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Introduction

of
Financial Accounting

DEFINE BUSINESS
Any legal activity which is doing for the purpose of earning profit is called business.
TYPE OF BUSINESS
Manufacturing
Trading
Servicing
TYPE OF BUSINESS ORGANIZATION
Trading
Partnership
Joint stock company
DEFINE TRANSACTION
Any dealing between two or more person which can change the financial position of the business is called
Transaction.
Type of transactions
Cash Transaction
Credit Transaction
DEFINE BOOK KEEPING.
Recording of business transactions in books of account in prescribed manner.
DEFINE ACCOUNTING.
Accounting is an art of recording, clarifying, summarizing and interpreting the results from financial statements.
DEFINE PROPRIETOR.
He is the owner of the business. He gives time and invests money into the business.
DEFINE CAPITAL.
The amount of cash or the value of goods or both invested by the owner in establishing his business is known as
capital.
or
Owner contribution in business assets is called capital.
DEFINE THE TERM DRAWING.
Withdrawal of cash or goods from the business for private and personal use of the owner is called drawing.
WHAT IS GOODS (MERCHANDISE)?
Anything which is purchased for resale purpose is called goods e.g. cloths are goods for cloth merchant.
DEFINE PURCHASES.
Goods purchased are called purchases, purchases are of two type
Cash Purchases
Credit Purchases
DEFINE CASH PURCHASES.
Goods purchased for cash are called cash purchases.
DEFINE CREDIT PURCHASES.
Goods purchases on credit are called credit purchases.
DEFINE PURCHASES RETURN / RETURN OUTWARD / RETURN TO SUPPLIER.
If goods purchased are returned to the supplier, it is called purchases return. The good are returned when they
are:
Defective
Not according to sample
Damaged

Excess of the quantity ordered for

DEFINE PURCHASES ALLOWANCE.


If the purchaser informs the supplier that some goods are defective and the supplier reduce some amount. This
reduction in price is known purchase allowance.
WHAT IS SALES ALLOWANCE?
If the customer informs the seller that some goods are defective and seller reduced some amount this reduction
in prices is known as sales allowance.
WHAT IS SALES?
Goods sold are called sales. Sales are of two kinds;
Cash sales
Credit sales
WHAT IS CASH SALES?
Goods sold for cash are called cash sales.
WHAT IS CREDIT SALES?
Goods sold on credit are called credit sales.
WHAT IS SALES RETURN (RETURN INWARD)?
If the customer returns the goods it is called sales return goods returned when they are

Defective
Not according to sample
Damaged
Excess of the quantity ordered for

WHAT IS STOCK (INVENTORY)?


Unsold goods are called stock / inventory.
DEFINE VOUCHER
Written evidence in support of business transaction e.g
Cash memo
Invoice
Cash receipt voucher
Cash payment voucher
DEFINE CASH MEMO.
Written evidence in support of cash transaction.
WHAT IS INVOICE?
Written evidence in support of a credit transaction.
WHAT IS DEBTORS (ACCOUNT RECEIVABLE)?
Debtors (account receivable) are those persons from whom the amount is receivable for goods sold on credit.
WHAT IS CREDITORS (ACCOUNTS PAYABLE)?
Creditors (account payable) are those persons to whom the amount is payable for goods purchased on credit.
WHAT IS DISCOUNT?

Reduction in the price of non-defective goods


Trade discount
Cash discount
(a) Discount allowed / Sale Discount

(b) Discount received / Purchases Discount


WHAT IS ALLOWANCE?
Reduction in the price of defective goods
Purchases allowance
Sales allowance
WHAT IS TRADE DISCOUNT?
It is deduction allowed by a trader on the lit price of the goods. It is not recorded in books of account.
WHAT IS CASH DISCOUNT?
Deduction allowed by a creditor to his debtor for making prompt payment is called cash discount.
Types of cash discount
Discount allowed
Discount received
WHAT IS ASSETS?
Valuable things posses by the business are called asset e.g. building, machinery, furniture etc.
TYPES OF ASSETS?
Tangible
Intangible
DEFINE LIABILITIES
Outsider contribution in business assets are called liabilities.
or
These are the amounts payable by the business e.g. bank loans and creditor.
DEFINE EXPENSES
Expense is an expired portion of acquisition price.
or
Cost of goods and services used up in the process of generating income.
Rent paid
Salaries paid
Wages paid
Interest paid
DEFINE EXPENDITURE
The cost of acquiring the assets is called expenditure.
DEFINE INCOME (REVENUE)
It is the price of goods sold or services rendered by the business e.g.
Rent received
Interest received
Commission received
Sales
WHAT IS CASH TRANSACTIONS?
If the value of transaction is met in cash immediately it is called cash transaction.
WHAT IS Credit Transactions?
If the value of transaction is not met in cash immediately it is called credit transaction.
WHAT IS COMMISSION?
It is remuneration for services rendered by one person to another person.

