City Standard Education System

CHAPTER 1
1) Define Accounting?
Accounting:
“Accounting is the art of recording, classifying and summarizing in a
significant manner and in terms of money, transactions and events which
are in part at least of financial character, and interpreting the result
thereof.”
2) Book keeping: Book keeping is the art of recording monetary transactions
in the books of accounts in a proper manner.
3) Business: any legal activity which is done for the purpose of earning profit
is known as business.
4) Accountancy: accountancy is the main subject. The word “Accountancy is
far extensive. It covers the entire body of theory and practice. E.g. Book-
Keeping, Accounting, Coasting, Auditing, Taxation etc.
5) Goods / Merchandises: it refers to something which has been purchased
by a trader for resale purposes or anything which has been manufactured
for selling purposes.
6) Purchases: In accounting language the word “purchases” has special
meaning. When saleable goods are bought in a business it is said that
purchases have been made.
7) Cash purchases: If goods are purchased from a supplier and payment is
made to him at the same time, such purchases are known as cash
purchases.
8) Credit purchases: If goods are purchased from a supplier and payment is
not made to him at the same time, rather the payment is arranged to be
made at some future data, such purchases are known credit purchases.
9) Sales: The goods are purchased for the selling purposes. When these
goods are sold to customers at the specific price, it is said to that sales
have been made.
10) Cash sales: If goods are sold to customers at a specific price and price of
goods is received from them at the time of sale of goods, such sales are
known as cash sales.
1
 City Standard Education System
11) Credit sales: If goods are sold to customers and he doesn’t pay the
price of goods at the time but agrees to make payment on some future
date, such sales are known as credit sales.
12) Return & outwards/ Purchases Returns: Goods once purchased
may subsequently be sent back to the seller for certain reasons, i.e. goods
are defective, not according to specification demand or below standard.
Such return of goods to the buyer is known as returns outwards.
13) Return & inwards/sales Purchases: If a customer to whom goods
have been sold finds that the goods have sold finds that the goods are
defective, unsatisfactory, below standard or not according to specification,
he may return these goods to the seller. To the seller such return of goods
to the seller. To the seller such return of goods is known as sales returns.
14) Debtors/Accounts Receivable: Debtors are the persons or
customers to whom goods have been sold on credit bases and from whom
the business is to receive money in near future. These are also known as
“Accounts Receivable.”
15) Creditors/ Accounts payable: creditors are the person or suppliers
from whom goods have been purchased on credit base and to whom the
business is to play money is near future. These are known as ‘Accounts
Payable’.
16) Trade discount: discount allowed by manufacturer or wholesaler at
the time of selling goods to retailer as a deduction from the list price or
catalogue price is called trade discount.
17) Cash discount: It is a deduction or allowance given by a creditor to
debtor if the amount is paid by the debtor before the due date.
18) Allowances: Sometimes, the customers (buyers) find that good
purchased have minor defects. In that case, the seller may agree to reduce
the price of damaged or defective goods to include the buyer to keep the
goods. Such reduction in price is known as purchases allowance’s to the
buyer and ‘Sales allowances’ to the seller.
19) Assets: Assets are the things having certain value possesses by a
business and receivable by a business no a particular date. For example

2
 City Standard Education System
Cash Furniture Building, Land, Machinery Stock of goods, Debtors,
Accounts receivable bank Balance etc.
20) Liabilities: Liabilities are the debts or obligations of a business.
21) Capital: It is the sources of funds provided by the owner /owners
from the business the business and expand the existing business.
22) Drawings: The amount of cash or goods taken by the owner/ owners
from the business for his personal use is known as “Drawings.”
23) Expenses: Expenses are the costs of goods and services used up in
the process of obtaining revenue e.g. Salaries, insurance, rent etc.
24) Stock/ Inventory: Unsold goods in the business ready for sale are
known as stock or inventory.
25) Accounting concepts: The term concepts include those basic
assumptions or conditions on which the science of accounting is based.
26) Separate Entity Concept: According to this concept business is
treated as a separate entity from its owners.
27) Going concern concept: According to this concept it is assumed that
the business will continue to operate for an indefinite time period, there is
no intention to liquidate the business in the foreseeable future.
28) Money measurement concepts: According to his concept
accounting records only those transaction or events, which can be
measured in term of money.
29) Dual Aspect Concept: According to this concept: According to this
concept, for every debit, there is an equivalent credit”.
30) Accounting period concept: According to this concept, “the life of
the business is divided into a series of relatively short accounting periods
of equal lengths for studying the results shown by the business.
31) Matching concept: the concept of offsetting expenses against
revenue is called the matching concept.”
32) Cost concept: According to this concept, “an asset is ordinarily
entered in the accounting record at the price paid to acquire it.”

