the system of accounting

Volume – I

YEAR 2015

WRITTEN BY: SYED AQEEL RAZA

THE SYSTEM OF ACCOUNTING VOLIUM – I

Written by; Syed Aqeel Raza

<THE SYSTEM OF ACCOUNTING < VOLIUM 1< SYED AQEEL RAZA<[email protected]>

FATHER OF ACCOUNTING

Fra Luca Bartolomeo de Pacioli (1445–1517) was an Italian mathematician, and seminal contributor to the field now known as accounting. He is referred to as the Father of Accounting and Bookkeeping (he was the first to publish a work on double-entry system of book-keeping). He was also called Luca di Borgo after his birthplace, Borgo Sansepolcro, Tuscany.


P R E F A C E

https://en.wikipedia.org/wiki/Tuscany

https://en.wikipedia.org/wiki/Sansepolcro

https://en.wikipedia.org/wiki/Double-entry_bookkeeping_system

https://en.wikipedia.org/wiki/Double-entry_bookkeeping_system

https://en.wikipedia.org/wiki/Accounting

https://en.wikipedia.org/wiki/Mathematician

https://en.wikipedia.org/wiki/Italy

First and foremost, I want thank to Almighty Allah who attached me to the Door-of-knowledge and encouraged me to serve mankind by spreading education which made the human supreme in creation.

The object of writing this book “The System of Accounting” is to provide basic accounting concept in easy way of styles and illustrations makes readers, students and business executives acquainted with the concept of accounting.

This book is primarily written for the use of beginners of this subject and for those who wish to have knowledge of it to keep eyes on their finance applied in business.

At last in short, I shall say that this is my a little contribution based on your suggestions. I tried my best to avoid errors, but errors may be being human then please notify and suggest anything for improvement with liberty on my email addresses [email protected].


F O R W A R D

mailto:[email protected]

I am in great pleasure of presenting my Book “The System of Accounting Volume 1 which I think, will be proved different others because of the reason that I tried utmost to select suitable words with Urdu translation where necessary to make it comprehensive to readers and the students of commerce.

I hope my a little struggle for this noble cause will be admirable with suggestions for improvement.


COPY RIGHT

Copy right of this book goes to writer and not allows others to use its contents to publish but downloads for reading and study

All the best to my readers

DISCLAIMER

The name of book “The System of Accounting”, contents, definition, and written material of this book is of writer not copied from any source but taken guideline from many other sources to complete thinking and saving errors. The name, amount, addresses and anything relating to personal in written materials are imaginary and thinking of writer.

In the opinion of writer, same views or concepts of accounting being the same subject with others may be resemblance but difference in idea of writing and presentation.

All the best to readers

TABLE OF CONTENTSLEVEL - I

PAGE # LEVEL I

PAGE #

INTRODUCTION INTRODUCTIONMeaning & Definition NATURE OF ACCOUNTS 24

ACCOUNTING 1 ASSETS 25BOOK KEEPING 2 Current Assets 26BUSINESS 3 Fixed Assets 27Business Terminology…..Service 4 Tangible Assets 28Business Terminology…..Trading 5 Prepaid & Deferred Assets 29Business Terminology…..Manufacturing 6 Intangible Assets 30BUSINESS ORGANIZATIONS 7 LIABILITIES 31 SOLE OWNERSHIP 8 Short Term Liabilities 32 PARTNERSHIP 9 Long Term Liabilities 33 COMPANIES/CORPORATIONS EQUITIES/PROPRIETORSHIP 34 - Joint Stock Companies 10 Internal Equities 35 - Pvt. Limited Companies 11 External Equities 36 - Public Limited Companies 12 Capital 37 - Multinational Companies 13 Drawing 38 - State Corp./Nationalized Industries. 14 INCOME/REVNUE 39 FRANCHISES 15 Accrual Basis Accounting 40CLASSIFICATION OF ACCOUNTS 16 Cash Basis Account 40 Real Accounts 16 Sale 41 Personal Accounts 16 Purchases 42 Nominal Accounts 16 EXPENSES 43TRANSACTIONS 17 Direct Expenses 44 Cash Transaction 18 Indirect Expenses 45 Credit Transaction 19 ABBRIVATION USED IN ACCOUNTING 46-47ENTRY 20 Single Entry 21 RULES FOR TRANSACTIONS 48 Double Entry 22 BUSINESS ENTITY 23


INTRODUCTION 1

ACCOUNTING I

Accounting is the “language of business “and the art of recording, summarizing and analyzing business information in a significant manner in terms of money, transactions and events. The accounting provides eyes and ears for management and is the key of success of every business. The most common accounting reports are called financial statement.

Translation


INTRODUCTION 2

BOOK-KEEPING

Book-Keeping is defined to record business dealings or transactions under systematic prescribed procedures and presentation in shape of money or money’s worth instruments enables Accountant to extract complete financial picture of a business.

Book-Keeping is the source of ascertain the working results from the written records of transactions. It helps and guides the management of the business to determine their policies and to make decisions in business operation.

Translation


INTRODUCTION 3

BUSINESS

Business means profit in term of money or money’s worth thing through the satisfaction of human wants under classification of Service, Trading and

Manufacturing. Any activity undertaken under legal frame of work with the aiming of earning profit is come under business classification such as hawker, shopkeeper, wholesaler, dealer, manufacturer, repair centre, banker etc.

.

Translation


INTRODUCTION 4

SERVICE

The term of business “service” describes work that supports a business but does not produce tangible commodity. In economics, a service is an intangible commodity. The business engaged rendering their skills or mechanical/technical services to his customers such as dry cleaner, Machinery repairers, accountants, advocates, auditors, doctors etc.

Translation


INTRODUCTION 5

Trading

The term of business “trading” describes the business engaged in purchasing and selling of commodities usually defined two kinds of business wholesale or import & export who maintain a stock and deliver their products to shops or large end customers.

. Translation


INTRODUCTION 6

Manufacturing

The term of business “manufacturing” describes the business engaged in producing merchandise most commonly applied to industrial production in which raw materials are transformed into finished goods on a large scale. Such finished goods may be used for other manufacturing concern or sold to wholesalers, wholesalers in turn sell them to retailers and retailers sell to end users..


INTRODUCTION 7

BUSINESS ORGANIZATION

There is need of an organization for operating of different nature of business and job. A business organization may be defined as single individual or group of persons having talent of different natures in order to provide goods and services to make profit.

Actually in business, the sense of organization is a business unit operated by one person, two or more persons making firm, concern, enterprise, company.

The main types of business organization are;

a) Sole Ownershipb) Partnershipc) Companies/Corporationsd) Franchises

Translation


INTRODUCTION 8

SOLE OWNERSHIP

This is a business owned by one person who provides capital for the business and usually directs and supervises its activities. The owner of the firm/organization is known is “sole trader” who is responsible for all losses and profits of the business.

Translation


INTRODUCTION 9

PARTNERSHIP

A partnership in business occurs when two or more persons carry on business in common with a view to make profit and every investor is called “partner.” The firm itself is called “partnership. The partners usually provide the capital and direct and supervise the activities of the business or by anyone who will act for all or by an employee. The investment or working of each partner may be equal or not equal on the basis of profit and loss sharing ratio.

Translation


INTRODUCTION 10

COMPANY/CORPORATION

JOINT STOCK COAMPANIES

The joint stock company is an organization, whose capital is contributed by several persons who owned under Companies Act 1984. The investors are called “Share holders/Stock holders.”

Translation

<THE SYSTEM OF ACCOUNTING < VOLIUM 1< SYED AQEEL RAZA<[email protected]

INTRODUCTION 11

COMPANY/CORPORATION

PRIVATE LIMITED

The Private Limited Company consists of not less than two persons and more than fifty persons. A private company must have the word limited (Ltd.) included in its name. The shares in this type of company cannot be offered to the public for sale. The company is usually owned and operated by family members.

Translation


INTRODUCTION 12

PUBLIC LIMITED

The Public Limited Company consist minimum number of persons is two. However, there is no limit as to the number of persons that can be in a public company. It must have the word Public Limited Company (PLC) at the end of its name. The company can offer shares and debentures for sale to the general public.

Translation


INTRODUCTION 13

MULTINATIONAL CORPORATION

A multinational firm is one which owns controls and operates enterprises in several countries in order to increase market share and improve overall profits. The parent company makes all the decisions which are carried out by the management of the subsidiary companies.

Translation

<SYSTEM OF ACCOUNTING < VOLUME 1< SYED AQEEL RAZA<[email protected]>

INTRODUCTION 14

STATE CORPORATION/NATIONALISED INDUSTIRES

The State Corporation or nationalized industries are owned, controlled and managed by the government or state. The main of the public corporation is to provide specific goods and/or services that meet the need of the country, at a reasonable price.

Translation

<SYSTEM OF ACCOUNTING < VOLUME 1< SYED AQEEL RAZA<[email protected]>

INTRODUCTION 15

FRANCHISES

A franchise is a right sold by one persons or firm called a franchisor. It is another form of cooperation between a big firm and a sole trader. In franchising, a well-known company allows someone to buy the right to use their trade names.

The potential franchisee pays to use the name, products or services of the major company which receives a lump sum and a share of the profits of the business sometimes called royalties.

The franchisee receives the majority of profits, but must also meet most of any losses. In addition to allowing use of their name, products, techniques or services, franchisors usually provide an extensive marketing back-up in return for the money they receive.

Translation

<THE SYSTEM OF ACCOUNTING < VOLUME 1< SYED AQEEL RAZA<[email protected]>

INTRODUCTION 16

CLASSIFICATION OF ACCOUNT

There are mainly three types of accounts.

1. Real Accounts

Accounts related to assets (tangible/touchable or intangible/none touchable) come under the category of real account e.g. land, furniture, machinery, goodwill, patents etc. are real accounts.

2. Personal Accounts.

Accounts related to persons or organizations are called personal account.

3. Nominal Accounts

The nominal accounts represent losses, incomes, gains.

Translation


INTRODUCTION 17

TRANSACTIONS

Any exchange of values is called “transaction “or the process of doing business with another person, company, etc. sub divided into cash transaction and credit transaction.

Translation


INTRODUCTION 18

Cash Transactions:

The transaction involves exchange of cash on the spot on receipt or payment is called cash transaction as;

- Purchase of Merchandise, Land, Building, Furniture etc. on cash.- Sold Merchandise, Furniture, Building, Equipment etc. on cash.- Services rendered on cash.- Received cash.

Translation


INTRODUCTION 19

Credit Transactions:

The transaction in which exchange valves involve but cash payment of receipt is not made immediately and to be made later is called Credit Transactions as;

- Purchase of Merchandise, Land, Building, Furniture etc. on credit.

- Sold Merchandise, Furniture, Building, Equipment etc. on credit.

- Services rendered on credit.- Paid cash

Translation


INTRODUCTION 20

ENTRY

The posting of a business transaction in a book with the sequence of date and with two kinds of changes “increase or decrease” known as an entry. A written record of a commercial transaction is known as “entry.”

Translation


INTRODUCTION 21

SINGLE ENTRY

A single entry book keeping system is a method of one side accounting entry relating with cash receipt and payment, bank receipt and payment and the accounts receivable and payable. It does not involve accounting equation “Assets=Liabilities Owner’s equity.”

This system of entry is used in small business where the business transactions are low in volume and uncomplicated.

Translation


INTRODUCTION 22

DOUBEL ENTRY

The double entry system in book keeping means that every business transaction involves two accounts (or more).

The double entry also allows for the accounting equation “Assets=Liabilities Owner’s equity” to always be in balance

Another aspect of double entry is that the amounts entered into general ledger accounts as debits must be equal to the amounts entered as credits.

Translation


INTRODUCTION 23

BUSINESS ENTITY

Business entity means a business, division, unit or other aspect of an organization. For example, a company with different divisions of the business might define each division as an entity. Also, each department or team within an organization might be its own entity. A product can be an entity, as well as a company's investments or assets.

The owner and the business are two separate entities such as owner as capital and the accounts, maintained by an accountant is related with him and business is other.

Translation


INTRODUCTION 24

NATURE OF ACCOUNT

The Account is a ledger record in a summarized form of all the transactions showing debit and credit or increase or decrease in an item based on assets, liabilities, proprietorship, revenues or expenses. Each account has a separate name distinguish it from other account.

Some examples of accounting element;

The value of furniture purchased for the business identified by Furniture a/c.

The amount is receivable from Mr. X identified by Mr. X a/c.

The amount of Capital invested in the business identified by Capital a/c.

The amount of expense incurred on account of salaries identified by Salaries a/c.

The value of sales made in business identified by Sales A/c.

The amount is available in the bank identified by Bank a/c.

The list of accounts can be endless or according to transaction or event.


INTRODUCTION 25

ASSETS

Actually some Resources or things such as merchandise, land, building, office equipment, cash etc. are needed to run any business called Assets.

Any item of economic value convertible in cash owned by an individual or company is an asset equal Liabilities + Proprietorship under following categories.

- Long-term/Non-current/tangible assets (Land, building, plant, equipment)

- Prepaid and deferred assets (expenditures for future costs such as -insurance, rent, interest)

- Intangible Assets (Trademarks, patents, copyrights, goodwill)

Translation


INTRODUCTION 26

CURRENT/LIQUID/MOVEABLE ASSETS

An asset such as receivable, inventory, cash, securities, prepaid expenses and other expenses that could be converted in cash in less than one year is current asset or circulation asset.

Translation


INTRODUCTION 27

FIXED/NON CURRENT/IMMOVABLE ASSETS

An Asset such as land, building, equipment, machinery, vehicles, and other such items enable owner to carry on its operations. In accounting, fixed asset does not necessarily mean immovable, any asset expected to last, or be in use; more than one year is considered as fixed asset. These assets are shown at their book value (purchase price less depreciation).

Translation


INTRODUCTION 28

TANGIBLE ASSETS

Tangible Assets or touchable assets are cash, equipment, machinery, plant, property and anything that has long term physical existence or is acquired for use in the operations of the business and not for sale to customers. They can be used as collateral to raise loans, and can be more readily sold to raise cash in emergencies.

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INTRODUCTION 29

PREPAID AND DEFFERED ASSETS

Prepaid recurring expenses such as insurance, interest or rent carried forward as an asset under the associated service of benefit is received called deferred assets.

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INTRODUCTION 30

INTANGIBLE ASSETS

Intangible assets are the long term resources of an entity but have no physical existence such as trademarks, patents, copyrights, goodwill. They derive their value from intellectual or legal rights. In contrast to tangible assets, intangible assets cannot be destroyed by fire, hurricane, or other accidents or disasters and can help build back destroy tangible assets.

Translation


INTRODUCTION 31

LIABILITIES

Liabilities mean the claims of suppliers on account of purchases for business operation under head of account “A/c Payable with individual or company names.

Translation


INTRODUCTION 32

Short-term/Current Liabilities

In accounting, current liabilities are often understood as all liabilities of the business that are to be settled in cash with the fiscal year.

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INTRODUCTION 33

Long Term Liabilities

Long term liabilities are liabilities with a future benefit of over one year such as notes payable that mature longer than one year.

The Examples of long-term liabilities are debentures, mortgage, loans and other bank loans.

Long –term liabilities are a way to show that you have to pay something off in a time period longer than one year.

Translation


INTRODUCTION 34

EQUITIES

Equity is the ownership or investor’s interest on values of assets or resources of a business. After liabilities have been accounted for, the positive remainder is deemed the owners' interest in the business.

Assets are the resources owned by business and equities are the sources from which those assets have been acquired.

There are two types of equities.

1- Internal Equities2- External Equities

Translation


INTRODUCTION 35

EQUITIES

INTERNAL EQUITIES

The claim or interest/income of owner and investor in the assets of the business to the amount invested is known as “Capital”, Proprietorship”, “Owner’s equities” or “Internal equities.”

Translation


INTRODUCTION 36

EQUITIES

EXTERNAL EQUITIES

The claim of suppliers or loan of institutions from the business assets are external equities called liabilities, owner’s equity or external equities.

Translation


INTRODUCTION 37

CAPITAL

Cash or goods used in business to generate income by investment of owner or partner are known Capital. In case of public limited company, who has several investors and each investor has shares of the company called share capital.

.

Translation


INTRODUCTION 38

DRAWING

The proprietor or partner of the business withdraws cash or commodities for his personal use are known “Drawings. In case of limited companies/corporations, no one can withdraw any value from the business.

.

Translation


INTRODUCTION 39

REVENUE

Revenue is the amount of money that is brought into a company by its business activities during a specific period, including discounts and deductions of return merchandise. It is “top line” or “gross income” from which costs are subtracted to determine net income.

