Accounts making

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Volume – I
YEAR 2015
WRITTEN BY:
SYED AQEEL RAZA

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It is my pre-words to accounts making that accounts
making in the system of accounting is like to build
home, set characters to any story, apply labor to
job, to make map of any plan or any work for
completion needs hands. I think anything has many
hands to make something. Whence the word makes
to joint alphabet thence the accounts makes the
building of accounting under umbrella of ALPRE and
provides cycling power to it afterwards.
Your comments and encourages is better than fruit.

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THE SYSTEM OF ACCOUNTING
ACCOUNTS MAKING
TABLE OF CONTENTS
Accounts making note 157-160
1-ASSSETS 160-163
1.1 Fixed Assets 163
1.1.1 Land 163-165
1.1.2 Building 166+168
1.1.3 Plant & Machinery 169-170
1.1.4 Furniture & Fixtures 171-173
1.1.5 Office Equipment 174-175
1.1.6 Other Assets 176-178
1.2 Current Assets 178
1.2.1 Cash in Hand 179-180
1.2.2 Cash at Bank A/c 181-182
1.2.3 Account ReceivableA/c 183-185
1.2.4 Purchase Merchandise A/c 186-187

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1.2.5 Prepaid Rent A/c 187-188
1.2.6 Prepaid Insurance A/c 189-193
1.2.7 Unexpired Insurance A/c 194-196
1.2.8 Prepaid Insurance A/c 197-198
1.2.9 Security Deposit A/c 199-200
1.2.10 Deferred Assets A/c 201-202
1.3 IntangibleAssets 202-204
1.4 Contra Assets 204-205
1.4.1 Accumulated DepreciationA/c 205-206
1.4.2 Purchase Return A/c 207
1.4.3 Purchase Discount A/c 208
1.4.4 UncollectableBad Debts 209
2- LIABILITIES 210
2.1 Short Term Liabilities 211
2.1.1 Account PayableA/c 211-212
2.1.2 Salaries Payable A/c 212-213
2.1.3 Accrued Expense A/c 214-215
2.1.4 Sales Tax Payable 216-217

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2.1.5 Income Tax Payable 218-220
2.1.6 Notes Payable A/c 220-221
2.1.7 Interest Payable A/c 221-222
2.2 Long Term Liabilities 223-224
3- PROPRIETORSHIP/OWNERS’EQUITY 224
3.1 Capital 224-225
3.2 Drawing 226
4 – REVENUES 227-228
4.1 Sales 229-230
4.2 Commission Income 230-231
4.3 Other Income 231-232
4.4 Unearned Revenue 232-233
4.5 Accrued Revenue Receivable 233-234
4.1 CONTRA REVENUE ACCOUNTS 234
4.1.1 Sales Return 234-235
4.1.2 Sales Discount 236-237
5- EXPENSES 237-238
5.1 Direct Expenses 239

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5.2 Indirect Expenses 240
5.3 Operating Expenses 241
5.4 Non-OperatingExpenses 242
5.4.1 AdministrativeExpenses 243
5.4.1.1 Advertising Expense A/c 243-244
5.4.1.2 Insurance Expense A/c 244-245
5.4.1.3 Repair & MaintenanceExpense 245-246
5.4.1.4 Salaries & Allowances 246-247
5.4.1.5 DepreciationExpense A/c 248
5.4.1.6 Office Supplies 249-250
5.4.1.7 Other Accounts Admin 250-251
5.4.2 Selling Expenses 252
5.4.2.1 Advertising Expense A/c 252-253
5.4.2.2 Sales Promotion A/c 254-255
5.4.2.3 Sales DistributionA/c 255-257
5.4.2.4 Other Accounts Sales 257-258
5.4.3 General Expenses 259
5.4.3.1 Rent Expense A/c 259-260

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5.4.3.2 Utility Expense A/c 260-261
5.5 Finance Expenses 262-263

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ACCOUNTS MAKING
ACCOUNTS MAKING
In the System of Accounting there are five principle of
recording transactions wherein Assets, Liabilities, Equities,
Revenues and Expenses increasing or decreasing under rules
of debit and credit as Assets and Expenses increases debit and
decreases credit and Liabilities, Equities and Revenues
increases credit and decreases debit. Assets, Liabilities and
Equities are the permanent member of double entry
accounting Equation “Assets=Liabilities + Equities” revolving
accounting cycle round the years and Expense and Revenue
related accounts are the temporary members of accounting
equation perform to calculate Profit and Loss Account, the
profit and loss relate to owners’ equity and the owners’ equity
is the part of accounting equation. The Expenses and
Revenues and related accounts are for making profit & loss
account do not move accounting cycle or transfer their
balances to next accounting year. The expense and revenue
accounts are related with single entry, the old accounting
system used or using in small businesses where to earn and
expense daily or to avoid record accounting applied
procedures.
<THE SYSTEM OF ACCOUNTING < VOLIUM1< SYED AQEEL RAZA<aqeelraza@live.com>

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ACCOUNTS MAKING
The Accounts making in the system of accounting is too
essential to reach the goal of accounting equation or to close
up them for accounting cycle. The thousands of account are
made under matching of five accounting principles; the
accounting principle plays the rules of head and controls huge
accounts created under them.
On creating accounts Land, Building, Furniture, Plant,
Machinery, Equipment, we find out that they relate to
Principle head “Asset” means the value to business or things
which we have in our possession, if we make accounts of
account payable, loan, advance, mark up etc. indicate the
debt and debt comes under Principle account “Liabilities”, and
so on, on making capital, profit & loss account etc we reach on
the decision that these accounts relate to Owners’ Equity, the
principle account head.

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ACCOUNTS MAKING
On making accounts sales, revenues, other incomes etc., we
find out they indicate income from business operation and
come under accounting principle head “Revenues” and like
this, if we make account, salaries expenses, cartage,
conveyance, wages expense, advertising expense, insurance
Expense so on, we ascertain that they relate to expenses of
five principle head of account. Expenses reduce income that
earned from doing business.
In the system of accounting there are three businesses are
described which are trading, manufacturing and servicing
have same concept of accounting system and requires the five
principle of accounting head but sub accounts relating to five
principal of accounting head mostly are common and not
common can be made according to the nature of business,
business activities, events and needs, and for the
manufacturing business, manufacturing process involves
machineries, equipments, finished goods, advertising,
promotion etc. accounts, for trading and servicing businesses
common accounts and some uncommon accounts are made.

