Introduction to Accounting

LO1: INTRODUCTION
1.1 Organization
Group of persons joined together to do some activity is known as organization.
Organisation

Profit Seeking Not-for-Profit

Organisation Organisation

Main object is to Main object is do

earn Profit Social Welfare

Named as Business
Not a part of Intro
(Whole Intro)
 Businesses

By activity

Trading Manufacturing Service-Providing

Business Business Business

Buys Products with the Buy substances with the

Provide services to
intention of resale and intention of using them
others on the basis of
to earn Profit by selling as a materials in making
personal skills
at higher prices a new product
Business Owner
He invests in business and gives whole control of business in the hands of Chartered
Accountant.

Business Manager
He will run the business and record the business.

1.2 Business

Business is a personality which is having some parts.

LO2: Accounting Heads (Parts of business)

(i) Capital
(ii) Drawings
(iii) Assets
(iv) Liabilities
(v) Purchases
(vi) Purchase Return
(vii) Sales
(viii) Sales Return
(ix) Expense
(x) Other Income
2.1 Capital

Capital is the amount invested by the owner of the business.

2.2 Drawings

Amount withdrawn by the business owner from the business for his personal use is
known as drawings.

2.3 Assets
A resource owned by the business which will give benefit to the business in future is
known as asset.

2.4 Liabilities

An obligation on business to pay someone in future is known as liability.

2.5 Purchases

When business buy goods from a supplier for resale purpose this is known as purchases.

2.6 Purchase Return

When business returns goods to the supplier due to any reason this return is known as
purchase return.

2.7 Sales

When business hands over goods to customers for some price this is known as sales.

2.8 Sales Return

When business receives back goods from customer this is known as sales return.
2.9 Expense
Spendings by business in running day to day operations of the business are known as
expenses.

2.10 Other Income

Any income from secondary activities is known as other income.
 Teams of
Accounting Heads

Debit Team Credit Team

• Assets • Liability
• Drawings • Capital
• Purchases • Purchase Return
• Sales Return • Sales
• Expenses • Other Income
 Accounting Rules
Debit Team
• The accounting heads maintained under this Team are recorded as Debit (Dr.) when
they are up in business.
• The accounting heads maintained under this Team are recorded as Credit (Cr.) when
they are down in business.

Assets Record as Debit Assets Record as Credit

Drawings Record as Debit Drawings Record as Credit
Purchases Record as Debit Purchases Record as Credit
Sales Return Record as Debit Sales Return Record as Credit
Expenses Record as Debit Expenses Record as Credit
Credit Team
• The accounting heads maintained under this Team are recorded as Credit (Cr.) when they
are up in business.
• The accounting heads maintained under this Team are recorded as Debit (Dr.) when they
are down in business.

Liability Record as Credit Liability Record as Debit

Capital Record as Credit Capital Record as Debit
Purchase Return Record as Credit Purchase Return Record as Debit
Sales Record as Credit Sales Record as Debit
Other Income Record as Credit Other Income Record as Debit
2.1 Capital

Capital is the amount invested by the owner of the business.

Capital

Cash Bank Asset Goods

Owner invested in Owner invested Owner invested in Owner invested in

the form of Cash through Cheque the form of Assets the form of goods

Cash (A) ↑ Dr. Bank (A) ↑ Dr. Asset ↑ Dr. Purchases ↑ Dr.
Capital ↑ Cr. Capital ↑ Cr. Capital ↑ Cr. Capital ↑ Cr.
2.2 Drawings

Amount withdrawn by the business owner from the business for his personal use is
known as drawings.
Drawings

Cash Bank Asset Goods

Owner withdraw Owner withdraw Owner withdraw in Owner withdraw

through Cash through Cheque form of Assets goods from business

Drawings ↑ Dr. Drawings ↑ Dr. Drawings ↑ Dr. Drawings ↑ Dr.