In general, a transaction between two parties where the buyer received goods, service and/or assets in exchange of money is sale.

In other words Revenue is also known as sales.

Translation


INTRODUCTION 40

REVENUE

ACCRUAL OR CASH REVENUE

Accrual basis is a method of recording accounting transactions when revenue earned and expenses incurred. The accrual basis Revenue requires the use of allowances for sales returns, bad debts, and inventory obsolescence, which are in advance of such items actually occurring.

The Alternative method of recording revenue transactions is cash basis.

Translation


INTRODUCTION 41

SALE

A sale is the exchange of a commodity for money or service in return for money or the action of selling something. If sale is made on cash basis known as “cash sales” and sales under a certain understanding, on credit, known “credit sales.”

Sales Return & Allowance

When a consumer is not satisfied with a product and expects to receive the full amount paid for the product known as Sales return or if the seller gets the claim from the consumer about the defect, damage etc., the seller allows some rebate in price of such goods it is known as Sales Allowance.

Sales Discount

Sales discount is a reduction in the price of a product or service that is offered by the seller, in exchange for early payment by the buyer or to increase sales.

Translation


INTRODUCTION 42

PURCHASES

The activity of acquiring goods or services for business is purchases. The purchases may be made on cash basis, if payment made immediately, “called cash” purchases and later on called “credit purchases.”

If the any item of purchased returns due to certain reasons known as Purchase Return. If the item is not according to sample or other reasons, the supplier or seller cut short the price of such item known as Purchase Allowance.

Purchase Discount is the rebate amount allowed on purchase by the seller.

Translation


INTRODUCTION 43

EXPENSES

An expense in accounting is the money spent or cost incurred in any entity’s efforts to generate revenue. Expenses represent the cost of doing business in the sum total of the activities directed towards making a profit.

Expenses associated with the main activity of the business are referred to as operating expenses. Expenses associated with a peripheral activity are non-operating or other expenses.

Operating expenses are often subdivided into categories such as fixed and variable expenses or into selling, general and administrative expenses.

Funds used to acquire or upgrade physical assets such as building and machinery also called capital expenses.

Profit = revenue – expenses

Expenses are mainly divided into two categories:-

1- Direct Expenses 2- Indirect expenses

Translation


INTRODUCTION 44

DIRECT EXPENSES

Direct expenses are expenses that are directly related to the creation of a product or service or purchase of goods such as Purchase price of goods, carriage on goods purchased, wages on goods, insurance of goods in transit, custom duty, freight etc.

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INTRODUCTION 45

INDIRECT EXPENSES

Indirect expenses are expenses that have no relationship with purchase of goods. Examples of indirect expenses include rent of building, salaries to employees, legal charges, insurance of building, depreciation, printing charges and so on.

Translation


INTRODUCTION 46

ABBREVIATION USED IN ACCOUNTING

A/c Account

B/d Brought down

B/F Brought forward

C/D carried down

C/F carry forward

Dr. Debit

Cr. Credit


INTRODUCTION 47

ABBREVIATION USED IN ACCOUNTING

ALPRE Assets, liabilities, proprietorship, revenue, expenses

JV Journal Voucher

Fol. Folio/page

Inv. Invoice

Memo Memorandum

N.L. Nominal Ledger

P.C.B. Petty Cash Book

C.B. Cash Book

P.D.B. Purchase Day Book

S.D.B. Sales Day Book

P&L Profit & Loss

S.L. Sales Ledger


INTRODUCTION 48

RULES FOR TRANSACTIONS

1 ASSETS A INCREASES DEBIT DECREASES CREDIT

2 LIABILITIES L DECREASES DEBIT INCREASES CREDIT

3 PROPRIETORSHIP P DECREASES DEBIT INCREASES CREDIT

4 REVENUE R DECREASES DEBIT INCREASES CREDIT

5 EXPENSES E INCREASES DEBIT DECREASES CREDIT

= ALPRE ASSETS= LIABILITIES + PROPRIETORSHIP

ASSETS = EQUIUTIES

RESOURCES = SOURCES


Volume – I

YEAR 2015



TABLE OF CONTENTS

< AFFECTS ON BUSINESS TRANSACTIONS>

Brief Introduction………………………………………………………………………………………..49

Analyzing, Equation, Rules Entry…………………………………………………………….51-70

Transactions…………………………………………………………………………………………………………………………………………… 50

The Accounting equation for a new company……………………………………………………………………………………….. 51

Mr. Frances starts his business with a capital investment of Rs. 100,000/=……………………………………………… 52

Taken shop on rent Rs.5, 000/= per month with deposit of Rs.10, 000/=, the rent paid in advance…..53-54

Purchased merchandise on cash Rs.50, 000/=…………………………………………………………………………………………..55

Cartage on merchandise Rs.1000/= paid…………………………………………………………………………………………………..56

Purchased merchandise of Rs.5000/= on credit from ABC & Co………………………………………………………..………57

Sold merchandise Rs.5, 000/= at cost for to a cash customer…………………………………………………….………………58

Sold merchandise for Rs.12, 000/= which costs to Rs. 10, 000/= to a cash customer…………..…………………..59

Cash paid to ABC & Co. Rs.2500/= as part payment……………………………………………………..…………………..60-61

Sold merchandise of Rs.10, 000/= on credit to AA & Co. at a profit of Rs.2000/=……………………………………62

Cash received Rs.5000/= as part payment from AA & Co. as part payment………………………….. ……….63-64

Merchandise returned to ABC & Co. Rs.1000/= and paid cash Rs. 1500/=…………………………..………………….65

Merchandise returned by Cash customer of Rs.2000/=…………………………………………… …………………….66-67

Paid salary Rs. 3000/= to employee…………………………………………………………………………… …………………68-69

Operated a bank account with Rs.5, 000/=……………………………………………………………………………….………….70

Accounting Equation………………………………………………………………………………………………………..………………….71


AFFECTS ON BUSINESS TRANSACTIONS 49

Every business transaction affects the fundamental accounting equation as to Assets = Liabilities + Owners’ Equity or owners’ Equity + Liabilities= Assets under rules of Debit and Credit or Increase or Decrease in values.

Assets are the Resources of the business and equities provide the source to acquire these assets. Therefore, ASSETS = EQUITIES OR RESOURCES =SOURCES.

The accounting equation can be expressed in three ways:

Assets = Liabilities + Owners’ Equity

Liabilities = Assets – Owners’ Equity

Owners’ Equity = Assets – Liabilities



Here are following transactions showing the effect on accounting equation;

The Accounting equation for a new company

Jan 05, 2015: Mr. Frances starts his business with a capital investment of Rs. 100,000/=.

Jan 06, 2015: Taken shop on rent Rs.5, 000/= per month with deposit of Rs.10, 000/=, the rent paid in advance

Jan 07, 2015: Purchased merchandise on cash Rs.50, 000/=.

Jan 08, 2015: Cartage on merchandise Rs.1000/= paid.

Jan 08, 2015: Purchased merchandise of Rs.5000/= on credit from ABC & Co.

Jan 10, 2015: Sold merchandise Rs.5, 000/= at cost for to a cash customer.

Jan 15, 2015: Sold merchandise for Rs.12, 000/= which costs to Rs. 10, 000/= to a cash customer.

Jan 16, 2015: Cash paid to ABC & Co. Rs.2500/= as part payment.

Jan 17, 2015: Sold merchandise of Rs.10, 000/= on credit to AA & Co. at a profit of Rs.2000/=.

Jan 20, 2015: Cash received Rs.5000/= as part payment from AA & Co. as part payment.

Jan 22, 2015: Merchandise returned to ABC & Co. Rs.1000/= and paid cash Rs. 1500/=

Jan 25, 2015: Merchandise returned by Cash customer of Rs.2000/=.

Jan 30, 2015: Paid salary to Rs. 3000/= to employee.

Operated a bank account with Rs.5, 000/=.



The Accounting equation for a new company

The accounting Equation for a brand new company looks like;

Since the business has only been planned not yet invested it has neither assets nor liabilities. Therefore,

ASSETS = LIABILITIES + Owner’s Equity 0 = 0 + 0



Jan 05, 2015: Mr. Frances starts his business with a capital investment of Rs. 100,000/=.

When Mr. Frances was planning to start business, he had zero capital and as soon as he put cash into business ,the value of capital has increased from zero to Rs.100,000/= and the value of cash has also been increased by Rs.100,000/=as an liquid assets.

Analysis:1) Accounts involved = Cash -Frances, Capital2) Nature of Accounts =Assets -Owner’s Equity3) Increase or decrease =Increases -Increases4) Rules of Debit and Credit =Debit -Credit

Accounting Equation:

ASSETS = LIABILITIES + Owner’s EquityCASH Owner’s, Capital

+Rs.100, 000/= = 0 +Rs.100, 000/=

Accounting Rules:Assets increases debit decreases credit.Capital decreases debit increases credit.

Cash/Liquid Assets = DebitCapital/Proprietorship = Credit

Recording of Entry:

Jan 05, Cash 100,000/= Capital/Frances 100,000/=(To record the Investment in the business)



Jan 06, 2015: Taken shop on rent Rs.5, 000/= per month with cash deposit of Rs.10, 000/=, the rent paid in advance.

Analysis:

1) Accounts involved = Prepaid Rent -Cash2) Nature of Accounts =Assets -Assets3) Increase or decrease =Increases -Decreases4) Rules of Debit and Credit =Debit -Credit

5) Accounts involved = Shop Deposit -Cash6) Nature of Accounts =Assets -Assets7) Increase or decrease =Increases -Decreases8) Rules of Debit and Credit =Debit -Credit


ASSETS = LIABILITIES + Owner’s Equity Frances, Capital

Cash + 100000 = +100000Shop Deposit +10000 - 10000Prepaid Rent + 5000 - 5000 =

Balance +15000 + 85000 = +100000

In this entry, the pre-paid rent which assumed assets before consumption increased in Assets and the cash has been paid which is decreasing in assets. The shop deposit is a recoverable asset increasing in assets and the cash paid against it decreasing in assets.



Accounting Rules:Assets increases debit decreases credit.

Prepaid Rent/Assets = DebitShop Deposit/Assets = Debit

Cash/Assets = Credit

Recording of Entry:Compound entry:

Jan, 06 Prepaid Rent 5,000/=

Shop Deposit 10,000/=Cash 15,000/=

(To record the payment of shop deposit & rent in advance)

Broken Entry:Jan, 06 Prepaid Rent 5,000/=

Cash 5,000/=(Paid shop rent in advance)Shop Deposit 10,000/=

Cash 10,000/=(Cash paid for shop deposit)



Jan 07, 2015: Purchased merchandise on cash Rs.50000/=

Analysis:1) Accounts involved = Merchandise - Cash2) Nature of Accounts =Assets -Assets3) Increase or decrease =Increases -Decreases4) Rules of Debit and Credit =Debit -Credit

Accounting Equation: ASSETS = LIABILITIES + Owner’s Equity

Frances, CapitalCash + 100000 = +100000Shop Deposit +10000 - 10000Prepaid Rent + 5000 - 5000 =Merchandise +50000 - 50000 =

Balance +65000 + 35000 = +100000

Accounting Rules:

Assets increases debit decreases credit.

Merchandise/Assets = DebitCash/Assets = Credit

Recording of Entry:

Jan 07, Merchandise 50000 Cash 50000(To record purchased merchandise on cash)

This transaction affects the accounting equation as to increase in assets and decrease in assets cash too and no change is made in equities side of the equation.



Jan 08, 2015: Cartage on merchandise Rs.1000/= paid.

Analysis:1) Accounts involved = Cartage -Cash2) Nature of Accounts = Expense -Assets3) Increase or decrease = Increases -Decreases4) Rules of Debit and Credit = Debit -Credit


ASSETS = LIABILITIES + Owner’s Equity Frances, Capital

Cash + 100000 = +100000Shop Deposit +10000 - 10000Prepaid Rent + 5000 - 5000 =Merchandise +50000 - 50000 = Cartage - 1000 = -1000

Balance +65000 + 34000 = +99000

Accounting Rules:

Expense increases debit decreases credit.Assets increases debit decreases credit.

Cartage/Expense = DebitCash/Assets = Credit

Recording of Entry:

Jan, 08 Cartage Rs. 1000 Cash Rs. 1000(To record paid Cartage for merchandise carried to shop)

The Asset “Cash” is decreased and the Expense decreases in owner’s Equity or from owner’s profit.



Jan 08, 2015: Purchased merchandise of Rs. 5000/= on credit from ABC & Co.

Analysis:1) Accounts involved = Merchandise - A/c Payable ABC & Co.2) Nature of Accounts =Assets -Liabilities3) Increase or decrease =Increases -Increases4) Rules of Debit and Credit =Debit -Credit

Accounting Equation:ASSETS = LIABILITIES + Owner’s Equity

Frances, CapitalCash + 100000 = +100000Shop Deposit +10000 - 10000Prepaid Rent + 5000 - 5000 =Merchandise +50000 - 50000 = Cartage - 1000 = -1000Merchandise + 5000A/c P/A ABC Co = +5000

Balance +70000 + 34000 = +5000 +99000

Accounting Rules:

Assets increases debit decreases credit.Liabilities decreases debit increases credit.

Merchandise/Assets = DebitA/c P/A ABC & Co. /Liabilities = Credit

Recording of Entry:

Jan 08, Merchandise 5000 A/c P/A ABC & Co. 5000

(To record merchandise purchased on credit)

This transaction affects the accounting equation as to increase assets/merchandise and increase in liabilities A/c payable ABC & Co. by equal amount.



Jan 10, 2015: Sold merchandise Rs.5, 000/= at cost for to cash customer.

Analysis:

1) Accounts involved = Sale - Cash2) Nature of Accounts =Revenue -Assets3) Increase or decrease =Increases -Increases4) Rules of Debit and Credit =Credit -Debit


ASSETS = LIABILITIES + Owner’s Equit y Cash Frances, Capital

Cash + 100000 = +100000Shop Deposit +10000 - 10000Prepaid Rent + 5000 - 5000 =Merchandise +50000 - 50000 = Cartage - 1000 = -1000Merchandise + 5000A/c P/A ABC Co = +5000Merchandise sold -5000 + 5000

Balance +65000 + 39000 = +5000 +99000 Accounting Rules:Assets increases debit decreases credit.Revenue decreases debit increases credit.

Cash/Assets = DebitSale = Credit

Recording of Entry:

Jan 10, Cash 5000Sale 5000(To record merchandise sold without profit & loss)

This transaction affects the equation as to increase in assets/cash and decrease in merchandise. The sale is connected with revenue but reducing the stock of merchandise affecting profit and loss and taken into account directly in merchandise.



Jan 15, 2015: Sold merchandise for Rs.12, 000/= which costs Rs. 10,000/= to a cash customer.

Analysis:

1) Accounts involved = Sale = Cash =Profit2) Nature of Accounts =Revenue =Assets =Capital3) Increase or decrease =Increases =Increases =Increases4) Rules of Debit and Credit =Credit =Debit =Credit

Accounting Equation:ASSETS = LIABILITIES + Owner’s Equity Cash Frances, Capital

+ 100000 = +100000Shop Deposit +10000 - 10000Prepaid Rent + 5000 - 5000 =Merchandise +50000 - 50000 = Cartage - 1000 = -1000Merchandise + 5000A/c P/A ABC Co = +5000Merchandise sold -5000 + 5000Merchandise sold -10000 + 12000 +2000 (Profit)

Balance +55000 + 51000 = +5000 +101000

Accounting Rules:Assets increases debit decreases credit.Revenue decreases debit increases credit.Capital decreases debit increases credit.

Cash/Assets = DebitSales/Revenue = CreditCapital/Profit = Credit

Recording of Entry:Jan 15, Cash 12000

Sales 10000Capital 2000(To record merchandise sold on profit)

This transaction affects the equation as to increase in assets/cash, decrease in merchandise and increase in owner’s equity by profit.



Jan 16, 2015: Cash paid to ABC & Co. Rs.2500/= as part payment.

Analysis:

1) Accounts involved = A/c Payable - Cash2) Nature of Accounts =Liabilities -Assets3) Increase or decrease =Increases -Decreases4) Rules of Debit and Credit =Credit -Credit


+ 100000 = +100000Shop Deposit +10000 - 10000Prepaid Rent + 5000 - 5000 =Merchandise +50000 - 50000 = Cartage - 1000 = -1000Merchandise + 5000A/c P/A ABC Co = +5000Merchandise sold -5000 + 5000Merchandise sold -10000 + 12000 +2000 (Profit) ABC & Co. - 2500 -2500

Balance +55000 + 48500 = +2500 +101000

Accounting Rules:Assets increases debit decreases credit.Liabilities decreases debit increases credit.

