Introduction

• Accounting - a process of identifying,

recording, summarizing, and reporting
economic information to decision makers
in the form of financial statements
• Financial accounting - focuses on the
specific needs of decision makers external
to the organization, such as stockholders,
suppliers, banks, and government
agencies
 The Nature of Accounting
• The accounting system is a series of steps
performed to analyze, record, quantify,
accumulate, summarize, classify, report,
and interpret economic events and their
effects on an organization and to prepare
the financial statements.
 The Nature of Accounting
• Accounting systems are designed to meet
the needs of the decisions makers who
use the financial information.
• Every business has some sort of
accounting system.
– These accounting systems may be very
complex or very simple, but the real value of
any accounting system lies in the information
that the system provides.
 The Balance Sheet
Sections of the balance sheet:
• Assets - resources of the firm that are expected
to increase or cause future cash flows
(everything the firm owns)
• Liabilities - obligations of the firm to outsiders or
claims against its assets by outsiders (debts of
the firm)
• Owners’ Equity - the residual interest in, or
remaining claims against, the firm’s assets after
deducting liabilities (rights of the owners)
 The Balance Sheet
The balance sheet equation:

Assets = Liabilities + Owners’

Equity
or
Owners’ Equity = Assets - Liabilities
C1

Importance of Accounting
is a
Accounting
Accounting Identifies
Identifies
system that

Records
Records

information
Relevant
Relevant Communicates
Communicates
that is

Reliable
Reliable
about
about an
an
organization’s
organization’s
Comparable
Comparable business
businessactivities.
activities.
1-6
 Accounting Activities
C1

 Identifying  Recording
Business Business
Activities Activities

Communicatin
g Business
Activities

1-7
C2
Users of Accounting
Information
Internal Users
External Users

• Lenders • Consumer Groups • Managers • Sales Staff

• Shareholders • External Auditors • Officers • Budget Officers
• Customers • Internal Auditors• Controllers
• Governments
1-8
C2
Users of Accounting
Information

External Users Internal Users

Financial accounting provides Managerial accounting provides

external users with financial information needs for internal
statements (shareholders, decision makers (officers,
lenders, etc.). managers, etc.).
1-9
A1
Assets

Cash
Cash
Accounts
Accounts Notes
Notes
Receivable
Receivable Receivable
Receivable
Resources
Resources
owned
owned oror
Vehicles controlled
controlled
Vehicles Land
by
by aa Land
company
company
Store
Store Buildings
Buildings
Supplies
Supplies Equipment
Equipment
1-10
 Liabilities
A1

Accounts
Accounts Notes
Notes
Payable
Payable Payable
Payable

Creditors’
Creditors’
claims
claims on
on
assets
assets
Taxes
Taxes Wages
Wages
Payable
Payable Payable
Payable

1-11
 The
The Accounting
Accounting Cycle
Cycle
Illustration 3-6
Transactions
Transactions

9.
9. Reversing
Reversing entries
entries 1.
1. Journalization
Journalization

8.
8. Post-closing
Post-closing trail
trail balance
balance 2.
2. Posting
Posting

7.
7. Closing
Closing entries
entries 3.
3. Trial
Trial balance
balance

Work
Work
6.
6. Financial
Financial Statements
Statements Sheet
Sheet
4.
4. Adjustments
Adjustments

5.
5. Adjusted
Adjusted trial
trial balance
balance
 Types
Types of
of Adjusting
Adjusting Entries
Entries
Prepayments
1. Prepaid Expenses.
Expenses paid in cash and
recorded as assets before
they are used or consumed.
2. Unearned Revenues.
Revenues received in cash
and recorded as liabilities
before they are earned.
Illustration 3-20
Accruals
3. Accrued Revenues.
Revenues earned but not
yet received in cash or
recorded.
4. Accrued Expenses.
Expenses incurred but not
yet paid in cash or
recorded.
Accounting is ‘the process of identifying, measuring, recording and
communicating economic transactions’ (Collis and Hussey, 2007, p. 5) and
there are two main branches
Financial accounting, which is primarily concerned with communicating
a true and fair view to external users
Management accounting, which is primarily concerned with
communicating information to internal users
The legal status of the business affects the number of owners, their
financial liability, legal formalities, how capital can be raised and financial
disclosure

