FROM THE DESK OF FAISAL DAWRA (APFA,MBA)

Definition
“Accounting is a language of business. The managers, cashiers and
others use the term accounting to explain the events of the existence
of business.” OR
“Accounting is an art of recording, classifying, summarizing and
presenting the financial transactions in a significant manner and in
terms of money.”

Accounting is an art of Books of Accounts

Recording General Journal

Classifying General Ledger
Summarizing Trial Balance
Presentation Financial Statements

Accounting objective
The accounting profession tends to view the basic objective of
accounting as providing useful financial information to aid in
making financial decisions. From a financial accounting view
point, where the emphasis is on external reporting, this objective
is fulfilled by providing financial statement about a business
enterprise that can be used by those outside the firm (investors,
creditors and others) to aid in making the financial decisions.
Accounting terminologies
 Business
Any activity undertaken with the objective of earning profit is
called a business.
The term business is classified into three groups.
 Trading
 Manufacturing
 Service
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 FROM THE DESK OF FAISAL DAWRA (APFA,MBA)

 Business organization
Actually the sense of organization is a ‘Firm’, concern or
enterprise, company business units and these all contains the
service of a group of persons, it may be owned by:
a)One person i.e sole proprietorship
b)Two or more than two persons i.e Partnership and Company
 Transaction
 Any exchange of value is called transaction such as:
 Purchase of merchandise, land, building and furniture
 Sold merchandise, old furniture, building and equipment
 Rendered services
 Received cash, cheque, note or bill
 Paid cash, cheque, note or bill
 Cash transaction
The transaction which involves the immediate exchange of cash
is called cash transactions.
 Credit transaction
The transaction in which the exchange of value is involved but
the immediate exchange of cash is not made, the receipt and
payment are to be made later on.
 Merchandise
The things in which a firm deals is merchandise for that firm or
business. The commodities which are bought and sold are
known as merchandise
 Purchases
It means the commodities or merchandise purchase for being
sold.
 Purchase return and allowance
If the purchaser of merchandise return all or some items of
purchase due to certain reasons as damaged, oversupplied by

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 FROM THE DESK OF FAISAL DAWRA (APFA,MBA)

the seller or are not according to the sample provided by the

buyer
 Purchase discount
The rebate amount allowed by the supplier on purchases.
 Sales
It means the merchandise or commodities sold which were
being purchased for sale.
 Sales return and allowance
If the seller of merchandise gets back all or some of the items
of the sales from a person or a firm it is known as sales return.
 Sales discount
The rebate amount allowed to the customer on sales.
 Accounts receivables
On account of credit sales an amount becomes due from the
purchaser/ customers that amount is known as accounts
receivables.
 Accounts payables
On account of credit purchase an amount becomes payable
to the seller that account is known as accounts payable.

 Bad debts or Uncollectable

If the total or portion of the total amount collectible from the
account receivables becomes uncollectable by the firm it is
known as bad debts or uncollectable
 General journal (GJ)
GJ is the general where the double entries are recorded
 General ledger (GL)
GL is the general where, all the transactions which are recorded
through double entry in the GJ, are classified according to the
head of account i.e. all transactions that are related with the
same account head written in a particular “ T” format.
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 FROM THE DESK OF FAISAL DAWRA (APFA,MBA)

 Trial Balance
Trial balance is the summery of all the transactions related to all
head of accounts i.e. Asset, Expense, Liability, Capital and
Revenues
 Financial Statement
Financial statement shows the monetary state of an entity, that
how much financial position is strong, what is the profitability of
an entity, what are the resources of cash inflows and cash out
flows and all relevant working regarding facts and figures.
 Double entry book keeping system
Double entry book keeping system is the system in which all the
financial transactions are recorded by entering them in two sides,
one side is called DEBIT side and the other side is called CREDIT
side.

The father of accounting “LUCA PACIOLI” firstly used the two

Latin words “DEBERE” (means to OWE) and “CREDRE” (means to
ENTRUST) in his books. These Latin meanings give us our first
glimpse (hint) into the underlying principles that the DEBIT and
CREDIT classification system seeks to maintain. It must also be
clear that we got the debit abbreviation ‘Dr.’ and credit
abbreviation ‘Cr.’ From the Latin, because unlike the Latin term,
there is no ‘r’ in the English term DEBIT

Complete Set of Financial Statement

A complete set of financial statement comprises as follows:
1) Statement of Financial position (Balance Sheet)
2) Statement of comprehensive income (Income Statement)
3) Statement of cash Flows
4) Statement of changes in equity
5) Notes to the financial statements
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 FROM THE DESK OF FAISAL DAWRA (APFA,MBA)

Elements of accounts OR Categories of Accounts

1) Assets
2) Expenses
3) Capital
4) Liabilities
5) Revenues

ASSETS
Assets are those items that results in an inflow of future economic
benefits. OR
Assets are the resources owned, managed and control by the entity
and that are expected to generate the future economic benefits.

There are two types of assets:

Current assets are those items that results in an inflow of future

economic benefits with in a period of 12 months.
Non Current assets are those items that results in an inflow of future
economic benefits with in a period of more than 12 months.
Expenses
Expenses are those outflows that are necessary to run the ordinary
business activities. OR
Expenses are that item that provides current economic benefits to
the entity.
Capital
Capital is the original amount of investment made by the owner.

