Basic

By
Mohammad Naqib(oria)
Lecturer in Accounting
Afghan institute , Kabul, Afghanistan
Cell: 0783286318 E-mail: naqiboria7@gmail
Accounting
Italian merchant “Luca Pavilion” pioneer of accounting

 The process of Recording , Classifying, Summarizing the financial information

(Transaction) and interpreting the result.

Accounting is called language of business because

it provides information regarding business to users.
Transaction
 Any dealing- (Give and take), buying and selling of goods and services
between two or more persons in terms of money is called Transaction.

 Purchased Computer for Cash $1500

 Paid Building Rent in cash $1000
Parties interested in Accounting information or
(Users of Accounting Information)

 Owners
 Prospective investors
 creditors
 Employees
 Management
 Government agencies etc.
Book Keeping
Book means Books of Accounts Keeping means Maintaining
or recording
so
Recording transactions in books of accounts in proper systematic way in term of
money.
 Book Keeping System
Single Entry System
 Single effect of every transaction is recorded

Oldest System, Incomplete, not acceptable

Double Entry System

 Double effect of every transaction is recorded

Trail balance, Income Statement, Balance sheet can be prepared. New system ,
acceptable
Complete system
Accounting Cycle/Circle

The Process Through Which Accounting Record Is

Completed & Repeated Is Called Accounting Cycle/Circle
Or
The Whole Process Of Accounting Is Called
Paid salary to ahmmad 105000
Accounting Cycle
 Accounting
Closing Entrie
Cycle
s Transactions Journal

Financial
Statement Ledg
er
O ut s t
a
Prepa nding Exp
id e
O u t s t e x p e ns e n s e
a
P r e p a nd i n g I n c o
Adjusted i d i nc
ome
me

Trail Balance Trail

Adju Balanc
st i n g e
Entri
es
 Account... (A/c)
A device which shows increase or decrease in
particular transaction
Summarized form a transaction is called Account
 Types of Accounts
1)Real Accounts
2)Nominal Accounts

1)Existence even after close of a year, Assets, Liabilities & Owner’s Equity

2)At the end of year closed to Income/Exp account,

Expense, Revenue
Types of Accounts
1. Assets
2. Capital/ Owner’s Equity
3. Liabilities
4. Revenue
5. Expenses
Assets
 Any thing valuable possessed by a firm which have
monetary value and are expected to benefit the future
operations.
e.g. cash, building, machinery, A/R etc
Types of Assts
Current Assets
Fixed Assets

 Current Assets
 “The assets which are either cash or can be converted into cash within a year”
 Fixed Assets
 “ Those Assets which remain in our organization for more than one year are fixed
assets
 Owner’s Equity/Capital
 The amount invested in the business by the owner is
called Owner’s equity or Capital.

 It is the claim of the owners on the assets of the

business organization. It is internal equities or owner
fund.
Liabilities

L iabilities are debts. It is the claim of the outsiders against the assets
of the enterprise, also called external equities.
e.g. Bank Loan, Account Payable (A/P) etc
Types of Liabilities
 Short Term/Current Liabilities: which are payable within one year
 Long Term Liabilities : these are payable after number of years
Revenue
All sort of income received is called
as Revenue. The revenue may be
earned from sales of merchandise
or by rendering services for the
customer.
 Earning revenue increases owner’s equity.

Goods bought for resale

purpose
Expenses

 To achieve the objectives of business, certain payments are expenses

of business.
 Expenses are the cost of the goods and services used up in the process of
earning revenue

, rent, electricity
Expenses decrease the owner’s equity.
 Increase and Decrease in items

(+)

Generally

(-)
 But systematically are written as

 Left side ( Debit) Dr.

Right Side (Credit) Cr.