WHAT IS DOUBLE ENTRY SYSTEM?


Systems in which two fold aspect (Dr & Cr) of transaction are recorded.
DEFINE EQUITY
Claim against business assets.
Equity is of two types
Owner equity / capital (owner contribution in business assets)
Outsider equity / liabilities (outsider contribution in business assets)
WHAT IS DRAWINGS?
Cash or Goods withdrawn by the owner from the business for personal use is called drawings.
HOW MANY TYPES OF ACCOUNTING?
Financial accounting
Management accounting
Cost accounting
WHAT IS FINANCIAL ACCOUNTING?
It is an accounting which is used to calculate the profit or loss and observe the financial position of the business.
WHAT IS COST ACCOUNTING?
It is an accounting which is used to calculate cost of product.
WHAT IS MANAGEMENT ACCOUNTING?
It is an accounting which is used for the decision making.
WHAT IS CASH SYSTEM OF ACCOUNTING?
It is a system in which accounting entries are made only when cash received or paid.
WHAT IS ACCRUAL SYSTEM OF ACCOUNTING?
It is a system in which accounting entries are made when transaction carried, whether on cash or on credit.
DEFINE CASH SYSTEM OF ACCOUNTING
It is a system in which accounting entries are made when cash is received or paid.
PARTIES INTERESTED IN ACCOUNTING INFORMATION?
Creditors
Debtors
Owners
Teachers
Students
Government
Employees
WHAT IS SINGLE ENTRY SYSTEM?
A system in which only one effect of transaction is recorded or two effect of transaction is recorded or sometime
no effect of transaction is recorded.
DEFINE DOUBLE ENTRY SYSTEM?
A system in which two fold aspect ( Dr & Cr) of each transaction is recorded.
DEFINE ACCRUAL SYSTEM OF ACCOUNTING
It is a system in which accounting entries are made on the basis of amount having become due for payment or
receipt.
WHAT IS FUNDAMENTAL ACCOUNTING EQUATION?
ASSETS = LIABILITIES + CAPITAL
WHAT IS MEANT BY THE TERM CONCEPT IN ACCOUNTING?

Accounting concept means the basic assumption upon which accounting is based.
DEFINE BUSINESS ENTITY CONCEPT.
According to this concept business is treated as separate person from its owner.
DEFINE GOING CONCERN CONCEPT.
According to this concept business will continue for a long period of time.
DEFINE MONEY MEASUREMENT CONCEPT.
According to this concept we record only those transactions which can be measured in term of money.
DEFINE COST CONCEPT
According to this concept an asset is recorded in the books at the price at which it was acquired.
DEFINE DUAL CONCEPT
According to this concept every transaction have two effect. (one is Dr & other is Cr)
DEFINE ACCOUNTING PERIOD
According to this concept life of a business is divided into small segment (1 Year) and each small segment is
called accounting period e.g. 1ST JANUARY 2005 -------------------------- 31ST DECEMBER 2005
DEFINE MATCHING CONCEPT
The concept of offsetting expenses against revenue is called matching concept.
or
According to this concept expense are match with income, we should consider only those expenses which are
incurred to generate income of that period.
Net profit (Year2005) = Income (Year 2005) Vs Expenses (Year 2005)
DEFINE REALIZATIONS CONCEPT
Revenue should be recognized at the time when goods are sold or services are rendered.
DEFINE THE TERM CONVENTION.
It means those customs or traditions which guide the accountant in maintaining the accounting record.
DEFINE CONVERSION OF DISCLOSURE.
It means important information relating to transaction must be disclosed.
DEFINE THE CONVENTION OF MATERIALITY.
It means we should record only those events which are significant and insignificant events should be ignored.
DEFINE CONVENTION OF CONSISTENCY.
It means that accounting practice should remain unchanged from one period to another.
DEFINE CONVENTION OF CONSERVATISM.
It means that uncertain and risk inherit in business transaction should be given a proper consideration.

