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# Definition of 'Accounting

'
To provide a record such as funds paid or received for a person or business. Accounting summarizes and submits this information in reports and statements. The reports are intended both for the firm itself and for outside parties.

'Accounting Equation'
The equation that is the foundation of double entry accounting. The accounting equation displays that all assets are either financed by borrowing money or paying with the money of the company’s shareholders. Thus, the accounting equation is: Assets = Liabilities + Shareholder Equity. The balance sheet is a complex display of this equation, showing that the total assets of a company are equal to the total of liabilities and shareholder equity. Any purchase or sale by an accounting equity has an equal effect on both sides of the equation, or offsetting effects on the same side of the equation. The accounting equation is also written as Liabilities = Assets – Shareholder Equity and Shareholder Equity = Assets – Liabilities.

5 pillars of accounting

Assets liability capital income expense

Fitness Equipment Limited Year Ended March 31, 2008 2007 --------------------------------------------------------------------------------Revenue \$ 14,580.2 \$ 11,900.4 \$ 8,290.3 Cost of sales (6,740.2) (5,650.1) (4,524.2) ------------------------ ----------Gross profit 7,840.0 6,250.3 3,766.1 ------------------------ ----------INCOME STATEMENTS (in millions) 2009

---------.525.9 \$ 29.8) ------------2.1 13.7) ----Profit (or loss) for the year 353.-----------Total operating expenses (22.0 ------\$ ------- ------------46.---------.8) (11.SGA expenses (3.7) ----------.624.4) (584.142. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In millions) 2009 . 2008 2007 --------------------------------------------------------------------------------------------Revenue \$ 36.8) Impairment loss (17.1) -----------2.3 ----Income tax expense (235.5) ----------.6) Depreciation (602.441.8 Cost of sales (18.5) (4.6) ------------4.215.132.968.0) -----------\$ 1.545.9 ------- ------- ------\$ Year Ended December 31.827.8) (15.980.9 -----------(1.8 9.------------ DEXTERITY INC.3 (119.997.3) Amortization (209.951.1 ----Gains from disposal of fixed assets Interest expense (142.6 \$ \$ (3.6 \$ 21.498.858.3) -----------\$ 2.954.0) ----Operating profit 732.---------.-----------Gross profit 17.485.172.656.4 (3.458.1) (3.---------.1) — — ----------.7) (4.5) (562.0 ------------(1.034.829.186.732.7) ------------4.2 -----------(124.296.142. general and administrative expenses (4.3 ----------.697.8) ----Profit before tax 589.-----------Operating expenses: Selling.3) (3.9) (141.745.9) (111.

481.9) ----------- -------- \$ (5.348.0) \$ 4.7 12.665.9) Profit (or loss) from associates.6) \$ -------- (3. Balance Sheet of XYZ.\$ Operating profit (or loss) 5.090.1) --.439. share of profit (or loss) from associates and non-controlling interest 8.6 --.4) \$ 9.6 \$ (4.-----------Profit (or loss) from continuing operations before tax. It does not show all possible kinds of assets.3) Profit (or loss) from non-controlling interest. it could be a consolidated balance sheet. net of tax 0.263.-----------Profit (or loss) from continuing operations \$ 2. net of tax (3.3) --. As of 31 December 2009 ASSETS Current Assets Cash and Cash Equivalents Accounts Receivable (Debtors) Less : Allowances for Doubtful Accounts Inventories Prepaid Expenses Investment Securities (Held for trading) Other Current Assets .651.8) (5.9) (799.678.8 -------(802.268.-----------Profit (or loss) from discontinued operations.789. Monetary values are not shown.-----------Income tax expense (1.510. but it shows the most usual ones.6 25.4 Sample balance sheet The following balance sheet is a very brief example prepared in accordance with IFRS.7) -------5.815.1 -------- ------------.0 --.461.1) ----------\$ (7. liabilities and equity. net of tax 164.3 (718. Because it shows goodwill.971.7) \$ (4.4) -------- ----------(1.1 (37.510. summary (total) rows are missing as well.0) ----------(1. Ltd.-----------Profit (or loss) for the year \$ 2.3) ----------\$ (8.5) (20.5 --.-----------Interest income 11.0 Interest expense (742.9 \$ 4.778.

g. e. Pension Obligations Other Non-Current Liabilities. 4. etc.g. Biological assets. Plant and Equipment (PPE) Less : Accumulated Depreciation Investment Securities (Available for sale/Held-to-maturity) Investments in Associates Intangible Assets (Patent. 2. accounts receivables. 2. such as apple trees grown to produce apples and sheep raised to produce wool. Preference Shares) Share Premium Less: Treasury Shares Retained Earnings Revaluation Reserve Accumulated Other Comprehensive Income Assets Current assets 1. Cash and cash equivalents Accounts receivable Inventories Prepaid expenses for future services that will be used within a year Non-current assets (Fixed assets) 1. Copyright. 3. Property. Deferred Tax Assets. Lease Obligations SHAREHOLDERS' EQUITY Paid-in Capital Share Capital (Ordinary Shares. Notes/Bonds Payable Deferred Tax Liabilities Provisions.g.) Less : Accumulated Amortization Goodwill Other Non-Current Assets. Lease Receivable LIABILITIES and SHAREHOLDERS' EQUITY LIABILITIES Current Liabilities (Creditors: amounts falling due within one year) Accounts Payable Current Income Tax Payable Current portion of Loans Payable Short-term Provisions Other Current Liabilities. e. Trademark. plant and equipment Investment property. e. 4. and cash and cash equivalents) 5. e.Non-Current Assets (Fixed Assets) Property. which are living plants or animals.g. Unearned Revenue. 3. such as real estate held for investment purposes Intangible assets Financial assets (excluding investments accounted for using the equity method. Deposits Non-Current Liabilities (Creditors: amounts falling due after more than one year) Loans Payable Issued Debt Securities.[17] .g. Investments accounted for using the equity method 6. e. Bearer biological assets are plants or animals which bear agricultural produce for harvest.