Golden Rules
of
Debit & Credit

For Recording Transactions

Business Entity

 Business is an artificial person. Business has its own separate entity than

the owner. we record all the transactions related to the business not to

the businessman.
Debit Credit Rules for Assets Accounts

 Increase in assets will be debited

 Decrease in assets will be credited

 Ex :Bought building for cash 8000$

Debit Credit Rules for Liabilities Accounts

 Decrease in liabilities will be debited

 Increase in liabilities will be credited

 EX :Purchase computer on account From Ali 1000$

 EX: paid cash to Ali 1000$
Debit Credit Rules for Capital Account

 Decrease in Capital will be debited

 Increase in Capital will be credited

 Ex:Ali started business with Cash 10000$

 Ali Drawing 1000$ for personial use
Transaction

 Irfan started business with Cash Rs. 80000

 Purchased Building on cash Rs. 36000
 Purchased Machinery on cash Rs. 10000
 Bought computer on account from Ali worth Rs.2000
 Purchased merchandise on cash Rs. 5000
 Purchased merchandise on account from Zaabi Rs.
10000
Example
1. Ali invested Computer To his business worth100$
2. Ali company bought Pen 5Afg
3. Ali company Return pen to the vendor
4. Ali company Purchase TV From Ahmad 200$
5. Ali company return TV To Ahmad
6. Ali company buy Energy from Alicozi company For cash10$
7. Ali bring cash 1000 To his business
8. Ali Withdraw computer from business for his use 100$
9. Ali draw cash 10$ for purchasing pen for his business
10. Ali company take a loan from Janullah cash 200
11. Ali company paid cash to Janullah 200$
Debit Credit Rules for Expenses Accounts

 Increase in expenses will be debited

 Decrease in expenses will be credited

 Ex: paid rant Expense 1000

Debit Credit Rules for Revenue Accounts

 Decrease in Revenue will be debited

 Increase in Revenue will be credited

 Ex: Sold Cement to Ali cash10000$

 Cement returned by Ali cash 800$
 Permanent Accounts

Assets Liabilities Owners’ Equity

To Increase: Debit Credit Credit

To Decrease: Credit Debit Debit
 Temporary Accounts
Revenues Expenses
To Increase: Credit Debit
To Decrease: Debit Credit

Slide 4.13
Equation of Accounting

 Asset=capital+ liability

Asset capital liability

Voucher
 A written evidence in support of a transaction.

 Types of Voucher
 Receipt Voucher
 Petty Voucher/Payment Voucher
 Adjustment/Journal Voucher
Receipt Voucher

 use for receive cash/check

Voucher No____ Date _____________

Received with thanks from Mr./ Miss _______son of_______________
On Account of ________sum of _________in word _____in cash/check

Finance office
Petty Voucher/Payment Voucher

 Used for all kinds of payment

Voucher No__ Date___

Debit_______Rent Finance
Information office
Paid Salary To Ahmad

Total Amount ______100

In word _________Hundered
Adjustment/Journal Voucher

 Used for making all kinds Adjustment

 Like prepaid income/Expense

Date particular Ref Dr Cr

1/1/2019 Staff Advance Salary 50000Af

cash 50000Af
1/30/2019 salary 50000Af
Staff advance Salary 50000Af
Terminologies used in Accounting

 Proprietor:
A person who invests the money or things in the business is called
owner/Proprietor.
Business Entity

 Business has its own separate entity than the owner, mean business is an
artificial person. we record all the transactions related to the business not to
the businessman.
Accounts Receivable (A/R)/Debtor

 A person to whom goods are sold on credit by a business organization is called

Account Receivable/Debtor
. NOTE: A/R is Asset

 Accounts Payable A/P (Creditor)

 A person from whom a business organization or individual purchases goods on
credit is called creditor, A/P
 NOTE: A/P is Liability
 Drawings

 The cash or commodities withdrew by the owner for his personal use from
business are known as Drawings.
Purchase Return

 When the merchandise purchased are returned back to the supplier for
some defect or delay or for any other reason, they are called purchase
return or return outward or return to supplier
Sales Return

 When the merchandise sold are returned by the customers for some defect or
for any other reason, they are called Sales returns or Return in ward or Return
from Customers
Merchandise

 Those items/goods/commodities which are purchased for resale purpose are

called as merchandise
 The Journal...
The word “Journal” has been derived from the French word “Jour”. Jour
means day. So Journal means daily. Transactions are recorded daily in
Journal and hence it has been named so

is an accounting record where the transactions are recorded in

chronological order( As per occurrence). Or
The book in which all the transactions are recorded first is
called Journal. Also called Book of original entry or Day book
Date Account Ref Debit Credit
$ $
The Recording Process
 Analyze each transaction
 Enter information in journal

 Example
 Bought Furniture for cash $5000
 Paid salaries to employees cash $1000
Journalizing

 Recording transactions in Journal is called Journalizing

Simple Journal Entry
Compound Journal Entry
The entry having one debit and one credit is called
simple Journal entry.

Machinery-----Dr.
Cash---------------Cr.

The entry having more than one debits or credits is

called compound Journal entry.
A/P-------------Dr.
Cash---------------------Cr.
Discount-------------------Cr.
 Ledger
King of All Books of accounts
A book which contains and classified
record of all the transactions of a
business in shape of accounts.