Liabilities
Liabilities are those obligations that results in an outflow of future
economic benefits.

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 FROM THE DESK OF FAISAL DAWRA (APFA,MBA)

There are two types of liabilities:

Current liabilities are those obligations that results in an outflow of

future economic benefits with in a period of 12 months.

Non Current liabilities are those obligations that results in an outflow

of future economic benefits with in a period of more than 12 months.

Revenues
Revenues are the gross receipts from the business without deducting
any expense.
Non current assets Current assets
Land Accounts Receivables
Building Prepaid expenses
Furniture and fixture Inventory
Plant Cash in hand
Machinery Cash at bank
Motor vehicles Accrued income (Rent, Interest or commission etc)
Non Current liabilities Current liabilities
Long term loan Accounts payables
Mortgage Accrued expenses (Salaries, rent, Interest or Commission
etc)

Debentures Taxes payables

Expenses Revenues
Rent Sales (Main activity)
Salaries Interest
Depreciation Commission
Interest Rent
Utilities expenses
Bad debt expenses Contra Assets
Misc. expenses Allowance for bad debts
Allowance for depreciation
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 FROM THE DESK OF FAISAL DAWRA (APFA,MBA)

Contra Revenue Contra Expense

Sales return Purchase return
Accounting equation
Resources = Sources
Assets = Equities
Assets = External equities + Internal equities
Assets = Liabilities + Proprietorship
LHS = RHS
Dr. = Cr.

Accounting equation for debit and Credit rule purpose

Dr. Cr.

Assets + Expenses = Capital + Liabilities + Revenues

Cr. Dr.

Q.1: Record the following entries in general journal of Shan company.

1. Started business with Rs. 450000
2. Purchase building on cash Rs. 200,000.
3. Purchase office supplies on cash Rs. 1000
4. Purchased computer on account from Mr. Noman Rs. 10,000
5. Purchase machinery on credit from Mr. Kashif Rs. 50,000
6. Paid shop rent of Rs. 500

Q.2: Record the following entries in general journal of Kashan

company.
1. Started business with Rs. 600000
2. Paid cash into bank Rs. 3000
3. Paid insurance Rs. 1500
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 FROM THE DESK OF FAISAL DAWRA (APFA,MBA)

4. Purchase computer on account from Mr. Salman Rs. 15000

5. Purchase office supplies on cash Rs. 3000
6. Purchase machinery on credit from Mr. Aslam Rs. 60000
7. Purchase building on cash Rs. 500000

Q.3: The following transactions were completed by Rizwan Brothers

during the month of Jan 2010.
1. Invested cash in the business by Rizwan Rs. 40000
2. Invested cash Rs. 40000 and building Rs. 100000 in the business by
Rizwan.
3. Purchase merchandise for cash Rs. 12000
4. Purchase merchandise on account Rs. 10000 from Rashid
5. Purchase merchandise of Rs. 20000 cash paid Rs. 8000 and
balance on credit.
6. Defective merchandise returned (on cash) Rs. 2000
7. Defective merchandise returned (on account) to Rashid Rs. 5000
8. Paid cash to Rashid Rs. 6000
9. Paid cash to supplier on account Rs. 9800 in full settlement of
Rs.10000.
Required:
Record all the transactions in the General Journal.
Q.4: The following transactions were completed by Hashim brothers
during the month of Feb 2005.
1. Commission earned and received Rs. 20000
2. Paid salaries by cheque Rs. 5000
3. Paid carriage/ transportation expense Rs.1000
4. Withdrew cash for personal use Rs. 5000
5. Withdrew merchandise for personal use Rs. 8000
6. Withdrew cash from bank for office use Rs. 6000
7. Paid insurance for 5 months in advance Rs.7000

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 FROM THE DESK OF FAISAL DAWRA (APFA,MBA)

8. Paid advance to supplier Rs. 8000

9. Received advance from customer Rs. 10000
Required:
Record all the transactions in General Journal.
Q.5: Irshad & company started business on Ist July, 2009 with Rs.
600000 in cash and machinery worth Rs. 200000.
2 July purchase merchandise on cash Rs. 8000 and on credit Rs.
20000 from Raja and Co.
4 July paid carriage Rs.2,000
6 July purchase office supplies on cash Rs.2,000
10 July Sold merchandise on cash Rs. 12,000 and on account
Rs.25,000 to pervaiz & co.
12 July Returned merchandise Rs. 1,000 to Raja & Co.
15 July paid to Raja & Co Rs.5,000 and received discount
Rs.500.
18 July paid salaries for the month Rs.12,000
20 July Retuned merchandise from Pervaiz & Co. Rs. 1,500
22 July received rent income Rs. 6000
25 July collected cash Rs. 10000 from Pervaiz & Co and allowed
discount of Rs. 800
30 July withdrew cash and merchandise for private use Rs. 2000
and 500 respectively
30 July purchase merchandise on account from Raza Rs. 10000
31 July Sold merchandise to Rashid on account Rs. 3500
Required:
a) Entries in General Journal to record the above transitions.
b) T – Accounts in the ledger, complete with all posting.
c) Trial Balance.

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