University of South Asia Lahore

University of South Asia Lahore

Layyah Campus

Fundamental Accounting

B.com

Course Outline

First Semester

BEFORE MID

• Basic Terminology of Accounting
• Accounting concept
• Debit credit rules
• Book –keeping
• Journal ,ledger, Trail balance
• Theory and practical work of (journal,ledger,Trail balance)
• Accounting Equation
• Theory and practical work of ( accounting equation)

BASIC TERMINOLOGY

Definition of Business

Activity or action under taken by a trader with objective to earn profit, is called business.

Example: Banking business etc.

Trader

A person who performs or dealing in trading is known as trader.

Types of Business

There are three types of business

Trading

Manufacturing

Service

Trading

It is a type of business in which the trader purchase, merchandise/goods and sells then in same position.

Manufacturing

It is another type of a business in which trader, trade purchase goods and sells them after some changing

Example: Sugarcane, sugar

Service

It is another type of a business in which any person rending services for earning income is formation as services business

Example: Teacher, Doctor etc

Transaction

Any dealing between two or more persons in the business for goods or services which effects financial position of a business is called transaction.

Manufacturer

A person, who manufactured goods for business, is called manufacturer.

Proprietor

A person who invests the money or things in the business is called proprietor, owner.

Capital

Proprietor money or things which he invests in the business is called capital. In other words, a proprietor interest in the business is called capital

Drawings

The cash or goods taken away from business by the owner for this personal or private user are called drawing.

• Basic Transaction
• Merchandise
• Purchase
• Purchase Return/Return out word
• Purchase Allowance
• Purchase Discount
• Sales / Turnover
• Sales Return / In word / Return by Customer
• Sales Allowance
• Sales Discount
• Reason of Return Sales
• Profit / Loss
• Invoice / Bill
• Voucher
• Trade Discount, Cash Discount, Discount Allowed, Discount Receipt
• Case Memo, Debtor, Creditor
• Revenue/Income, Expenses
• Material, Direct Material Indirect Material
• Account, Types of Account, according to British Approach, American Approach
• Salary and Wages
• Commission

Business Transaction

A business transaction is occurrence of a condition that must be recorded as an exchange of merchandise / services in case of it purchase and sales at particular price and date.

Cash Transaction

When cash is paid or received recorded as a result of an exchange of merchandise or services on cash bases is called cash transaction.

Credit Transaction

When the payment or receipt of cash for future date.

Merchandise

The things purchased for resale purpose.

Purchases

Merchandise purchased for being sold purposes. It may be cash purchase and credit purchase.

Purchase Return

If purchased merchandise are return by supplier / creditor, due to any reason is called purchase return.

Reasons

• Found defective goods.
• Damaged
• Not according to sample
• Excess of quantity ordered

Purchase Allowance

If purchaser inform supplier that some merchandise are damage, reduction in price by supplier.

Purchase Discount

The concession allowed by the supplier on the purchase of merchandise.

Sales / Turnover

Merchandise sold are called sale. When merchandise are sold by any person at particular price.

It may be cash sale / credit sale.

Sales Return / inword

When any purchase goods are returned by customer to business due to any reason some purchases

Reasons

• Found defective goods.
• Damaged
• Not according to sample
• Excess of quantity ordered

Sales Allowance

It the seller is informed by the purchaser, that some goods are effective due to some reason, and agree to sale on reduction price.

Sales Discount

The concession allowed by the seller on the sales of goods to purchaser.

Profit

Excess income over expense.

Loss

Excess expense over income.

Invoice / Bill

A document list given by seller to buyer for credit or cash sales, purchase of goods.

Voucher

Written evidence which prepare in support of business transaction is called voucher.

Trade Discount

It is a deduction allowed by trader/seller, to buyer on list price of product at time of its selling

When merchandise are sold in bulk.

When custom is old customer.

When merchandise are sold to trader.

No accounting transaction passed and record, but it verbal.

Cash Discount

A discount which is allowed or received at the time of cash receipt or payment on credit sales or purchases.

Discount Allowed

A discount which is allowed by seller to buyer at the time of early receipt against credit sales.

Discount Received

A discount which is received by the buyer from seller at the time of early payment against credit purchase.