 Orin other words ledger is a book in

which every account is allotted a
separate page, and all the transactions
relating to that account are written on
that page in summery form.
 Standard Form of Ledger
Title…………….. A/c #0098
Dr. Cr.
Date Account Ref Amount Date Account Ref Amount
The General Ledger
 Posting

Transferring information from the

Journals to the Ledger Accounts is
called Posting
 Types of ledger

1:General ledger system when we make

Five ledger for Five account
2;susidiray ledger: when we make a sub
ledger for each account is

Financial Accounting 54
Cash account Account No 1
DR CR
Date Particular Ref Amount Date ParticularRef Amount
1 Capital 1000 2 Purchases 50
5 Sales 150 3 Salaries 100
4 Rent 50

Balance c/f 950

Total 1150 Total 1150
Capital account Account No2
DR CR
Date Particular Ref Amount Date Particular Ref Amount
Balance c/f 1000 1 Cash 1000

Total 1000 Total 1000

Purchases account Account No 3

DR CR
Date Particular Ref Amount Date Particular Ref Amount
Cash 50 Balance c/f 50

Total 50 Total 50
Salaries account Account No 4
DR CR
Date Particular Ref Amount Date Particular Ref Amount
Cash 100 Balance c/f 100

Total 100 Total 100

Rent account Account No 5

DR CR
Date Particular Ref Amount Date Particular Ref Amount
Cash 50 Balance c/f 50

Total 50 Total 50
Sales account Account No 6
DR CR
Date Particular Ref Amount Date Particular Ref Amount
Balance c/f 220 Cash 150
A/R 70

Total 220 Total 220

Account Receivable account Account No 7

DR CR
Date Particular Ref Amount Date Particular Ref Amount
Sales 70 Balance c/f 70

Total 70 Total 70
Dr./ Cr. Balance

When Dr. side of an account is

greater/heavier than cr. Side, the
difference/remaining is called as
Dr. Balance and vice versa
 Trial Balance
A list of all the accounts and their balances
at a given time.
It serves to prove the
mathematical
equality of debits and
credits after posting.

It aids in the
preparation of financial
statements.
 ABC Co.
Trail Balance
As on June 31,2007

Account Ref Debit Credit

Total
Preparing a Trial Balance
 When? At the end of an accounting period.
 Why? “Getting ready” to prepare a set of financial statements.

Slide 4.22
 MR.A
Trail Balance
As at 6th January 2008
Sr.# Items DR Cr
Cash 950
Capital 1000
Purchases 50
Salaries 100
Rent 50
Sales 220
A/R 70

Total 1220 1220

The Basis of an Accounting System
Accounting consists of many rules and procedures. These rules (or principles)
and procedures guide the setting up and maintaining of financial records. Each
businesses sets up its accounting system according to its specific needs, but all
businesses follow the same basic rules and procedures.

An assumption is something taken for granted as true. When we go to a play,

we assume that the show will be as advertised, that the actors can be heard by
the audience, and that they are all speaking a language we understand. If our
assumptions are wrong, the play will be disappointing or make no sense.
Business “audiences” also must be able to make assumptions.

Accounting is based on four assumptions about business operations. These

assumptions underlie all reports are summarized by the terms “business
entity,” “going concern,” “unit of measure,” and “time period.”
Business Entity
A business entity is an organization that exists
independently of its owner’s personal holdings. This
means that accounting records contain only the financial
information related to the business. The business
owner’s personal financial activities or other investments
are not included in the reports of the business. For
example, the personal residence of a business owner,
valued at $75,000, is not reported in the accounting
records of the business. However, buildings owned by
the business are included in its financial records and
reports.
Going Concern
In accounting, it is assumed that a business will
continue to operate in the future. In other words, a
business is said to be a going concern. Financial
reports are prepared on the assumption that the
business will operate long enough to carry out its
operations and meet future obligations.
Unit of Measure
The effects of business transactions are measured in
money amounts. In the United States, the monetary unit
of measure is the dollar. For accounting records, the
dollar is assumed to have a fixed buying power. In other
words, the effects of inflation or deflation are not
reflected in the financial records of a business.
Everything is recorded at cost..
Time Period
Accounting reports are prepared for a specific period of
time. A period of time covered by an accounting report
is referred to as a fiscal period. The fiscal period can
cover any period of time – such as one month or three
months – but the most common period is one year.
Accounting Equation

 Assets and equities (capital and liabilities) are the basic elements of
accounting, when Assets get equal to equities (Capital and Liabilities) is
called Accounting Equation or also called Balance sheet equation. i.e.

ASSETS= EQUITIES
ASSETS= CAPITAL + LIABILITIES