Natures of Accounts rules of


Debit, credit & Journal

DEFINE ACCOUNT.
A summarized record of business transactions relating to a person or thing is called account.
DEFINE REAL ACCOUNT (PROPERTY ACCOUNT).
Real account deals with those things which tangible visible or which exist in reality like machinery, building etc.
DEFINE NOMINAL ACCOUNT (PROPRIETARY ACCOUNT)?
Nominal account deals with those things which are intangible or invisible or which do not exist in reality like
Salaries rent interest etc.
DEFINE PERSONAL ACCOUNT?
Accounts relating to persons firms companies and industries are personal account like.
EXPLAIN THE TERM OF DEBIT AND CREDIT.
If we divided the page into two part then left hand side will be called debit and right hand side will be called
credit.
HOW MANY NUMBERS OF ACCOUNTS ARE IN BRITISH APPROACH?
There are three types of account are in British approach:
Real account
Nominal account
Personal account

RULES OF DEBIT AND CREDIT ACCORDING TO BRITISH/TRADITIONAL APPROACH.


ACCOUNTS NAME

DEBIT

CREDIT

Real accounts

Coming into business

Going out from business

Nominal Accounts

Expenses

Income

Personal Accounts

Receiving person

Giving person

HOW MANY NUMBERS OF ACCOUNTS IN AMERICAN APPROACH.


There are five accounts in American approach:
Assets
Expenses
Income
Liabilities
Owner equity
RULES OF DEBIT AND CREDIT ACCORDING TO AMERICAN/MODREN APPROACH.
ACCOUNTS NAME
Assets Account
Expense Account
Income Account
Liabilities
Owner equity Account

DEBIT
Increase
Increase
Decrease
Decrease
Decrease

CREDIT
Decrease
Decrease
Increase
Increase
Increase

DEFINE JOURNAL
The book of account in which business transactions are originally recorded in chronological order are called
journal
or
Journal has been derived from the French words Jour which means day.
Journal is the first book of accounting in which we record business transaction chronologically.
DEFINE ENTRY.
To enter the transactions in journal is called entry.
DEFINE JOURNALIZING.
The act of recording transactions in journal is called journalizing.
DEFINE NARRATION.
A short explanation of each transaction is written below each entry is called narration.
DEFINE SIMPLE ENTRY.
An entry in which one account is debited and one account is credited is called simple entry.
DEFINE COMPOUND ENTRY.
An entry in which more than one account is debited or more than one account is credited is called compound
entry.
WHY JOURNAL IS CALLED DAY BOOK?
Journal is called day book because all transactions are recorded on daily basis.
WHY JOURNAL IS CALLED BOOK OF ORIGNAL ENTRY / PRIME ENTRY / BASIC ENTRY?
Journal is called book of original entry because transaction first recorded in journal.

Ledger and Trial Balance

LEDGER AND TRIAL BALANCE


DEFINE LEDGER.
The book in which individual record of each account is maintained.
or
The book in which all the business transactions are finally recorded in the concerned account in a
Summarized and classified form is called ledger
DEFINE POSTING.
The process of recording business transaction in ledger called posting.
EXPLAIN THE TERM BALANCE.
The difference between the two sides of an account is called balance.
EXPLAIN DEBIT BALANCE.
If the debit side of an account is heavier. Its balance is known as debit balance.
EXPLAIN CREDIT BALANCE.
If the credit side of an account is heavier. Its balance is known as credit balance.
EXPLAIN ZERO BALANCE.
If the two sides of an account are equal then it will be called zero balance.
WHAT ARE THE KINDS OF LEDGER?
There are three kinds of ledger:
Debtor ledger
Creditor ledger
General ledger
DEFINE DEBTOR LEDGER.
It contains the accounts of all the customers (debtors) to whom goods have been sold on credit.
DEFINE CREDITOR LEDGER.
It contains the accounts of all the suppliers (creditor) from whom, good have been purchased on credit.
DEFINE GENERAL LEDGER.
It may contain the records of real and nominal account items.
DEFINE TRAIL BALANCE.
A trial balance is a list of debit and credit balance of all ledger accounts.
It has two purposes:
Check the accuracy of accounts
Prepare a summary of accounts
DEFINE FOLIOING.
When the page number of ledger is recorded in ledger folio column of journal & page number of journal is
recorded in journal folio column of ledger is known as folioing.
EXPLAIN AND DRAW ACCOUNTING CYCLE.
It refers to a complete sequence of accounting procedures which are required to be repeated in same order
during each accounting period.
Transaction
Final Account

Journal
Trial balance
Ledger