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ACCOUNTS MAKING
In order to have knowledge and definition of accounts, I am
discussing individually on accounts most commonly used in
the system of accounting.
The System of Accounting has five principal head which are
Assets, Liabilities, Proprietorship, Revenue and Expenses
wherein Assets, Liabilities and Proprietorship are permanent
accounts rounding accounting cycle and Revenue and
Expenses are temporary accounts end on Income & loss
account or provide the source of income or loss to capital
account.
Here we discuss thoroughly each principal head, its sub
accounts and related with accounts mostly used in accounts
making;-
1-ASSETS
Assets are the resources of the business and equities are
sources, sources provide finances to resources for conversion
capital into assets enable business to start functioning. Assets
are the main head which generate sub heads and sub heads

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ACCOUNTS MAKING
further generate related accounts according to the nature of
the business.
Many terms of assets are used in accounting such as fixed
assets, tangible assets, non-current assets, immoveable
assets, long term resources having live more than one year,
and these are recorded at book value or on purchase price
decreasing depreciation and placed sub head of ASSETS in
financial statement .Other assets are current assets, liquid
assets, value assets, moveable assets, intangible assets and
short term assets having life under one year.
Some assets are contra assets which reduces the value of
assets.
<THE SYSTEM OF ACCOUNTING< VOLIUM1< SYED AQEEL RAZA<aqeelraza@live.com>

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ACCOUNTS MAKING
Much Kind of assets according to the nature of business are in
accounts or can give name or make account to any asset
purchased or acquired for business.

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ACCOUNTS MAKING
Here are the details and description some of assets relating to
fixed assets, tangible assets, non-current assets, immoveable
assets, long term assets.
1-FIXED ASSETS
1- Land
2- Building
3- Plant & Machinery
4- Furniture & Fixtures
5- Office Equipment
6- Other Assets
1.1.1 LAND A/c
Land is required mostly in manufacturing concerns producing
raw material or convert raw material into finished goods for
home country and out countries and having huge production,
labor, materials and process.

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ACCOUNTS MAKING
The land is fixed, non- current, tangible, long term resources
or immovable asset of the business and the permanent
member of accounting cycle and shown in balance sheet as
land. There is no depreciation is charged on land and the value
of land is recorded as book value or purchase value instead of
market value.
Banks offer loan on mark up or on demand finance against
mortgage of land to assess market value of the land.
The account of land is made under head Fixed Assets and
according to accounting rules as asset increases debit
decreases credit it will be debited and other account which is
cash or bank also an asset is credited. There is no affect on
accounting equation is made as cash converted into asset
“Land,” and this action is called asset for asset entry or
conversion entry.
Entry;
Land
Cash/Bank
(Purchase land by cash/bank)

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ACCOUNTS MAKING
1.1.2 BUILDING A/c
After purchasing of land, the building is needed to be
constructed and designed according to the nature or work of
business keeping in view all the aspects of health and safety
of workmen.
The expense on construction of building is capital
expenditure, and capital expenditure is converted into asset
as Building Account. Money spending any kind on all repairs
and maintenance on building is charged as expenses under
head Repair & Maintenance Building.
The building is fixed, non- current, tangible asset, long term
resources or immoveable asset of the business and the
permanent member of accounting cycle and shown in balance
sheet as Building. The value of building is recorded as book
value or construction value instead of market value, and
depreciation is charged on building.

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ACCOUNTS MAKING
Therefore, the account of building is made under head Assets
and sub head Fixed Assets and according to accounting rules
asset increases debit decreases credit it will be debited and
other account which is cash or bank also an asset is credited.
There is no affect on accounting equation as cash converted
into asset (Building) and this action is called asset for asset
entry or conversion entry.
Entry;
Building Debit
Cash/Bank Credit
(Purchase building by cash/bank)

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ACCOUNTS MAKING

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ACCOUNTS MAKING
1.1.3 PLANT AND MACHINERY A/c
There will be needed to have plant and machinery to run any
manufacturing concern according to the nature and work of
business after acquiring of land and building.
The Plant and Machinery is fixed, non- current, tangible asset,
immoveable or long term resources of the business and the
sheet as Plant & Machinery. The value of plant and machinery
is recorded as book value or purchase value, and depreciation
is charged on plant and machinery.
Money spending any kind on all repairs and maintenance on
plant and machinery is recorded as expenses under head
Repair & Maintenance (Plant & Machinery).
The account of plant and machinery is made under head
Fixed Assets, the sub head of Assets and according to
accounting rules asset increases debit decreases credit it will
be debited and other account which is cash or bank also an
asset is credited. There is no affect on accounting equation is
made as cash converted into asset “Plant & Machinery and
this action is called asset for asset entry or conversion entry.

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ACCOUNTS MAKING
Entry;
Plant & Machinery Debit
Cash/Bank Credit
(Purchase plant & machinery by cash/bank)

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ACCOUNTS MAKING
1.1.4 FURNITURE & FIXTURES A/c
Furniture and fixtures according to the nature and work of
business is also required in any concern after acquiring land,
building and plant and machinery.
The Furniture and fixtures is fixed, non- current, tangible
asset, immoveable or long term resources of the business and
the permanent member of accounting cycle and shown in
balance sheet as Furniture and Fixtures. The value of furniture
and fixtures is recorded as book value or purchase value, and
depreciation is charged over it.
Furniture and fixtures is recorded as expenses under head
Repair & Maintenance (furniture and fixtures) or Repair &
Maintenance (F&F).
The account of Furniture and Fixtures is made under
head Fixed Assets, the sub head of Assets and accordingto
accounting rules asset increases debit decreases credit it will
be debited and other account which is cash or bank also an