Cash Memo

It is a voucher that is used for exchange of goods or services for cash.

Debtor

The person who sold goods is business on credit/cash base.

Creditor

The Person who purchase goods for business on credit/cash base.

Revenue/Income

It is means received amount from sold of merchandise in the business.

Expenses

Cost doing business is called expenses.

Material

Buying things which are made different things.

Direct Material

Direct material are those material which are used directly in manufacturing a products e.g. cotton, cloth.

Indirect Material

The materials which necessarily used in manufacturing a product, but the cost of those material cannot be directly measures of that product,

Account

A summarized record of transactions relating to a particular person or things is called account.

Types of Account, according to British Approach

• Personal Account.
• Real Account.
• Nominal Account.

Personal Account

Accounts which is relating to persons, firms, companies, are called personal account.

Real Account

Accounts, which keep records of properties or things owned by business, are called real account. or

The account which contains Assets, Liability, owner, equity of a business, is called real account.

Nominal Accounts

All these accounts which keep record of expenses, gain, losses.

Types of Account, according to American Approach

I)Assets.

II)Liabilities.

III)Capital.

IV)Revenue.

V)Expense.

Commission

Remuneration for services performed by one person to another normally o the percentage basis is called commission

Salary

A fixed remuneration for services performed by one person to another for fixed period and fixed price is called salary.

Book Keeping

Book-Keeping is an art of recording the business transaction is prescribed manner in set of book, is called Book Keeping.

A book keeper is responsible for recording of business data. His job is clerical nature.

• It is field of recording accounting system.
• For preparing of book-keeping, not require any special skill or knowledge.
• It is base of Accounting.

Definition of Book-Keeping

Book-Keeping is the recording branch of accounting.

Book-Keeping System

There are two system of Book-Keeping

Single Entry Book System.

Double Entry Book System

Objectives of Book-Keeping

To keep written record of business.

To provide periodic results.

For Owner

For Management.

For Suppliers.

For Owner

The primary objective of book-keeping with reference to the owner is to the supply of following:

The amount of profit earned or loss sustain during trading period.

Increase of decrease in owner, equity and total value of Assets, Liabilities.



For Management

The books-keeping must provide financial information, to management, such information help then in _ future, for planning, and taking decision.

For Suppliers

Book-keeping provide information to suppliers, and other financial institution who have no access in determining financial position of a business

What is Accounting

Accounting is the art of recording, analyzing, classifying, summarizing, reporting, interpreting and projecting and communicating the results of economic activity or business activities

In another words we can say accounting is language of business.

Recording

In this part we record the books of original entry.

Classifying

After analyzing business transaction divided into Real, Personal, Nominal Accounts.

Prepare journal, ledger transaction.

Analyzing

Analyzing, according Personal, Nominal and Real Account, of different business transactions.

For analyzing apply Debit, Credit rules.

Identify Capital, Revenue and Expenses.

Summarizing

In summarizing prepare from ledger or profit and loss trading and balance sheet.

Reporting

Prepare business summarizing along with signature of Authentic Officer and prepared formal documents.

Interpreting

After reporting, gives its explanation in easy words to interested person in business provide them accurate information to investor, owner, customer, Govt. or any person who engaged in business activities.

Projecting
In this field of Accounting, take information _____, reporting, interpreting for business future.
Example:

• Future product quantity.

• Future product quality, material, purchase, area etc.

The purpose of Accounting
The basic purpose of accounting is to provide decision makers with information useful in making economic decision. Such as Money, land, labor, wages.
To provide information about the accounting period results.
To provide information about financial position of business.
To provide information to management for future planning.

To provide information for income tax collection.

To provide information for general purpose.

Financial Position

The financial resources and obligations of an organization as described in a balance sheet.

Limitations of Accounting

It deals only with past transactions.

Accounting statements do not ____ the effect of inflation.

Accounting Cycle

Accounting Cycle start from journal ______and end with balance sheet.

DIFFERNIATE BETWEEN BOOK-KEEPING AND ACCOUNTING

Difference Points / Book-keeping / Accounting
1: Recording / it is recording phase of accounting system / it is summarizing phase of accounting system
2. Skill / it does not require any special skill or knowledge / it requires special skill and knowledge
3. Base / It is the basis of accounting / It is business language

Debit

Amount recorded on left side of account.