CHAPTER 2
3
 City Standard Education System
 Transactions: a business event which can be measured in terms of money
and which must be recorded in books of account is called a “Transaction.”
33) Cash Transaction: If the value of a transaction is met in cash
immediately, it is called cash transaction. E.g. Furniture bought for cash.
34) Credit Transaction: If the value of transaction is not met in cash
immediately, it is called credit transaction. E.g. Furniture purchased on
account or credit.
35) Monetary events: Events are related with money i.e. which change
the financial position of a person are known as “Monetary Events”
36) Accounting Equation: The expression of the equality of an entity’s
assets with the claims against them is referred to as the accounting equation
i.e. Assets = Claims against assets

OR

Assets = Liabilities + Owner’s equity

37) Equity: Equity is the claim against the assets of the business.

Equity = Liabilities + owner’s equity.

CHAPTER 3
38) Double Entry system: The
system under which both the changes in transaction are recorded one
change is debited while the other change is credited with an equal
amount.
39) Single Entry system: A
system in which sometimes both aspects of a transaction are recorded
sometimes only one aspect of a transaction is recorded and sometimes no
aspects of a transaction is receded is called single entry system.
40) Nominal accounts: Account
which is with expenses losses and gains are known as nominal account
e.gh. Carriage n loss by theft etc.
41) Real or Property Accounts:
Accounts which are related with properties or things owned by a business
are known as real or property accounts e.g. Land building office equipment
etc.

4
 City Standard Education System
42) Personal Accounts:
Accounts which are relates with persons or institutions are known as
personal accounts e.g. Habib Bank Debtor’s account. Creditors accounts
etc.
CHAPTER 4
43) Journal: The book in
which transactions are first of all recorded chronologically together with is
short description is called “Journal.” It is also called “Book of Original
Entry.” Or “Prime Entry” or Primary Entry or Preliminary Entry or First
entry.
44) Compound entry: An entry
which more than one account is debited or more than account is called
credited is called Compound entry.
45) Narration: A short
explanation of each transaction which is written under each entry is called
Narration.
CHAPTER 5
 Ledger: The ledger in which all the transaction of a business concern are
finally recorded in the concerned accounts in a summarized and classified
form is called ledger.
 Posting: The process of transferring information debits and credits form
journal to ledger is known as posting.
Stages of Accounting Cycle: Following stages are include accounting
cycle Transaction Journal Ledger
Trial Balance Final Accounts
 Trial Balance: An informal accounting schedule or statement that list the
ledger account balances at a point in time and compares the total of debit
balances with the total of credit balances is called “Trial Balance.”
CHAPTER 6
 Bill of Exchange: An unconditional instrument in writing address by one
person to another signed by the person giving it requiring the person to
whom it is addressed to pay on demand pr at a fixed or determinable fixed
future time a sum certain in money to or to the order of a specific person
or to the bearer.
 Drawer: A person who draws a bill if exchange is known as drawer.
 Drawee: A person to whom a bill of exchange is drawn is known as
Drawee.
 Payee: A person who receives the amount of bill is known as payee.