A/c Payable/Liabilities = DebitCash/Assets = Credit

Recording of Entry:Jan 16, ABC & Co. (A/c P/A) 2500

Cash 2500

(To Record cash paid to ABC & Co. as part payment)This transaction affects the equation as to decrease in liabilities and decrease in cash/assets with equal amount.



Jan 17, 2015: Sold merchandise of Rs.10, 000/= on credit to AA & Co. at a profit of Rs.2000/=.

Analysis:1) Accounts involved = Sale - A/c R/A (AA & Co.)2) Nature of Accounts =Revenue -Assets3) Increase or decrease =Increases -Increases4) Rules of Debit and Credit =Credit -Debit


+ 100000 = +100000Shop Deposit +10000 - 10000Prepaid Rent + 5000 - 5000 =Merchandise +50000 - 50000 = Cartage - 1000 = -1000Merchandise + 5000A/c P/A ABC Co = +5000Merchandise sold -5000 + 5000Merchandise sold -10000 + 12000 +2000 (Profit) ABC & Co. - 2500 -2500Merchandise sold -10000 A/C R/A +12000 +2000 (Profit)

Balance +57000 + 48500 = +2500 +103000


Accounting Rules:

Assets increases debit decreases credit.Revenue decreases debit increases credit.Capital decreases debit increases credit.

A/c Receivable/Assets = DebitSales/Revenue = CreditProfit/Capital = Credit

Recording of Entry:Jan 16, AA & Co. (R/A) 12000

Sale 10000Capital 2000

(To Record merchandise sold on credit to AA & Co. on profit of Rs.2000)

This transaction affects the equation as to increase in assets, increase in sales/revenue and increase in capital by Rs.2000/=



Jan 20, 2015: Cash received Rs.5000/= as part payment from AA & Co.

Analysis:1) Accounts involved = A/c Receivable = Cash2) Nature of Accounts =Assets =Assets3) Increase or decrease =Decreases =Increases4) Rules of Debit and Credit =Credit =Debit


+ 100000 = +100000Shop Deposit +10000 - 10000Prepaid Rent + 5000 - 5000 =Merchandise +50000 - 50000 = Cartage - 1000 = -1000Merchandise + 5000A/c P/A ABC Co = +5000Merchandise sold -5000 + 5000Merchandise sold -10000 + 12000 +2000 (Profit) ABC & Co. - 2500 -2500Merchandise sold -10000 A/C R/A +12000 +2000 (Profit)A/c R/A (AA & Co) -5000 +5000

Balance +52000 + 53500 = +2500 +103000


Cash/Assets = DebitA/c R/A (AA & Co.) = Credit

Recording of Entry:Jan 16, Cash 5000

A/c R/A AA & Co. 5000

(To Record the part payment received by AA & Co.,)



Jan 22, 2015: Merchandise returned to ABC & Co. Rs.1000/= and paid cash Rs. 1500/=

Analysis:1) Accounts involved = Purchase Return =A/c Payable =Cash2) Nature of Accounts =Assets =Liabilities =Assets3) Increase or decrease =Decreases =Decreases =Decreases4) Rules of Debit and Credit =Credit =Debit =Credit


+ 100000 = +100000Shop Deposit +10000 - 10000Prepaid Rent + 5000 - 5000 =Merchandise +50000 - 50000 = Cartage - 1000 = -1000Merchandise + 5000A/c P/A ABC Co = +5000Merchandise sold -5000 + 5000Merchandise sold -10000 + 12000 +2000 (Profit) ABC & Co. - 2500 -2500Merchandise sold -10000 A/C R/A +12000 +2000 (Profit)A/c R/A -5000 +5000Mer.Return -1000A/c P/A ABC & Co. -1500 -2500

Balance +51000 + 52000 = 0 +103000

Accounting Rules:


Purchase Return/Assets = DebitA/c Payable/Liabilities = CreditCash = Credit



Recording of Entry:

Jan 22 A/c R/A AA & Co. 2500Purchase Return 1000Cash 1500

(To Record merchandise returned to ABC & Co. & paid balance payment)

This transaction affects the equation as to increase in cash/assets and decrease in Account Receivable AA & Co.



Jan 25, 2015: Merchandise returned by Cash customer of Rs.2000/=.

Analysis:1) Accounts involved = Sale Return - Cash2) Nature of Accounts =Revenue -Assets3) Increase or decrease =Decreases -Decreases4) Rules of Debit and Credit =Debit -Credit


+ 100000 = +100000Shop Deposit +10000 - 10000Prepaid Rent + 5000 - 5000 =Merchandise +50000 - 50000 = Cartage - 1000 = -1000Merchandise + 5000A/c P/A ABC Co = +5000Merchandise sold -5000 + 5000Merchandise sold -10000 + 12000 +2000 (Profit) ABC & Co. - 2500 -2500Sale -10000 A/C R/A +12000 +2000 (Profit)A/c R/A -5000 +5000Mer.Return -1000A/c P/A ABC & Co. -1500 -2500Merchandise S/R +2000 -2000

Balance +53000 + 50000 = 0 +103000


Sale Return/Revenue = DebitCash/Assets = Credit

Recording of Entry:Jan 25: Sale Return 2000

Cash 2000(To Record merchandise returned by Cash customer)



Jan 30, 2015: Paid salary Rs. 3000/= to employee.

Analysis:1) Accounts involved = Salaries -Cash2) Nature of Accounts = Expense -Assets3) Increase or decrease = Increases -Decreases4) Rules of Debit and Credit = Debit -Credit


ASSETS = LIABILITIES + Owner’s Equity Cash Frances, Capital

+ 100000 = +100000Shop Deposit +10000 - 10000Prepaid Rent + 5000 - 5000 =Merchandise +50000 - 50000 = Cartage - 1000 = -1000Merchandise + 5000A/c P/A ABC Co = +5000Merchandise sold -5000 + 5000Merchandise sold -10000 + 12000 +2000 (Profit) ABC & Co. - 2500 -2500Sale -10000 A/C R/A +12000 +2000 (Profit)A/c R/A -5000 +5000Mer.Return. -1000A/c P/A ABC & Co. -1500 -2500Merchandise s/R +2000 -2000Salaries -3000 -3000

Balance +53000 + 47000 = 0 +100000


Accounting Rules:Expense increases debit decreases credit.Assets increases debit decreases credit.

Salaries/Expense = DebitCash/Assets = Credit

Recording of Entry:

Jan, 30 Salaries Rs. 1000 Cash Rs. 1000(To record salary paid to employee)

The Asset “Cash” is decreased and the Expense decreases in owner’s Equity or from owner’s profit.



Operated a bank account with Rs.5, 000/=.

Analysis:1) Accounts involved = Bank -Cash2) Nature of Accounts = Assets -Assets3) Increase or decrease = Increases -Decreases4) Rules of Debit and Credit = Debit -Credit


ASSETS = LIABILITIES + Owner’s Equity Cash Frances, Capital

+ 100000 = +100000Shop Deposit +10000 - 10000Prepaid Rent + 5000 - 5000 =Merchandise +50000 - 50000 = Cartage - 1000 = -1000Merchandise + 5000A/c P/A ABC Co = +5000Merchandise sold -5000 + 5000Merchandise s -10000 + 12000 +2000 (Profit) ABC & Co. - 2500 -2500Merchandise sold -10000 A/C R/A +12000 +2000 (Profit)A/c R/A -5000 +5000Mer.Return -1000A/c P/A ABC & Co. -1500 -2500Merchandise +2000 -2000Salaries -3000 -3000Bank Account +5000 -5000

Balance +58000 + 42000 = 0 +100000



Accounting Rules:


Bank/Assets = Bank/AssetsCash/Assets = Credit

Recording of Entry:

Jan, 30 Bank Rs. 1000 Cash Rs. 1000(To record cash deposited into bank)

The Asset “Cash” is decreased and bank account increases)



ACCOUNTING EQUATION

ASSETS = LIABILITIES + OWNER’S EQUITY

CASH 42,000

BANK 5,000

SHOP DEPOSIT 10,000

ACCOUNT RECEIVEABLE 7,000

PREPAID RENT 5,000

MERCHANDISE 31,000 = 0 + 100,000

TOTAL 100,000 = 0 + 100,000


Volume – I

YEAR 2015


TABLE OF CONTENTS

< ACCOUNTING CYCLE>

Accounting Cycle…………………………………………………………….72-73

1- Source Documents…………………………………………………74-76

I -Cash Memo………………………………………………………………..77-79

Ii - Invoice………………………………………………………… ………….80-82

Iii - Instruments of Banks……..………………………… ……………83

a) Cheque Book……………………………………………… …………..83-85

b) Deposit Slip………………………………………………………………….86

c) Funds Transfer Form…………….………………… ……………..87-89

4-Vouchers………………………………………………………… ………90

a) Cash Payment voucher………………………… ……………….91

b) Cash Receipt Voucher………………………… ………………..92

c) Bank Payment Voucher……………………… ………………..93

d) Bank Receipt Voucher…..…………………… ……………….94

e) Petty Cash Voucher…..……………………… ………………..95

2- JOURNAL……………..……………………………… ……………..96

Kinds of Journals………………………………… ……………………..97

1-General Journal………………………… ………………………98-100

2-Cash Book……………………………………………………………..101-102

3-Petty Cash Book……………………………………………………….103-105

4-Cash Receipt Journal………………………………………………..106-107

5-Cash Payment Journal………………………………………………108-109

6-Purchase Journal……………………………………………………..110-111

7-Purchase Returns & Allowances Journal………… ……..112-114

8-Sales Journal……………………………………………… ………. 115-116

9-Sales Returns and Allowances Journal………… ……..117-119

Debit & Credit Memorandum………………………… ……..120-123

3-General Ledger……………………………………… …………..124-128

4-Trial Balance (Unadjusted)……………………… ………..129-135

5-Adjustment……………………………………………………………136-137

6-Trial Balance (Adjusted)………………………… ……………138-142

7-Closing Entries…………………………………… ……………..143-144

8-Worksheet……………………………………… ……………….145-148

9-Final Statements……………………………… ……………..149-153

10-Post Closing Trial Balance………………… ……………154-156

ACCOUNTING CYCLE 72

ACCOUNTING CYCLE

Accounting cycle means the collective processing of accounting events of a firm repeated in the same order in each accounting period. The business accounting cycle is for one year in length. The steps begin when a transaction occurs and end with its inclusion in financial statements.

Here are following steps in accounting cycle:-

1-Source Document2-Journal 3-Leger4-Trial Balance unadjusted5-Adjustments6-Trial Balance Adjusted7-Closing Entries8-Worksheet9-Finance Statement10- Post Closing Trial Balance


ACCOUNTING CYCLE 73


ACCOUNTING CYCLE 74

1-Source Document

The source document which describes the transactions and events moves accounting cycle. The Cash Memo, Invoice, Bill, Statement, Bank Instrument or any other paper in black and white enables accountant to support and proof the transaction incurred are source documents. The accounting cycle involves sale, purchase, inventory or any other system adopted by company creating source documents manually or electronically under trading, servicing and manufacturing businesses.

The accounting cycle cannot move without source document.


ACCOUNTING CYCLE 75


ACCOUNTING CYCLE 76

Some source documents with their specimen using in accounting are narrated below:-

1-CASH MEMO2-INVOICE/BILL3-INSTRUMENTS OF BANK

a)Chequeb)Deposit Slipc)Funds Transfer Form

4) VOUCHERS

a) Cash Payment Voucher

b) Petty Cash Voucher

c) Bank Payment Voucher

d) Cash Receipt Voucher

e) Bank Receipt Voucher

f) Journal Voucher


ACCOUNTING CYCLE 77

1-CASH MEMO

Cash Memo is the document of source when sale, purchase or service is made in cash on the spot for business, the seller have to give written instrument like Cash Memo to the person purchased goods or acquired services. The cash memo is made in duplicate or triplicate according to the requirement of business.

Generally the Cash Memo contains:

Name, address and deals in of supplier or rubber stamp, name and address of the purchaser, serial number, date, quantity, description, rates of goods, amount

Goods once sold will not be back. E. &.O.E. means if there is any mistake in cash memo that is subject to correction.

The cash memo must be signed by the duly authorized person.


ACCOUNTING CYCLE 78

In case of trade discount or cash discount, sales tax and anything is shown separately or designed according to nature of business of firm.


ACCOUNTING CYCLE 79

CASH MEMOS.No. Date M/S. Qty. Particulars Rate Amount

Total Goods once sold will not be back. E.&.O.E.

Signature


ACCOUNTING CYCLE 80

2-INVOICE:

Invoice is the commercial document that controls the sale of a product, inventory and taxes. It may be on cash or credit. In case of credit, the amount will be receivable by the purchaser or payable to the seller for a certain period. The Invoice is made in duplicate or triplicate according to the requirement of business manually or electronically.

The Invoice is also known as bill, statement, sales invoice or sales tax invoice.

It may usually contain as per specimen or design according to nature of business of firm.


ACCOUNTING CYCLE 81


ACCOUNTING CYCLE 82

COMPANY LOGO Invoice No.

Date

COMPANY NAME P.Order No.

(Company Slogan)

(Address )

No., Street, City, code

Phone, Fax

e-mail

SALES TAX NO.

To

Name

Company Name

Address

Phone No.

SALES TAX NO.

S.NO. QUANTITY DESCRIPTION RATE AMOUNT

SUB TOTAL

SALES TAX

TOTAL

THANK YOU FOR YOUR BUSINESS


ACCOUNTING CYCLE 83

3- INSTRUMENTS OF BANK

a) Cheque Book

A small book containing 25, 50, and 100 leaves preprinted instruments issued by bank to enable account holder to withdraw or transfer an amount from his account.

The cheque book contains two portion of each leave one the large portion or main portion called cheque which is presented into bank for payment the amount written and another small portion called counter folio remains with the account holder for record of withdrawals.

A cheque is an order, signed by account holder (drawer) to place an order to bank (drawee) to pay a certain sum of money to the person’s name written on the cheque (payee).


ACCOUNTING CYCLE 84


ACCOUNTING CYCLE 85

b) Deposit Slip

The bank deposit slip or pay-in-slip is a small preprinted form used to transfer funds by way of cash or cheque into account to fill the information in the required fields.

The pay-in-slip contains either two portion or in duplicate. The small portion or duplicate copy of the deposit slip is returned by bank to account holder after acknowledge the amount in cash or cheque and affixing the seal and officer’s signature.

Today computerized electronic machines are making the same job.


ACCOUNTING CYCLE 86


ACCOUNTING CYCLE 87

c) FUNDS TRANSFER FORM

The Bank issues preprinted form for making demand draft, pay order, funds transfer to other account of out station and other countries electronically. The account holder has to fill the form and deposit the cash or cheque for the purpose. The bank or financial institution returns the small portion of form to depositor after acknowledging the amount in cash and cheque with seal and signature. The charges for rendering services are deducted by bank.

Internet Banking is also useful for transfer funds from one account to another account throughout country or worldwide.


ACCOUNTING CYCLE 88


ACCOUNTING CYCLE 89

ACCOUNTING CYCLE 90

4) VOUCHERS

A written record of payment and receipt by way of cash and bank is called voucher supported by evidence or events that a transaction has taken place. To record liabilities and adjustment journal voucher is used.


ACCOUNTING CYCLE 91a)-Cash Payment Voucher

CASH PAYMENT VOUCHER

Name of Company Date Voucher No. C.B. Folio

DEBIT A/c

PAID TO

On account of Amount

Rs. Ps.

TOTAL

RUPEES

Prepared by: Checked by: Authorized by: Received By:


ACCOUNTING CYCLE 92b)-Cash Receipt Voucher

CASH RECEIPT VOUCHER


CREDIT A/cReceived from


Rs. Ps.

TOTAL

RUPEES



ACCOUNTING CYCLE 93c)-Bank Payment Voucher

BANK PAYMENT VOUCHER


DEBIT A/c

PAID TO


Rs. Ps.

TOTAL

RUPEES



ACCOUNTING CYCLE 94d) -Bank Receipt Voucher

BANK RECEIPT VOUCHER

Name of Company Date BP.V NO. C.B. Folio

CREDIT A/c

Received from


Rs. Ps.

TOTAL

RUPEES



ACCOUNTING CYCLE 95

e- Petty Cash Voucher

Name of Company

PETTY CASH VOUCHERNo. Paid to Rupees Rs. on account of Prepared by: Checked by: Authorized by: Received By:


ACCOUNTING CYCLE 96

2-Journal

A journal is a book or computer file in which monetary transactions systematically are entered the first time they are processed in chronological sequence to control large number of transactions of a day.