Cash (A) ↓ Cr. Bank (A) ↓ Cr. Asset ↓ Cr. Purchases ↓ Cr.
 2.3 Assets
A resource owned by the business which will give benefit to the business in future is
known as asset.
Assets
Non-Current Assets Current Assets

Definition Examples Examples Definition

A resource which (i) Land (i) Stocks/Inventory A resource which

will give benefit (ii) Premises (ii) Debtors/ will give benefit
for more than one (iii) Building Trade Receivables / for less than one
year to entity. (iv) Plant Account Receivable year to entity.
(v) Machine (iii) Other Receivables
(vi) Equipment (iv) Prepayments
(vii) Furniture (v) Advances
(viii) Fixture (vi) Cash at bank
(ix) Fittings (vii) Cash in hand
(x) Computer (viii) Petty Cash
(xi) Vehicles (ix) Loan given for < 1 year
2.4 Liabilities

An obligation on business to pay someone in future is known as liability.

Liabilities

Non-Current Liabilities Current Liabilities

Definition Examples Definition Examples

(i) Loan from HBL (i) Loan from MCB

for 5 Years for 1 Year
Obligation to pay Obligation to pay
(ii) Loan from Person (ii) Loan from Person
someone in more someone in less than
for 3 Years for 8 months
than 1 Year 1 Year
(ii) Loan from brother (iii) Creditor
of owner for 2 Years (iv) Bank Overdraft
2.5 Purchases

When business buy goods from a supplier for resale purpose this is known as purchases.

Supplier
The party from which business buy goods is known as supplier.

Creditor/Trade Payable
The party from whom business buy goods on credit is known as creditor.

Account Payable
The party from whom business buy Non-current asset on credit is known as Acc. Payable
 Purchases

Purchase of goods Purchase of Non-Current Asset

On Cash On Credit On Cash On Credit

Business buy goods Business buy goods Business buy Non- Business buy Non-
and pay cash and promise to pay in Current Asset and pay Current Asset and
immediately Future (< 1 year) cash immediately promise to pay later

Purchases ↑ Dr. Purchases ↑ Dr. Non-Current asset ↑ Dr. Non-Current asset ↑ Dr.
Cash (A) ↓ Cr. Creditor (L) ↑ Cr. Cash (A) ↓ Cr. Acc. Payable (L) ↑ Cr.
2.6 Purchase Return
When business returns goods to the supplier due to any reason this return is known as purchase return.

Purchase Return

Purchase return of goods Purchase return of Non-Current Asset

On Cash On Credit On Cash On Credit

Business return goods Business return goods Business return Non- Business return Non-
and receive cash and Current Liability Current Asset and Current Asset and
immediately (Creditor) reduced receive cash Acc. Payable reduced

Cash (A) ↑ Creditor (L) ↓ Dr. Cash (A) ↑ Acc. Payable (L) ↓ Dr.
Purchase Return ↑ Cr. Purchase Return ↑Cr. Non-Current asset ↓Cr. Non-Current asset ↓Cr.
2.7 Sales

When business hands over goods to customers for some price this is known as sales.

Customer
The party to whom business sells goods is known as Customer.

Debtor/Trade receivables
The party to whom business sells goods on credit is known as Debtor.

Discussion of Sale of Non-Current Asset will be in FAR-1

 Sale

On Cash On Credit

Business sold goods and Business sold goods and

receive cash immediately customer promise to pay
from customer in future (< 1 year)

Cash (A) ↑ Dr. Debtor (A) ↑ Dr.

Sales ↑ Cr. Sales ↑ Cr.
2.8 Sales Return
When business receives back goods from customer this is known as sales return.

Sales Return

On Cash On Credit

Business accept return Business accept return

from customer and pay from customer & Current
him Cash immediately asset (debtor) reduced

Sales Return ↑ Dr. Sales Return ↑ Dr.

Cash (A) ↓ Cr. Debtor (A) ↓ Cr.
2.9 Expense
Spendings by business in running day to day operations of the business are known as
expenses.
Expense

Pay Cash immediately Will Pay later

Business spend on daily Business spend on daily

operations & pay cash operations & will pay this
immediately expense in Future

Expense ↑ Dr. Expense ↑ Dr.

