Ch # 01 Introduction to Accounting

3. Punjab Group of Colleges Principles of Accounting Ch# 01 Introduction to Accounting

4. Punjab Group of Colleges Learning Objective • The Need for Accounting • Objectives of Accounting • Accounting as a business language • Users of Accounting • Definition of Accounting • Branches of Accounting • Forms of Business Organization • Important accounting terms

5. Punjab Group of Colleges The Need for Accounting • Accounting is often called the language of business. The basic function of any language is to serve as a means of communication. Accounting also serves this function. • In other words, wherever money is involved, accounting is required to account for it. • In all activities and organizations (business or non-business) which require money and other economic resources, accounting is required to account for these resources.

6. Punjab Group of Colleges The Need for Accounting Accounting helps answering questions like; • How can I change the way I operate to make more profit? • How much is owed to me, and how much do I owe? • Should I put more money in my business or sell it and go into another business? • How much am I worth? • Am I making or losing money from my business?

7. Punjab Group of Colleges Objectives of Accounting • Objective of accounting may differ from business to business depending upon their specific requirements. • However, the following are the general objectives of accounting • Keeping systematic record. • Ascertain the results of the operation. • Ascertain the financial position of the business. • To protect business properties. • To facilitate rational decision – making. • To satisfy the requirements of law

8. Punjab Group of Colleges Why Accounting is called business language? Actually accounting is a system which communicate the results of business to its various users, that’s why we say accounting is a language of business.

9. Punjab Group of Colleges Users of Accounting • Accounting is important to whom? Owners: • The owners provide funds or capital for the organization. • They possess curiosity in knowing whether the business is being conducted on sound lines or not, and whether the capital is being employed properly or not. • Owners, being businessmen, always keep an eye on the returns from the investment. • Comparing the accounts of various years helps in getting good pieces of information.

10. Punjab Group of Colleges Users of Accounting • Accounting is important to whom? Management: The management of the business is greatly interested in knowing the position of the firm. The accounts are the basis, the management can study the merits and demerits of the business activity. Thus, the management is interested in financial accounting to find whether the business carried on is profitable or not. The financial accounting is the “eyes and ears of management and facilitates in drawing future course of action, further expansion etc.”

11. Punjab Group of Colleges Users of Accounting • Accounting is important to whom? Creditors: Creditors are the persons who supply goods on credit, or bankers or lenders of money. It is usual that these groups are interested to know the financial soundness before granting credit. The progress and prosperity of the firm, two which credits are extended, are largely watched by creditors from the point of view of security and further credit. Profit and Loss Account and Balance Sheet are nerve centers to know the soundness of the firm.

12. Punjab Group of Colleges Users of Accounting • Accounting is important to whom? Employees: Payment of bonus depends upon the size of profit earned by the firm. The more important point is that the workers expect regular income for the bread. The demand for wage rise, bonus, better working conditions etc. depend upon the profitability of the firm and in turn depends upon financial position. For these reasons, this group is interested in accounting.

13. Punjab Group of Colleges Users of Accounting • Accounting is important to whom? Investors: The prospective investors, who want to invest their money in a firm, of course wish to see the progress and prosperity of the firm, before investing their amount, by going through the financial statements of the firm. This is to safeguard the investment. For this, this group is eager to go through the accounting which enables them to know the safety of investment.

14. Punjab Group of Colleges Users of Accounting • Accounting is important to whom? Government: Government keeps a close watch on the firms which yield good amount of profits. The state and central Governments are interested in the financial statements to know the earnings for the purpose of taxation.

15. Punjab Group of Colleges Users of Accounting • Accounting is important to whom? Consumers: These groups are interested in getting the goods at reduced price. Therefore, they wish to know the establishment of a proper accounting control, which in turn will reduce to cost of production, in turn less price to be paid by the consumers. Researchers are also interested in accounting for interpretation.