A daily record of events or business is referred to diary as private journal.


ACCOUNTING CYCLE 97

KINDS OF JOURNALS

1-GENERAL JOURNAL2-CASH BOOK3-PETTY CASH BOOK4-CASH RECEIPT JOURNAL5-CASH PAYMENT JOURNAL6-PURCHASE JOURNAL7-PURCHASE RETURN AND ALLOWANCES

JOURNAL8-SALES JOURNAL9-SALES RETURN AND ALLOWANCES

JOURNAL


ACCOUNTING CYCLE 98

1-GENERAL JOURNAL

In accounting, a first step for recording of financial transactions is General Journal where double entry book keeping entries are recorded by debiting one or more account and crediting another one or more accounts with the same total amount under accounting equation.

A general journal entry includes the date of the transaction, the titles of the accounts debited and credited, and an explanation of the transaction also known as narration.

There are some other journals used for special purposes called Special Journals same as General Journal or book of original entry.


ACCOUNTING CYCLE 99


ACCOUNTING CYCLE 100

PAGE NO.

GENERAL JOURNAL

DATE DESCRIPTION REF. DEBIT CREDIT



2-CASH BOOK

The Cash Book is usually maintained all cash receipts and cash major payments including bank deposits and withdrawals.

The cash book is periodically reconciled with the bank statement as an internal auditing.

Large business organizations that have a number of transactions of cash payments and cash receipts use cash receipt and cash payment journals.



3-PETTY CASH BOOK

Petty cash is a small amount of discretionary funds in the form of cash used for payment of expenses. Because of the inconvenience, cost of writing, signing, saving time and energy of cashier, petty cash book is written where cashier issues a cheque or cash from main cash book as petty cash funds to petty cashier. The book keeping entry for this initial fund would be to debit Petty Cash Funds and credit bank account or main cash account automatically.

Petty Cash Book contains five normally columns namely (1) Receipt (2) Date (3) Description (4) Voucher Number (5) Payments link to separate head of account.



4-CASH RECEIPT JOURNAL

The Cash Receipt Journal is used to record cash receipt only designed by the requirements of business and below is commonly used;-



CASH RECEIPT JOURNAL

DATE DESCRIPTIONOTHER ACCOUNTS: Cr. SALES

A/C RECEIVABLE: Cr. SALES CASH RECEIPT

Ref. Amount Cr. Ref. Amount DISCOUNT DR. Dr.



5-CASH PAYMENT JOURNAL

The Cash Payment Journal known as “Multi Columns Cash Payment Journal” is used to record major cash and bank payments in various ways designed according to the requirement of the business.



CASH PAYMENTS JOURNAL

DATE

DESCRIPTION

Voucher

OTHER ACCOUNTS

Purchases Trnas- A/C PAYABLE

Purchase CASH PAYMENTS

No. Ref.

Amount

portation

Ref.

Amount

Discount

Dr. Dr. Dr. Dr. Cr. Cr.



6- PURCHASE JOURNAL

The Purchase Journal is used for recording transactions relating to credit purchases of merchandise and not for cash purchases as cash purchases of merchandise are recorded in Cash Book or Cash Payment Journal.



PURCHSASE JOURNALPage No.

DATE NOVICE NO. NAME OF SUPPLIERPOST

AMOUNTRef.



7-PURCHASE RETURN AND ALLOWANCES JOURNAL

Purchase Return and Allowances Journal is a Book known as Purchase Return outwards book and purchase return

day book, wherein purchaser records all the debit memorandum of parties of Purchase returns to seller for certain reasons. Buyer sends a debit note to the seller contains the quantity of goods returned and reasons for return of goods.

The Purchase return and allowances journal is the summary of parties whom goods has returned and the claim of returns has been adjusted making General Journal Entry by debiting Account Payable and crediting Purchase Return and Allowances under reference.



Page No.

DATE CREDIT MEMO NO. NAME OF SUPPLIERPOST

AMOUNTRef.



8-SALES JOURNAL

The Sales journal is used to record credit sales of merchandise and not for cash sales.



SALES JOURNALPage No.

DATE ACCOUNT DEBITED INVOICE NO.POST

AMOUNTRef.



9-SALES RETURNS AND ALLOWANCES JOURNAL

Sales Return and Allowances Journal is a book, known as Sales Return Inwards Book or Sales Return Day Book, wherein seller records only all the credit memorandum of Parties of sales returns to him by his customers for sold reasons.

The sale return and allowances journal is the summary of parties who returned the goods and the claim of returns has been adjusted making General Journal Entry by debiting Sales Return and Allowances and crediting Account receivable under reference.



SALES RETURNS AND ALLOWANCES JOURNALPage No.

DATE ACCOUNT CREDITEDCREDIT POST

AMOUNTMEMO Ref.



DEBIT AND CREDIT MOMORANDUM

If any defect in commodities found, the purchaser will inform the supplier for deduction of amount payable by debit memorandum. If the supplier accepts the request, he will issue a credit memorandum for deduction of amount receivable.

The debit memorandum reduces the liability to vendor and credit memorandum reduces accounts receivable to vendor.


ISSUED BY PURCHASER

SPECIMEN OF DEBIT MEMORANDUMKARACHI TRADING COMPANY P.O. BOX 990, KARACHI- PAKISTAN Debit Memorandum NO. 001 To: Date: January 10,2015 M/s. Azad Traders S.I.T.E., Karachi We are debiting your account with the value of under mentioned goods returned; Qty. Particulars Amount(Rs.)5 Radio sets @ Rs.100 as per invoice. 500.00 No. 002 dated 12.1.2015 Less

Returned goods being of inferior quality

via Malik Transport Co. E.&O.E. Signature



ISSUED BY SELLER

SPECIMEN OF CREDIT MEMORANDUMAZAD TRADERS S.I.T.E., KARACHI-PAKISTAN To: Credit Memorandum No. 10 Karachi Trading Co., Date: January 15,2015 P.O. BOX 990, KARACHI- PAKISTAN We are crediting your account with the value of under mentioned goods Received from you for the reason stated in your Debit Note. Qty. Particulars Amount(Rs.)

5Radio sets @ Rs.100 as per Debit Note No. 500.00

No. 0012 dated 10.1.2015 Less

Returned (goods being of inferior quality)

E.&O.E. Signature



3-GENERAL LEDGER

General journal shows debit and credit the accounts head but the actual increase or decrease is ascertained in

an individual account and the group of accounts is known as LEDGER or as book of final entry.

There are three types of accounts in ledger;

1-Standard Form2-Skeleton Form “T” Shape.3-Self Balancing Form



GENERAL LEDGERCOMPANY NAME LEDGERAccount of

DEBIT CREDIT Dr. BALANCEDATE PARTICULARS FOLIO Rs. Rs. or Rs. Cr. Standard Form of Ledger Account



GENERAL LEDGER

COMPANY NAME LEDGERAccount of

DATE PARTICULARS FOLIO DEBIT DATE PARTICUALRS FOLIO CREDIT Standard Form of Ledger Account



Cash Acc: No.

Specimen of Skeleton Form or "T" Shape Form



GENERAL LEDGERCOMPANY NAME LEDGERAccount of

DATE PARTICULARSFOLIO DEBIT

PARTICUALRS FOLIO CREDIT

Specimen of self balancing form



4-TRIAL BALANCE (UNADJUSTED)

All the ledger accounts are summarized into a statement at the end of a period such as month, quarter or year known as TRIAL Balance. An unadjusted trial balance is the one which is summarized before any adjustments made in ledger accounts.

The debit and credit result of account balance is taken or kept in its proper place account related to;

Debit Balance Credit Balance

Assets Contra Assets

Expenses Liabilities

Prepaid expenses Capital

Drawing Revenue

The Trial balance is formed in two as to Standard Form and Skeleton Form specified below;


ACCOUNTING

CYCLE 130


ACCOUNTING

CYCLE 131

TRIAL BALNACEAT THE END OF THE YEAR JUNE,30 2014

TITLE OF ACCOUNTAccount DEBIT CREDITNo. Rs. Rs.

Specimen of trial Balance standard form



COMPANY NAMETRIAL BALNACEAT THE END OF THE YEAR JUNE,30 2014

ASSE

TS

CON

TRA

ASSE

T

LIAB

ILIT

IES

PRO

PRIE

TORS

HIP

INCO

ME

EXPE

NSE

S

Specimen of trial Balance Skeleton form



COMPANY NAMETRIAL BALNACEAT THE END OF THE YEAR JUNE, 30 201….

TITLE OF ACCOUNTAccount DEBIT CREDIT No. Rs. Rs.

ASSETS: 1 FIXED/TANGIBLE ASSETS 1.1 Land 11101 Building 11102 Furniture 11103 Office Equipment 11104 Plant & Machinery 11105 CURRENT ASSETS 1.2 CASH 11201 BANK 11202 Accounts Receivable 11203 Merchandise Inventory 11204 Purchases Merchandise 11205 Un-expire insurance 11206 Notes Receivable 11207 INTENGIBLE ASSETS 1.3 Goodwill 11301 Trade Mark 11302 Copy right 11303 CONTRA ASSETS 1.4 Accumulated Depreciation (E.O.) 11401 Accumulated Depreciation (FURN.) 11402 Accumulated Depreciation (P&M) 11403 Purchase Return 11404 Purchase discount 11405 Uncollectable/Bad Debts 11406 LIABILITIES 2 LONG TERM LIABILITIES 20001 Mark up 20002

Loan 20003 PAGE 134 CURRENT LIABILIITES 2.1 Accounts Payable 22101

Salaries Payable 22102 Notes Payable 22103 Income Tax Payable 22104 Sales Tax Payable 22105 PROPRIETORSHIP 3 Capital 30001 Drawings 30002 INCOME 4 Fees earned 40001 Sales 40002 Commission Income 40003 Other Income 40004 CONTRA REVENUE 4.1 Sales Return 41001 Sales Discount 41002 EXPENSES 5 ADMIN/MANUFACTURING EXP 5.1 Utilities expenses 51001 Telephone Expenses 51002 Office Maintenance expenses 51003 Repair & Maintenance Plant & Machinery 51004 Salaries Expenses 51005 Office Supplies 51007 Depreciation Expenses 51009 DIRECT EXPENSES 5.2 Cartage 52001 Wages/Labor 52002 Custom Duty 52003 SELLING EXPNESES 5.3 Advertising Expenses 53001 Promotion 53002 Distribution 53003 PAGE 135 FINANCIAL EXPNESES 5.4 Bank Commission 54001 Bank Charges 54002

5-ADJUSTMENT

In order to present a true and fair view of the financial position, an entry is made in accounts which does not record a transaction but made to rectify errors, missed recording, not recorded properly or wrong amounts were recorded previously or some transactions are recorded only at the end of the year. These transactions or entries are related with the adjustment, reversing, correction of errors.

Below is the most common adjustment;

ACCRUED EXPENSES/UNRECRODED EXPENSES

PREPAID EXPENSES

DEPRESCIATION EXPENSES

BAD DEBITS/UNCOLLECTIBLE

UNUSED SUUPLIES OR MERCHANDISE

ACCRUED INCOME/UNRECORD EXPNESES.

UNEARNED REVENUE




6-TRIAL BALANCE (ADJUSTED)

After adjusting and positing the entries into ledger accounts, re-trial balance is prepared called adjusted trial balance.

Like the unadjusted trial balance, the adjusted trial balance accounts are listed usually in or order as “assets, liabilities, and equity, income and expenses accounts.”

An adjusted trial balance is formatted exactly like an unadjusted trial balance.



COMPANY NAMEADJUSTED TRIAL BALANCEAT THE END OF THE YEAR JUNE,30 2014

TITLE OF ACCOUNTAccount DEBIT CREDIT ADJUSTMENT ADJUSTED T.B.No. Rs. Rs. Debit Credit Debit Credit

ASSETS: 1 FIXED/TANGIBLE ASSETS 1.1 LAND 11101 Building 11102 Furniture 11103 Office Equipment 11104 Plant & Machinery 11105 CURRENT ASSETS 1.2 CASH 11201 BANK 11202 Accounts Receivable 11203 Merchandise Inventory 11204 Purchases Merchandise 11205 Prepaid Rent 11206 Unexpired insurance 11207 Notes Receivable 11208 Prepaid Rent 11209 Prepaid Advertising 11210 Prepaid Insurance 11211 Prepaid fee 11212 INTENGIBLE ASSETS 1.3 Goodwill 11301 Trade Mark 11302 Copy right 11303 CONTRA ASSETS 1.4 Accumulated Depreciation (E.O.) 11401 Accumulated Depreciation (FURN.) 11402 Accumulated Depreciation (P&M) 11403 141 Purchase Return 11404 Purchase discount 11405

Uncollectable/Bad Debts 11406 LIABILITIES 2 LONG TERM LIABILITIES 20001 Mark up 20002 Loan 20003 CURRENT LIABILIITES/SHORT TERM 2.1 Accounts Payable 22101 Salaries Payable 22102 Notes Payable 22103 Income Tax Payable 22104 Sales Tax Payable 22105 Accrued expenses 22106 Salaries Payable 22107 Wages payable 22108 Interest payable on bank loan 22109 Interest payable on Notes Payable 22110 Advertising Expenses payable 22111 Transporting expense payable 22112 Telephone expenses payable 22113 Electricity Power & light payable 22114 Advertising expense payable 22115 PROPRIETORSHIP 3 Capital 30001 Drawings 30002 INCOME 4 Fees earned 40001 Sales 40002 Commission Income 40003 Other Income 40004 Unearned Fees revenue 40005 Unearned Subscription Revenue 40006 Unearned Commission Revenue 40007 Unearned Rent Revenue 40008 Accrued Rent Revenue Receivable 40009 Commission Revenue Receivable 40010 Service Revenue Receivable 40011 142 Accrued expense receivable 40012 CONTRA REVENUE 4.1 Sales Return 41001

Sales Discount 41002 EXPENSES 5 ADMIN/MFG. EXP 5.1 Utilities expenses 51001 Telephone Expenses 51002 Office Maintenance expenses 51003 Repair & Maintenance Plant & Machinery 51004 Salaries Expenses 51005 Office Supplies 51007 Depreciation Expenses 51009 DIRECT EXPENSES 5.2 Cartage 52001 Wages/Labor 52002 Custom Duty 52003 SELLING EXPNESES 5.3 Advertising Expenses 53001 Promotion 53002 Distribution 53003 FINANCIAL EXPNESES 5.4 Bank Commission 54001 Bank Charges 54002



7- CLOSING ENTRIES

Revenue, expense and capital withdrawal (dividend) accounts are temporary accounts need to rest at the end of the accounting period through Income Summary or Expense and revenue summary. Closing entries are the journal entries used to transfer the balances of these temporary accounts to permanent accounts. The closing journal entries may be in the form of a compound journal entry if there are several accounts to close.

The sequence of closing process is as under:

1. Close the revenue accounts to Income Summary2. Close the expense account to Income Summary3. Close Income Summary to Retained Earnings4. Close Dividends to Retained Earnings



EXAMPLES

1. Close the revenue accounts to Income Summary

DATE ACCOUNTS DEBIT CREDIT

mm/dd RevenueXXXX.XX

Income Summary XXXX.XX

2. Close the expense account to Income Summary

DATE ACCOUNTS DEBIT mm/dd Income Summary XXXX.XX Expenses

3. Close Income Summary to Retained Earnings

DATE ACCOUNTS DEBIT CREDITmm/dd Income Summary XXXX.XX Retained Earnings XXXX.XX

4. Close Dividends to Retained Earnings

DATE ACCOUNTS DEBIT CREDITmm/dd Retained Earnings XXXX.XX Dividends XXXX.XX

4. Unrecorded expenses or accrued expenses



DATE ACCOUNTS DEBIT CREDITmm/dd Expense Account XXXX.XX Accrued Expense XXXX.XX

8- WORKSHEET

The worksheet means working paper containing different types of information or accounting data prepared to minimize errors in the permanent record of accounting, simplify work and for testing of ledger accounts, adjusting entries and financial accounts.

The worksheet or working paper specimen below is very useful providing information for;

Financial statement

Owner’s equity

Posting of adjusting entries in the accounting records

Recording of closing entries



COMPANY NAME

ADJUSTED TRIAL BALANCEAT THE END OF THE YEAR JUNE,30 2014

TITLE OF ACCOUNTAccount Dr. Cr. ADJUSTMENT

ADJUSTED T.B.

INCOME STATEMENT

BALANCE SHEET

No. Rs. Rs. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.