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ACCOUNTS MAKING
asset is credited. There is no affect on accounting equation is
made as cash converted into asset “Furniture & Fixtures,” and
this action is called asset for asset entry or conversion entry.
Entry;
Furniture & Fixtures Debit
Cash/Bank Credit
(Purchase furniture & fixtures by cash/bank)

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ACCOUNTS MAKING

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ACCOUNTS MAKING
1.1.5 OFFICE EQUIPMENT
Office Equipments like typewriters, computers, printers, fax
machines, etc. are also required to control and run any
concern according to the nature and work of business.
The Office Equipment is fixed, non- current, tangible asset,
sheet as Office Equipment. The value of Office Equipment is
recorded as per book value or purchase value, and
depreciation is charged over it.
office equipment is recorded as expenses under head Repair &
Maintenance (Office Equipment).
The account of Office Equipment is made under head Fixed
Assets, the sub head of Assets and according to accounting
rules asset increases debit decreases credit it will be debited
and other account which is cash or bank also an asset is
credited. There is no affect on accounting equation is made as
cash converted into asset (office equipment) and this action is
called asset for asset entry or conversion entry.

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ACCOUNTS MAKING
Entry;
Office Equipment Debit
Cash/Bank Credit
(Purchase office Equipment by cash/bank)

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ACCOUNTS MAKING
1.1.6 OTHER ASSETS
Other assets are a group of accounts of minor value adding
during business operation to avoid lengthiness in the system
of accounting. Like land, building, plant & machinery,
Furniture and fixtures and office equipment there may be
other assets like Air Conditioning unit, generator, power
factor, tools, vehicles etc.
The Other Assets is fixed, non- current, tangible asset,
sheet as Other Assets. The value of Other Assets is recorded
as book value or purchase value, and depreciation is charged
over it.
other assets is recorded as expenses under head Repair &
Maintenance (Other Assets head wise).
The account of Other Assets is made under head Fixed Assets,
the sub head of Assets and according to accounting rules asset
increases debit decreases credit it will be debited and other
account which is cash or bank also an asset is credited.

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ACCOUNTS MAKING
There is no affect on accounting equation is made as cash converted
into asset (Other Assets) and this action is called asset for asset entry
or conversion entry.
Entry;
Other Assets Debit
Cash/Bank Credit
(Purchase generator by cash/bank)

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ACCOUNTS MAKING
Like fixed assets many Kind of assets according to the nature
of business are therein or can give name or make account to
any asset.
Here are the details and description some of assets relating to
current assets, liquid assets, moveable assets, value assets,
intangible assets, short term assets;
1.2 Current Assets
1- Cash in hand
2- Cash at Bank
3- Accounts Receivable
4- Merchandise Inventory
5- Purchases Merchandise
6- Prepaid Rent
7- Prepaid Insurance
8- Unexpired Rent
9-Unexpired Insurance
10-Prepaid Advertising
11-Security Deposit
12-Deferred Assets

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ACCOUNTS MAKING
1.2.1 CASH IN HAND A/c
Cash is used for payments relating to purchases, expenses,
debts and all financial matters which are expedited during
business operation. The source of cash is transferred by
capital, conversion of assets, sale, any kind of revenue and all
other sources where cash comes during business operation.
Cash in hand means cash balance in cash book and petty cash
book or the cash remained unused during business operation
at the end of accounting period and shown in balance sheet as
Cash-in-hand.
Cash in hand is current asset, liquid asset, moveable asset or
value asset of any entity.
The account of cash is made under head Current Asset, the
sub head of asset and cash comes from capital assume. It will
be transfer entry of cash from the sources of the business and
shown debit balance in cash book. The account cash debit and
credit from cash book.

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ACCOUNTS MAKING
Entry;
Cash Debit
Capital Credit
(Cash by investment)

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ACCOUNTS MAKING
1.2.2 CASH AT BANK A/c
All cash comes from the sources of business during business
operation is kept in bank account for all payments to save risk
and according to the instruction of government issued from
time to time for controlling taxes by bank. All records of cash
drawn and paid are furnished by bank which is reconciled with
cash book by account holder.
The balance unused in bank at the end of the accounting
period is cash at bank shown in balance sheet.
Cash at bank is current asset, liquid asset, moveable asset or
value asset of any entity.
The account of Cash at bank is made under head Current
Asset, the sub head of Assets and shown in debit balance in
cash book as;

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ACCOUNTS MAKING
Entry;
Bank Debit
Cash Credit
(Cash deposited into bank)

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ACCOUNTS MAKING
1.2.3 ACCOUNTS RECEIVABLE A/c
The money recoverable from customer whom goods or
services sold on credit is called account receivable.
Account receivable is a current asset, liquid asset or value
assets, the sub head of Assets shown in balance sheet as
Accounts receivable under note, the detail of parties.
On account of sale on credit, an account “Account R/A “with
party’s name individually created in the ledger to record
increase or decrease the amount due on customer. As per
accounting rule debt is debited to account receivable and
credited by cash, cash is also an asset, therefore, cash move to
other hand and this action is called asset for asset or moving
entry. When cash is the amount of debt is received, it will be
reversed.
Entry;
Account Receivable Debit
Cash Credit
On recovery of cash, the entry will be;
Cash Debit
Account Receivable Credit

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ACCOUNTS MAKING
1.2.4 MERCHANDISE INVENTORY A/c
Merchandise inventory means the merchandise remain unsold
at the end of accounting period.
Merchandise Inventory is current asset and shown in balance
sheet as Stock or Merchandise Inventory.

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ACCOUNTS MAKING
The merchandise inventory ending is reduced by cost of
merchandise sold statement as unsold goods already recorded
In purchases and opening inventory therefore, the entry will
be;
Merchandise Inventory Debit
Income Summary Credit

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ACCOUNTS MAKING
1.2.5 PURCHASES MERCHANDISE A/c
Merchandise means to things or commodities bought and
sold. Purchases are made on cash basis where payment made
immediately is cash purchases and on account where payment
made after purchases on certain understanding called credit
purchases.
Unused merchandise into Purchases is current asset shown in
balance sheet as stock or Merchandise Inventory and
permanent member of accounting cycle but used merchandise
relates to income summary and temporary asset.
On purchasing of commodities, the Local purchase account or
import purchase A/c is debited and cash a/c or party’s account
in case of credit purchase is credited. It is asset for asset or
conversion entry.
Entry’
Local Purchases Debit
Cash/bank Credit
Import Purchases Debit
Bank Credit

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ACCOUNTS MAKING
1.2.6 PREPAID RENT A/c
On starting business, there will be need to have a place, shop,
go-down, building etc. which is acquired by applying capital or on
rent and rent is paid in advance and advance remains unutilized
is owned and ownership claims to be an asset.