Credit

Amount recorded on right side on account.

Rules of Debit and Credit

Debit / Credit
Increase in Assets. / Decrease in Assets.
Increase in Expense/loss. / Decrease in Expense.
Decrease in Liabilities. / Increase in Liabilities.
Decrease in Capital/Ownership. / Increase in Revenue.
Decrease in Revenue / Increase in Capital/Ownership

• JOURNAL

A book of original entry to record different business transactions chronologically (according to date) is called journal

CHARACTERISTIC OF JOURNAL

• A transaction is recorded originally in the journal
• A transaction is recorded on the same day when it takes place
• Narration is given for each entry
• It provides all necessary information about a transaction
• It helps to locate and remove errors

NARRATION

“A short explanation of each transaction which is written below each entry is called narration”

DOUBLE ENTRY SYSTEM

“A system in which equal debit and credit entries are made for every transaction.in which every business transaction effects two or more accounts is double entry system”

COMPOUND ENTRY

“The entry in which more than one accounts are debited or more than one accounts are credited is called Compound entry”

For example:

Wage Debit

Rent =

To Cash Credit

PRACTICS MATERIAL FOR GENERAL JOURNAL

Q.1. Mr. Ali started the business in 2007 and journalizes the following transactions

May Rs.

01.Started the business with cash 400,000

02.Deposited cash into bank 300,000

03.Purchased building and payment made by cheques 150,000

04.Goods purchased by cheques 15,000

05.Goods sold for cash and amount deposited into bank 10,000

06.Insurance premium paid by cheques 5,000

Q.2. Enter the following transactions into general journal with the month of March

March Rs

01.Merchandise distributed as free sample 15,00

02.Merchandise given as charity 37

03.Merchandise taken away by the proprietor 36

04.Merchandise destroyed by fire 190

05.Merchandise stolen by dishonest worker 950

06.On Eid day merchandise given as charity 640

07.Merchandise used in the home of proprietor 390

Q.03.Mr. Ali started the business in 2004. The following transactions occurred during the month of July

July

01.Mr Ali opened a bank account in the name of the business with a deposit of cash Rs 45,000

02.Mr Ali purchased land to be used as the parking plot for a total price of Rs.140,000, Ali cash down payment of Rs.28,000 was made and a note payable was issued for the balance of the purchase price

03.Mr Ali purchased a small portable building for Rs.4,000 cash .the purchase price included installation of the building on the parking plot.

04.Mr Ali purchased office equipment on credit from Suzuki and company for Rs.3,000

05.Mr Ali paid Rs.2,000 of the amount owed to Suzuki and company

INTRUCTIONS

a)Prepare journal entries for the month of July

b)Post to ledger accounts of the three-column running balance form

c)Prepare a trail balance at July.

LEDGER

“The book in which all business transactions are finally recorded in the concerned accounts in a summarized and classified form is called ledger”

POSTING

“The process of transferring the business transactions from journal to ledger is known as posting”

FOLIOING

“The process of entering the ledger page number in “ledger column” of the journal and journal page number in Journal column of the ledger is called “Folioing”

GENRAL LEDGER

The ledger in which all the accounts are posted except debtors or creditors when ledger or creditors is prepared is called general ledger.

TRAIL BALANCE

A statement which is prepared by taking out the debit and credit balances of all accounts appearing in ledgers in order to check the arithmetical accuracy of the ledger is called Trail balance.

ADVANTAGES OF TRAIL BALANCE

01.It provides proof of arithmetical accuracy of accounting entries

02.Itfacilitate the preparation of final accounts by providing in summarized form.

ADVANTAGES OF LEDGER

Following are the main advantages of Ledger

01.It provides guarantee of successful application of double entry system

02.It provides summarized record of every account separately

03.It helps in preparation of final accounts

CHARACTERISTICS OF LEDGER

Ledger has two identical sides

01.Left hand side (debit side)

02.Right hand side ( credit side)

DIFFERENCE BETWEEN JOURNAL AND LEDGER

Journal / Ledger
It is a book of first entry / It is book of second entry
Recording in journal is called journalizing / Recording in ledger is called posting
Unit of data is called transactions / Unit of data in ledger is called account

ACCOUNTING EQUATION

“A method by which the financial position of a business can be checked at glance is called accounting equation.”