ASSETS: 1 FIXED/TANGIBLE ASSETS 1.1 LAND 11101 Building 11102 Furniture 11103 Office Equipment 11104 Plant & Machinery 11105 CURRENT ASSETS 1.2 CASH 11201 BANK 11202 Accounts Receivable 11203 Merchandise Inventory 11204 Purchases Merchandise 11205 Prepaid Rent 11206 Unexpired insurance 11207 Notes Receivable 11208 Prepaid Rent 11209 Prepaid Advertising 11210 Prepaid Insurance 11211 Prepaid fee 11212 INTENGIBLE ASSETS 1.3 Goodwill 11301 Trade Mark 11302 Copy right 11303 CONTRA ASSETS 1.4 Accumulated Depreciation (E.O.) 11401 Accumulated Depreciation (FURN.) 11402 Accumulated Depreciation (P&M) 11403

Purchase Return 11404 147

Purchase discount 11405 Uncollectable/Bad Debts 11406 LIABILITIES 2

LONG TERM LIABILITIES 20001 Mark up 20002 Loan 20003 CURRENT LIABILIITES/SHORT TERM 2.1 Accounts Payable 22101 Salaries Payable 22102 Notes Payable 22103 Income Tax Payable 22104 Sales Tax Payable 22105 Accrued expenses 22106 Salaries Payable 22107 Wages payable 22108 Interest payable on bank loan 22109 Interest payable on Notes Payable 22110 Advertising Expenses payable 22111 Transporting expense payable 22112 Telephone expenses payable 22113 Electricity Power & light payable 22114 Advertising expense payable 22115 PROPRIETORSHIP 3 Capital 30001 Drawings 30002 INCOME 4 Fees earned 40001 Sales 40002 Commission Income 40003 Other Income 40004 Unearned Fees revenue 40005 Unearned Subscription Revenue 40006 Unearned Commission Revenue 40007 Unearned Rent Revenue 40008 Accrued Rent Revenue Receivable 40009 Commission Revenue Receivable 40010 Service Revenue Receivable 40011

Accrued expense receivable 40012 148

CONTRA REVENUE 4.1 Sales Return 41001 Sales Discount 41002

EXPENSES 5 ADMIN/MFG. EXP 5.1 Utilities expenses 51001 Telephone Expenses 51002 Office Maintenance expenses 51003 Repair & Maintenance Plant & Machinery 51004 Salaries Expenses 51005 Office Supplies 51007 Depreciation Expenses 51009 DIRECT EXPENSES 5.2 Cartage 52001 Wages/Labor 52002 Custom Duty 52003 SELLING EXPNESES 5.3 Advertising Expenses 53001 Promotion 53002 Distribution 53003 FINANCIAL EXPNESES 5.4 Bank Commission 54001 Bank Charges 54002



9-FINANCIAL STATEMENTS

At the end of the accounting period, financial statements as income statement and Balance sheets are prepared to close up all the financial activities during the year.

All the expenses and revenue accounts are closed by Income Statement or Expense and Revenue Summary showing Net Income or Net Loss for the period.

All the Assets, Liabilities and Proprietorship accounts are presented in Balance Sheet.



COST OF MERCHANDISE

The rule of cost of merchandise in profit and loss summary is important to find out the net income or loss. The amount of cost of merchandise sold is obtained by the process of the following;



COST OF MERCHANDISE SOLD STATEMENTAT THE END OF THE YEAR 201..

COST OF MERCHANDISE SOLD Merchandise Inventory (Opening) xxxx.xx Purchases xxxx.xx Less: Purchase Returns & Allows. xxx.xx Less: Purchase Discount (+)xxx.xx (-)xxxx.xx NET PURCHASES xxxx.xx Add: Transportation in; Cartage xxx.xx Import Duties xxx.xx Custom Duties xxx.xx Clearing & forwarding Exp. xxx.xx Freight Charges xxx.xx (+)xxx.xx COST OF MERCHANDISE AVAILABLE FOR SALE xxxx.xx LESS: MERCHANDISE INVENTORY (ENDING) (-)xxxx.xx

COST OF MERCHANDISE SOLD xxxx.xx(Transferred to Profit & Loss Account)



INCOME STATEMNET

PROFIT AND LOSS STATEMENTAT THE END OF THE YEAR 201

SALES REVNUE: Sales

Less: Sales Return & Allowances xxxx.xx

Less: Sales discounts xxxx.xx

(-)xxxx.xxNET SALE xxxx.xx LESS : COST OF MERCHANDISE SOLD (-)xxxx.xxGROSS PROFIT OR LOSS (+/-)xxxx.xx LESS EXPENSES

Operating Expenses xxxx.xx

General Expenses xxxx.xx

Financial Expenses xxxx.xx (-)xxxx.xx

NET PROFIT OR LOSS (+/-)xxxx.xx(Transferred to Capital Account)

If net sales exceed the cost of merchandise sold, it means that there is gross income and if it is less to cost of merchandise sold, there is gross loss. And for this, expenses increase or decrease the gain or loss.



BALANCE SHEETS

COMPANY NAME

BALANCE SHEET AS AT 30.06.2015

ASSETS Amount EQUITIES Amount

CURRENT ASSETS CURRENT LIABILITIES

Cash in handxxxx.xx Accounts Payable

xxxx.xx

Cash at Bankxxxx.xx Bank Over draft

xxxx.xx

Accounts Receivablexxxx.xx Salaries Payable

xxxx.xx

Stock xxxx.xx Wages Payable

xxxx.xx

Unexpired Insurancexxxx.xx Utilities Payable

xxxx.xx

Unexpired Rentxxxx.xx

XXXX.XX

XXXX.XX

NON-CURRENT ASSETS LONG TERM LIABILITIES

Land xxxx.xx Mark-up

xxxx.xx

Buildingxxxx.xx Loan

xxxx.xx

Furniture & Fixturesxxxx.xx

XXXX.XX

Office Equipmentxxxx.xx OWNER'S EQUITY

Less: Accumulated Depreciation (F&F) (-)xxxx.xx Capital xxxx.xx Less: Accumulated Depreciation (OE) (-)xxxx.xx Less: Drawing (-)xxxx.xx

TOTAL

XXXX.XX TOTAL

XXXX.XX



10-POST CLOSING TRIAL BALANCE

A post closing trial balance contains only the balance sheet accounts and their amounts i.e. assets, liabilities, owner equities. It is prepared after closing the expenses and revenue accounts.

The preparation of post-closing trial balance is the last step of the accounting cycle and gives the assurance that sum of debits equal the sum of credits before the start of new accounting period. It provides the opening balances for the next ledger accounts of the new accounting period.

This is the end of the accounting cycle and in the next accounting period; the accounting cycle will be repeated again as before.

The following is the example of closing trial balance;



COMPANY NAME

POST CLOSING TRIAL BALANCEAT THE END OF THE YEAR JUNE, 30 201…

TITLE OF ACCOUNT DEBIT CREDIT Rs. Rs.

Cash xxxx.xx Accounts receivable xxxx.xx Stock xxxx.xx Prepaid Insurance xxxx.xx Prepaid Rent xxxx.xx Land xxxx.xx Building xxxx.xx Furniture & Fixtures xxxx.xx Office Equipments xxxx.xx Accounts Payable xxxx.xxBank overdraft xxxx.xxSalaries Payable xxxx.xxWages payable xxxx.xxUtilities Payable xxxx.xxMark up xxxx.xxLoan xxxx.xxCapital xxxx.xx TOTAL XXXX.XX XXXX.XX


ENDING WORDS

ON

ACCOUNTING CYCLE

Accounting covers all the department of life, the life cannot move or survive without food and food comes from money, money comes from doing business, business needs accountancy and accountancy has process like cycle revolves all finances resulting in financial statements showing the true and fair financial position enables businessman to take further decisions on business movement.

The Accounting cycle which starts once has no break either to carry on or wind up the business activities.

I tried a little to describe the subject concisely to follow the concept within no time.

Your comments and support is assurance of writing further.

Author

Volume – I

YEAR 2015


It is my pre-words to accounts making that accounts making in the system of accounting is like to build home, set characters to any story, apply labor to job, to make map of any plan or any work for completion needs hands. I think anything has many hands to make something. Whence the word makes to joint alphabet thence the accounts makes the building of accounting under umbrella of ALPRE and provides cycling power to it afterwards.

Your comments and encourages is better than fruit.

THE SYSTEM OF ACCOUNTING

ACCOUNTS MAKING

TABLE OF CONTENTS

Accounts making note 157-160

1-ASSSETS 160-163

1.1 Fixed Assets 163

1.1.1 Land 163-165

1.1.2 Building 166+168

1.1.3 Plant & Machinery 169-170

1.1.4 Furniture & Fixtures 171-173

1.1.5 Office Equipment 174-175

1.1.6 Other Assets 176-178

1.2 Current Assets 178

1.2.1 Cash in Hand 179-180

1.2.2 Cash at Bank A/c 181-182

1.2.3 Account Receivable A/c 183-185

1.2.4 Purchase Merchandise A/c 186-187

1.2.5 Prepaid Rent A/c 187-188

1.2.6 Prepaid Insurance A/c 189-193

1.2.7 Unexpired Insurance A/c 194-196

1.2.8 Prepaid Insurance A/c 197-198

1.2.9 Security Deposit A/c 199-200

1.2.10 Deferred Assets A/c 201-202

1.3 Intangible Assets 202-204

1.4 Contra Assets 204-205

1.4.1 Accumulated Depreciation A/c 205-206

1.4.2 Purchase Return A/c 207

1.4.3 Purchase Discount A/c 208

1.4.4 Uncollectable Bad Debts 209

2- LIABILITIES 210

2.1 Short Term Liabilities 211

2.1.1 Account Payable A/c 211-212

2.1.2 Salaries Payable A/c 212-213

2.1.3 Accrued Expense A/c 214-215

2.1.4 Sales Tax Payable 216-217

2.1.5 Income Tax Payable 218-220

2.1.6 Notes Payable A/c 220-221

2.1.7 Interest Payable A/c 221-222

2.2 Long Term Liabilities 223-224

3- PROPRIETORSHIP/OWNERS’EQUITY 224

3.1 Capital 224-225

3.2 Drawing 226

4 – REVENUES 227-228

4.1 Sales 229-230

4.2 Commission Income 230-231

4.3 Other Income 231-232

4.4 Unearned Revenue 232-233

4.5 Accrued Revenue Receivable 233-234

4.1 CONTRA REVENUE ACCOUNTS 234

4.1.1 Sales Return 234-235

4.1.2 Sales Discount 236-237

5- EXPENSES 237-238

5.1 Direct Expenses 239

5.2 Indirect Expenses 240

5.3 Operating Expenses 241

5.4 Non-Operating Expenses 242

5.4.1 Administrative Expenses 243

5.4.1.1 Advertising Expense A/c 243-244

5.4.1.2 Insurance Expense A/c 244-245

5.4.1.3 Repair & Maintenance Expense 245-246

5.4.1.4 Salaries & Allowances 246-247

5.4.1.5 Depreciation Expense A/c 248

5.4.1.6 Office Supplies 249-250

5.4.1.7 Other Accounts Admin 250-251

5.4.2 Selling Expenses 252

5.4.2.1 Advertising Expense A/c 252-253

5.4.2.2 Sales Promotion A/c 254-255

5.4.2.3 Sales Distribution A/c 255-257

5.4.2.4 Other Accounts Sales 257-258

5.4.3 General Expenses 259

5.4.3.1 Rent Expense A/c 259-260

5.4.3.2 Utility Expense A/c 260-261

5.5 Finance Expenses 262-263

ACCOUNTS MAKING 157

ACCOUNTS MAKING

In the System of Accounting there are five principle of recording transactions wherein Assets, Liabilities, Equities, Revenues and Expenses increasing or decreasing under rules of debit and credit as Assets and Expenses increases debit and decreases credit and Liabilities, Equities and Revenues increases credit and decreases debit. Assets, Liabilities and Equities are the permanent member of double entry accounting Equation “Assets=Liabilities + Equities” revolving accounting cycle round the years and Expense and Revenue related accounts are the temporary members of accounting equation perform to calculate Profit and Loss Account, the profit and loss relate to owners’ equity and the owners’ equity is the part of accounting equation. The Expenses and Revenues and related accounts are for making profit & loss account do not move accounting cycle or transfer their balances to next accounting year. The expense and revenue accounts are related with single entry, the old accounting system used or using in small businesses where to earn and expense daily or to avoid record accounting applied procedures.


ACCOUNTS MAKING 158

The Accounts making in the system of accounting is too essential to reach the goal of accounting equation or to close up them for accounting cycle. The thousands of account are made under matching of five accounting principles; the accounting principle plays the rules of head and controls huge accounts created under them.

On creating accounts Land, Building, Furniture, Plant, Machinery, Equipment, we find out that they relate to Principle head “Asset” means the value to business or things which we have in our possession, if we make accounts of account payable, loan, advance, mark up etc. indicate the debt and debt comes under Principle account “Liabilities”, and so on, on making capital, profit & loss account etc we reach on the decision that these accounts relate to Owners’ Equity, the principle account head.


ACCOUNTS MAKING 159

On making accounts sales, revenues, other incomes etc., we find out they indicate income from business operation and come under accounting principle head “Revenues” and like this, if we make account, salaries expenses, cartage, conveyance, wages expense, advertising expense, insurance

Expense so on, we ascertain that they relate to expenses of five principle head of account. Expenses reduce income that earned from doing business.

In the system of accounting there are three businesses are described which are trading, manufacturing and servicing have same concept of accounting system and requires the five principle of accounting head but sub accounts relating to five principal of accounting head mostly are common and not common can be made according to the nature of business, business activities, events and needs, and for the manufacturing business, manufacturing process involves machineries, equipments, finished goods, advertising, promotion etc. accounts, for trading and servicing businesses common accounts and some uncommon accounts are made.


ACCOUNTS MAKING 160

In order to have knowledge and definition of accounts, I am discussing individually on accounts most commonly used in the system of accounting.

The System of Accounting has five principal head which are Assets, Liabilities, Proprietorship, Revenue and Expenses wherein Assets, Liabilities and Proprietorship are permanent accounts rounding accounting cycle and Revenue and Expenses are temporary accounts end on Income & loss account or provide the source of income or loss to capital account.

Here we discuss thoroughly each principal head, its sub accounts and related with accounts mostly used in accounts making;-

1-ASSETS

Assets are the resources of the business and equities are sources, sources provide finances to resources for conversion capital into assets enable business to start functioning. Assets are the main head which generate sub heads and sub heads


ACCOUNTS MAKING 161

further generate related accounts according to the nature of the business.

Many terms of assets are used in accounting such as fixed assets, tangible assets, non-current assets, immoveable assets, long term resources having live more than one year, and these are recorded at book value or on purchase price decreasing depreciation and placed sub head of ASSETS in financial statement .Other assets are current assets, liquid assets, value assets, moveable assets, intangible assets and short term assets having life under one year.

Some assets are contra assets which reduces the value of assets.


ACCOUNTS MAKING 162

Much Kind of assets according to the nature of business are in accounts or can give name or make account to any asset purchased or acquired for business.


ACCOUNTS MAKING 163

Here are the details and description some of assets relating to fixed assets, tangible assets, non-current assets, immoveable assets, long term assets.

1-FIXED ASSETS

1- Land2- Building3- Plant & Machinery4- Furniture & Fixtures5- Office Equipment6- Other Assets

1.1.1 LAND A/c

Land is required mostly in manufacturing concerns producing raw material or convert raw material into finished goods for home country and out countries and having huge production, labor, materials and process.


ACCOUNTS MAKING 164

The land is fixed, non- current, tangible, long term resources or immovable asset of the business and the permanent member of accounting cycle and shown in balance sheet as land. There is no depreciation is charged on land and the value of land is recorded as book value or purchase value instead of market value.

Banks offer loan on mark up or on demand finance against mortgage of land to assess market value of the land.

The account of land is made under head Fixed Assets and according to accounting rules as asset increases debit decreases credit it will be debited and other account which is cash or bank also an asset is credited. There is no affect on accounting equation is made as cash converted into asset “Land,” and this action is called asset for asset entry or conversion entry.

Entry;

Land

Cash/Bank

(Purchase land by cash/bank)


ACCOUNTS MAKING 165


ACCOUNTS MAKING 166

1.1.2 BUILDING A/c

After purchasing of land, the building is needed to be constructed and designed according to the nature or work of business keeping in view all the aspects of health and safety of workmen.

The expense on construction of building is capital expenditure, and capital expenditure is converted into asset as Building Account. Money spending any kind on all repairs and maintenance on building is charged as expenses under head Repair & Maintenance Building.