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ACCOUNTS MAKING
Therefore prepaid rent is a current asset and debited as Prepaid
rent or unexpired rent and unexpired rent is claimable or utilizable
in the next accounting cycle.
Entry;
Prepaid Rent Debit
Cash Credit
(Cash paid for rent in advance)

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ACCOUNTS MAKING
1.2.7 PREPAID INSURNACE A/c
Prepaid Insurance is an account which shows the amount
paid for business insurance in advance at the time of
taking business policy from Insurance Company for any
asset’s value covering all losses covered under policy. It is
an asset before expiry, affects accounting equation, and
debited under rules of double entry and on completion the
period covered prepaid insurance credited and Insurance
Expenses debited. Like unexpired insurance, if the some
portion of it remains to consume will also be an asset.
Entry;
Prepaid Insurance Debit
Cash Credit
(Insurance paid in advance)

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ACCOUNTS MAKING
1.2.8 UNEXPIRED RENT A/c
Unexpired rent is meant that some part of rent which was
paid in advance saved to consume and value to business
owned and claimable or recycle able for the next
accounting period. The rent when was paid in advance
then debited as Prepaid Rent and on the end of
accounting period credited the consumed rent by crediting
Prepaid Rent. The balance of unexpired rent is charged as
asset of the company.

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ACCOUNTS MAKING
Therefore, unexpired rent is the amount which is the asset of the
company is consumable or claimable in next accounting cycle.
Example
Prepaid Rent 10,000/=
Cash 10,000/=
(Rent paid in advance)
Rent Expenses 8,000/=
Prepaid Rent 8,000/=
(Rent consumed during the year)
Balance of Prepaid Rent Rs.2, 000/= is unexpired rent.

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1.2.9 UNEXPIRED INSURNCE A/c
The some part of business insurance which saved to
consume is unexpired insurance and by definition
unexpired insurance is an asset. It is an example that a
businessman takes policy worth Rs.100000/= from
Insurance Company for one year on 1st
September and it
was debited with prepaid insurance. On ending of the year
at 30th
June, consumed part of the insurance which
becomes 75000/= for nine months is debited by Insurance
expense and credited by Prepaid Insurance. The balance
of Prepaid Insurance Rs.25000/= is consumable or
claimable from Insurance Company for the next
accounting period.
In other words unexpired insurance is the amount that is
the asset of the company and balanced into prepaid
insurance means already paid insurance in advance
consumable or claimable from Insurance Company for the
next accounting period.

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ACCOUNTS MAKING
Example
Prepaid Insurance 10,000/=
Cash 10,000/=
(Insurance paid in advance)
Insurance Expenses 8,000/=
Prepaid Insurance 8,000/=
(Insurance consumed during the year)
Balance of Prepaid Insurance Rs.2, 000/= is unexpired insurance.
<THE SYSTEM OF ACCOUNTING < VOLIUM 1< SYED AQEEL RAZA<aqeelraza@live.com>

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ACCOUNTS MAKING

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1.2.10 PREPAID ADVERTISING A/c
The prepaid advertising is current asset/liquid asset/value
asset and debited as Prepaid Advertising or unexpired
Advertising and unexpired Advertising is claimable or
utilizable in the next accounting cycle.
The account Prepaid Advertising comes under Assets, sub
head Current Asset/Liquid Asset/Value Asset and
according to accounting rules asset increases debit
decreases credit then it will be debited and other account
which is cash or bank also an asset is credited. There is
no affect on accounting equation is made as cash
converted into value asset “Pre-Paid advertising” and this
action is called asset for asset or conversion entry to value
asset.

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ACCOUNTS MAKING
Entry;
Prepaid Advertising Debit
Cash Credit
(Cash paid for advertising in advance)

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1.2.11 SECURITY DEPOSIT A/c
Security deposit is the amount that company has to give on
import stage or to acquire fixed assets from parties that take
some amount from buyer to have with him for assurance of
their assets in other custody.
On taking shop, go down, office or any premises for business on
rent, one should have to deposit some amount with the owner
that is refundable.
Security deposit is short term asset or current asset in case of
returning within one year of the balancesheet date and after
one year, it will be long term asset or non-current asset.
The account security deposit comes under Assets, sub
head Current Asset or non-current asset conditionally and
as per accounting rule it is debited to Security Deposit and
credited by cash or bank, cash is also an asset, therefore, cash
move to other hand and this action is called asset for asset or
moving entry.

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Entry;
Security Deposit Debit
Cash/Bank Credit

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1.2.12 DEFERRED ASSETS A/c
Unconsumed prepaid expenses, which could not be expired
during accounting period such as insurance, rent, interest,
advertising etc., are carried forward as an asset for future
benefit is called deferred assets.
Deferred Assets are long term current assets transferred by
prepaid expenses shown in balance sheet.
Entry;
Deferred Assets Debit
Prepaid Expenses Credit

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1.3 Intangible Assets
1- Goodwill
2- Trade Mark
3- Copy Right
4- Brands
5- Logos

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Intangible assets such as goodwill, logos, trade mark, brands, copy
write etc. are long term current assets and have no physical
existence but relate to the value of reputation of business generated
gradually by first day of its having. It may be purchased to increase
the value of business and sold to take benefit of having it.
Entry;
For purchase of intangible asset
Intangible Asset Debit
Cash Credit
For sale of intangible asset
Cash Debit
Intangible Asset Credit

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Intangible assets of having limited life can be amortize under
formula annual amortization expense=cost/useful life debiting
Amortization Expense and crediting Accumulated Amortization and
of an indefinite life, there is not amortization but is test of
impairment and written down to its recoverable amount under
formula impairment loss = carrying value-recoverable amount
debiting Loss on Impairment and crediting Accumulated
Impairment Loss.
1.4 Contra Assets
1. Accumulated Depreciation(O.E.)
2. Accumulated Depreciation (P&M)
3. Accumulated Depreciation (F)
4. Purchase Return
5. Purchase Discount
6. Allowance for Uncollectable Bad Debts
CONTRA ACCOUNTS
Contra accounts reduce the value of a related account and to
correct previous mistakes.

