Chapter # 1

Business Transaction

Mariha Shan
 What is Bookkeeping?

Bookkeeping is the act of recording financial transactions .

Important things to remember when bookkeeping are the
need to keep accurate and complete records, and
understanding that your work is confidential.
Types of financial transactions
▪ Sales – exchanging a good or service for money
▪ Purchase – buying a good or service
▪ Payments – transfer of money to someone else (for example, for purchases
or for wages to employees)
▪ Receipts – getting money from someone else (for example, from customers)
▪ Petty cash – paying for low value items with a small fund of cash
▪ Payroll – wages and salaries paid to employees, and any payroll taxes
▪ These transactions are entered in the accounting records of the
business, which are also known as the 'books'.
▪ The records are used to prepare a set of accounts (also known as
financial statements or financial accounts)
 Definition of Accounting

Definition:
Accounting is the science of recording, classifying &
summarizing in a significant manner & in term of money,
transaction & events which are in part at least of a financial
character & interpreting the result thereof
Accounting consists of two elements:
Recording
Transaction must be recorded
as they occur in order to provide
up-to-date information for management
Statement of profits or
loss reflects the performance
of a business over a period of time
Summarizing
The transaction for a period are
summarized in order to provide
information about the company
to interest parties.
Financial Statements
Statement of financial
reflects the position
of a business at a point in time
Who needs accounting?
Any organization/ business/ individual that needs to keep track of their
income, expenses, assets and liabilities.

Business:
Any activity undertaken with the intention to make profit , but result can be
profit or loss.
A business is an organization that aims to make a profit for its owner. It can do this
through buying or making and selling goods or services. Profit is the difference between
a business's income and expenses. Income comes mainly from the sales of goods or
services by a business. Expenses are the amounts that a business pays in order to run
the business (including buying the items that it will sell, as well as the other costs of
running the business, like electricity for the lights). A business can be small, medium or
large.
It is important to understand that there is a difference between the business and its
owner. The owner of a business usually gives money to the business to start it. The
business then tries to make more money for the owner.
 Types of Business
1. Sole trader: a business owned and operated by one person.
2. Partnership: a business owned and operated by two or more people.
3. Company: a business owned by many people and operated by many
(thought not necessarily the same people)
1. Sole trader:
A sole trader is the simplest form of business owned and managed by
one person (although there might be any number of employees) fully
and personally liable for any losses that the business might make.
e.g small retailer, painter and decorator.
2. Partnership:
A partnership is where: a business owned jointly by a number of
partners (minimum 2). Partners share profit and losses in accordance
with their agreement.
e.g accounting firms and estate agents.
3. Companies:
Companies are more complex and have the following characteristics:
Owned by shareholders (or members)
Limited companies are two types:
1. Public (shares issued to anyone)
2. Private (share issued restricted to friends and family)

Non business transaction: it is not just businesses that will need to have accounting
information and prepare financial statements- also
▪ Charities
▪ Clubs
▪ Government (or public sector) organization
Business transactions:
▪ A transaction is an exchange of interest between two person or parties.
▪ Every business buys and sells goods or services and get paid for what it
sells and has to pay for what it buys. Many businesses have employees
and have to pay for their work. All businesses incur expenses for services
they receive such as electricity, water, telephone services.

Types of transactions:
1. Cash transaction
2. Credit transaction
▪ With a cash transaction, the buyer pays for the item immediately as it is
received or possibly in advance. Cash is directly involved in a cash
transaction.
e.g. payments through bank or payments through cash in hand.

▪ With credit transaction, the buyer doesn’t have to pay for the item on receipt
but is allowed some time. Cash is involved in a credit transaction. Payments
and receipts are postponed for some future time (credit period)
e.g. business buys goods for resale and payment is made after one month.
Keeping a record
Transactions are recorded in accounts. The system of recording
transaction is therefore called the accounting system. It is also called
the book keeping system and sometimes ledger accounts.
Ledger: is a book of Account in which all different accounts are
maintained.
Accounts (T-Accounts)
An account is a summarized record of transaction in which transactions
of similar nature are recorded.
Accounting consists of three main types:
1) Recording: in book of prime entry.
2) Classifying: the transaction according to their nature and posted
them in their particular accounts. e.g. sale transaction are posted to
the sale account and expenses are posted to the expense account.
3) Summarizing: accounting data is transformed into meaningful form
and summarized under two financial statement named as Statement
of profit or loss and other comprehensive Income (income
statement) and Statement of Financial Position (Balance Sheet)
Statement of Profit & Loss and other Comprehensive Income for
the year:
▪ It is a statement which shows business financial performance for a
certain period by comparing its income and expenses.
Statement of Financial Position:
▪ It is a statement which shows business financial position at a given
point of time by presenting its Assets, Liabilities and Capital.
 Accounting Cycle
1. Day book or book of prime entry/journal
2. Ledger/ T Accounts

3. Trail Balance
4.errors of Trail Balances rectified

5. Adjusted Trail Balance

6.Final Accounts (SOFP and P &L)

 Key terms of accounting

Assets (owned by the business):

Assets are the resources owned & controlled by the entity as a result of past events.
From which future economic benefits are expected to flow to the entity.
Assets

Non-Current Assets Current Assets

Assets acquired for ongoing
long-term use in the business.
e.g Land, Building, Vehicles,
Furniture, Fixtures & fittings,
computer, plant and machinery.
Assets acquired for resale or
expected to the resale within the normal
course of trading.
e.g. Cash in hand, Cash at bank ,
Receivable and stock.
Liabilities (owned by the business):
A liability is the present obligation/ responsibilities of the business; the settlement of which is likely
to result in payment of cash or other assets or providing services.
Liabilities

Non-Current Liabilities Current Liabilities

Long-term liabilities payable more Liabilities which are payable within

than 12 months after the balance sheet 12 months of the balance sheet date.
date.

e.g. bank loan payable in 5years e.g. Creditor/payable, Bank Overdraft

Capital:
Amount of fund invested by the owner into the business with a view of earning profit.
Investment can be in the form of cash, or providing some non-current assets.
Revenue: inflow of economic benefits e.g. sales, interest earned, rental income etc.
Expenses: Indicates money spent for rent, electricity, telephone, insurances, salaries
and wages, marketing, discounts etc.
Drawing: amount or goods taken out of the business by the owner for his personal use. It
directly decreases his interest (capital) in the business, as business is separate from its
owner. (Separate entity concepts).
Profit: it is excess of revenue over expenditure.
Loss: it is excess of expense over revenue.
Debtor /receivable:
A person to whom the business has sold items and by whom the business is owed
money. A receivable is an asset of business (the right to receive payment is owned by
business).
e.g. Sale of any Non-current asset.
Trade debtor/trade receivable:
A person who owes the business money for debts incurred in the course of trading
operations i.e because the business has sold its goods or services.
e.g Business is involved in producing medicine and sale of those medicines on credit
to its customer. All trade receivables are current assets of business.
Creditor/Payable:
A person from whom a business has purchased items and to whom a business owes
money. An account payable is liability of the business.
e.g. Purchase of a plant and machinery on credit.
Trade creditors/trade payable:
A person to whom a business owes money for debts incurred in the course of trading
operations. The term might refer to debts still outstanding which arise from purchase
from suppliers of material, components or goods for resale.
e.g. Purchase of stock/inventory pf medicine for resale on credit. These are the current
liabilities of business.