The building is fixed, non- current, tangible asset, long term resources or immoveable asset of the business and the permanent member of accounting cycle and shown in balance sheet as Building. The value of building is recorded as book value or construction value instead of market value, and depreciation is charged on building.


ACCOUNTS MAKING 167

Therefore, the account of building is made under head Assets and sub head Fixed Assets and according to accounting rules asset increases debit decreases credit it will be debited and other account which is cash or bank also an asset is credited. There is no affect on accounting equation as cash converted into asset (Building) and this action is called asset for asset entry or conversion entry.

Entry;

Building Debit

Cash/Bank Credit

(Purchase building by cash/bank)


ACCOUNTS MAKING 168


ACCOUNTS MAKING 169

1.1.3 PLANT AND MACHINERY A/c

There will be needed to have plant and machinery to run any manufacturing concern according to the nature and work of business after acquiring of land and building.

The Plant and Machinery is fixed, non- current, tangible asset, immoveable or long term resources of the business and the permanent member of accounting cycle and shown in balance sheet as Plant & Machinery. The value of plant and machinery is recorded as book value or purchase value, and depreciation is charged on plant and machinery.

Money spending any kind on all repairs and maintenance on plant and machinery is recorded as expenses under head Repair & Maintenance (Plant & Machinery).

The account of plant and machinery is made under head Fixed Assets, the sub head of Assets and according to accounting rules asset increases debit decreases credit it will be debited and other account which is cash or bank also an asset is credited. There is no affect on accounting equation is made as cash converted into asset “Plant & Machinery and this action is called asset for asset entry or conversion entry.


ACCOUNTS MAKING 170

Entry;

Plant & Machinery Debit

Cash/Bank Credit

(Purchase plant & machinery by cash/bank)


ACCOUNTS MAKING 171

1.1.4 FURNITURE & FIXTURES A/c

Furniture and fixtures according to the nature and work of business is also required in any concern after acquiring land, building and plant and machinery.

The Furniture and fixtures is fixed, non- current, tangible asset, immoveable or long term resources of the business and the permanent member of accounting cycle and shown in balance sheet as Furniture and Fixtures. The value of furniture and fixtures is recorded as book value or purchase value, and depreciation is charged over it.

Money spending any kind on all repairs and maintenance on Furniture and fixtures is recorded as expenses under head Repair & Maintenance (furniture and fixtures) or Repair & Maintenance (F&F).

The account of Furniture and Fixtures is made under head Fixed Assets, the sub head of Assets and according to

accounting rules asset increases debit decreases credit it will be debited and other account which is cash or bank also an


ACCOUNTS MAKING 172

asset is credited. There is no affect on accounting equation is made as cash converted into asset “Furniture & Fixtures,” and this action is called asset for asset entry or conversion entry.

Entry;

Furniture & Fixtures Debit

Cash/Bank Credit

(Purchase furniture & fixtures by cash/bank)


ACCOUNTS MAKING 173


ACCOUNTS MAKING 174

1.1.5 OFFICE EQUIPMENT

Office Equipments like typewriters, computers, printers, fax machines, etc. are also required to control and run any concern according to the nature and work of business.

The Office Equipment is fixed, non- current, tangible asset, immoveable or long term resources of the business and the permanent member of accounting cycle and shown in balance sheet as Office Equipment. The value of Office Equipment is recorded as per book value or purchase value, and depreciation is charged over it.

Money spending any kind on all repairs and maintenance on office equipment is recorded as expenses under head Repair & Maintenance (Office Equipment).

The account of Office Equipment is made under head Fixed Assets, the sub head of Assets and according to accounting rules asset increases debit decreases credit it will be debited and other account which is cash or bank also an asset is credited. There is no affect on accounting equation is made as cash converted into asset (office equipment) and this action is called asset for asset entry or conversion entry.


ACCOUNTS MAKING 175

Entry;

Office Equipment Debit

Cash/Bank Credit

(Purchase office Equipment by cash/bank)


ACCOUNTS MAKING 176

1.1.6 OTHER ASSETS

Other assets are a group of accounts of minor value adding during business operation to avoid lengthiness in the system of accounting. Like land, building, plant & machinery, Furniture and fixtures and office equipment there may be other assets like Air Conditioning unit, generator, power factor, tools, vehicles etc.

The Other Assets is fixed, non- current, tangible asset, immoveable or long term resources of the business and the permanent member of accounting cycle and shown in balance sheet as Other Assets. The value of Other Assets is recorded as book value or purchase value, and depreciation is charged over it.

Money spending any kind on all repairs and maintenance on other assets is recorded as expenses under head Repair & Maintenance (Other Assets head wise).

The account of Other Assets is made under head Fixed Assets, the sub head of Assets and according to accounting rules asset increases debit decreases credit it will be debited and other account which is cash or bank also an asset is credited.


ACCOUNTS MAKING 177

There is no affect on accounting equation is made as cash converted into asset (Other Assets) and this action is called asset for asset entry or conversion entry.

Entry;

Other Assets Debit

Cash/Bank Credit

(Purchase generator by cash/bank)


ACCOUNTS MAKING 178

Like fixed assets many Kind of assets according to the nature of business are therein or can give name or make account to any asset.

Here are the details and description some of assets relating to current assets, liquid assets, moveable assets, value assets, intangible assets, short term assets;

1.2 Current Assets

1- Cash in hand2- Cash at Bank3- Accounts Receivable4- Merchandise Inventory 5- Purchases Merchandise6- Prepaid Rent7- Prepaid Insurance8- Unexpired Rent

9-Unexpired Insurance

10-Prepaid Advertising

11-Security Deposit

12-Deferred Assets


ACCOUNTS MAKING 179

1.2.1 CASH IN HAND A/c

Cash is used for payments relating to purchases, expenses, debts and all financial matters which are expedited during business operation. The source of cash is transferred by capital, conversion of assets, sale, any kind of revenue and all other sources where cash comes during business operation.

Cash in hand means cash balance in cash book and petty cash book or the cash remained unused during business operation at the end of accounting period and shown in balance sheet as Cash-in-hand.Cash in hand is current asset, liquid asset, moveable asset or value asset of any entity.

The account of cash is made under head Current Asset, the sub head of asset and cash comes from capital assume. It will be transfer entry of cash from the sources of the business and shown debit balance in cash book. The account cash debit and credit from cash book.


ACCOUNTS MAKING 180

Entry;

Cash Debit

Capital Credit

(Cash by investment)


ACCOUNTS MAKING 181

1.2.2 CASH AT BANK A/c

All cash comes from the sources of business during business operation is kept in bank account for all payments to save risk and according to the instruction of government issued from time to time for controlling taxes by bank. All records of cash drawn and paid are furnished by bank which is reconciled with cash book by account holder.

The balance unused in bank at the end of the accounting period is cash at bank shown in balance sheet.

Cash at bank is current asset, liquid asset, moveable asset or value asset of any entity.

The account of Cash at bank is made under head Current Asset, the sub head of Assets and shown in debit balance in cash book as;


ACCOUNTS MAKING 182

Entry;

Bank Debit

Cash Credit

(Cash deposited into bank)


ACCOUNTS MAKING 183

1.2.3 ACCOUNTS RECEIVABLE A/c

The money recoverable from customer whom goods or services sold on credit is called account receivable.

Account receivable is a current asset, liquid asset or value assets, the sub head of Assets shown in balance sheet as Accounts receivable under note, the detail of parties.

On account of sale on credit, an account “Account R/A “with party’s name individually created in the ledger to record increase or decrease the amount due on customer. As per accounting rule debt is debited to account receivable and credited by cash, cash is also an asset, therefore, cash move to other hand and this action is called asset for asset or moving entry. When cash is the amount of debt is received, it will be reversed.

Entry;

Account R/A. Debit

Cash Credit

On recovery of cash, the entry will be;

Cash Debit

Account R/A. Credit


ACCOUNTS MAKING 184

1.2.4 MERCHANDISE INVENTORY A/c

Merchandise inventory means the merchandise remain unsold at the end of accounting period.

Merchandise Inventory is current asset and shown in balance sheet as Stock or Merchandise Inventory.

The merchandise inventory ending is reduced by cost of


ACCOUNTS MAKING 185

merchandise sold statement as unsold goods already recorded

in purchases and opening inventory therefore, the entry will be;

Merchandise Inventory Debit

Income Summary Credit


ACCOUNTS MAKING 186

1.2.5 PURCHASES MERCHANDISE A/c

Merchandise means to things or commodities bought and sold. Purchases are made on cash basis where payment made immediately is cash purchases and on account where payment made after purchases on certain understanding called credit purchases.

Unused merchandise into Purchases is current asset shown in balance sheet as stock or Merchandise Inventory and permanent member of accounting cycle but used merchandise relates to income summary and temporary asset.

On purchasing of commodities, the Local purchase account or import purchase A/c is debited and cash a/c or party’s account in case of credit purchase is credited. It is asset for asset or conversion entry.

Entry’

Local Purchases Debit

Cash/bank Credit

Import Purchases Debit

Bank Credit


ACCOUNTS MAKING 187

1.2.6 PREPAID RENT A/c

On starting business, there will be need to have a place, shop, go-down, building etc. which is acquired by applying capital or on rent and rent is paid in advance and advance remains unutilized is owned and ownership claims to be an asset.


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Therefore prepaid rent is a current asset and debited as Prepaid rent or unexpired rent and unexpired rent is claimable or utilizable in the next accounting cycle.

Entry;

Prepaid Rent Debit

Cash Credit

(Cash paid for rent in advance)


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1.2.7 PREPAID INSURNACE A/c

Prepaid Insurance is an account which shows the amount paid for business insurance in advance at the time of taking business policy from Insurance Company for any asset’s value covering all losses covered under policy. It is an asset before expiry, affects accounting equation, and debited under rules of double entry and on completion the period covered prepaid insurance credited and Insurance Expenses debited. Like unexpired insurance, if the some portion of it remains to consume will also be an asset.

Entry;

Prepaid Insurance Debit

Cash Credit

(Insurance paid in advance)


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1.2.8 UNEXPIRED RENT A/c

Unexpired rent is meant that some part of rent which was paid in advance saved to consume and value to business owned and claimable or recycle able for the next accounting period. The rent when was paid in advance then debited as Prepaid Rent and on the end of accounting period credited the consumed rent by crediting Prepaid Rent. The balance of unexpired rent is charged as asset of the company.


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Therefore, unexpired rent is the amount which is the asset of the company is consumable or claimable in next accounting cycle.

Example

Prepaid Rent 10,000/=

Cash 10,000/=

(Rent paid in advance)

Rent Expenses 8,000/=

Prepaid Rent 8,000/=

(Rent consumed during the year)

Balance of Prepaid Rent Rs.2, 000/= is unexpired rent.


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ACCOUNTS MAKING 194

1.2.9 UNEXPIRED INSURNCE A/c

The some part of business insurance which saved to consume is unexpired insurance and by definition unexpired insurance is an asset. It is an example that a businessman takes policy worth Rs.100000/= from Insurance Company for one year on 1st September and it was debited with prepaid insurance. On ending of the year at 30th June, consumed part of the insurance which becomes 75000/= for nine months is debited by Insurance expense and credited by Prepaid Insurance. The balance of Prepaid Insurance Rs.25000/= is consumable or claimable from Insurance Company for the next accounting period.

In other words unexpired insurance is the amount that is the asset of the company and balanced into prepaid insurance means already paid insurance in advance consumable or claimable from Insurance Company for the next accounting period.


ACCOUNTS MAKING 195

Example

Prepaid Insurance 10,000/=

Cash 10,000/=

(Insurance paid in advance)

Insurance Expenses 8,000/=

Prepaid Insurance 8,000/=

(Insurance consumed during the year)

Balance of Prepaid Insurance Rs.2, 000/= is unexpired insurance.


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1.2.10 PREPAID ADVERTISING A/c

The prepaid advertising is current asset/liquid asset/value asset and debited as Prepaid Advertising or unexpired Advertising and unexpired Advertising is claimable or utilizable in the next accounting cycle.

The account Prepaid Advertising comes under Assets, sub head Current Asset/Liquid Asset/Value Asset and according to accounting rules asset increases debit decreases credit then it will be debited and other account which is cash or bank also an asset is credited. There is no affect on accounting equation is made as cash converted into value asset “Pre-Paid advertising” and this action is called asset for asset or conversion entry to value asset.


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Entry;

Prepaid Advertising Debit

Cash Credit

(Cash paid for advertising in advance)


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1.2.11 SECURITY DEPOSIT A/c

Security deposit is the amount that company has to give on import stage or to acquire fixed assets from parties that take some amount from buyer to have with him for assurance of their assets in other custody.

On taking shop, go down, office or any premises for business on rent, one should have to deposit some amount with the owner that is refundable.

Security deposit is short term asset or current asset in case of returning within one year of the balance sheet date and after one year, it will be long term asset or non-current asset.

The account security deposit comes under Assets, sub head Current Asset or non-current asset conditionally and as per accounting rule it is debited to Security Deposit and credited by cash or bank, cash is also an asset, therefore, cash move to other hand and this action is called asset for asset or moving entry.


ACCOUNTS MAKING 200

Entry;

Security Deposit Debit

Cash/Bank Credit


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1.2.12 DEFERRED ASSETS A/c

Unconsumed prepaid expenses, which could not be expired during accounting period such as insurance, rent, interest, advertising etc., are carried forward as an asset for future benefit is called deferred assets.

Deferred Assets are long term current assets transferred by prepaid expenses shown in balance sheet.

Entry;

Deferred Assets Debit

Prepaid Expenses Credit


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1.3 Intangible Assets

1- Goodwill2- Trade Mark3- Copy Right4- Brands5- Logos


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Intangible assets such as goodwill, logos, trade mark, brands, copy write etc. are long term current assets and have no physical existence but relate to the value of reputation of business generated gradually by first day of its having. It may be purchased to increase the value of business and sold to take benefit of having it.

Entry;

For purchase of intangible asset

Intangible Asset Debit

Cash Credit

For sale of intangible asset

Cash Debit

Intangible Asset Credit


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Intangible assets of having limited life can be amortize under formula annual amortization expense=cost/useful life debiting Amortization Expense and crediting Accumulated Amortization and of an indefinite life, there is not amortization but is test of impairment and written down to its recoverable amount under formula impairment loss = carrying value-recoverable amount debiting Loss on Impairment and crediting Accumulated Impairment Loss.

1.4 Contra Assets

1. Accumulated Depreciation(O.E.)2. Accumulated Depreciation (P&M)3. Accumulated Depreciation (F)4. Purchase Return5. Purchase Discount6. Allowance for Uncollectable Bad Debts

CONTRA ACCOUNTS

Contra accounts reduce the value of a related account and to correct previous mistakes.


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1.4.1 ACCUMULATED DEPRESCIATION A/c

Contra assets accounts are reduced by accumulated depreciation, a collection of depreciation, on fixed assets like building, plant and machinery, furniture and fixtures, office equipment and other fixed assets. Contra assets relating to depreciation credited by accumulated depreciation, a new account is generated instead of asset account and shown in balance sheet reducing the amount of fixed assets accounts.


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Adjusting Entry;

Depreciation Expenses Asset Debit

Accumulated Depreciation - Asset Credit

Closing Entry;

Expense and Revenue Summary asset Debit

Depreciation Expenses Asset Credit


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1.4.2 PURCHASE RETURN A/c

Purchase return which relates to purchase account, a temporary asset account, reduces the value of cost of goods sold in cost of goods sold statement or in income statement.

Entry;

Account Payable Debit

Purchase Return & Allows Credit


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1.4.3 PURCHASE DISCOUNT A/c

Purchase discount which relates to purchase account, a temporary asset account, reduce the value of cost of goods sold in cost of goods sold statement or in income statement.

Account payable Debit

Purchase Discount Credit


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1.4.4 UNCOLLECTABLE BAD DEBTS

The new account “Allowance for uncollectable bad debt” is created against accounts receivable accounts. Allowance for uncollectable bad debit consists on estimated value by percentage of receivables from suppliers.

Uncollectable/Bad Debits Expenses Debit

Allowance for uncollectible/Bad debts Credit


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2-LIABILITIES

Liabilities mean the claim of suppliers on account of purchases or the debts taken or have to pay on various causes during business operation.

Liabilities are the second main principle of accounting consists on short term and long term liabilities and shown in balance sheet.


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2.1 SHORT TERM LIABILITIES

1. Accounts Payable

2. Salaries & Wages Payable

3. Accrued Expenses

4. Sales Tax Payable

5. Income Tax Payable

6. Notes payable

7. Interest payable on banks’ loan

2.1.1 Accounts Payable

Short term liabilities is meant by debts payable shorter than one year such as accounts payable, shown in balance sheet under the heading current liabilities covering note, the detail of parties to whom the debt is payable. Short term liabilities are credited as A/c payable with party name from whom the goods purchased and purchases are debited under rules.