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ACCOUNTS MAKING
1.4.1 ACCUMULATED DEPRESCIATION A/c
Contra assets accounts are reduced by accumulated
depreciation, a collection of depreciation, on fixed assets like
building, plant and machinery, furniture and fixtures, office
equipment and other fixed assets. Contra assets relating to
depreciation credited by accumulated depreciation, a new
account is generated instead of asset account and shown in
balance sheet reducing the amount of fixed assets accounts.

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Adjusting Entry;
Depreciation Expenses Asset Debit
Accumulated Depreciation - Asset Credit
Closing Entry;
Expense and Revenue Summary asset Debit
Depreciation Expenses Asset Credit

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1.4.2 PURCHASE RETURNA/c
Purchase return which relates to purchase account, a
temporaryasset account, reduces the value of cost of goods
sold in cost of goods sold statement or in income statement.
Entry;
Account payable Debit
Purchase Return Credit

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1.4.3 PURCHASE DISCOUNT A/c
Purchase discount which relates to purchase account, a
temporary asset account, reduce the value of cost of goods
sold in cost of goods sold statement or in income statement.
Account Payable Debit
Purchase discount Credit

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1.4.4 UNCOLLECTABLE BAD DEBTS
The new account “Allowance for uncollectable bad debt” is
created against accounts receivable accounts. Allowance for
uncollectable bad debit consists on estimated value by
percentage of receivables from suppliers.
Uncollectable/Bad Debits Expenses Debit
Allowance for uncollectible/Bad debts Credit

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2-LIABILITIES
Liabilities mean the claim of suppliers on account of purchases
or the debts taken or have to pay on various causes during
business operation.
Liabilities are the second main principle of accounting consists
on short term and long term liabilities and shown in balance
sheet.

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2.1 SHORT TERM LIABILITIES
1. Accounts Payable
2. Salaries & Wages Payable
3. Accrued Expenses
4. Sales Tax Payable
5. Income Tax Payable
6. Notes payable
7. Interest payable on banks’ loan
2.1.1 Accounts Payable
Short term liabilities is meant by debts payable shorter than one
year such as accounts payable, shown in balance sheet under the
heading current liabilities covering note, the detail of parties to
whom the debt is payable. Short term liabilities are credited as A/c
payable with party name from whom the goods purchased and
purchases are debited under rules.

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Merchandise/Assets = Debit
A/c P/A ABC & Co. /Liabilities = Credit
2.1.2 Salaries Payable A/c
At the end of the year, the balance of salaries, the salaries to
staff permanently working in an organization, and wages, the
wages to workmen working on daily basis, remain to pay
because of the reason that the some companies pay salaries
and wages to their staff after last day of the month. The
remaining part of the salaries & wages, already charged in
expenses, comes under head Salaries & Wages payable,
showing the salaries & wages are remaining to pay.

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ACCOUNTS MAKING
Salaries are wages payable come under short term liabilities
journalized as;
Salaries & Wages Expenses Debit
Salaries & Wages Payable Credit

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ACCOUNTS MAKING
2.1.3 ACCRUED EXPENSES
Accrued Expenses, the amount of expenses relating to current
accounting year, are the liabilities of short term and payable
under head Accrued Expenses in the next accounting period.
The account of Accrued Expenses is temporary account from
which all expenses relating to previous accountingyear are paid
and charged in balance sheet under Current Liabilities. The
accrued expenses on one side make profit & loss actual and on
other side wipes out the matter of expenses relating to
previous accounting year.
The Expenses relating to previous year are debited in new
accounting year under head Accrued Expenses and credited in
previous accounting year in lump sum as Accrued Expenses.

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ACCOUNTS MAKING
Ledger Entry in current year
Accrued Expenses Debit
Cash/Bank Credit
Ledger Entry in previous year
Expenses (Head wise) Debit
Accrued Expenses Credit

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ACCOUNTS MAKING
2.1.4 SALES TAX PAYABLE
Sales tax payable, the amount of sales tax balance of sales and
purchases in ledger account at the end of the accounting year,
comes under liabilities shown in balance sheet.
Sales tax on supplies or services is charged by Estate on
prescribed rate which is deducted by Sales Tax Invoice and
journalized as;
Goods or Services a/c Debit
Sales Tax payable a/c Credit
Sales tax payable a/c credit Credit
Sales tax allows the adjustment of purchases and other related
expenses as;
Sales Tax Payable A/c Debit
Purchases/related expenses A/c Credit

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ACCOUNTS MAKING
The balance of ledger in sales tax payable account is meant to
pay the tax into bank as;
Sales Tax Payable A/c Debit
Cash/Bank A/c Credit
<THE SYSTEM OF ACCOUNTING < VOLIUM 1< SYED AQEEL RAZA<aqeelraza@live.com>

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ACCOUNTS MAKING
2.1.5 INCOME TAX PAYABLE A/c
Income tax payable, the amount of Income tax balance in
ledger account at the end of the accounting year, comes under
liabilities shown in balance sheet.
Income tax on supplies and services is charged by Estate on
prescribed rate which is deducted by withholding agent;
withholding agent is that who makes payment to suppliers and
service providers. The tax, which is deducted by withholding
agent, is credited to withholding agent under credit note by
suppliers or service provider.
In case of salaried persons, the Income tax on payment of
salaries to employees is deducted and deposited by company
and received the amount of income tax from employees.
The income tax deducted by withholding agent on sales is
claimable or adjustable by government.