Cash (A) ↓ Cr. Expense Payable (L) ↑ Cr.
2.10 Other Income
Any income from secondary activities is known as other income.

Income

Receive Cash immediately Will receive later

Business earn from some Business earn from some

secondary activities & secondary activities &will
receive Cash immediately receive Cash in Future

Cash (A) ↑ Dr. Income receivable (A) ↑ Dr.

Other Income ↑ Cr. Other Income ↑ Cr.
 Analyse of Business Transactions
01 July Owner started business with Rs. 100,000 Cash & Rs. 50,000 in Cheque
Capital ↑ Cr. Cash ↑ Dr. Bank ↑ Dr.

05 July Owner invested Delivery Van into the business amounting Rs. 500,000.
Capital ↑ Cr. Van (A) ↑ Dr.

07 July Bought Office Furniture amounting Rs. 20,000 through Cash.

Purchases Furniture (A) ↑ Dr. Cash (A) ↓ Cr.

09 July Bought Equipment amounting Rs. 50,000 on account (on Credit).

Equipment (A) ↑ Dr. Creditor Acc. Payable for Equipment (L) ↑ Cr.

11 July Purchased goods amounting Rs. 10,000 through cheque.

Purchases ↑ Dr. Bank (A) ↓ Cr.
13 July Purchased goods amounting Rs. 50,000 on Credit.
Purchases ↑ Dr. Creditor (L) ↑ Cr.

14 July Purchase return amounting Rs. 2,000 of goods previously purchased through cheque.
Purchase Return ↑ Cr. Bank (A) ↑ Dr.

18 July Sold goods amounting Rs. 60,000 on Cash.

Sales ↑ Cr. Cash (A) ↑ Dr.

20 July Sold goods amounting Rs. 40,000 on account (on Credit).

Sales ↑ Cr. Debtor (A) ↑ Dr.

21 July Sales Return of goods amounting Rs. 5,000 which were sold previously on 20th July.
Sales Return ↑ Dr. Debtor(A) ↓ Cr.

23 July Took Loan from Meezan amounting Rs. 50,000 in Cheque.

Loan from Meezan (L) ↑ Cr. Bank (A) ↑ Dr.
24 July Paid Salary to the office boy amounting Rs. 10,000 through Cash.
Salary expense ↑ Dr. Cash (A) ↓ Cr.

26 July Repaid 50% of Previous Loan through Cheque.

Loan from Meezan (L) ↓ Dr. Bank (A) ↓ Cr.

27 July Received interest due to a Bank deposit amounting Rs. 10,000 in cheque.
Interest Income (Other Income) ↑ Cr. Bank (A) ↑ Dr.

29 July Bought Stationery amounting Rs. 5,000 through Cash.

Purchases Stationery expense ↑ Dr. Cash (A) ↓ Cr.

30 July Owner took Cash for administrative purposes amounting Rs. 10,000.
Drawings Admin expenses ↑ Dr. Cash (A) ↓ Cr.

31 July Owner withdrew Furniture amounting Rs. 20,000 for her wife.
Drawings ↑ Dr. Furniture (A) ↓ Cr.
 Format of Journal
Date Description Debit Credit
01 July Cash (A) ↑ 100,000
Bank (A) ↑ 50,000
Capital ↑ 150,000
05 July Van (A) ↑ 500,000
Capital ↑ 500,000
07 July Furniture (A) ↑ 20,000
Cash ↓ 20,000
09 July Equipment (A) ↑ 50,000
Acc. Payable for Equipment (L) ↑ 50,000
11 July Purchases ↑ 10,000
Bank (A) ↓ 10,000
13 July Purchases ↑ 50,000
Creditor (L) ↑ 50,000
14 July Bank (A) ↑ 2,000
Purchase Return ↑ 2,000
18 July Cash (A) ↑ 60,000
Sales ↑ 60,000
Date Description Debit Credit
20 July Debtor (A) ↑ 40,000
Sales ↑ 40,000
21 July Sales Return ↑ 5,000
Debtor(A) ↓ 5,000
23 July Bank (A) ↑ 50,000
Loan from Meezan (L) ↑ 50,000
24 July Salary expense ↑ 10,000
Cash (A) ↓ 10,000
26 July Loan from Meezan (L) ↓ 25,000
Bank (A) ↓ 25,000
27 July Bank (A) ↑ 10,000
Interest Income (Other Income) ↑ 10,000
29 July Stationery expense ↑ 5,000
Cash (A) ↓ 5,000
30 July Admin expenses ↑ 10,000
Cash (A) ↓ 10,000
31 July Drawings ↑ 20,000
Furniture (A) ↓ 20,000
 Format of Ledger
Recording the transactions from Journal to Ledger is called Posting
Title of Accounting Head
Cash A/c
Credit of any Debit of any
other Date Particulars Rs. Date Particulars Rs. other
accounting head accounting head
with its name with its name

