By;Assad Ullah lecturer at salam

university 0787927789
Chapter No 1
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 Definition of Accounting
Accounting is the process of identifying
Recording, Classifying, Summarizing and Interpreting the
Financial Results to the interested parties.
 OR

In simple words we can say

 “Accounting is the Language of Business”.
Components of Accounting

Classifying
Recording

Summarizing

Interpreting
 Components of Accounting

Recording
 Recording means making written
records of financial events.

Classifying
 It relates to the process of grouping
of accounts together .
 Conti…..

Summarizing
 It is the process of bringing together various
items of information to explain the accounting
results.
 combining written records into periodic reports
Interpreting
 using the information in reports to make
judgments and decisions
 Accounting Systems

“An accounting system consists of the

personnel, procedures, devices and records
used by an organization
1. to develop accounting information
and
2. to communicate this information to
decision makers”.
 Accounting systems

Accounting system vary from one organization to the

next.
Accounting system in small businesses may consist of
a cash register, a checkbook and Income Tax reports.
In large businesses it includes computers, highly
trained personnel and accounting report.
Users of Accounting

?
 Users of Accounting

Internal External
Users Users
•Managers
•Lenders
•Directors
•Shareholders
•Internal
•Governments
Auditors
•External
•Budget Officers
Auditors
•Employees
 TYPES OF ACCOUNTING

Tax
Accounting

Management
Accounting Financial
Accounting
 FINANCIAL ACCOUNTING

 “It refers to the information's describing the financial resources,

obligations and activities of an economic entity that is intended for use
primarily by external decision makers- investors and creditors”.

Financial resources: means assets and

Obligations: means liabilities and owner equities.
Activities: means results of operations i.e. profit and loss.

IT IS OFTEN KNOWN AS A GENERAL PURPOSE

ACCOUNTING.
 MANAGEMENT ACCOUNTING

 “Management accounting is the use of accounting

information by the management for the purpose of
decision making.”

 A company's managers and employees constantly

need such information in order to run and control
daily business operations.
 TAX ACCOUNTING

 It is not the preparation of an income tax return ,but it is tax

planning.

 Tax planning means anticipating the tax effects of business

transactions and structuring these transactions in a manner that
will minimize the income tax burden.
OR
 Tax accounting is the arrangement of business transaction in
such a way that should minimize the tax Burdon of business
 Business
 Literally, the word “BUSINESS” means the state of being
busy.
 In other words, business is an activity in which various
persons regularly produce or exchange goods and services
for mutual gain or profit. The goods and services produced
or purchased for personal use are not included in “business”.
 James Stephenson says that:
 “Every human Legal activity which is engaged in for the
sake of earning profit may be called business.”
 Types of Business

Owner’s Nature

Sole Proprietorship Manufacturing

Partnership Business Merchandising

Corporations Services
 Basic
Terminologies
 WHAT IS RETURN OF INVESTMENT?

 Return of investment is the return of amount that you have

invested or loaned to the business at some future date.

 For investors the return of investment is ‘the sale of ownership

at some future date’.

 And for creditors the Return of Investment is ‘the repayment

of loan at a future date.
 WHAT IS RETURN ON INVESTMENT?

 “Return on investment is return of something by the

company for the use of your fund”.

 The return on investment for investors is Profit.

 And the Return on investment for Creditors is

interest.
 Example of
“Return “of” and “On” Investment”

 If you have loaned $1000 to the business ,and the

business promise to pay $1100 at the end of year 1st ,then
$1000 is return of your investment and $100 is return on
your investment.
 BUSINESS:
Any legal activity which is carried on to earn profit
is known as business.
 Profession:
This is a kind of business for which previous training,
skills and qualification is required. e.g. if u want to become
a lecturer of Accounting so first of all u must have the
knowledge of accounting then u can start ur teaching
profession.
 Proprietor/Owner:
Proprietor is the person who invests capital(cash,
goods etc).He is entitled to earn profit and suffers losses.
e.g. Ahmad started a business of furniture .In this
example Ahmed is the owner of business.
 Transaction:
Any act of buying and selling b/w two persons or
business enterprises is called a transaction. OR Exchange of
values is known as transaction. e.g. purchase and sale of
property, goods etc.
 Merchandise/Goods:
The things or items bought or sold in an enterprises in order to
earn profit are called merchandises/goods e.g. Bookseller sells books
the books are merchandise for bookseller.
 Purchases:
Goods or services, articles and items bought for a business are
called purchases.
 Purchase Return:
when the goods/merchandises are returned back to supplier for
some defect or for any other reason they are called purchase return or
return outward or return to supplier. e.g. we have put an order for 500
chairs but among 500 chairs we have received 50 chairs broken.
Definitely v will return these 50 chairs to our supplier & thus this
return of 50 chairs will b known as purchase return.
 Sales:
When the merchandises (goods & services) are sold out they
are called sales.
 Sales Return:
When the merchandises sold are returned by the customers for
some defect or any other reason they are called sales return or
return inward or returns from customers.
 Commission:
When a person or enterprises renders some business services
for another person or enterprises, the remuneration rewarded to
that person or enterprises is known as commission. It is revenue
when received and expense when paid
 Account Receivable:
Whenever the goods are sold on credit basis. The
person to whom the goods are sold on credit basis is called as
A/C Receivable. It is recorded as asset for the business
because u have to receive cash in some future period of time.
 Accounts Payable:
Whenever the goods are purchased on credit basis. The
person from whom the goods are purchased is termed as A/C
Payable.
 Discount:
It is reduction, deduction grant or allowance from the
price of goods or any other asset.It can be divided into two types
Discount
Trade discount Cash discount

a) Trade Discount: Discount which is received and paid at the time

of sales and purchase is called trade discount.
b) Cash Discount: Discount which is allowed to(A/C Receivable) or
received from (A/C Payable) is known cash discount.
 VOUCHER:
Any written evidence of business transactions is called
voucher. The voucher may be cash memo, bill, invoice etc.

 INVOICE:
A written evidence / Documents given by the seller to the
buyer for credit sale of goods is called invoice.
 INVENTORY : Goods or Merchandise on Hand, that is goods remaining unsold, is called stock,
Inventory.

 DRAWINGS : The cash or commodities withdraw by owner for his personal uses from business are
known as Drawings.

 DEPRECIATION : The conversion of long term assets in to expense over useful life of a asset is
called Deprecation
Accounting/Bookkeeping Differences

Accounting – Includes the design of accounting

systems, preparation of financial statements, audits,
cost studies, development forecasts, income tax
work, computer applications to accounting
processes, and the analysis and interpretation of
accounting information as an aid to making
business decisions

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 Accounting/Bookkeeping
Differences

Bookkeeping – Means the recording of

transactions, the record-making phase of
accounting. The recording of transactions
tends to be mechanical and repetitive; it is
only a small part of the field of accounting
and probably the simplest part.

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 Generally Accepted
Accounting Principles
Financial accounting practice is governed by concepts
and rules known as Generally accepted accounting
principles (GAAP).

Relevant Information Affects the decision of its

users.

Reliable Information Is trusted by users.

Comparable Is helpful in contrasting

Information organizations.
 Principles of Accounting

Objectivity Principle Cost Principle

Accounting information is Accounting information is
supported by independent, Based on actual cost.
unbiased evidence.
 Principles of Accounting

Revenue Recognition Principle

Monetary Unit Principle 1. Recognize revenue when it is earned.
Express transactions and events in 2. Proceeds need not be in cash.
monetary, or money, units. 3. Measure revenue by cash received
plus cash value of items received.
End of Chapter 1