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ACCOUNTS MAKING
The following accounts are generated in connection with
income tax;
As withholding agent
Party’s account A/c Debit
Income tax payable A/c Credit
As other than withholding agent
Income Tax payable A/c Debit
Party’s Accounts A/c Credit
As an Employer
Salaries Expenses A/c Debit
Income Tax payable A/c Credit
As a Depositor
Income Tax Payable Debit
Cash/Bank Credit

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ACCOUNTS MAKING
2.1.6 NOTES PAYABLE A/c
A promissory note is an instrument of formal written
promise by one person or maker, who makes note and
promises to pay, to another person or payee, the person
whom the amount is payable, for payment of liabilities. For
example, if company or person received cash against
promissory note from person or financial institution on
promise to repay a note recorded as;

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ACCOUNTS MAKING
Cash/Bank Debit
Notes payable Credit
2.1.7 Interest on Notes Payable
In case of interest on notes, mentioned in promissory note
with the specific rate of interest and terms therein, the
borrower will accrue the transaction debiting Interest
Expenses and crediting Interest payable and on payment of
interest debiting interest payable and crediting cash as;

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ACCOUNTS MAKING
Accrual of Interest on notes payable
Interest Expenses
Interest payable
Payment of Interest on Notes payable
Interest payable
Cash

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ACCOUNTS MAKING
2.2 LONG TERM LIABILITIES
1. Loans
2. Debentures
3. Mortgage
4. Bank Loans
2.2.1234 Long Term Liabilities
Long term liabilities is meant by debts payable longer than one year
such as loans, debentures, mortgage, bank loans etc. as shown in
balance sheet under main head liabilities.
In order to operate business or to solve funds problems,
organizations take loans from some sources such as persons, banks,
financial institution or on leasing on fixed assets. The assets against
loans, debentures, mortgages, banks loans are debited and
persons/organization/financial institution are credited in the book of
company having liabilities.
Assets/Cash/Bank Debit
A/c Payable (Financial Institution) Credit

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ACCOUNTS MAKING
3 - PROPRIETORSHIP/OWNERS’ EQUITY
1. CAPITAL
2. DRAWING
3.1 CAPITAL A/c
Capital, a permanent member of accounting cycle, in shape of
cash or goods invested in business is a part of owner’s equity
means owner’s interest on values of assets or the recourses of
business.

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ACCOUNTS MAKING
Capitalaccount is generated in connectionwith investment in
business as to credit capital account and debit asset account;
Cash Invested in business
Cash Debit
Capital Credit

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ACCOUNTS MAKING
3.2 DRAWING A/c
Drawing is a contra equity account which reduces the capitalof
owner because of the owner withdraws cash or goods for his
personal use as;
Cash drawn for personal use
Drawing Debit
Cash Credit

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ACCOUNTS MAKING
4 – REVENUE/INCOME
Revenue is the fourth main principle head of the system of
accounting and many accounts relating to income linked with
like income from sales, commission income, other incomes etc.
Under rules of debit and credit revenue increases credit
decreases debit then on selling, cash or account
receivable/asset increases and merchandise/asset sold
decreases. it is asset for asset entry but the profit or
commodity purchased for doing business is involved in selling
this asset therefore, it belongs to revenue, ascertain in profit
and loss account, profit and loss transferred to equity and
equity is the source. It is concluded that the profit is the source
generated by sales and sales contra to commodities.
Revenue is the part of income summary and temporary
member of accounting cycle. It ends on profit and loss account
which transferred to Balance sheet under owners’ equity or
capital account.

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ACCOUNTS MAKING
4.1 SALES
4.2 COMMISSION INCOME
4.3 OTHER INCOMES
4.4 UNEARNED REVENUE
4.5 ACCRUED REVENUE RECEIVABLE

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ACCOUNTS MAKING
4.1 SALES A/c
The merchandise or commodities that was purchased or
manufactured for doing businessor to make profit by selling
them to customer is sale. In sale, the process involves that
manufacturermanufactures goods, sells to distributor;
distributor to whole seller and whole seller to retailer and
retailer to end user.
Sales come under the fourth main head “Revenue”, the
temporarymember of accounting cycle, ends on profit and
loss account. Under rules, it is credited either on cash or on
credit and debited cash and on account receivable in case of
sale on account like;
Sale on cash
Cash Debit
Sales Credit
Sales on account
A/c Receivable (ABC Co.) Debit
Sales Credit

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ACCOUNTS MAKING
4.2 COMMISSION INCOME A/c
Commission income relates to the business of services wherein
no merchandise or commodity is involvedbut consultancyor
making help in executing commercial transactionslike
commission on sale, commission on property selling etc.
Commission income comes under main head revenue crediting
commission income debiting cash/bank.
Cash/Bank Debit
Commission income Credit

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ACCOUNTS MAKING
4.3 OTHER INCOMES
Other incomes is the summary of incomes from other sources
besides business specific incomes but relates to business like
scrap sale, shop sale, income from bank interest, etc.
Other income generates sub accounts according to the nature
of incomes and recorded as;
Cash/Bank Debit
Other Income Credit

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ACCOUNTS MAKING
4.4 UNEARNED REVENUE
Unearned revenues mean company receives the money in
advance for services or sale of goods that not performed or
delivered or pre-receipt for undeliveredgoods or unperformed
services. In other words, the unearned revenue is the liability
until it earns so recorded as;
Cash/Bank
Unearned revenues
On delivery of goods or performing services, unearned revenue
will be debited and credit sales/service as;
Unearned revenues
Sales

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ACCOUNTS MAKING
4.5 ACCRUED REVENUE RECEIVABLE
Accrued revenue means to buildup revenues that have been
earned and sales performed but not received or recorded at
the end of accounting period which could be recognized by
adjusting entry.
Accrued revenue is treated as an asset instead of liability.
Accrued Account receivable Debit
Income account Credit

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ACCOUNTS MAKING
4.1 CONTRA REVENUE ACCOUNT
4.1.1 SALES RETURN
4.1.2 SALES DISCOUNT
4.1.1 SALES RETURN
Sales return account, a contra revenue account, is made if the
goods sold returned causing defects, expiry, damage and any
reason. It reduces income but balanceto inventoryor stock. In
case of sale on credit, the amount of credit is given to
purchaser on receipt of his complainor debit note recording

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ACCOUNTS MAKING
journalentry for adjustment of claim as to debit sales return
and allowances and credit account receivable.
One side, sales return and allowances reduce the account of
account receivable or liabilityof purchaser and on other side
sales in income statement as;
Sales Return & Allowances Debit
Account Receivable Credit.