Debit of respective ledger Credit of respective ledger

with its amount With its amount
 Question # 01:
Mr. Zahid Qavi has started a business on July 01,2014. Date Description Debit Credit
Following transactions took place during this year of 01.07.14 Cash (A) ↑ 500,000
operations. Capital ↑ 500,000
Date Transactions 15.08.14 Cash (A) ↑ 50,000
01.07.14 Started business with Rs. 500,000 in Cash Sales ↑ 50,000
Business made sales to Mr. Ahmad amounting Rs. 24.09.14 Purchases ↑ 5,000
15.08.14
50,000 and receive amount in cash immediately.
Cash (A) ↓ 5,000
24.09.14 Cash purchases amounting to Rs. 5,000
Business made sales to Mr. Hassan amounting Rs. 08.10.14 Bank (A) ↑ 40,000
08.10.14 Sales ↑ 40,000
40,000 and receive amount immediately in cheque
30.12.14 Bought goods through cheque amounting Rs. 10,000 30.12.14 Purchases ↑ 10,000
21.01.15 Cash sales of Rs. 30,000 to Mr. Don Bank (A) ↓ 10,000
Goods bought through cheque amounting Rs. 25,000 30,000
25.02.15 21.01.15 Cash (A) ↑
from Anwaar
Sales ↑ 30,000
Sales amounting Rs. 20,000 and amount received in
14.04.15 25.02.15 Purchases ↑ 25,000
cheque
Business buy goods amounting Rs. 20,000 from Mr. Bank (A) ↓ 25,000
24.06.15
Irfan and paid cash immediately 14.04.15 Bank (A) ↑ 20,000
Required: Sales ↑ 20,000
(a) Prepare Journal entries and record them as Journal. 24.06.15 Purchases ↑ 20,000
(b) Prepare all the relevant Ledgers Cash (A) ↓ 20,000
 Date Description Debit Credit Cash a/c
01.07.14 Cash (A) ↑ 500,000 Date Particulars Dr. Date Particulars Cr.
01.07.14 Capital 500,000 24.09.14 Purchases 5,000
Capital ↑ 500,000
15.08.14 Sales 50,000 24.06.15 Purchases 20,000
15.08.14 Cash (A) ↑ 50,000 21.01.15 Sales 30,000
Sales ↑ 50,000
24.09.14 Purchases ↑ 5,000
Cash (A) ↓ 5,000
08.10.14 Bank (A) ↑ 40,000 Capital a/c
Sales ↑ 40,000 Date Particulars Dr. Date Particulars Cr.
01.07.14 Cash 500,000
30.12.14 Purchases ↑ 10,000
Bank (A) ↓ 10,000
21.01.15 Cash (A) ↑ 30,000
Sales ↑ 30,000 Bank a/c
25.02.15 Purchases ↑ 25,000 Date Particulars Dr. Date Particulars Cr.
Bank (A) ↓ 25,000 08.10.14 Sales 40,000 30.12.14 Purchases 10,000
20,000 14.04.15 Sales 20,000 25.02.15 Purchases 25,000
14.04.15 Bank (A) ↑
Sales ↑ 20,000