16. Punjab Group of Colleges What the actually Accounting is?

17. Punjab Group of Colleges Functions of Accounting The Basic Functions of Accounting Are: • Recording • Classifying • Summarizing • Interpreting

18. Punjab Group of Colleges Functions of Accounting Recording: • In accounting, first of all, all business events (Transactions) are recorded in the books of account in a proper form. • The recording section of Accounting is called: “Book-Keeping” • The book in which transactions are first of all recorded chronologically is called: “Journal”

19. Punjab Group of Colleges Functions of Accounting Classifying: • 2nd Step in accounting is to classify all the relevant information in one place in a separate account called Ledger account. • All the changes in one accounts are put together for analysis purpose. • The book in which classification is done is called: “Ledger”

20. Punjab Group of Colleges Functions of Accounting Summarizing: In the third stage the necessary data and information are summarized on the basis of classified record of transactions. Interpreting: In the 4th Stage the summarized data is organized into different statement and communicated to its users.

21. Punjab Group of Colleges Definition of Accounting “Accounting is an art of recording, classifying, summarizing and interpreting the information of a business in a proper form.” It can also be defined as: “Accounting is the art of recording, classifying and summarizing in a significant manners and in terms of money, transactions and events, which are in part at least, of a financial character and interpreting the results thereof.”

22. Punjab Group of Colleges Branches of Accounting • Financial Accounting • Cost Accounting • Managerial Accounting

23. Punjab Group of Colleges Financial Accounting The main purpose of financial accounting is to ascertain the true results (profit or loss) of the business operation during a particular period of time.

24. Punjab Group of Colleges Cost Accounting The object of cost accounting is to determine the cost of goods manufactured or produce by the business. It also helps the management of the business in controlling the cost by indicating avoidable losses and wastes.

25. Punjab Group of Colleges Managerial Accounting • The main object of this accounting is to communicate relevant information periodically to the management of the business to enable it to take suitable decisions

26. Punjab Group of Colleges Important ant Accounting Terms • Business: “Any lawful and regular activity performed for the purpose of earning profit is called Business.” Types Of Business: Manufacturing Trading Services

27. Punjab Group of Colleges Forms of Business Organizations • Sole Proprietorship • Partnership • Joint Stock Company

28. Punjab Group of Colleges Book-Keeping The book-keeping is the art of recording monetary transactions in the books of account in a proper manner. OR The systematic way of recording business transactions in the books of accounts is called Book-Keeping.

29. Punjab Group of Colleges Business Transaction “A business event which can be measured in terms of money and which must be recoded in the books of accounts is called Business Transaction.” Examples: • Ali invested cash in business • Purchased goods for cash • Paid salaries etc.etc.

30. Punjab Group of Colleges Types of Business Transaction Cash Transaction: “When the value of a transaction is met in cash immediately, it is called cash transaction.” Example: Purchased goods for cash Rs. 1000/- Credit Transaction: “When the value of a transaction is not met in cash immediately, it is called cash transaction.” Example: Purchased goods on credit for Rs. 500/-

31. Punjab Group of Colleges Flow of Business Transaction • Investment by the owner (Capital) • Purchase of various properties & Instruments (Asset) • Purchase of Goods (Merchandise) • Sales of Goods • Payment of Expenses • Generating Revenue from Services • Payment to creditors (Liabilities) • Withdrawal of money by the owner (Drawings)

32. Punjab Group of Colleges Capital

33. Punjab Group of Colleges Capital “The amount invested by the owner in the business to start a business is called Capital.” • The rights of the owner’s over the assets of the business are called capital. • Example: Ali invested cash in business. • Two changes will be recorded: • Cash account (Increasing cash in business) • Capital account (The rights of the owner’s are increasing)

34. Punjab Group of Colleges Assets

35. Punjab Group of Colleges Assets The economic resources of the business are called Assets. OR All those properties and possessions owned, controlled and receivable by the business are called its Asset. Examples: Cash in hand Cash at bank Building Furniture