shareholders' equity by construction must equal assets minus liabilities. It comprises: 1. Records of the values of each account in the balance sheet are maintained using a system of accounting known as double-entry bookkeeping. Regarding the items in equity section. Financial liabilities (excluding provisions and accounts payable). issued and fully paid. Liabilities See Liability (accounting) 1. Deferred tax liabilities and deferred tax assets 6. Anythingthat will provide benefit to the business is Debit. 14. preferences. we have established followingrules for Debit and Credit: 11. 3. however. Numbers of shares authorized. shareholders' equity is part of the company's liabilities: they are funds "owing" to shareholders (after payment of all other liabilities). 2. Provisions for warranties or court decisions 3. Fromour discussion up to this point. Liabilities and assets for current tax 5. which is known as the shareholders' equity. and are a residual. 5. The balance of assets and liabilities (including shareholders' equity) is not a coincidence. the following disclosures are required: 1. and issued but not fully paid Par value of shares Reconciliation of shares outstanding at the beginning and the end of the period Description of rights. Unearned revenue for services paid for by customers but not yet provided  Equity The net assets shown by the balance sheet equals the third part of the balance sheet. including shares held by subsidiaries and associates Shares reserved for issuance under options and contracts A description of the nature and purpose of each reserve within owners' equity Rules of Debit and Credit · 10. In this sense. 4. and restrictions of shares Treasury shares. 12. Non-controlling interest in equity Formally. "liabilities" is used in the more restrictive sense of liabilities excluding shareholders' equity. Accounts payable 2. · 15. such as promissory notes and corporate bonds 4. OR 13. usually. Issued capital and reserves attributable to equity holders of the parent company (controlling interest) 2. 8. Boththese statements may lookdifferent but in fact if we consider that whenever an account . 6. 7. Anyaccount that obtains a benefit is Debit. 9.

the assetaccount is 38. · 31. 23. 35. the `thing' is termed as Asset. it willhave to return that benefit to the business then both the 17. 21. i. Credited 39. 18. statementswill look like differentsides of the same picture. 40. Increase in Asset is Debit 36. As explained in the case of Debit. benefits as a result of a transaction. Similarly we have established thatwhenever a business transfers a value / benefit to an accountand 29. For credit 20. forsay 37. whenever an account provides benefit to the business the 25. By combining both these rules we can devise followingrules of Debit and Creditfor Assets: 32. 16 42. cash.16. businesswill have a responsibility to returnthat benefit at some time in future and so it is Credit. Rules of Debit and Credit forAssets 27. o When an asset is created or purchased. · 24. Decrease in Asset is Credit 41. o Reversing the above situation if the asset is sold. · 19. ii. as a result creates some thingthat will provide futurebenefit. Anyaccount that provides a benefit is Credit. Anything to which the business has a responsibility to return a benefit in future is Credit. which is termed as disposing off. so it is 33. · 28. 30. the asset account provides benefit to the cash account. 26.value / benefit is transferred to that account. Therefore. ©Virtual University of Pakistan . OR 22. Debited 34.

.43.

Increase in Liability is Credit 54.44. when we pay cash forany expense that expenseaccount 66. Increase in Expenditure is Debit 70. Therefore. Incomeaccounts are exactly opposite to expense accounts just as liabilities are opposite to that of 78. Expenditureaccount will be credited 73. vii. 72. · 63. VU 46. the benefit from expenses is for a short run. we will receive 71. Decrease in Expenditure is Credit 75. iv. 50. benefits from cash. if we return any item that we had purchased. From assets. o Now we can lay down ourrule for Expenditure: 68. Therefore. it is Debited. Therefore. · 48. Rules of Debit and Credit forExpenses 59. using the same principle we can draw our rules of Debit and Credit forIncome 81. business to return a benefit. we have to payfor expenses. o When the business returns the benefit or repays the liability. iii. · 80. Increase in Income is Credit . the liabilityaccount benefits 55. So it is Debited 56. cash in return. · 65. · 60. · 77. 82. Credited 52. Rules of Debit and Credit forIncome 76. assets. 64. liabilities are the exact opposite of the assets. Justlike assets. 79. 69. Decrease in Liability is Debit 58. Using our rule for Debit and Credit. 62. we draw benefit for a long time whereas 61. FinancialAccounting (Mgt-101) 45. therefore. 57. 53. v. vi. Rules of Debit and Credit forLiabilities 47. Anythingthat transfers value to the business. o Reversing the above situation. o When a liability is created the benefit is provided to business by thataccount so it is 51. 67. is a Liability. and in turncreates a responsibility on part of the 49. from the business. Therefore. Expenditure is just likeAsset but for a short run. 74. Cash account willreceive benefit from thatExpenditure account.