The document serves as an introductory lecture on principles of accounting, covering definitions, principles, and key concepts relevant to the field. It differentiates between accounting and bookkeeping, outlines various branches of accounting, and details fundamental accounting terminologies and practices. Additionally, the document explains the accounting cycle, fundamental accounting equations, and various types of financial statements.

1. 1
Principles
Accounting
Lecturer: Mr. Sajid Ali

2. Lecturer: Mr. Sajid Ali 2
CHAPTER 1
Introduction to
Principles of Accounting:

3. Lecturer: Mr. Sajid Ali 3
ACCOUNTING
•is “the Language of Business”
•The process of analyzing, recording,
classifying, summarizing, reporting and
interpreting business transactions.
Accounting Definitions

4. Lecturer: Mr. Sajid Ali 4
“The art of systematically recording,
presenting and interpreting the financial
information of an enterprise”
McFarlan, Ayares and Stove
A service activity designed to
accumulate, measure and communicate
financial information about
organizations for decision making.
Harold Q. Lengenderfer
Accounting Definitions

5. Lecturer: Mr. Sajid Ali 5
“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, interpreting the
results thereof”
American Institute of Certified
Public Accountants
Accounting Definitions

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Book means “the book of
accounts” and keeping
means “maintaining
them in proper form and
order”. Book keeping is
defined as:
The art of recording
business transactions in
terms of money under
appropriate heads.
BOOK KEEPING

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Difference between Accounting and Book keeping
Art of recording business transactions in terms of money under appropriate
heads. Book keeping
Art of recording, classifying, summarizing, reporting and interpreting
business transactions. Accounting
Person responsible for book keeping is known as “Book Keeper”. Book
keeping
Person responsible for accounting is known as “Accountant”. Accounting
Job of book keeper is of clerical nature. Book keeping
Job of accountant is technical nature. Accounting
No professional degree, education, experience or skill is required. Book
keeping
Professional degree, education, experience or skill is required. Accounting

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Difference between Accounting and Book keeping
Financial statements cannot be prepared and no decision or
action can be taken. Book keeping
Financial statements can be prepared and decision and action
can be taken. Accounting
It has no branches. Book keeping
It has several branches such as financial accounting, cost
accounting, management and tax accounting etc. Accounting
It is as simple as counting in the field of mathematics and
provides the basis for accounting. Book keeping
It is a broader field and is used for business decisions.
Accounting

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1.Financial Accounting
2.Cost Accounting
3.Managerial Accounting
4.Government Accounting
5.Auditing
Branches of Accounting

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Single-Entry System Vs Double-Entry System
A. Single-Entry System
An accounting system in which for most
business transactions only one side of
the transaction is recorded is called
single entry system.
B. Double-Entry System
An accounting system in which for all
business transactions both the two sides
of the transaction are recorded is called
double entry system.

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Basic Accounting Terminologies
1.Business
Any activity undertaken for the purpose of
earning profit such as buying and selling
goods, rendering services and
manufacturing goods.
Business may b:
a. Manufacturing
b. Merchandising
c. Service

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A person who invests the money or
things in the business is called as owner
or proprietor. It refers to the owner of
the business whose owner is single (sole-
proprietorship business).
3. Transaction
Any dealing between two persons or
business enterprises is called transaction.
Or an activity of an organization in which
the exchange of value is taken place is
called transaction.
2. Proprietor

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Transaction is of two types.
A. Cash transaction,
B. Credit transaction.
Cash transaction
Transaction on cash.
Credit transaction
Transaction on account.
Types of Transaction

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Any documentary evidence of a
transaction is called voucher. Voucher
may be:
a. Cash memo
A documentary evidence of cash
transaction.
b. Invoice
A documentary evidence of credit
transaction.
4. Voucher

15. Lecturer: Mr. Sajid Ali 15
A record of a particular item e.g. cash,
land, building, salary etc. is called
account.
Heads of accounts
1. Assets
2. Liabilities
3. Owner’s Equity
4. Expense
5. Revenue
5. Account

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Items purchased for resale are called
merchandise.
6. Merchandise

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7. Purchases
Cost of merchandise purchased is
recorded in a separate account called
purchases.
8. Sales
The amount earned from the sale of
merchandise is recorded in a separate
account called sales.
9. Revenue
Price of goods sold or services rendered
is called revenue. Examples are sales, fee
received, commission received, rent
received, interest received, discount
received etc.

