SKILL SESSION

IST LECTURE
BASIC CONCEPTS, METHOD AND DEFINITION OF ACCOUNTING
ACCOUNTING
It is an art as well as science of recording, classifying and
summarizing the business transactions and interpret result
thereof.
OR
It is a systematic way of recording
OR
It is a business language.
Business
Any Lawful Activity to earn profit is called business.
Non Profitable Organization/Welfare Institute or NGO
Work for welfare or specific purpose not for profit.
TYPES OF BUSINESS
(As per formation)
Sole Proprietor / Business Individual
Partnership (Association of Person AOP)
Company
Public
Private
Limited or unlimited
Partnership (Association of Person AOP):
A partnership is governed by the Partnership Act, 1932.
Registration: The registration of a partnership concern is
not compulsory. There are certain privileges given to the
registered firms which are denied to unregistered ones. 

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 Number of Members: A partnership can be started by at
least two persons. The maximum number is ten in case of
banking and insurance business and it is twenty for any
other business.
Legal Status: A partnership has no separate legal entity
apart from its members. Members cannot enter into an
agreement with the firm.
Liability: The liability of partners is unlimited. The partners
are jointly and separately responsible for the liabilities of
the business.
Transfer of Shares: A partner can transfer his share only
with the consent of all other partners.
Management and Control: A partnership concern is
managed and controlled by the partners. The partners
have a right to participate in the administration of
business.
Private Limited Company
Private Limited Company is governed by the Companies
Act, 1956
Registration: The registration of a company is compulsory.
There are two stages in registering private limited
company, the first is ‘Incorporation’ and the second is
‘Commencement of Business’. A private limited company
can start business after obtaining certificate of
incorporation.
Number of Members: There must be at least two persons
for starting a private company and maximum number of
members can be fifty.

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 Legal Status: A Private Company has a separate legal
entity.
Liability: The liability of shareholders is limited to the
value of shares held by them. The members are not
personality liable for the obligations of the business.
Transfer of Shares: A shareholder can sell his shares
whenever he feels so. There is no binding no the transfer
of shares of a company.
Management and Control: A private company is managed
by elected representatives of the shareholders.
TYPES OF BUSINESS
(As per function)
Trading
Manufacturing
Service
STATUTORY / REGULATORY BODIES
I.A.S.B (International Accounting Standard Board)
Maintain I.F.R.S
F.A.S.B (Federal Accounting Standard Board)
Maintain G.A.A.P
S.E.C.P (Securities and Exchange Commission of Pak)
F.B.R. (Federal Board of Revenue)
S.R.B (Sindh Board of Revenue)
Pakistan Stock Exchange.
State Bank Of Pakistan
Accounting VS Finance
Accounting:

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The systematic and comprehensive recording of financial
transactions pertaining to a business. Accounting also refers to
the process of summarizing, analyzing and reporting these
transactions.
Finance:
The science that describes the management, creation and study
of money, banking, credit, investments, assets and liabilities.
Finance consists of financial systems, which include the public,
private and government spaces, and the study of finance
and financial instruments, 

BASIS OF ACCOUNTS
CASH BASIS
ACCRUAL BASIS

TYPES OF ACCOUNTING
FINANCIAL ACCOUNTING
COST ACCOUNTING
MANAGERIAL ACCOUNTING

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 SKILL SESSION
2nd Topic
BASIC CONCEPTS, METHOD AND DEFINITION OF
ACCOUNTING
Accruals–

In computing profit revenue earn must be match against the expenditure incurred in earning it.

Going Concern Assumption –

Financial statements are prepared assuming that the company is a going concern which means that
the company intends to continue its business and is able to do so.

OR

The going concern principle is the assumption that an entity will remain in business for the
foreseeable future. (i.e. it has neither the need nor the intention
to liquidate or significantly curtail its operations).

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■ Historical Cost

A measure of value used in accounting in which the price of an asset on the balance sheet is
based on its nominal or original cost when acquired by the company.

Realization

The realization principle is the concept that revenue can only be recognized once the underlying
goods or services associated with the revenue have been delivered or rendered, respectively.
Thus, revenue can only be recognized after it has been earned.

Materiality

A matter is material if its omission or misstatement would reasonably influence the decisions of
a user of the accounts.

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 ILLUSTRATION BASIC ACCOUNTING EQUATION

Assets Liabilities Owner Equity Revenue Expense

Debit INC Dec Dec Dec INC
Credit Dec INC INC INC Dec

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 SUBSIDIARY LEDGERS

 A subsidiary ledger is a group of accounts with a common characteristic,

such as customer accounts.
 The subsidiary ledger is assembled to facilitate the recording process by
freeing the general ledger from details concerning individual balances.
 Two common subsidiary ledgers are the Accounts Receivable Ledger and the
Accounts Payable Ledger.
CONTROL ACCOUNT
 The general ledger account that summarizes subsidiary
ledger data is called a control account.
 Each general ledger control account balance must
equal the composite balance of the individual accounts
in the subsidiary ledger.

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