“A statement which shows the equality of business assets and liabilities is called accounting equation”

Assets=Liabilities +owners equity

OWNER EQUITY

“Capital invested by the proprietors is called owner equity”

PRACTICS MATERIAL OF ACCOUNTING EQUATION

Q.1. Show the effect of following transactions on the accounting equation.

a) Mr Ali started business with cash Rs. 200,000

b) He purchased building for Rs. 10,000

c) He purchased goods worth for cash Rs. 50,000

d) He sold goods to Aslam for Rs.20, 000 costing Rs.17, 000 on credit basis

e) He withdraws cash Rs.3, 000 for his personal use.

Q.2.Compute the missing amounts in each of following three cases.

Assets= Liabilities + Owner equity

a)3, 72000 = 2, 28000 + ?

b)? = 150,000 + 100,000

c)820,000 = ? + 380,000

AFTER MID

• Bank reconciliation statement
• Theory and practical work of ( BRS)
• Cash book and its types
• Theory and practical work of cash book
• Depreciation
• Method of depreciation
• Theory and practical work of ( depreciation )
• Inventory
• Approaches use for recording inventory
• Method of recording inventory
• Theory and practical work of ( inventory)

• BANK RECONCILIATION STATEMENT

“A statement which contains a complete and satisfactory detail of the difference in balance as per the cash book, and pass book is called Bank reconciliations statement”

METHOD OF PREPARING BRS

• Starting with cash book, or Pass book balance
• Through adjusted cask book
• Correct method

NOTE:

CORRECT BANK BALANCE

(In case of cash book)

If cash book balance is overdraft then the items added should be deducted and the items deducted should be added to bring correct bank balance

CORRECT BANK BALANCE

(In case of bank statement)

if bank statement balance is overdraft then the items added are deducted and vice versa in order to bring correct bank balance.

PRACTICS MATERIAL

Q.NO. 1… From the following particulars, prepare a bank reconciliation statement as on 31st march 1990, and arrive at the balance as per pass book

01. On 31st march 2005, the bank balance as per the cash book was, Rs. 15000.

02. Cheques deposited into the bank on 28th march but were not collected by the bank by 31st march, Rs. 1000.

03. Cheques issued but were not presented for the payment by 31st march , Rs.1550.

04. The bank credited a dividend of Rs. 2000, on 31st march but the intimation was received by the trader on 5th april 2005.

05. A cheque of Rs. 500 was received from a customer and was entered in the bank column of cash book on 25 march but was paid into the bank on 1st april.

Q.NO.2: Prepare a bank reconciliation statement of Mr.ali as on 31st march 2004, from the particulars given below.

a) Balance as per the pass book Rs. 30200

b) Insurance premium of Rs 1000 was directly paid by the bank for which there is no record in the cash book

c) Interest of Rs.700 is credited by the bank in the pass book which is not recorded in the cash book .

d). Cheques for a total amount of Rs, 20000, were deposited into the bank in march but a cheque for Rs.2500 out of them was credit in April

e) A cheque for Rs 6500 was deposited into the bank on march but in April the cheque was returned by the bank ….

CASH BOOK

A book of original entry in which all cash receipts and payments are recorded chronologically is called cash book.

CHARACTERISTICS OF CASH BOOK

A cash book having following characteristics

• Only cash transactions are recorded
• It serves for both journal and the ledger simultaneously

KINDS OF CASH BOOK

The cash book having following kinds

• Single column cash book
• Double column cash book
• Three column cash book

SINGLE COLUMN CASH BOOK

A cash book in which only cash receipts and payments are recorded is called single column cash book.

DOUBLE COLUMN CASH BOOK

A cash book in which cash as well as discount transactions are recorded is called double column cash book.

THREE COLUMN CASH BOOK

A cash book in which cash, bank and discount transactions are recorded on each side in three columns, separately is called three column cash book.

PETTY CASH BOOK

The book in which petty items of expenses are recorded is called petty cash book