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10. Expense
To make a payment or incur an
obligation for the purchase of assets,
merchandise or service is called expense.
Expense may be:
Capital expense
Expense incurred on the purchase of
assets is called capital expense. Such as
purchase of land, building, Furniture etc.
Revenue expense
Expense incurred on merchandise &
service or asset the cost of which has
been used up or expired is called revenue
expense.

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Examples of revenue expense are:
Salary, wages, rent,
Interest, commission paid, telephone,
Water, gas, electricity,
News paper bills, advertisements,
Depreciation, custom duty, excise duty,
Octrio, carriage, income tax etc.
Expense

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The amount earned after deducting the
cost of the product from the revenue. In
simple words revenue minus expense is
called profit, income or net profit or net
income.
12. Loss
The excess of cost of product over its
revenue is called loss.
11. Profit

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13. Discount
A deduction or reduction in the price of
goods, assets or services sold or
purchased is called discount. Discount
has two types. There are two types of
discount.
(1) Trade discount
(2) Cash discount
1. Trade Discount
Discount at the time of buying and
selling is called trade discount.
2. Cash discount
Discount when the payment is made
before the due date.

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Discount may also be
(1) discount received (2) discount allowed
Discount received
The trade or cash discount received to
the organization is called discount
received.
Discount allowed
The trade or cash discount allowed by the
organization is called discount allowed.

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14. Commission
Remuneration for services performed.
15. Stock/ Inventory
Goods or merchandise on hand at any
time are called stock or inventory.
Stock may be:
A. Opening B. Closing
Stock at the beginning of the period are
called opening stock.
Stock on hand at end of year are called
closing stock.

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16. Turn Over
Total sale during a particular period.
17.Balance
The difference between the debit and
credit sides of any account.
Balance may b:
A. Debit Balance B. Credit Balance
If the debit side is more than the credit
one it is called debit balance.
if the credit side is more than the debit
one it is called credit balance.

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18. Accounts Receivable/Debtor
A person or organization to whom goods
are sold on account.
19. Accounts Payable/Creditor
A person or organization from whom
goods are purchased on account.
20. Notes Payable
A legal document on which some asset is
purchased on account.

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21. Notes Receivable
A legal document on which some asset is
sold on account.
22. Cash Book
A book in which the receipts and
payments of cash is recorded.
23. Bad Debts/Uncollectable
The amount due from debtors which is
not collectable from them.

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24. Reserve for bad debts
An amount set aside to cover the future
loss due to doubtful debt.
25. Outstanding expense
The expense the benefit of which has
been received but the payment is not yet
made.
26. Prepaid expense
The expense for which the payment is
made in advance.

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27. Unearned revenue:
Revenue received in advance for which no
services have been rendered or goods
have not yet sold.
28. Accrued revenue
Revenue earned but not yet received.
29. Assets
Items purchased or produced for business
use.

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30. Types of Assets
Assets have the following types.
a. Current Assets
Asset that can be converted into cash
within one accounting period. Examples
are cash, bank, accounts receivable,
notes receivable, stock etc.
b. Fixed Assets
Asset that cannot be converted into cash
within one accounting period. Examples
are land, building, furniture, machinery,
computers etc.

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c. Non-current assets
Assets acquired to retain them to earn
profit. Examples are investments, shares
of other companies, fixed deposits, Govt.
Securities.
d. Intangible
Assets that cannot be touched but provide
some benefit to the organization.
Examples are goodwill; copy right, patent
right, trademarks etc.

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31. Equities
The rights of the owner and outsiders
against the assets of the business. The
equity may be owner’s equity and
liabilities.
a. Owner’s Equity
The investment of an owner in a business
or the claim of the owner against the
assets of the business.

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b. Liability
The debt of the organization or the claim
of the outsiders against the assets of the
business.
Liability may b:
Short-term
Liability payable for short period such as
a month or a year)
Long-term
Liability payable long period that is for
number of years.

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32. Drawings
The cash or items taken by the owner are
called as drawing.
33. Financial Statements
Statements showing the financial position
of the business.
34. Income statement
A statement showing the profit or loss of
a business for a specific time period.

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35. Balance sheet
A sheet of assets, liabilities and owner’s
equity prepared at a specific time.
36. Accounting cycle
The sequential occurrence of the
accounting process.
37. Journal
A book in which business transactions are
recorded first.

