings during
an accounting period.
REVENUES
Amounts generated, received or to be received, against the services rendered/performed or
against the sale of merchandising inventories.
(The price of goods sold or services provided)
Revenues are recorded when income is earned not necessarily when the cash is collected
from the sale. This is consistent with the accrual basis of accounting.
Revenues are not an income/profit but it is means to income/profit.
Possible Examples:
o Title of revenues recorded: depends upon nature of services like Teaching, medical
consulting, architectural designing revenues etc.
o Sales: (Merchandising Business) revenues generated from sell of common products
like medicines, electronics, groceries etc.
Classification of Revenues
1. Operating Revenues: Revenues that are generated through operating activities of
business. E.g. sells of electronics if having an electronics business.
2. Non-Operating Revenues: Revenues that are generated against non-operating activities
of business like revenue from rent if not having a renting business.
Non-operating revenues generate additional revenues in addition to the operating
business activities.
EXPENSES
(The cost of goods and services used in the process of generating revenues)
Accounts incurred, paid or to be paid, against the services/benefits received during the
accounting period and are recoverable/adjustable from the current’s period revenue is known
as an expense. E.g. salaries, bills, rents, advertising of business, repair/maintenance expanses
etc.
Depreciation Expanses
Classification of Expanses
1. Operating Expenses: expenses incurred against operating activities of business. I.e.
salaries, bills, rents etc.
2. Non-operating Expenses: expenses incurred against non-operating activities of
business. I.e. Interest, Income taxes etc.
PROFIT/INCOME
Revenue - Expenses = Profit
Revenues ˃ Expenses = Profit
Expenses ˃ Revenues = Loss
Revenues = Expenses = Breakdown
Assets = Equities
Every transaction in business brings about at least two changes in the business.
Revenues increases owner’s capital, while expenses or losses, drawing and dividends
decreases owner’s capital.
ACCOUNTING PRINCPLES
Accounting information that is communicated externally to investors, creditors, and other
users must be prepared in accordance with all standards that are understood by both the
preparers and users of the information.
1) Generally Accepted Accounting Principles (GAAP)
Used in the USA
Principles established by SEC and Financial Accounting Standard Board (FASB)
USA.
2) International Financial Reporting Standards (IFRS)
More realistic and flexible approach
Used in almost 166 counties including Pakistan all around the Globe
Principles established by International Accounting Standard Board (IASB)
IFRS is used in modified version in Pakistan according to the instructions of
Institute of Chartered Accountants Pakistan (ICAP) and Security Exchange
Commission of Pakistan (SECP)
ACCOUNTING PRINCIPLES
1. ACCOUNTING PERIOD:
The life of business is divided into various periods and for each period financial statements
are prepared in order to check the progress and performance.
2. STABLE DOLLAR/ CURRENCY/ MONATRY/ UNIT ASSUMPTION:
Accounting record remains same
No impact of inflation and deflation on currency.
Stable currency
Purpose: to check the progress of business.
3. HISTORICAL /COST PRINCIPLE
The assets are recorded in the accounting record at the value which was payed to
acquire those assets.
4. REVENUE RECOGNITION/ REALIZATION/ ACCRUALS
The revenue in the accounting records should be recorded when goods are sold or
services have been provided, ignoring the payment of cash.
ACCOUNTING CYCLE
Accounting cycle is a step-by-step process of recording, classification and summarization
of economic transactions of a business. The accounting cycle is generally comprises a
year or other accounting period.
Closing Recording
Entries General-Entries
Balance Classifying
Sheet General-Ledger
Summarizing
Income
Trial-Balance
Statements
Adjusting
Adjusted Trial-
Entries
Balance
5 Adjusted Trial Balance (Summarizing): it is listing of all account balances after posting all
necessary adjusting entries. Exp: FAN: 5,000-200= 4,800
7 Balance Sheet (Accounting): A financial report showing the assets, liabilities, and owner
equity of an enterprise on a specific date. Also called a position statement. It is permanent
financial statement. [Not closed]
8 Closing Entries: Closing entries are made at the end of the accounting period to zero out all
temporary (Income statement) accounts and transfer their balances to permanent (Balance
Sheet) accounts to retained earnings.
T ACCOUNTS
BOOKKEEPING: General Journal and General Ledger
TRIAL BALANCE
It is summarized part of accounting
It is prepared through General Ledger
Definition: Trial Balance is a summarized statement of Ledger accounts, necessarily prepared by
the firms at the end of the respective accounting period.
The ultimate purpose of trial balance is preparing financial statements.
Specific Definition: Trial Balance is two columns schedule, (debit and credit), listing the titles of
accounts and theirs balances in the order, in which they (accounts) appear in the ledger.
Cost−Residual Value
Depreciation Expense =
Estimate Life
Cost – Accumulated Depreciation = Book Value