Business entity concept – information in the financial statements relates

only to the activities of the entity and not to the activities of its owner(s)
Going concern concept – financial statements are normally prepared on the
basis that the entity is a going concern and will continue in operation for the
foreseeable future as far as it is known
Important because going concern values are higher than values on
disposal of a business (eg If the entity was intending to close or cut
back its activities, its stock might have a value that is lower than the
original cost)
Materiality concept – only items of information that are material (significant) are
included
An item is material if its omission or misstatement could influence the
economic decisions of users
Materiality depends on the size of the item or error and the circumstances of
its omission or misstatement
Money measurement concept - only items that are capable of being
measured in monetary terms are included in the financial statements (a
limitation?)
It is assumed that the currency is stable and holds its value over time

Historical cost concept – values of assets are based on their original acquisition
cost, unadjusted for subsequent changes in price or value (assets that increase
in value over time can be revalued)
Debate over measure of fair value as alternative
Accruals concept - revenue and costs are recognised as they are earned
and incurred, and they are matched with one another and dealt with in the
profit and loss account of the period to which they relate, irrespective of
when cash is received or paid
Basic Accounting Entries
• In this lesson we shall try to make simple
journal entries for a business and
• then post them to the ledger accounts.
• The 3 Golden rules of Accounting:

• Debit what comes in and Credit what goes out.

• 2. Debit all expenses and Credit all incomes.

• 3. Debit the receiver and Credit the giver.

• Exercise 1 -

• Assets Transaction Entries

• 1 Cash paid to buy goods worth $2000.

• 2. Purchased machine worth $10,000 in cash.

•
• Liability Transaction Entries

• 1. Took loan of $5000 from Kabul bank.

• 2. Purchased goods worth $6000 on credit from Ali & Co.
• 3. Owner contributed capital $10,000
• Income Transaction Entries

• 1 Sales of $5000 in cash.

• 2. Sales of $4000 on credit to Rehmat.

•
• Expense Transaction Entries

• 1. Paid fuel expenses of $400 in cash.

• 2. Repaid loan of $5000 along with interest
expense of $500.
Date Explanation Ref. Debit Credit
Goods a/c Dr. $2000
To Cash a/c $2000
(Cash paid to buy goods)

Machine a/c Dr. 10000

To Cash a/c 10000
(Cash paid to buy machine)

Cash a/c Dr. 5000

To Loan a/c 5000
(Took a loan of from Kabul bank)

Goods a/c Dr. 6000

To Ali & Co. a/c 6000
(purchased goods on credit)

Cash a/c Dr. 10000

To Capital a/c 10000
(Capital contributed by the owner)
Date Explanation Ref Debit Credit
.
Cash a/c Dr. $ 5000
To Sales a/c $ 5000
(Sales of goods for cash)

Rehmat a/c Dr. 4000

To Sales a/c 4000
(Credit sales to Rehmat)

Fuel expenses a/c Dr. 400

To Cash a/c 400
(Cash paid for fuel expenses)

Loan a/c Dr. 5000

Interest expense a/c Dr. 500
To Cash a/c 5500
(repaid loan along with the interest expense)
THIS IS AN EXAMPLE OF COMPOUND
JOURNAL ENTRY
A journal entry in which more than 2
accounts are affected is called a
COMPOUND JOURNAL ENTRY.
• Posting to ledger accounts: Means transfer of entries
from the journal to
• the appropriate ledger accounts.

• Steps to post a transaction from Journal to Ledger

account :

• 1. If an account is getting debited in the journal entry, put

the amount on the debit side of the account while
posting. In the particulars column, write “To [name of
account which is being credited in the journal entry].

• 2. If an account is getting credited in the journal entry,

put the amount on the credit side of the account while
posting. In the particulars column, write “By [name of
account which is being debited in the journal entry].
• Steps to get the balance of an account:

• 1. Total both the debit and credit sides of the

account.

• 2. Write the total of the bigger side at the bottom

of both the sides of the account.