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Merchandise/Assets = DebitA/c P/A ABC & Co. /Liabilities = Credit

2.1.2 Salaries Payable A/c

At the end of the year, the balance of salaries, the salaries to staff permanently working in an organization, and wages, the wages to workmen working on daily basis, remain to pay because of the reason that the some companies pay salaries and wages to their staff after last day of the month. The remaining part of the salaries & wages, already charged in expenses, comes under head Salaries & Wages payable, showing the salaries & wages are remaining to pay.


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Salaries are wages payable come under short term liabilities journalized as;

Salaries & Wages Expenses Debit

Salaries & Wages Payable Credit


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2.1.3 ACCRUED EXPENSES

Accrued Expenses, the amount of expenses relating to current accounting year, are the liabilities of short term and payable under head Accrued Expenses in the next accounting period.

The account of Accrued Expenses is temporary account from which all expenses relating to previous accounting year are paid and charged in balance sheet under Current Liabilities. The accrued expenses on one side make profit & loss actual and on other side wipes out the matter of expenses relating to previous accounting year.

The Expenses relating to previous year are debited in new accounting year under head Accrued Expenses and credited in previous accounting year in lump sum as Accrued Expenses.


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Ledger Entry in current year

Accrued Expenses Debit

Cash/Bank Credit

Ledger Entry in previous year

Expenses (Head wise) Debit

Accrued Expenses Credit


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2.1.4 SALES TAX PAYABLE

Sales tax payable, the amount of sales tax balance of sales and purchases in ledger account at the end of the accounting year, comes under liabilities shown in balance sheet.

Sales tax on supplies or services is charged by Estate on prescribed rate which is deducted by Sales Tax Invoice and journalized as;

Goods or Services a/c Debit

Sales Tax payable a/c Credit

Sales tax payable a/c credit Credit

Sales tax allows the adjustment of purchases and other related expenses as;

Sales Tax Payable A/c Debit

Purchases/related expenses A/c Credit


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The balance of ledger in sales tax payable account is meant to pay the tax into bank as;

Sales Tax Payable A/c Debit

Cash/Bank A/c Credit


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2.1.5 INCOME TAX PAYABLE A/c

Income tax payable, the amount of Income tax balance in ledger account at the end of the accounting year, comes under liabilities shown in balance sheet.

Income tax on supplies and services is charged by Estate on prescribed rate which is deducted by withholding agent; withholding agent is that who makes payment to suppliers and service providers. The tax, which is deducted by withholding agent, is credited to withholding agent under credit note by suppliers or service provider.

In case of salaried persons, the Income tax on payment of salaries to employees is deducted and deposited by company and received the amount of income tax from employees.

The income tax deducted by withholding agent on sales is claimable or adjustable by government.


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The following accounts are generated in connection with income tax;

As withholding agent

Party’s account A/c Debit

Income tax payable A/c Credit

As other than withholding agent

Income Tax payable A/c Debit

Party’s Accounts A/c Credit

As an Employer

Salaries Expenses A/c Debit

Income Tax payable A/c Credit

As a Depositor

Income Tax Payable Debit

Cash/Bank Credit


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2.1.6 NOTES PAYABLE A/c

A promissory note is an instrument of formal written promise by one person or maker, who makes note and promises to pay, to another person or payee, the person whom the amount is payable, for payment of liabilities. For example, if company or person received cash against promissory note from person or financial institution on promise to repay a note recorded as;


ACCOUNTS MAKING 221

Cash/Bank Debit

Notes payable Credit

2.1.7 Interest on Notes Payable

In case of interest on notes, mentioned in promissory note with the specific rate of interest and terms therein, the borrower will accrue the transaction debiting Interest Expenses and crediting Interest payable and on payment of interest debiting interest payable and crediting cash as;


ACCOUNTS MAKING 222

Accrual of Interest on notes payable

Interest Expenses

Interest payable

Payment of Interest on Notes payable

Interest payable

Cash


ACCOUNTS MAKING 223

2.2 LONG TERM LIABILITIES

1. Loans

2. Debentures

3. Mortgage

4. Bank Loans

2.2.1234 Long Term Liabilities

Long term liabilities is meant by debts payable longer than one year such as loans, debentures, mortgage, bank loans etc. as shown in balance sheet under main head liabilities.

In order to operate business or to solve funds problems, organizations take loans from some sources such as persons, banks, financial institution or on leasing on fixed assets. The assets against loans, debentures, mortgages, banks loans are debited and persons/organization/financial institution are credited in the book of company having liabilities.

Assets/Cash/Bank Debit

A/c Payable (Financial Institution) Credit


ACCOUNTS MAKING 224

3 - PROPRIETORSHIP/OWNERS’ EQUITY

1. CAPITAL

2. DRAWING

3.1 CAPITAL A/c

Capital, a permanent member of accounting cycle, in shape of cash or goods invested in business is a part of owner’s equity means owner’s interest on values of assets or the recourses of business.


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Capital account is generated in connection with investment in business as to credit capital account and debit asset account;

Cash Invested in business

Cash Debit

Capital Credit


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3.2 DRAWING A/c

Drawing is a contra equity account which reduces the capital of owner because of the owner withdraws cash or goods for his personal use as;

Cash drawn for personal use

Drawing Debit

Cash Credit


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4 – REVENUE/INCOME

Revenue is the fourth main principle head of the system of accounting and many accounts relating to income linked with like income from sales, commission income, other incomes etc.

Under rules of debit and credit revenue increases credit decreases debit then on selling, cash or account receivable/asset increases and merchandise/asset sold decreases. it is asset for asset entry but the profit or commodity purchased for doing business is involved in selling this asset therefore, it belongs to revenue, ascertain in profit and loss account, profit and loss transferred to equity and equity is the source. It is concluded that the profit is the source generated by sales and sales contra to commodities.

Revenue is the part of income summary and temporary member of accounting cycle. It ends on profit and loss account which transferred to Balance sheet under owners’ equity or capital account.


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4.1 SALES

4.2 COMMISSION INCOME

4.3 OTHER INCOMES

4.4 UNEARNED REVENUE

4.5 ACCRUED REVENUE RECEIVABLE


ACCOUNTS MAKING 229

4.1 SALES A/c

The merchandise or commodities that was purchased or manufactured for doing business or to make profit by selling them to customer is sale. In sale, the process involves that manufacturer manufactures goods, sells to distributor; distributor to whole seller and whole seller to retailer and retailer to end user.

Sales come under the fourth main head “Revenue”, the temporary member of accounting cycle, ends on profit and loss account. Under rules, it is credited either on cash or on credit and debited cash and on account receivable in case of sale on account like;

Sale on cash

Cash Debit

Sales Credit

Sales on account

A/c Receivable (ABC Co.) Debit

Sales Credit


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4.2 COMMISSION INCOME A/c

Commission income relates to the business of services wherein no merchandise or commodity is involved but consultancy or making help in executing commercial transactions like commission on sale, commission on property selling etc.

Commission income comes under main head revenue crediting commission income debiting cash/bank.

Cash/Bank Debit

Commission income Credit


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4.3 OTHER INCOMES

Other incomes is the summary of incomes from other sources besides business specific incomes but relates to business like scrap sale, shop sale, income from bank interest, etc.

Other income generates sub accounts according to the nature of incomes and recorded as;

Cash/Bank Debit

Other Income Credit


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4.4 UNEARNED REVENUE

Unearned revenues mean company receives the money in advance for services or sale of goods that not performed or delivered or pre-receipt for undelivered goods or unperformed services. In other words, the unearned revenue is the liability until it earns so recorded as;

Cash/Bank

Unearned revenues

On delivery of goods or performing services, unearned revenue will be debited and credit sales/service as;

Unearned revenues

Sales


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4.5 ACCRUED REVENUE RECEIVABLE

Accrued revenue means to build up revenues that have been earned and sales performed but not received or recorded at the end of accounting period which could be recognized by adjusting entry.

Accrued revenue is treated as an asset instead of liability.

Accrued Account receivable Debit

Income account Credit


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4.1 CONTRA REVENUE ACCOUNT

4.1.1 SALES RETURN

4.1.2 SALES DISCOUNT

4.1.1 SALES RETURN

Sales return account, a contra revenue account, is made if the goods sold returned causing defects, expiry, damage and any reason. It reduces income but balance to inventory or stock. In case of sale on credit, the amount of credit is given to purchaser on receipt of his complain or debit note recording


ACCOUNTS MAKING 235

journal entry for adjustment of claim as to debit sales return and allowances and credit account receivable.

One side, sales return and allowances reduce the account of account receivable or liability of purchaser and on other side sales in income statement as;

Sales Return & Allowances Debit

Account Receivable Credit.


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4.1.2 SALES DISCOUNT

Sales discount account, a contra revenue account, is made if reduction in the price of a product or service offered by seller in place of early payment or to increase sales. It reduces income but not affect on inventory or stock. The amount of credit is given to purchaser at the time of purchasing on cash sale or/on credit in later adjustment by crediting purchaser’s account as;

Sales Discount Debit

Account Receivable Credit.

Sales return reduces the account of account receivable or liability of purchaser and sales in income statement.


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5 - EXPENSES

Expenses are the fifth part of main principle head of the system of accounting and numerous accounts linked with it like direct expenses, freight charges, insurance of goods in transit, carriage, wages, custom duty, import duty, octroi, other taxes etc. and all indirect expenses, operating and non-operating, other than direct expenses like rent of building, salaries to employees, legal charges, insurance expense, depreciation expense, printing expense, office stationery expense, financial charges etc., revolving in selling expenses, administrative expenses, financial expenses, general expenses etc.


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Expenses are the member of temporary accounts ending on profit and loss account. The net profit and loss is ascertained by reducing them to income and loss account.


ACCOUNTS MAKING 239

5.1 DIRECT EXPENSES

Direct expenses involve in purchases from purchase point to business place like cartage, freight, goods insurance in transit, carriage inward, wages, custom duty, import duty, octroi, taxes and all other expenses included in goods or in process of making goods directly.

Direct expenses affect on the cost of goods sold by adding them in merchandise purchased. In other words they increase the value of actual purchases or to the cost of goods sold.


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5.2 INDRECT EXPENSES

Indirect expenses relate to operating and non-operating expenses containing manufacturing expenses, selling expenses, administrative expenses, financial expenses, general expenses etc. which generate numerous accounts like rent of building, salaries to employees, legal charges, insurance expense, depreciation expense, printing expense, office stationery expense etc.

The net profit and loss is ascertained by reducing indirect expenses to income and loss account.


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5.3 OPERATING EXPENESES

All expenditures involve in business operation but not directly associated with the cost of goods usually sub divided administrative expenses, sales expenses and general expenses like salaries expenses, repair & maintenance expenses, advertising expenses, insurance expenses, rent expenses, utility expenses.

The net profit or loss is ascertained by reducing them to revenues in income statement.


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5.4 NON OPERATING EXPENSES

Some expenditure in business are incurred for reasons and not involve normal business operations are non operating expenses like interest charges or other costs of borrowing and expenses relating to employee benefits, such as pension contributions, non recurring items such as accounting adjustments, obsolete of equipment or currency exchange etc.


ACCOUNTS MAKING 243

5.4.1 ADMINSTRATIVE EXPENSES

Advertising Expenses

Insurance Expenses

Repair & Maintenance

Salaries &Allowances

Depreciation Expenses

Office Supplies

5.4.1.1 ADVERTISING EXPENSES

Advertising may be administrative expense, in case of giving advertising for hiring staff, property transfer, sale, legal rights etc.

On payment of advertising cost, it must be debited with Advertising expenses and cash/account payable credit in cash of credit advertising.

Advertising Expense debit

Cash/account payable credit


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5.4.1.2 INSURANCE EXPENSE

Insurance expense means the amount of insurance is paid on policies for any business value in anticipation of recovering losses from any kind of fire, theft, hazardous etc. in the business. There will be no return, in case of nothing is occurred like personal insurance.

The expenditure on insurance is debited by Insurance Expenses and credited cash/bank under rules of debit and credit.

Example:

Paid for insurance on goods

Insurance Expense debit

Cash/Bank credit


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5.4.1.3 REPAIR & MAINTENANCE EXPENSES

The Assets involves in business operation need to renovate, repair and maintain or to keep in working condition, there will be accounts like repair & maintenance, building, plant & machinery office equipment, air conditioners etc.

All repair and maintenance on assets are expenses, debited under rules and reduce income;

Repair & Maintenance debit

Cash credit


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5.4.1.4 SALARIES & ALLOWANCES

A business unit has different departments, huge labors, officers and directors for business operation and their salaries and allowances, remunerations, benefits are recorded under head Salaries & Allowances A/c, Remuneration A/c, Benefits A/c generated to specific benefit.

Salaries and allowances are journalized at the end of the month to create liability of the period as;


ACCOUNTS MAKING 247

Salaries & Allowances Debit

Salaries & Allowances payable Credit

And when, salaries & allowances are distributed by cash or bank, the recording of entry will be as;

Salaries & Allowances payable Debit

Cash/Bank Credit.

Salaries & Allowances comes under Expense Account may be split out department wise, station wise, category wise etc.


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5.4.1.5 Depreciation Expense A/c

The Account depreciation expense is derived from accumulated depreciation which reduces the net income under Income and loss account.

Depreciation expense is the result of calculation of accumulated depreciation on fixed assets under different methods and recorded at the end of the year as;

Depreciation Expense Debit

Accumulated Depreciation Credit


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5.4.1.6 Office Supplies

Office requires stationery like pens, pencils, calculators, papers, staplers, toners, ink, etc besides printing vouchers, forms, books, etc.

The expense on stationery and printing for office comes under administrative expenses debited under rules and the account of all purchases relating to printing and stationery using in office will be Office Supplies Expense A/c or Printing & Stationery A/c like;

Office Supplies Expense A/c Debit

Cash/Bank Credit


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5.4.1.7 OTHER ACCOUNTS (ADMINSTRATIVE)

Many other expenses relating to cash or petty cash commonly used under administration like EOBI Expense a/c, Social Security A/c Security Expenses A/c, conveyance a/c, cartage a/c, vehicle running expenses a/c, staff welfare a/c, ex-gratia a/c, mobile expense a/c, janitorial expenses a/c, entertainment a/c, potage a/c, incidental a/c, rent rates & tax a/c, miscellaneous a/c, consumable stores a/c and many other accounts creatable according to the need of recording transactions.


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The expenses in question may be passed through petty cash system or directly from cash book as shown below;

Petty Cash Funds a/c Debit

Petty cash expenses (accounts) Credit

OR

Conveyance Debit

Cash Credit


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5.4.2 SELLING EXPNESES

Advertising Expenses

Sales Promotion Expenses

Sales Distribution Expenses

5.4.2.1 Advertising Expense A/c

In all three business; trading, manufacturing and servicing, there is need to advertise the item that the manufacture is producing and benefiting its traders to increase its manufacturing process by selling its produces. The traders who imports items not known in the region, they should have to introduce imported items by advertising with the support of newspaper, magazines, TV. Channels, cables, wall chalking, hand bills and all other sources come under advertising. As far as servicing is concerned, the one is introduced oneself by doing advertising.


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Advertising Expense account is made to record all the transaction relating to advertising.

Advertising Expense comes under the fifth principle account ALPRE and the sub account of Selling expenses on the income statement.

On payment of advertising cost, it must be debited with Advertising expenses and cash/account payable credit in cash of credit advertising.


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5.4.2.2 Sales Promotion Expenses

Sales promotion is an essential part of business which introduces the items that are new or imported and none is known about its function or advantages. Sales promotion also makes goodwill of the items promoted by means of installing stall, door to door introduction, different activities in school, college, health institution etc. in city or out city, in country or out country.

The Expenditure on promotion comes under Sales Promotion Expenses directly head or having sub accounts like travelling expense a/c, conveyance a/c, communication a/c, field expense ac, salaries & allowances a/c, staff welfare a/c, vehicle expense a/c, conveyance a/c, cartage a/c and many other accounts relating to sales promotion.

Sales promotion expenses linked with Selling Expenses and debited under expenses rules like;

Sales Promotion Expenses a/c Debit

Cash/Bank Credit


ACCOUNTS MAKING 255

5.4.2.3 Sales Distribution Expenses

Another essential part of sales is distribution from which the demand of items is distributes to distributor, whole seller, retailer or end user in city or out city, in country or out country.


