National University (FAST-NU)
Introduction to
Accounting
National University (FAST-NU)
Accounting Defined
IdentifiesIdentifies
RecordsRecords
CommunicatesCommunicatesRelevantRelevant
ReliableReliable
ComparableComparable
AccountingAccountingis a
system that
information
that is
to help USERS make better decisions.
to help USERS make better decisions.
National University (FAST-NU)
Identifying Business
Transactions
Recording Business Activities
Communicating
Business Activities
Accounting Activities
Accounting - “Language of Business”
National University (FAST-NU)
Accounting Activities
Identifying Business Activities
Selecting transactions and events that are
relevant to organization
Recording Business Activities
Keeping a chronological log of transactions
and events measured in Rupees and Classified &
Summarized in useful format
Communicating
Business Activities
Preparing accounting
reports. Also includes
analyzing & interpreting them
(to help Users in making better
decisions)
Accounting “is not an end in itself”
National University (FAST-NU)
Accounting as an Information System
National University (FAST-NU)
Accounting vs Bookkeeping
Bookkeeping is the mechanical and repetitive process of recording financial transactions and keeping financial records either manually and electronically.
Bookkeeping is a small part of accounting.
Accounting includes the design of an information system that meets user’s needs.
Accounting goals are the analysis, interpretation, and use of information.
National University (FAST-NU)
Users of Accounting Information
Internal Users External Users
Those directly involved in
managing and operating an organization
Those not directly involved in managing
and operating an organization
National University (FAST-NU)
Users of Accounting Information
Internal Users External Users
Accounting information helps users both internal and external to make better decisions
Accounting information helps users both internal and external to make better decisions
DirectorsManagers
Officers/employeesBudget OfficersInternal Auditors
Owner/ShareholdersCreditors/ Lenders
CustomersInvestors
External AuditorsBrokers/Financial Analyst
Financial Advisors
National University (FAST-NU)
Types of Accounting
Internal Users External Users
Financial Accounting
Area of accounting that serves the external users by providing them with the General-Purpose Financial Statements
Where general-purpose refers to the broad range of purposes for which external users rely on these statements
Management Accounting
Area of accounting that serves the decision-making needs of the internal users by providing them with the Specific-Purpose Financial Reports
Where specific-purpose refers to a particular decision/problem areas that requires specific reports to be prepared
National University (FAST-NU)
Types of Accounting(other differences)
Management Accounting
- For Internal Users
- For Planning and Control
- Not specific Format required
- Future Oriented
- No Time-Lines
- Not legally required
- No need to follow IAS
Financial Accounting
- Primarily for external Users
- For general-purpose
- Specific Format required
- Past Oriented
- Time-Lines
- Legally required
- Need to follow IAS
National University (FAST-NU)
Accounting and Technology (Computerized Accounting System)
Reduces time, effort and cost of record
keeping.
Improves clerical accuracy.
Changes the way we store, process and summarize large masses of data.
Technology
National University (FAST-NU)
ProprietorshipProprietorship PartnershipPartnership CorporationCorporation
Types of Business Ownership
Private-Sector Organizations
National University (FAST-NU)
Financial Accounting practice is governed by concepts and rules known as
Generally Accepted Accounting Principles (GAAP).
Financial Accounting practice is governed by concepts and rules known as
Generally Accepted Accounting Principles (GAAP).
Relevant Information
Relevant Information
Affects the decision of its users.
Affects the decision of its users.
Reliable InformationReliable Information Is trusted by users.
Is trusted by users.
Comparable Information
Comparable Information
Is helpful in contrasting organizations.
Is helpful in contrasting organizations.
Generally Accepted Accounting Principles
National University (FAST-NU)
Institute of Chartered Accountants of Pakistan
(ICAP)
Institute of Chartered Accountants of Pakistan
(ICAP)
Two Main Bodies to decide about Accounting Standards in Pakistan
Two Main Bodies to decide about Accounting Standards in Pakistan
Securities and Exchange
Commission of Pakistan (SECP)
Securities and Exchange
Commission of Pakistan (SECP)
International Accounting Standard (IAS) are to be followed in Pakistan
(according to Companies Ordinance 1984)
International Accounting Standard (IAS) are to be followed in Pakistan
(according to Companies Ordinance 1984)
Setting Accepted Standards
National University (FAST-NU)
Principles of Accounting
OBJECTIVES
To reveal how to maintain and produce accounting results.