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ACCOUNTS MAKING
4.1.2 SALES DISCOUNT
Sales discount account, a contra revenue account, is made if
reduction in the price of a product or service offered by seller in
place of early payment or to increase sales. It reduces income
but not affect on inventory or stock. The amount of credit is
given to purchaser at the time of purchasing on cash sale or/on
credit in lateradjustment by crediting purchaser’s account as;
Sales Discount Debit
Account Receivable Credit.
Sales return reduces the account of account receivable or
liabilityof purchaser and sales in income statement.

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ACCOUNTS MAKING
5 - EXPENSES
Expenses are the fifth part of main principlehead of the system
of accounting and numerous accounts linkedwith it like direct
expenses, freight charges, insurance of goods in transit,
carriage, wages, custom duty, import duty, octroi, other taxes
etc. and all indirect expenses, operating and non-operating,
other than direct expenses like rent of building,salaries to
employees, legal charges, insurance expense, depreciation
expense, printing expense, office stationery expense, financial
charges etc., revolving in selling expenses, administrative
expenses, financialexpenses, general expenses etc.

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ACCOUNTS MAKING
Expenses are the member of temporary accountsending on
profit and loss account. The net profit and loss is ascertained by
reducing them to income and loss account.

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ACCOUNTS MAKING
5.1 DIRECT EXPENSES
Direct expenses involvein purchases from purchase point to
business place like cartage, freight, goods insurance in transit,
carriage inward, wages, custom duty, import duty, octroi, taxes
and all other expenses includedin goods or in process of
making goods directly.
Direct expenses affect on the cost of goods sold by adding them
in merchandise purchased. In other words they increase the
value of actual purchases or to the cost of goods sold.

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ACCOUNTS MAKING
5.2 INDRECT EXPENSES
Indirect expenses relate to operating and non-operating
expenses containingmanufacturingexpenses, selling expenses,
administrativeexpenses, financialexpenses, general expenses
etc. which generate numerous accounts like rent of building,
salaries to employees, legal charges, insurance expense,
depreciationexpense, printing expense, office stationery
expense etc.
The net profit and loss is ascertained by reducing indirect
expenses to income and loss account.

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ACCOUNTS MAKING
5.3 OPERATING EXPENESES
All expenditures involve in business operation but not
directly associated with the cost of goods usually sub
divided administrative expenses, sales expenses and
general expenses like salaries expenses, repair &
maintenance expenses, advertising expenses, insurance
expenses, rent expenses, utility expenses.
The net profit or loss is ascertained by reducing them to
revenues in income statement.

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ACCOUNTS MAKING
5.4 NON OPERATINGEXPENSES
Some expenditure in business are incurred for reasons
and not involve normal business operations are non
operating expenses like interest charges or other costs of
borrowing and expenses relating to employee benefits,
such as pension contributions, non recurring items such
as accounting adjustments, obsolete of equipment or
currency exchange etc.

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ACCOUNTS MAKING
5.4.1 ADMINSTRATIVE EXPENSES
Advertising Expenses
Insurance Expenses
Repair & Maintenance
Salaries &Allowances
Depreciation Expenses
Office Supplies
5.4.1.1 ADVERTISING EXPENSES
Advertising may be administrative expense, in case of giving
advertising for hiring staff, property transfer, sale, legal rights
etc.
On payment of advertising cost, it must be debited with
Advertising expenses and cash/account payable credit in cash
of credit advertising.
Advertising Expense debit
Cash/account payable credit

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ACCOUNTS MAKING
5.4.1.2 INSURANCE EXPENSE
Insurance expense means the amount of insurance is paid on
policies for any business value in anticipation of recovering losses
from any kind of fire, theft, hazardous etc. in the business. There
will be no return, in case of nothing is occurred like personal
insurance.
The expenditure on insurance is debited by Insurance Expenses
and credited cash/bank under rules of debit and credit.
Example:
Paid for insurance on goods
Insurance Expense debit
Cash/Bank credit

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ACCOUNTS MAKING
5.4.1.3 REPAIR & MAINTENANCE EXPENSES
The Assets involves in business operation need to renovate,
repair and maintain or to keep in working condition, there will
be accounts like repair & maintenance, building, plant &
machinery office equipment, air conditioners etc.
All repair and maintenance on assets are expenses, debited
under rules and reduce income;
Repair& Maintenance debit
Cash credit

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ACCOUNTS MAKING
5.4.1.4 SALARIES & ALLOWANCES
A business unit has different departments, huge labors, officers
and directors for business operation and their salaries and
allowances,remunerations, benefits are recorded under head
Salaries & Allowances A/c, RemunerationA/c, Benefits A/c
generated to specific benefit.
Salaries and allowances are journalizedat the end of the month
to create liabilityof the period as;

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ACCOUNTS MAKING
Salaries & Allowances Debit
Salaries & Allowances payable Credit
And when, salaries & allowancesare distributed by cash or
bank, the recording of entry will be as;
Salaries & Allowances payable Debit
Cash/Bank Credit.
Salaries & Allowances comes under Expense Account may be
split out department wise, station wise, category wise etc.