5
 City Standard Education System
 Accommodation bills: Accommodation bills are drawn and accepted
without any sale purchases of goods the main purpose of such bills is to
help one party or both the parties financially.
 Maturity: Maturity is the due date of the bill at which the amount of bills
is received or paid.
 Days of grace: The three additional days which are allowed to Drawee for
the payment of bill of exchange are called days of grass.
 Endorsement of bills: The procedure by which a bill of exchange is
transferred from one person to another person for the settlement of debts
is called endorsement of bills.
 Dishonor of bills: A bill of exchange is said to be dishonor when its
acceptor refuses to pay the amount of the bill to the holder of the bill on
the maturity.
 Nothing charges: The small fee which the notary public receives from the
holder of the bill in case of dishonor of bill is known as nothing charges.
 Renewal of bill: The cancellation of the old bill before its maturity in
return for a new bill (which includes interest) for an extended period is
called Renewal of bill.
 Retiring of a bill: retiring a bill means to pay the amount of bill before
due date under concession (rebate).
 Promissory note: A promissory note an instrument in writing (not being
a bank note or a currency note) containing an unconditional undertaking
signed by the maker to pay a certain some of money only to or to the order
of a certain person or to the bearer of the instrument.
CHAPTERN 7
 Cash Book/ Cash journal: A book in which all the transaction in which
cash is involved (weather the business has paid cash or received cash) are
recorded is called cash book or cash journal.
 Purchases Book /purchases journal: A book in which only credit
purchases of goods are recorded is called purchases book or purchases
journal it is also called purchased day book Bought book /bought journal,
inward invoice book or invoice book.
 Sales books/ Sales Journal: A book in which only all credit sales of
goods area recorded is called sales book or sales journal it is also called
sales day book, outward invoice book or only day book.
 Sales return journal/ sales returns book: The goods we have sold on
credit if subsequently return by the customer to us for some solid reasons
are recorded in this book. This book is also known as returns inwards
book.

6
 City Standard Education System
 Purchases return journal/purchases return book: The goods we have
bought on credit if subsequently returned by us to the suppliers for some
solid reasons are recorded in this book. This book is also known as
returns outwards book.
 Debit note: If goods bought on credit are returned to the seller for any
solid reasons the buyer debit the seller account and informs the seller
through a note this note is caller debit note.
 Credit notes: If goods sold on credit are returned by the buyer the seller
credit the buyer account and informs the buyer through a note. The note
is called credit note.

CHAPTER 8

 Bank: An institution which purchases and sells money and transacts other
financial business of like nature is known as bank.
 Current Account: In current account a customer is allowed to deposit or
withdraw the money from the bank according to his own will. Generally
bank allows no interest on current account.
 Fixed Account: In fixed account the amount can be withdrawn from bank
after fixed determinable period of time. The bank allows interest on fixed
account.
 Saving bank account: An account in which deposits can be made only up
to certain limit and the customer; is not allowed to withdraw the amount
from such account twice or thrice a week ;is; called PLS saving account t. it
is also known as saving account or profit or loss saving account.
 Bank overdraft: the amount which a bank allowed to a customer to
withdraw in excess of his deposits for the sake of depositor’s goodwill is
known as bank overdraft.
 Pay in slip: Pay in slip is used to deposit the amount in the bank.
 Endorsement of the cheque: The holder of the cheque may transfer the
cheque in favour of his creditor for the clearance of his debts. This process
is known as endorsement of the cheque.
 Dishonor of cheque: sometime there may be a mistake in writing a cheque
or the amount of deposit in bank account may be less than the amount of
cheque drawn in such a case the ban will refuse to honour the cheque and
the cheque is called dishonored cheque.
7
 City Standard Education System
 Rebel column cash book: In treble column cash book three columns of
amount are provided in each side of cash book i.e. cash bank & discount.
 Contra Entry: An entry in which cash account and bank account area
involved and it is recorded on both sides of cash book is called contra entry.
 Bank reconciliation statement: if there is any discrepancy arises between
the balance of the cash book and that of pass book the depositor prepares a
statement of explanation is called bank reconciliation statement.
 Petty cash book: The book in which small payments which are not
convenient to record in the main cash book (like postage, traveling
expenses purchase of stationary etc.) are recorded is called petty cash book.
 CHAHPTER 9
 Rectifying Entries: If there is any account error in the books of account ot
must be rectified. But errors are not rectified by erasing the wrong figures.
All errors are rectified by passing fresh journal entries. These entries are
known as rectification entries.
 CHAPTER 10
 Accounting cycle: Transactions journal ledger trial balance final
account
 Fixed assets: Assets which have long life and which are bought for use in
business for long period of time is called fixed assets e.g. land building
furniture etc.
 Real assets: assets which have some market value are called real assets e.g.
building, machinery stock, debtors cash goodwill etc,
 Tangible assets: Assets which have physical existence and which can be
seem touched or felt are called tangible assets e.g. land building machinery
etc.
 Intangible assets: Assets which have no physical existence and which
cannot be seen touched or felt are called intangible assets e.g. Goodwill
patent right, trade mark etc.
 Current assets: Assets which have short life and which can be converted
into cash quickly to meet the short term liabilities are called current assets
e.g. stock debtors cash etc. there are called circulatory or floating assets.