24.06.15 Purchases ↑ 20,000
Cash (A) ↓ 20,000
 Date Description Debit Credit Sales a/c
01.07.14 Cash (A) ↑ 500,000 Date Particulars Dr. Date Particulars Cr.
15.08.14 Cash 50,000
Capital ↑ 500,000
08.10.14 Bank 40,000
15.08.14 Cash (A) ↑ 50,000 21.01.15 Cash 30,000
Sales ↑ 50,000 14.04.15 Bank 20,000
24.09.14 Purchases ↑ 5,000
Cash (A) ↓ 5,000
08.10.14 Bank (A) ↑ 40,000
Sales ↑ 40,000 Purchases a/c
Date Particulars Dr. Date Particulars Cr.
30.12.14 Purchases ↑ 10,000
24.09.14 Cash 5,000
Bank (A) ↓ 10,000 30.12.14 Bank 10,000
21.01.15 Cash (A) ↑ 30,000 25.02.15 Bank 25,000
Sales ↑ 30,000 24.06.15 Cash 20,000
25.02.15 Purchases ↑ 25,000
Bank (A) ↓ 25,000
14.04.15 Bank (A) ↑ 20,000
Sales ↑ 20,000
24.06.15 Purchases ↑ 20,000
Cash (A) ↓ 20,000
 Cash a/c Purchases a/c
Date Particulars Dr. Date Particulars Cr. Date Particulars Dr. Date Particulars Cr.
01.07.14 Capital 500,000 24.09.14 Purchases 5,000 24.09.14 Cash 5,000
15.08.14 Sales 50,000 24.06.15 Purchases 20,000 30.12.14 Bank 10,000
21.01.15 Sales 30,000 30.06.15 Bal. c/d 555,000 25.02.15 Bank 25,000
580,000 Dr. Nature balance 580,000 24.06.15 Cash 20,000
30.06.15 Bal. c/d 60,000
Capital a/c
60,000 Dr. Nature balance 60,000
Date Particulars Dr. Date Particulars Cr.
01.07.14 Cash 500,000
30.06.15 Bal. c/d 500,000 Mr. Zahid Qavi
Cr. Nature balance 500,000 500,000 Trial Balance
Sales a/c
As at 30.06.15
Date Particulars Dr. Date Particulars Cr.
15.08.14 Cash 50,000 Description Debit Credit
08.10.14 Bank 40,000 Cash 555,000
21.01.15 Cash 30,000 Capital 500,000
30.06.15 Bal. c/d 140,000 14.04.15 Bank 20,000 Sales 140,000
Cr. Nature balance 140,000 140,000
Bank 25,000
Bank a/c Purchases 60,000
Date Particulars Dr. Date Particulars Cr.
640,000 640,000
08.10.14 Sales 40,000 30.12.14 Purchases 10,000
14.04.15 Sales 20,000 25.02.15 Purchases 25,000
30.06.15 Bal. c/d 25,000
60,000 Dr. Nature balance 60,000
Assume: List price of goods is Rs.
90,000. Trade discount is Rs. Business is Seller-Think like a seller
6,000.
Further Cash discount is applied Rs. %
@ 10% of Agreed Price.
List Price 90,000 x
Cash Sales Less Trade/Bargain discount (6,000) x
10 𝑛 Agreed amount 84,000 100%
x
15 40
Less;
Credit Sales Cash discount