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5.4.1.5 DepreciationExpense A/c
The Account depreciationexpense is derived from accumulated
depreciationwhich reduces the net income under Income and
loss account.
Depreciationexpense is the result of calculationof
accumulateddepreciationon fixed assets under different
methods and recorded at the end of the year as;
DepreciationExpense Debit
Accumulated Depreciation Credit

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ACCOUNTS MAKING
5.4.1.6 Office Supplies
Office requires stationery like pens, pencils, calculators, papers,
staplers, toners, ink, etc besides printing vouchers, forms,
books, etc.
The expense on stationery and printing for office comes under
administrativeexpenses debitedunder rules and the account of
all purchases relating to printing and stationery using in office
will be Office Supplies Expense A/c or Printing & Stationery A/c
like;
Office Supplies Expense A/c Debit
Cash/Bank Credit

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ACCOUNTS MAKING
5.4.1.7 OTHER ACCOUNTS (ADMINSTRATIVE)
Many other expenses relating to cash or petty cash commonly
used under administration like EOBI Expense a/c, Social
Security A/c Security Expenses A/c, conveyance a/c, cartage
a/c, vehicle running expenses a/c, staff welfare a/c, ex-gratia
a/c, mobile expense a/c, janitorial expenses a/c, entertainment
a/c, potage a/c, incidental a/c, rent rates & tax a/c,
miscellaneous a/c, consumable stores a/c and many other
accounts creatable according to the need of recording
transactions.

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The expenses in question may be passed through petty cash
system or directly from cash book as shown below;
Petty Cash Funds a/c Debit
Petty cash expenses (accounts) Credit
OR
Conveyance Debit
Cash Credit

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ACCOUNTS MAKING
5.4.2 SELLING EXPNESES
Advertising Expenses
Sales Promotion Expenses
Sales Distribution Expenses
5.4.2.1 Advertising Expense A/c
In all three business; trading, manufacturing and servicing,
there is need to advertise the item that the manufacture is
producing and benefiting its traders to increase its
manufacturing process by selling its produces. The traders
who imports items not known in the region, they should have
to introduce imported items by advertising with the support
of newspaper, magazines, TV. Channels, cables, wall chalking,
hand bills and all other sources come under advertising. As far
as servicing is concerned, the one is introduced oneself by
doing advertising.

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Advertising Expense account is made to record all the
transaction relating to advertising.
Advertising Expense comes under the fifth principle account
ALPRE and the sub account of Selling expenses on the income
statement.
On payment of advertising cost, it must be debited with
Advertising expenses and cash/account payable credit in cash
of credit advertising.

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ACCOUNTS MAKING
5.4.2.2 Sales Promotion Expenses
Sales promotion is an essential part of business which
introduces the items that are new or imported and none is
known about its function or advantages. Sales promotion also
makes goodwill of the items promoted by means of installing
stall, door to door introduction, different activities in school,
college, health institution etc. in city or out city, in country or
out country.
The Expenditure on promotion comes under Sales Promotion
Expenses directly head or having sub accounts like travelling
expense a/c, conveyancea/c, communication a/c, field expense
ac, salaries & allowances a/c, staff welfare a/c, vehicle expense
a/c, conveyance a/c, cartage a/c and many other accounts
relating to sales promotion.
Sales promotion expenses linked with Selling Expenses and
debited under expenses rules like;
Sales Promotion Expenses a/c Debit
Cash/Bank Credit

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ACCOUNTS MAKING
5.4.2.3 Sales Distribution Expenses
Another essential part of sales is distribution from which the
demand of items is distributes to distributor, whole seller,
retailer or end user in city or out city, in country or out country.

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ACCOUNTS MAKING
The expenditure on distribution come under Sales Distribution
Expenses a/c directly or having sub accounts like travelling
expense a/c, communication a/c, field expense a/c, salaries &
allowances a/c, staff welfare a/c, vehicle expenses a/c,
conveyance a/c, freight & cartage a/c and may other accounts
relating to sales distribution.
Sales distribution expenses linked with Selling Expenses and
debited under expenses rules like;
Sales Distribution Expenses a/c Debit
Cash/Bank Credit

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ACCOUNTS MAKING
5.4.2.4 Other Accounts (Sales & Marketing)
Many other expenses relating to cash or petty cash commonly
used under sales & marketing like conveyancea/c, cartage a/c,
vehicle running expenses a/c, staff welfare a/c, ex-gratia a/c,
mobile expense a/c, entertainment a/c, potage a/c, incidental
a/c, miscellaneousa/c, commission a/c, incentive a/c, field
expenses a/c, printing & stationery a/c and many other
accounts creatable according to the need of recording
transaction.

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ACCOUNTS MAKING
The expenses in question may be passed through petty cash
system or directly from cash book as shown below;
Petty Cash Funds a/c Debit
Petty cash expenses (accounts) Credit
OR
Conveyance Debit
Cash Credit

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ACCOUNTS MAKING
5.4.3 GENERAL EXPENSES
Rent Expenses
Utility Expenses
5.4.3.1Rent Expenses A/c
0n starting of business, the business man needs some assets
either to purchase or take on rent. In the form of rent, he must
have to pay deposit, pre rent, monthly rent of the asset
acquired for businessuse.
When the rent is paid for business premises, the account
“Rent Expense” is made and debited as Rent Expense
and credited cash under rules of debit and credit.
Rent Expense Debit
Cash Credit Credit
(Rent for Jan 2015)

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ACCOUNTS MAKING
5.4.3.2 Utilities Expense A/c
Utility expenses mean electricity, Sui gas, water and
other useful items for smooth operation of business. It
may be itself account or divided into other accounts like
Electricity charges a/c, Sui gas charges a/c, water &
sewerage a/c, etc.

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ACCOUNTS MAKING
The expenditure on utilities comes under general
expenses or under sub accounts in question and debited
under expenses rules like;
Utilities Expense a/c Debit
Cash/Bank Credit

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ACCOUNTS MAKING
5.5 FINANCIAL EXPENSES
BANK CHARGES
BANK COMMISSION
MARK UP
Financial charges are the amounts that are deducted by
financial institutions on making financial instruments, on line
transfer, check books; accounting maintaining charges, mark up
on loans, credit cards, late charges, taxes, postages, excise duty
and many other charges based on the nature of transactions.
Financialcharges are considered as non-operatingexpenses but
charges relates to business operation are operating expense
like mark up on loan taken for business operation.
Many accounts may be created for financial charges but mostly
used as bank charges, bank commission, mark up etc. and
recorded as;
Bank charges Debit
Cash/Bank Credit

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ACCOUNTS MAKING

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