To ensure that information provided by accounting records is Relevant, Reliable, and Comparable.
To ensure the different interested groups that the accounting Records are the Accurate Reflection of the business.
To introduce each and every business unit with the standardized Rules & Regulations pertaining to the maintenance of accounting records.
National University (FAST-NU)
Principles of Accounting
OBJECTIVES
To provide enough information to different users of accounting information as these different groups have different perception for same aspects of accounts.
To enable every concerned person and party to make comparison between different firms especially with regard to accounting information.
National University (FAST-NU)
Principles of Accounting
OBJECTIVES
Cost Principle Objectivity (Reliability) Principle Money Measurement Principle Going Concern Principle Business Entity Dual Aspect Realization Principle Accrual Principle
National University (FAST-NU)
Objectivity PrincipleAccounting information is
supported by independent, unbiased evidence.
Principles of Accounting
Cost PrincipleAccounting information is based
on actual cost.
Money Measurement PrincipleOnly those transactions will be
recorded which can be measured in money terms.
Now Future
Going-Concern PrincipleReflects assumption that the
business will continue operating instead of being closed or sold.
National University (FAST-NU)
Principles of Accounting
Dual aspect Concept Every transaction has at least
two effects and both of these affects should be recorded. It is applied to Accounting Equation
Realization PrinciplesRevenues should be recorded at the time when are earned, NOT at the time when are received.
Accruals PrinciplesExpenses should be recorded at
the time when are incurred, NOT at the time when are paid.
Business Entity Principle For accounting purposes, entity of
Owner is separate from entity of Business
National University (FAST-NU)
Accounting Equation
Cash (resource)Owned
Cash (resource)Owned =
ResourcesProvider(Owner)
ResourcesProvider(Owner)
Other ResourcesOwned
Other ResourcesOwned =
ResourcesProvider
(non-Owners)
ResourcesProvider
(non-Owners)
ResourcesOwned
ResourcesOwned =
ResourcesProvider(Owner)
ResourcesProvider(Owner)
ResourcesProvider
(non-Owners)
ResourcesProvider
(non-Owners)+
ResourcesOwned
ResourcesOwned = Claim of
Owner
Claim of Owner
Claim of non-owners
Claim of non-owners+
ASSETSASSETS = CAPITALCAPITAL LIABILITIESLIABILITIES+
National University (FAST-NU)
Accounting Equation
AssetsEquity & Liabilities
CapitalCapital LiabilitiesLiabilitiesAssetsAssets = +
National University (FAST-NU)
Expanded Accounting Equation
CapitalCapital LiabilitiesLiabilitiesAssetsAssets = +
RevenuesRevenues ExpensesExpensesOwner Capital
Owner Capital
Owner Withdrawals
Owner Withdrawals
_ + _
National University (FAST-NU)
Accounting Equation
LandLand
EquipmentEquipment
BuildingsBuildings
CashCash
VehiclesVehicles
Store Supplies
Store Supplies
Notes Receivable
Notes Receivable
Accounts Receivable
Accounts Receivable
Resources owned by
the company
Resources owned by
the company
ASSETS
National University (FAST-NU)
Accounting Equation
LIABILITIES
Taxes Payable
Taxes Payable
Wages Payable
Wages Payable
Notes Payable
Notes Payable
Accounts Payable
Accounts Payable
Creditors’ claims on
assets
Creditors’ claims on
assets
National University (FAST-NU)
Accounting Equation
CAPITAL
Owner’sclaims
on assets
Owner’sclaims
on assets
RevenuesRevenues
Owner Investments
Owner Investments
Owner Withdrawals
Owner Withdrawals
ExpensesExpenses
National University (FAST-NU)
Transactions & Accounting Equation
The accounting equation must remain in balance after each transaction.