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38. Ledger
A book which contains a condensed and
classified record of all the business
transactions in shape of accounts.
39. Trial Balance
A list of accounts and their balances
prepared in the same order as they were
appearing in ledger and cash book.

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40. Adjustments
The process of up-to-dating the record at
the end of the period.
41. Closing entries
The journal entries to close all expense
and revenue accounts.
42. Post-Closing Trial Balance
A trial balance prepared after the closing
entries.

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Accounting Equation:

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The Accounting
Cycle

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Accounting Equation
Assets = Owner’s Equity + Liabilities
components of accounting equation
a. Assets
b. Owner’s equity
c. Liabilities

40. Lecturer: Mr. Sajid Ali 40
some example transactions
1. Started business with cash $500000.
Accounting Equation
Assets = Owner’s Equity + Liabilities
S.NO Cash Owner’s Equity
1 500000 500000
Balance 500000 500000
Total 500000 500000

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2. Purchased building for cash $200000.
S.NO Cash Building = Owner’s Equity Accounts Payable
2 500000
-200000
200000 500000
Balance 300000 200000 500000
Total 500000 500000
Accounting Equation

42. Lecturer: Mr. Sajid Ali 42
3. Purchased machinery on account $15000.
S.NO Cash Building Machinery O/E Accounts Payable
Balance 300000 200000 500000
3 15000 15000
Balance 300000 200000 15000 500000 15000
Total 515000 515000
Accounting Equation
Assets = Owner’s Equity + Liabilities

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4. Purchased merchandise for cash $10000.
S.NO Cash Building Machinery Merchandise O/E A/P
Balance 300000 200000 15000 500000 15000
4 -100000 100000
Balance 200000 200000 15000 100000 500000 15000
Total 515000 515000
Accounting Equation
Assets = Owner’s Equity + Liabilities

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5. Sold merchandise of value $50000 for $60000.
received cash $40000 and for the balance a note.
S.NO Cash Building Machinery Merchandise N/R O/E A/P
Balance 200000 200000 15000 100000 500000 15000
5 +40000 -50000 20000 +10000
Balance 240000 200000 15000 50000 20000 510000 15000
Total 525000 525000
Accounting Equation
Assets = Owner’s Equity + Liabilities

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6. Paid cash on account $10000.
S.NO Cash Building Machinery Merchdise N/R O/E A/P
Balance 240000 200000 15000 50000 20000 510000 15000
6 -10000 -10000
Balance 230000 200000 15000 50000 20000 510000 5000
Total 515000 515000
Accounting Equation
Assets = Owner’s Equity + Liabilities

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7.Paid Salary $30000.
S.NO Cash Building Machinery Merchandise N/R O/E A/P
Balance 230000 200000 15000 50000 20000 510000 5000
7 -30000 -30000
Balance 200000 200000 15000 50000 20000 480000 5000
Total 485000 485000
Accounting Equation
Assets = Owner’s Equity + Liabilities

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Analysis and Classifying
Accounts

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The Accounting
Cycle

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Account
A place where the
record of a particular
item is kept.
A brief record of a
transaction.

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Classes/Heads of Accounts
Assets
Liabilities
Owner’s equity
Expenses & losses
Revenues

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Rules of debit and credit
For Assets:
Increase in assets is debited.
Decrease in assets is credited.
For expenses:
Increase in expense is debited.
Decrease in expense is credited.

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For liabilities
Increase in liabilities is credited.
Decrease in liabilities is debited.
For owner’s equity
Increase in owner’s equity is credited.
Decrease in owner’s equity is debited.
For revenues
Increase in revenues is credited.
Decrease in revenues is debited.

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Procedure of finding debit and credit
A. By the analysis of transaction, find out
the accounts to be involved.
B. Classify these accounts into assets,
liabilities, owner’s equity, revenue and
expense.
C. Apply the rules of debit and credit.