• 3. Write the difference on the side with the

smaller total; along with the following
• lines in particulars column ;

• To Balance c/d (if dr. side total < cr. side total)
• By Balance c/d (if dr. side toal > cr. side total)
dr. cr.
Cash Account
Date Particulars Amount $ Date Particulars Amo
unt $
To Loan a/c 5000 By goods a/c 2000
To capital a/c 10000 By machine a/c 10000
To sales a/c 5000 By Fuel exp a/c 400
By Loan a/c 5000
By Interest expense a/c 500
By balance c/d 2100

20000 20000

So we can see that the closing balance of the cash account on is

$ 2,100
• Important points regarding account
balances :

• Asset accounts and expense accounts

usually have debit balances.

• Liability accounts and income accounts

usually have credit balances.

• These two rules along with the 3 rules of debit

and credit make journalizing and
• posting very easy for the accountant
• Exercise – 2

• MAKE JOURNAL ENTRIES OF THE FOLLOWING ACCOUNTING

EVENTS
• AND THEN POST THEM TO THE APPROPRIATE ACCOUNTS:

• 1. On 04/05/2008, Hamid started business (his factory) with a capital $

1,00,000.

• 2. Bought machine for $20,000 on 09/05/2008.

• 3. He purchased raw-materials worth $ 2,000 on credit of 30 days from Ali &

Co.
• on 11/05/2008.

• 4. Paid $400 in cash for fuel expenses on 15/05/2008.

• 5. Salary paid on 01/06/2008 , $ 5,000.

• 6. Took loan of $30,000 from bank on 07/08/2008.

Date Explanation Ref. Debit Credit
04/05/2008 Cash a/c Dr. 12 $ 1,00000
Capital a/c 01 $ 1,00000
Capital contributed to start the
business

09/05/2008 Machine a/c Dr. 20 20,000

Cash a/c 12 20,000
Machine purchased
11/05/2008 Raw materials a/c Dr. 22 2,000
Ali & Co. 23 2,000
Credit purchase of raw-materials
15/05/2008 Fuel expenses a/c Dr. 25 400
Cash a/c 12 400
Date Explanation Ref. Debit Credit

07/08/2008 Cash a/c Dr. 30,000

Loan a/c 30,000
Loan taken from bank
dr. cr.
Cash Account
Date Particulars Amount $ Date Particulars Amount $
04/05/08 To capital a/c 1,00,000 09/05/08 By machine a/c 20,000
15/05/08 By Fuel exp a/c 400
01/06/08 By Salary a/c 5,000
07/08/08 To Loan a/c 30,000 07/08/08 By balance c/d 1,04,600

1,30,000 1,30,000

So we can see that the closing balance of the cash account on 07/08/08 is
$ 1,04,600.
Dr. capital account
Cr.
Date Particulars Amount $ Date Particulars Amount $
04/05/08 To balance c/d 1,00,000 04/05/08 By cash a/c 1,00,000

1,00,000 1,00,000

Dr. machine account Cr.

Date Particulars Amount $ Date Particulars Amount $
09/05/08 To cash a/c 20,000 09/05/08 By balance c/d 20,000

20,000 20,000
Dr. Raw materials account Cr.

Date Particulars Amount $ Date Particulars Amount $

11/05/08 To Ali & Co.a/c 2000 11/05/08 By balance c/d 2000

2000 2000

Dr. Ali & Co. account Cr.

Date Particulars Amount $ Date Particulars Amount $
11/05/08 To balance c/d 2,000 11/05/08 By raw- 2,000
materials a/c
2,000 2,000
Dr. Fuel expenses account Cr.

Date Particulars Amount $ Date Particulars Amount $

15/05/08 To cash a/c 400 15/05/08 By balance c/d 400

400 400

Dr. Salary account Cr.

Date Particulars Amount $ Date Particulars Amount $
01/06/08 To cash c/d 5,000 01/06/08 By balance c/d 5,000

5,000 5,000
Dr. Loan account Cr.
Date Particulars Amount $ Date Particulars Amount $
07/08/08 To balance c/d 30,000 07/08/08 By cash a/c 30,000

30,000 30,000