‫غم‬ Settlement discount

Early Payment discount
Seller ky liye Prompt Payment discount (8,400) (10%)
Discount allow
krna aik gham hyy Net Amount received 75,600 90%
10
In it, 15 means if customer pays within 15 days, then he is
10 𝑛 𝑛
Credit Terms x allowed 10% Cash Discount & means if Customer doesn’t
15 40 40
want to get cash discount and will not pay within 15 days he
must have to pay in 40 days in all circumstances
List Price:
It is tagged price, No fixed price shop & Bargain option is available
Think like a Seller
Credit Sales Cash Sales
Date Description Dr. Cr. Date Description Dr. Cr.
Credit Sales made Cash Sales made
01.01.19 Debtor (A) ↑ 84,000 01.01.19 Cash/Bank (A) ↑ 84,000
Sales ↑ 84,000 Sales ↑ 84,000
Cash received from Debtors Cash received from Customers immediately
11.01.19 Cash/Bank (A) ↑ 75,600
Debtor (A) ↓ 75600
Discount allowed @ 10% Discount allowed
11.01.19 Discount allowed exp. ↑ 8,400
Debtor (A) ↓ 8,400
If No Discount Hence;
allowed then; Cash (A) ↓ / Bank (A) ↓ • Discount allowed is a Non-Cash expense
As, Cash/Bank is not credited • Trade discount will never be recorded in books
Bank Dr. 84,000 • Trade discount can be on cash sales as well as on
so Discount allowed is
Debtor Cr. 84,000 Credit sales
Non-Cash expense
• Cash discount can only be on Credit Sales.
Other Names of Discount allowed:
Cash discount, Early Payment discount, Settlement discount, Prompt Payment discount
Assume: List price of goods is Rs.
90,000. Trade discount received is Business is Buyer-Think like a Buyer
Rs. 6,000.
Further Cash discount is applied Rs. %
@ 10% of Agreed Price.
List Price 90,000 x
Cash Purchase Less Trade/Bargain discount (6,000) x
10 𝑛 Agreed amount 84,000 100%
x
15 40
Less;
Credit Purchase Cash discount

‫خوشی‬ Settlement discount

Early Payment discount
Business ky liye Prompt Payment discount (8,400) (10%)
Discount receive
krna aik Khushi hy Net Amount Paid 75,600 90%
10
In it, 15 means if Business pays within 15 days, then it is allowed
10 𝑛 𝑛
Credit Terms x 10% Cash Discount & means if Business doesn’t want to get
15 40 40
cash discount and will not pay within 15 days he must have to
pay in 40 days in all circumstances
 Think like a Buyer
Credit Purchases Cash Purchases
Date Description Dr. Cr. Date Description Dr. Cr.
Credit Purchase made Cash Purchases made
01.01.19 Purchases ↑ 84,000 01.01.19 Purchases↑ 84,000
Creditor (L) ↑ 84,000 Cash/Bank (A) 84,000
Cash Paid to creditor ↓
11.01.19 Creditor (L) ↓ 75,600 Cash paid to Suppliers immediately
Cash/Bank (A) 75600
↓
Discount received @ 10% Discount received
11.01.19 Creditor (L) ↓ 8,400
If No Discount Discount Received (O.I) 8,400 Hence;
↑
received Cash (A) ↑ / Bank (A) ↑ • Discount received is a Non-Cash Income
then; As, Cash/Bank is not debited • Trade discount will never be recorded in books
Creditor Dr. 84,000 • Trade discount can be on cash Purchases as well as
so Discount received is
Cash Cr. 84,000 on Credit Purchases
Non-Cash Income
• Cash discount can only be on Credit Purchases.
Other Names of Discount Received:
Cash discount, Early Payment discount, Settlement discount, Prompt Payment discount
 Advances

Advance to Supplier Advance from Customer

For Purchase of goods For Purchase of Asset Sale of goods

Advance to Supplier (A) ↑ Dr. Advance to Supplier (A) ↑ Dr. Cash (A) ↑ Dr.
Cash (A)↓ Cr. Cash (A)↓ Cr. Advance from Customer (L)↑Cr.

Subsequently Subsequently Subsequently Subsequently Subsequently Subsequently Cash

goods purchased Cash received asset purchased Cash received goods sold paid back

Purchases ↑ Dr. Cash ↑ Dr. N.C. Asset ↑ Dr. Cash ↑ Dr. Advance from Advance from
Advance to Advance to Advance to Advance to Customer (L)↓Dr. Customer (L)↓Dr.
Supplier (A)↓ Cr. Supplier (A)↓ Cr. Supplier (A)↓ Cr. Supplier (A)↓ Cr. Sales ↑ Cr. Cash (A) ↓ Cr.