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Classes of accounts- British System
A.Real Accounts
a. Personal accounts
b. Property accounts
c. Proprietor accounts
B. Nominal Accounts

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Some transactions analysis
1. Started business with cash $25000.
S.NO Accounts Heads Inc/Dec Dr./Cr. Amounts
1 Cash
Owner’s Equity
Asset
O/E
Inc.
Inc.
Dr.
Cr.
25000
25000

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2. Purchased furniture for cash $ 50000.
S.NO Accounts Heads Inc/Dec Dr./Cr. Amounts
2 Furniture
Cash
Asset
Asset
Inc.
Dec.
Dr.
Cr.
50000
50000

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3. Purchased machinery for cash $ 10000.
S.NO Accounts Heads Inc/Dec Dr./Cr. Amounts
3 Machinery
Cash
Asset
Asset
Inc.
Dec.
Dr.
Cr.
10000
10000

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4. Purchased merchandise for cash $ 5000.
S.NO Accounts Heads Inc./Dec. Dr./Cr. amounts
4 Purchases
Cash
Expense
Asset
Inc.
Dec.
Dr.
Cr.
5000
5000

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5. Purchased merchandise on account $ 1500 from MM Smith.
S.NO Accounts Heads Inc./Dec. Dr./Cr. Amounts
5 Purchases
Accounts payable-MM…
Expense
Liability
Inc.
Dec.
Dr.
Cr.
1500
1500

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6. Paid cash on account $ 1000.
S.NO Accounts Heads Inc./Dec. Dr./Cr. Amounts
6 Cash
Accounts payable-MM…
Asset
Liability
Dec.
Dec.
Cr.
Dr.
1000
1000

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7. Sold merchandise on for cash $ 2500.
S.NO Accounts Heads Inc./Dec. Dr./Cr. Amounts
7 Cash
Sales
Asset
Revenue
Inc.
Inc.
Dr.
Cr.
25000
25000

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8. Sold merchandise on account $ 2700 on Brevet Company.
S.NO Accounts Heads Inc./Dec. Dr./Cr. Amounts
8 Accounts Receivable
Sales
Asset
Revenue
Inc.
Inc.
Dr.
Cr.
2700
2700

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9. Received cash on account $ 2000.
S.NO Accounts Heads Inc./Dec. Dr./Cr. Amounts
9 Accounts Receivable
Cash
Asset
Asset
Dec.
Inc.
Cr.
Dr.
2000
2000

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10. Paid salary $ 1500.
S.NO Accounts Heads Inc./Dec. Dr./Cr. Amounts
10 Salary
Cash
expense
Asset
Inc.
Dec.
Dr.
Cr.
1500
1500

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11. Received commission $ 1200.
S.NO Accounts Heads Inc./Dec. Dr./Cr. Amounts
11 Commission
Cash
Revenue
Asset
Inc.
Inc.
Cr.
Dr.
1200
1200

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12. Paid commission $ 200.
S.NO Accounts Heads Inc./Dec. Dr./Cr. Amounts
12 commission
Cash
Revenue
Asset
Inc.
Dec.
Cr.
Dr.
200
200

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13. Brought cash by the owner $ 5000.
S.NO Accounts Heads Inc./Dec. Dr./Cr. Amounts
13 Owner’s Equity
Cash
O/E
Asset
Inc.
Inc.
Cr.
Dr.
5000
5000

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14. Cash taken by the owner $ 2000.
S.NO Accounts Heads Inc./Dec. Dr./Cr. Amounts
14 Owner’s Equity
Cash
O/E
Asset
Dec.
Dec.
Dr.
Cr.
2000
2000

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15. Furniture value $20000 taken by the owner.
S.NO Accounts Heads Inc./Dec. Dr./Cr. Amounts
15 Owner’s Equity
Furniture
O/E
Asset
Inc.
Inc.
Cr.
Dr.
20000
20000

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16. Sold machinery of value $ 3000 on account to Jamal computers.
S.NO Accounts Heads Inc./Dec. Dr./Cr. Amounts
16 Accounts Receivable-ja
Machinery
asset
Asset
Inc.
Dec.
Dr.
Cr.
3000
3000

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17. Returned merchandise $ 700 by Brevet Company.
S.NO Accounts Heads Inc./Dec. Dr./Cr. Amounts
17 Accounts Receivable-Br.
Sales Return
asset
Revenue
Dec.
Dec.
Cr.
Dr.
700
700

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18. Purchases returned by MM Smith $ 500.
S.NO Accounts Heads Inc./Dec. Dr./Cr. Amounts
18 Accounts Payable-MM.
Purchases Return
asset
Expense
Dec.
Dec.
Dr.
Cr.
500
500