36. Punjab Group of Colleges Assets Assets are the things having certain value possessed by the business and receivables by the business on a particular date. For example cash, furniture, building, land, machinery, stock of goods, debtors, bank balance, goodwill etc

37. Punjab Group of Colleges Types of Assets The most common types of assets are: Current Asset (Cash, Bank, Debtors, Stock) Fixed Assets (Land, Building, Machinery, Furniture, Good will) Tangible Assets (Land, Building, Machinery) Intangible Asset (Good will, Patent, Copy Rights, Trade mark)

38. Punjab Group of Colleges Goods or Merchandise

39. Punjab Group of Colleges Goods or Merchandise In accounting language the word “Goods” has special meaning. “It refer to something which has been purchased by the trader for resale purposes or anything which has been manufactured for selling purpose.” For example furniture purchased in business for use in business, it will not regarded as “goods”, but if it is purchased for resale, it will be regarded as “goods”

40. Punjab Group of Colleges Purchases • All those things which are brought in business for resale these are known as purchases. • For example: Cloth purchased by a cloth merchant. • Purchases are of two types • Cash purchases • Credit purchases or Purchase on account

41. Punjab Group of Colleges Cash Purchase If goods are purchased from supplier and payment is made to him at the same time, such purchases are known as “Cash Purchases” Example: Purchased goods for Rs. 2,000/- Two changes will be recorded: • Purchases account (Increase in goods) • Cash account (decrease in cash)

42. Punjab Group of Colleges Credit Purchases When goods purchased from supplier and payment is not made to him at the same time, rather the payment is arranged to be made at some future date is known as “Credit Purchase” Example: Goods purchased on account for Rs. 200/- Two changes will be recorded: • Purchases account (Goods are increasing) • Creditors account (Responsibility to pay is increasing)

43. Punjab Group of Colleges Creditor or Accounts Payable All those suppliers who have provided goods on credit to business and have to pay their amount in future are called creditors. All those persons to whom money is payable on account of goods purchased on credit. Example: Goods purchased on account for Rs. 200/- from Sajid • Here Sajid is a creditor of the business

44. Punjab Group of Colleges Purchases Returns or Return outwards Goods once purchased may sent back to seller for certain reasons, • Goods are defected. • Goods are not according to specification . • Goods are damaged or below standard. such return of goods is known as purchases returns, or Returns outward or Returns to supplier.

45. Punjab Group of Colleges Purchase Discount and Sale Discount The concession given by supplier to the buyer on purchase of goods is known as “purchase discount ”to the buyer and “Sale Discount” to the seller ( supplier)

46. Punjab Group of Colleges Allowances Sometimes, the customer (buyer) find the goods purchased have minor defects. In that case the seller may agree to reduce the price of defected or damaged goods to induce the buyer to keep the goods. Such reduction in price is known “Purchase Allowance” for buyer and “Sales Allowance” for seller.

47. Punjab Group of Colleges Sales When purchased goods are sold to the customer at specific price, it is said that sales have been made. • Sales are of two types: • Cash Sales • Credit Sales

48. Punjab Group of Colleges Cash Sales If goods are sold to the customer at a specific price and price of goods is received from them at the time of sale. Such sales are known as cash sales. Example: Sold Goods for Cash Rs. 2,000/- Two changes will be recorded: Cash Account (Cash is increasing) Sales Account (Revenue is being generated)

49. Punjab Group of Colleges Credit Sales If goods are sold to the customer and he does not pay the price of goods at the same time but agree to make payment on some future date, such sales are known as credit sales or sale on account. Example: Sold goods to Nasir on account Two changes will be recorded: Nasir Account (Debtor-Asset-Increasing) Sales Account ((Revenue is being generated)

50. Punjab Group of Colleges Debtors or Account Receivable Debtors are the persons or customer to whom goods have been sold on credit basis and from whom the business has to receive money in near future. Example: Goods sold to Aslam on credit for Rs. 1,000/- Here Aslam is the debtor of business for Rs.1,000/-