The system accounting.pdf level one

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 (sometimes Paccioli or Paciolo;

1445–1517) was an Italian mathematician, Franciscan friar,

collaborator with Leonardo da Vinci, 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.


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

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

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

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

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

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

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

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

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

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

P R E F A C E 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].


mailto:[email protected]

F O R W A R D

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.


TABLE OF CONTENTS

LEVEL - I PAGE

# LEVEL I PAGE

#

INTRODUCTION

INTRODUCTION Meaning & Difinition NATURE OF ACCOUNTS 24

ACCOUNTING 1 ASSETS 25

BOOK KEEPING 2 Currrent Assets 26

BUSINESS 3 Fixed Assets 27

Business Terminology…..Service 4 Tangible Assets 28

Business Terminology…..Trading 5 Prepaid & Deffered Assets 29

Business Terminology…..Manufacturing 6 Intangible Assets 30

BUSINESS 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 Cop./Nationalized Industries. 14 INCOME/REVNUE 39

FRANCHISES 15 Accrual Basis Accounting 40

CLASSIFICATION OF ACCOUNTS 16 Cash Basis Account 40

Real Accounts 16 Sale 41

Personal Accounts 16 Purchases 42

Nominal Accounts 16 EXPENSES 43

TRANSACTIONS 17 Direct Expenses 44

Cash Transaction 18 Indirect Expenses 45

Credit Transaction 19 ABBRIVATION USED IN ACCOUNTING 46-47

ENTRY 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 Ownership

b) Partnership

c) Companies/Corporations

d) 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.

Translation


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.

Translation


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.

Translation


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 Equities

2- 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.

Translation


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


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