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The expenditure on distribution come under Sales Distribution Expenses a/c directly or having sub accounts like travelling expense a/c, communication a/c, field expense a/c, salaries & allowances a/c, staff welfare a/c, vehicle expenses a/c, conveyance a/c, freight & cartage a/c and may other accounts relating to sales distribution.

Sales distribution expenses linked with Selling Expenses and debited under expenses rules like;

Sales Distribution Expenses a/c Debit

Cash/Bank Credit


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5.4.2.4 Other Accounts (Sales & Marketing)

Many other expenses relating to cash or petty cash commonly used under sales & marketing like conveyance a/c, cartage a/c, vehicle running expenses a/c, staff welfare a/c, ex-gratia a/c, mobile expense a/c, entertainment a/c, potage a/c, incidental a/c, miscellaneous a/c, commission a/c, incentive a/c, field expenses a/c, printing & stationery a/c and many other accounts creatable according to the need of recording transaction.


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The expenses in question may be passed through petty cash system or directly from cash book as shown below;

Petty Cash Funds a/c Debit

Petty cash expenses (accounts) Credit

OR

Conveyance Debit

Cash Credit


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5.4.3 GENERAL EXPENSES

Rent Expenses

Utility Expenses

5.4.3.1 Rent Expenses A/c

0n starting of business, the business man needs some assets either to purchase or take on rent. In the form of rent, he must have to pay deposit, pre rent, monthly rent of the asset acquired for business use.

When the rent is paid for business premises, the account “Rent Expense” is made and debited as Rent Expense and credited cash under rules of debit and credit.

Rent Expense Debit

Cash Credit Credit

(Rent for Jan 2015)


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5.4.3.2 Utilities Expense A/c

Utility expenses mean electricity, Sui gas, water and other useful items for smooth operation of business. It may be itself account or divided into other accounts like Electricity charges a/c, Sui gas charges a/c, water & sewerage a/c, etc.


ACCOUNTS MAKING 261

The expenditure on utilities comes under general expenses or under sub accounts in question and debited under expenses rules like;

Utilities Expense a/c Debit

Cash/Bank Credit


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5.5 FINANCIAL EXPENSES

BANK CHARGES

BANK COMMISSION

MARK UP

Financial charges are the amounts that are deducted by financial institutions on making financial instruments, on line transfer, check books; accounting maintaining charges, mark up on loans, credit cards, late charges, taxes, postages, excise duty and many other charges based on the nature of transactions.

Financial charges are considered as non-operating expenses but charges relates to business operation are operating expense like mark up on loan taken for business operation.

Many accounts may be created for financial charges but mostly used as bank charges, bank commission, mark up etc. and recorded as;

Bank charges Debit

Cash/Bank Credit


ACCOUNTS MAKING 263

Volume – I

YEAR 2015


Q&A 01 QA-264

What is an account?

An account, already designed, is the summary of information relating to transactions with it. The word account, a noun, is derived from accounting, an adjective. Accounts are made according to accounting principle “Assets, Liabilities, Proprietorship, Revenues, Expenses (ALPRE) like building a/c, an asset, loan a/c, a liability, capital a/c, equity, sales a/c, and an income and insurance expenses a/c, an expense.


Q&A 02 QA-265

What are sources and resources terms used in accounting?

Funds or things carried for investment in business are sources of business as capital or owners’ equity and acquiring assets like land, building, merchandise, cash, etc. are resources of the business. Therefore, sources are equal to resources or conversion sources into resources.


Q&A 03 QA-266

Why is drawing contra equity account?

If cash or goods are used for personal above limitation and recorded in business, the destruction of sources of business means assets will be ruined. In order to save sources, the withdrawal of cash or goods from business for personal use is recorded in a separate account named Drawing, reduces or contra the capital account, alarms the owner about ups and downs in business.


Q&A 04 QA-267

What is the difference between double entry system and single entry system?

Single entry is bookless system and consists on revenues and expenses. It is used in small businesses where no remarkable capital, assets and liabilities are applied.

Single entry system has no rule for recording transactions just writing information on registers or verbally.

Double entry system applies five principles in the system of accounting which are assets, liabilities, proprietorship, revenue and expenses where revenues and expenses are is temporary accounts end on income or loss.

The double entry system of accounting has accounting equation “assets=liabilities + proprietorship”.

Double entry system can use in small and large businesses showing true financial picture.


Q&A 05 QA-268

What is the connection of accounting with book keeping?

Accounting is the language of business and provides idea of keeping money in written properly which shows the true picture of finances invested in business.

Accounting defines a complete system and rules of recording transactions to book keeping under five main principle; assets, liabilities, proprietorship, revenue and expenses.

The book keeping is the art of transferring idea of accounting in the shape of books as ledger, cash books, journals and various statements.

The book keeping adopts the system and rules of recording transactions, style, designs, and many more from accounting.

Accounting is an idea and book keeping practical.


Q&A 06 QA-269

Does revenue or expense affect accounting equation?

Revenue or expense is the temporary member of accounting cycle and ends on profit and loss account transferable to capital account. So, they do not affect directly to accounting equation “Assets=Liabilities + Proprietorship” but affect proprietorship indirectly and the proprietorship is the part of accounting equation.


Q&A 07 QA-270

What do you mean by Entity?

In business any unit, division or an organization is an entity. A company may have different entities like unit, department, team, division as well the goods which it sells.

Company’s investments or assets as well as owner and business are also entities.

Entity means individual, team, thing or unit of an organization and the account relating to separate entities.


Q&A 08 QA-271

Explain the period applied on fixed assets for calculation of depreciation. If any asset exists but life is low, then will depreciation applied over it? (Shakir)

The depreciation is accumulated on fixed assets having life over one year or more depending on the value of fixed assets, if the value of fixed assets below the mark, it will directly be charged in expenses. For example a calculator which comes under fixed assets but the price or value of it is cheap so it will be charged directly in expenses as printing and stationery office. But computer, printer, scanners may be fixed assets if comes under the value for calculation of depreciation.

Plant and machinery, office equipment, air conditioning unit, furniture, etc. having long life and heavy values are accumulated for depreciation up to ten years under different methods of depreciation.

It is concluded that the period applied on fixed assets for calculation of depreciation is more than one year depending on the value of asset.


Q&A 09 QA-272

What is Goshwara and how to make it? (Shakir)

The word goshwara is of Urdu word and in English means schedule which means to make details or plan of anything for any department of life but in accounting it represents the summary or detail of accounts relating to the same nature. If a company sales or purchases goods on credit from different parties, different parties accounts are maintained in ledger for paying and receiving in future date and prepares a schedule of creditors and debtors wherein details of paying and receiving amounts from customers or suppliers or makes according to its facilitation as date, amount, maturity of amounts, reasons etc.

In financial statements, some schedule of creditors, debtors and other accounts having huge information indicating notes.

Income tax or sales department also requires schedules or statements relating to details of taxes at the end of the year.

It also refers to statement which prepared at the end of the accounting year for submitting income tax, sales tax and management.


Q&A 10 QA-273

What is accounting cycle and its steps working?

Accounting cycle is the process of accounting and the process of accounting has ten steps which moves the cycle with no end as the source document provides evidence to journal, journal helps ledger to make accounts, ledger enables trial balance unadjusted to summarize accounts, trial balance unadjusted requires adjustment, adjustment provides trial balance adjusted, trial balance adjusted closes entries to worksheet, worksheet to financial statements and balances of financial statements as post closing trial balance re-cycle accounting for the next period like before.

The connection of every step is joined to each other enables accounting cycle rounding with no end.


Q&A 11 QA-274

What do you mean by purchase and sale?

In accounting, purchase or sale relates to goods or merchandise used in doing business. In manufacturing concerns, materials are purchased and converted in finished goods, and sold to distributors or whole sellers; distributors and whole seller purchase and sale to retailers and retailers purchase and sell to end user.

Purchase and sale both have transactions of cash and credit. Purchase is asset and sale is revenue then purchase is debited and sale is credited. Purchase and sale are temporary account and make the cause of income or loss, and end on income and loss statement.

Therefore, purchase and sale are the main source of rounding account cycle.


Q&A 12 QA-275

Explain the difference between tangible and intangible assets?

Tangible assets are the assets which have long term physical existence like plant, machinery, equipment, furniture and fixtures etc and or touchable assets like cash, account receivable, merchandise inventory, prepaid expense etc. Tangible assets are acquired for operation of business and not for sale like commodities

When intangible assets have no physical existence like trade mark, goodwill, copy right etc. but convert into current asset to sell them. Intangible assets are the long term recourses of business and made slowly by reputation. Intangible assets help business in bad times to acquire to loan against fire or any hazards in business.


Q&A 13 QA-276

What do you understand by single entry and doe single entry accounting system convert into double entry?

Single entry relates to cash receipts and payments or expenses and revenues and receivables and payables and it does not involve accounting equation of double entry system. This system of accounting is used in small business where the transactions or information are in diary, register or in memory.

Single entry accounting system may be converted into double entry accounting system because payments and receipts, expenses and revenues, and receivables and payments can be taken from diary, register or memory and the amount brought for doing business as capital depends on the information or on estimation.

Financial statements may be prepared basing the information from diary, register or memory but the true financial picture under this system may be under question.

Self assessment of accounts by income tax is based on the same system of accounting.


Q&A 14 QA-277

What do understand by double entry accounting system and does double entry convert into single entry system of accounting?

In double entry accounting system all transactions are recorded according to rules of debit and credit and the rules of debit and credit should be in accordance with accounting equation as Assets=liabilities + proprietorship. The amount of debit must be equal to the amount of credit and there may be two or more debit and credit.

The single entry system is quite different because it has only information of transactions on diary, register or in memory which may be recovered in individual accounts according to the five principles of accounts.

As far as the question does double entry convert into single entry system is concerned, it may be said that the trial balance or post closing trial balance which resulted the information of transactions is the example of single entry wherein debit and credit is shown of every individual account.

Double entry accounting system provides true accounting picture, every transaction has proof and complete books of accounts presentable to income tax, sales tax, management, shareholders etc.


Q&A 15 QA-278

How many kinds of business?

There are three types of businesses wherein trading, manufacturing and services are in practice but purpose of each business is to make profit by its investment and efforts. Trading and manufacturing business require capital to start business but services business does not require capital but requires efforts.


Q&A 16 QA-279

What do you known about trading business, explain many aspect of it?

This type of business relates to commodities. In trading business, trader purchases commodities from manufacturer or importer and sale to wholesaler or retailer in profit.

In trading business many aspects of trading are therein;

- Trader has to invest his capital and from this capital, he purchases goods and sale to others in profit.

- The trader sells commodities on commission to link business parties. This business is called Commission trading.

- The trader gets commodities on credit and pays the amount after sale it is called credit trading.

- A trading in which trader holds commodities and searches parties, on getting parties he picks up the commodities on credit and/or on cash and sale it out by his own price.

Nowadays, trading from internet is flourishing. Any trader can find out parties to trade his products.


Q&A 17 QA-280

What do you mean by transaction?

Exchange of values is meant by transaction and transaction affects by double entry accounting system under debit and credit rules. It may be on cash and on credit.


Q&A 18 QA-281

What do you mean by accrual?

Accrual, relates to payment and receipt, and is journalized to create liability or revenue before payment and receipt. An accrual as an expense relates to liability of the period when it occurred but not paid and as revenue relates to receivables of the period when it earned but not received.


Q&A 19 QA-282

What is deferred used in accounting?

Deferred, relates to income and expense, and is referred by unconsumed or unsettled part of account at the end of accounting period shown in balance sheet directly or without appearing in income statement.

Deferred refers to payment made but reported as an expenses in a later period and revenue received but earned in future accounting period.


Q&A 20 QA-283

Describe the rules of transaction and its affect?

Everything or system is moving with rules which makes thing better to perform functioning. In the system of accounting, the rules of transaction are described under accounting equation as to assets=liabilities + owners’ Equity which increase or decrease the five principle of accounts; assets, liabilities, proprietorships, revenue and expenses with equal value of increase or decreases to one account to one account, one account to more account.

The rules of transactions are described here;

Assets Increase Debit Decreases Credit

Liabilities Decreases Debit Increases Credit

Proprietorship Decreases Debit Increases Credit


QA-284

Revenue Decreases Debit Increases Credit

Expenses Increases Debit Decreases Credit

The rules of transaction affect the equation as;

- Assets are acquired by Assets cash and asset affects to asset.

- Liabilities acquired by asset cash from others and asset affects to liabilities.

- Proprietorship or capital come from investment and investment affects asset and capital.

- Revenues come from asset cash and asset affects income to capital.

- Expenses pay by asset cash and asset affects income to capital.


Q&A 21 QA-285

Explain connection between manufacturing, trading and services businesses?

Manufacturing is the process of making goods or products from raw materials acquired locally or from abroad. This process involves land, building, plant and machineries, laborers and complete system of administration and sell to traders on cash or credit. This type of business is concern with trading business.

In trading business, traders acquire goods or commodities on cash or on credit from manufacturer and sell to wholesaler, retailer or end user. Trading business is concern with manufacturing business.


QA-286

No capital involves in services business but efforts or skill works to earn. Service business involves in manufacturing and trading. A man employed to work, technician repairs machineries, and a worker involves in manufacturing, a man to sell products, a consultant or legal advisor gives advice are providing services.

If to see then manufacturing, trading and services business involves each other in whole system as;

Manufacturing business produces products, sells goods to traders and acquired man power from services business for manufacturing process.

Trading business sells goods to customer, goods comes from manufacturing and selling requires man power by services business.

Service business provides technical support or manpower to manufacturing and trading business to work.

Therefore, it may be said that manufacturing, trading and services are connection with each other in every respect.


Q&A 22 QA-287

Explain the roll in business of an accountant and the quality of good accountant?

The word accountant is derived from account and to write it is called accountant or writer of accounts moves accounting cycle and may say him the driver of accounting cycle, the accounting cycle starts from source document enables accountant to keep records of all transactions crystallizes and makes legal accounts to post closing enables accountant to recycle the next accounting process and so on.

The accountant may equip with logical knowledge created itself cracks hard nuts enables accountant to overcome the problems in writing books of accounts, making financial statements and satisfying management in taking decisions may come before him during accountancy besides education of accounts manually or computerized.


QA-288

The quality of good accountant requires honesty, this is the first of his being accountant, and to prove honesty he must have all records, evidence and balances up to date physically facilitate auditors to check and make reports as the older said the honest is the best policy, faithfulness is the part of faith restricts him to perform bad and do good with collogue, management, parties and all relating to his circle and to all matters of finances and may say faithfulness is the second pillar or condition of his being accountant. The third condition of his being accountant is secrecy which does not allow accountant to show facts and figures of accounts to others inside or outside which saves from many difficulties, quarrels and causes.

The last and four conditions of his being accountant is to love his profession, prepares true accounts having evidence, resist to de shape or de figure statements of accounts.

The accountant, the driver of accounting cycle, is the pillar of business and the base of his profession stands on four pillars; honest, faithfulness, secrecy, love to profession.


Q&A23 QA-289

FILL IN THE BLANKS

- Account is the language of _________________and book keeping is defined to record_______________.

- Business means __________ under classification of ______types of business i________ii_________iii______________.

- The main types of business organization are a_____________b___________c___________d______________.

- Any exchange of value is called_______________ and sub divided into ________transaction and _____________transaction.

- The posting of business transaction in book is called____________.

- Business entity means ________________.

- ALPRE is the short form of _________________________________________.

- <THE SYSTEM OF ACCOUNTING < VOLIUM 1< SYED AQEEL RAZA<[email protected]>

QA-290

- Assets are ______________ and investment _______________.

- __________ asset covers accounting period and ______ assets are longer than one year.

- Tangible assets are ________and intangible ___________.

- Prepaid expenses are __________assets.

- Liability means the claim of supplier under head account___________.

- There are two types of equities i______________ii______________.

- Drawing is a __________asset.

- Credit sale is recorded under head account _______________.

- <THE SYSTEM OF ACCOUNTING < VOLIUM 1< SYED AQEEL RAZA<[email protected]>

QA-291

- Expenses are mainly divided into two categories i__________________ii______________.

- Assets = liabilities + proprietorship is accounting _______________.

-

- Cash increases__________ and decreases________________.

- Capital increases______________ decreases_________________.

- Account payable increases_______________ decreases__________.

- Account Receivable is ________________.

Expense increases_____________decreases_______.

A sale is _____________ and increases ___________.

Accounting cycle starts from____________________ and end on______________.


Volume – I


YEAR 2015

THE END

the system of accounting

Education

concept of accounting

concepts of accounting

system of accounting

system of accounting

basic accounting concept

written materials

intangible assets

prepaiddeferred assets