LiabilitiesLiabilities EquityEquityAssetsAssets = +
National University (FAST-NU)
Transactions & Accounting Equation
Impact of transaction:
(1) Cash (asset)
(2) J. Scott, Capital (equity)
Transaction 1:
J. Scott, the owner, contributed $20,000 cash to start the business.
National University (FAST-NU)
Transactions & Accounting Equation
J. Scott, the owner, contributed $20,000 cash to start the business.
National University (FAST-NU)
Transactions & Accounting Equation
Impact of transaction:
(1) Cash (asset)
(2) Supplies (asset)
Transition 2:
Purchased supplies paying $1,000 cash.
National University (FAST-NU)
Transactions & Accounting Equation
Purchased supplies paying $1,000 cash.
National University (FAST-NU)
Transactions & Accounting Equation
Transition 3:
Purchased equipment for $15,000 cash.
Impact of transaction:
(1) Cash (asset)
(2) Equipment (asset)
National University (FAST-NU)
Transactions & Accounting Equation
Purchased equipment for $15,000 cash.
National University (FAST-NU)
Transactions & Accounting Equation
Transition 4:
Purchased Supplies of $200 and Equipment of $1,000 on account.
Impact of transaction:
(1) Supplies (asset)
(2) Equipment (asset)
(3) Accounts Payable (liability)
National University (FAST-NU)
Transactions & Accounting Equation
Purchased Supplies of $200 and Equipment of $1,000 on account.
National University (FAST-NU)
Transactions & Accounting Equation
Transition 5:
Borrowed $4,000 from 1st American Bank.
Impact of transaction:
(1) Cash (asset)
(2) Notes payable (liability)
National University (FAST-NU)
Transactions & Accounting Equation
Borrowed $4,000 from 1st American Bank.
National University (FAST-NU)
Transactions & Accounting Equation
The balances so far appear below. Note that the Balance Sheet Equation is still in balance.
Now let’s look at transactions involving revenue, expenses and withdrawals.
National University (FAST-NU)
Transactions & Accounting Equation
Transition 6:
Rendered consulting services receiving $3,000 cash.
Impact of transaction:
(1) Cash (asset)
(2) Revenues (equity)
National University (FAST-NU)
Transactions & Accounting Equation
Rendered consulting services receiving $3,000 cash.
National University (FAST-NU)
Transactions & Accounting Equation
(Alternate approach)Rendered consulting services receiving $3,000
cash.
Assets = Liabilities +Owner's Equity
Cash Supplies EquipmentAccounts Payable
Notes Payable
Owner's Capital
Bal. 4,000$ 1,200$ 16,000$ 1,200$ 20,000$ (5) 3,000 3,000
7,000$ 1,200$ 16,000$ 1,200$ -$ 23,000$
National University (FAST-NU)
Transactions & Accounting Equation
Transition 7:
Paid salaries of $800 to employees.
Impact of transaction:
(1) Cash (asset)
(2) Salaries expense (equity)
Remember that the balance in the salaries expense account actually increases. But, equity actually decreases because expenses reduce equity.
National University (FAST-NU)
Transactions & Accounting Equation
Remember that expenses decrease equity.
Paid salaries of $800 to employees.
National University (FAST-NU)
Transactions & Accounting Equation
(Alternate approach)Paid salaries to employees, $800 cash.
Assets = Liabilities +Owner's Equity
Cash Supplies EquipmentAccounts Payable
Notes Payable
Owner's Capital
Bal. 4,000$ 1,200$ 16,000$ 1,200$ 20,000$ (5) 3,000 3,000 (6) (800) (800)
6,200$ 1,200$ 16,000$ 1,200$ -$ 22,200$
National University (FAST-NU)
Transactions & Accounting Equation
Transition 8:
J. Scott withdrew $500 from the business for personal use.
Remember that the balance in the J. Scott, Withdrawals account actually increases. But, equity actually decreases because withdrawals reduce equity.
Impact of transaction:
(1) Cash (asset)
(2) J. Scott, Withdrawals (equity)
National University (FAST-NU)
Transactions & Accounting Equation
Remember that withdrawals decrease equity.
J. Scott withdrew $500 from the business for personal use.
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