8
 City Standard Education System
 Current liabilities: The debts which are repayable within a short period of
time are called current or short term liabilities e.g. creditors bills payable
bank overdraft etc.
 Contingent liabilities: contingent liabilities are not liabilities at present
may or may not become liabilities in future. It depends upon certain future
event.
 Wasting assets: Those assets whose value gradually reduce on account of
use and finally exhausted completely are called wasting assets e.g. Mine
forest etc.
 Direct expenses: Expenses connected with the purchase of goods are
known as direct expenses e.g. freight wages carriage inward etc.
 Indirect Expenses: All those expenses other than direct expanses are
known as indirect expenses e.g. wages carriage inward etc.
 CHAPTER 11

 Outstanding expenses: The expenses which have been incurred during the
current year but have not been paid till the end of the current year are
called outstanding expenses or accrued expenses or expenses payable e.g.
wages payable accrued salaries etc.
 Prepaid expense: The expense which have been paid during the current
year but the services or benefit against them have not been received till
the end of the current year are known as prepaid expenses or unexpired
expenses or expense paid in advance e.g. prepaid rent etc.
 Depreciation: Gradual decreases in the monetary value of an asset due to
usage in business are known as depreciation. Depreciation is a loss to the
business.
 Accumulated depreciation: The sum or total of the depreciation expense
in the different accounting years is called accumulate depreciation.
 Bad debits: The debits which are irrecoverable from the debtors are called
bad debtors.
 Normal loss: loss which arises due to handling of goods before breakage
shrinkage is known as normal loss. It is not recorded in bill of accounts.
9
 City Standard Education System
 Abnormal loss: Loss which arises die to fire flood or some other abnormal
reasons is known as abnormal loss it is recorded in the books of accounts.

 CHAPTER 12
 WORK sheet: A work sheet is a large columnar sheet of paper especially
designed to arrange in a convenient systematic from all the accounting
data required at the end of the period. It is not a permanent record but it
is a working of paper of accountant.
 Income statement: A statement which is prepared to ascertain the net
income or net loss of the business for a specific accounting period is
known as income statement.
 CHAPTER 13
 Operating expenses: the expense which incurred for the generation of
revenues from the sales of goods is called operating expenses.
 Selling expenses: All expenses regarding sales of goods and sending goods
to the buyer are called selling expenses. e.g. carriage outward
advertisement salesmen’s salaries etc.
 Cost of goods sold: It represents the sum of the cost of all goods which
have been sold during the accounting period.
Cost of goods sold = opening stock + purchases – closing stock.
 CHAPTER 14
 Capital expenditure: An expenditure which results in the acquisition of
permanent assets in the business for the purpose of earning revenue is
known as capital expenditure.
 Revenue Expenditure: All those expenditure which are incurred in the day
to day conduct and administration of a business and the effect of which is
completely exhausted within the current accounting year are known as
revenue expenditures. These expenditure are also known as expenses or
expired cost.
 Revenue receipts: Receipts which are recurring (received again & again)
by nature and which are available for meeting all day to day expenses of

10
 City Standard Education System
the business concern are known as revenue receipts e.g. sale proceeds of
goods interest received commission received etc.
 Capital receipts: receipts which are non-recurring (not received again &
again) by nature and whose benefit is enjoyed over a long period are
called capital receipts e.g. money brought into business by the owner loan
from bank sale proceeds of fixed assets.
 CHAPTER 15
 Error of omission: An error in which a transaction has been completely
omitted from the original books of accounts is known as error of omission
e.g. Goods sold to Shakeel has been omitted to record in the sales journal.
 Error of commission: An error in which a transaction instead of being
recorded in the right account has been recorded in a wrong account of
the sale class is known as error of commission e.g. sale of goods to Amir
wrongly debired to Anwar account.
 Compensation errors: It mean that some errors in amount have accrued
on the opposite sides of two or more accounts and have cancelled
themselves in the net result are called compensation errors.
 Error of posting: An error in which amount is posted to the wrong side of
the same account is known as error of posting e.g. Goods sold to Arshad
wrongly credited to his account.
 Errors of principle: Errors which arises out of the ignorance of the
fundamental principles of accounting e.g. Repair of furniture has been
wrongly debited to furniture account.
 Suspense account: A suspense account is an account in which those
transactions are entered which cannot be placed to their proper accounts.

11