4. What is Accounting
Accounting is the an art or recording, classifying and summarizing in a significant manner
in term of money, transaction and other events.
According American Accounting Association (AAA) Formulated the definition in 1966
Accounting is the process of identifying , measuring and communication economic information to permit
informed judgments and decision by users of information.
•Accounting Principle Board (APB)
Accounting is a service activity. Its function is to provide quantitative information, primarily financial in
nature, about economics entities that is intended to be useful in making economic decisions.
5. Identify the business transaction
Measuring the identified transaction and events
Recording the business transaction
Classifying the business transaction
Summarizing business transaction
Analyzing the business transaction
Interpreting the business transaction
Communicating the interpreted information to the
user
6. Books of Accounts
Books of account refer to the records or books in which all financial
information (transactions) of a business or an entity is recorded and
maintained.
The process of recording financial information or transactions in the books
of account is known as bookkeeping. Whereas, the person that records the
financial information of a business in the books of account is called
bookkeeper/accountant.
7. There are two types of books of accounts.
Books of original entry
These are the books where we record business transactions for the first
time (mostly credit based transaction).
8. In case of a small business a general journal is usually maintained, but in
case of larges business the following books of accounts are generally
maintained.
Purchase journal
Sale journal
Purchase return journal
Sales return journal
Cash book (two/three column)-used for cash based transaction.
Petty cash book (used for small/miscellaneous expenses).
9. Books of Secondary Entry
Main ledger
The balance in each customer account is periodically reconciled with the
accounts receivable balance in the general ledger, to ensure accuracy. For
example A/R ledger, A/P ledger, Sales ledger etc.
Subsidiary ledger
The subsidiary ledger is also commonly referred to as the sub ledger or
subaccount, or we can say it is the expanded form of main ledger.
For example we divide the A/R ledger into individual debtor customer’s
account.
10. Financial Statements
Financial Statement is simply the declaration of what
is believed to be true communicated in terms of
monetary units or we can say financial
statements (or financial reports) are formal records
of the financial activities and position of a business,
person, or other entity.
11. Interim Statement
The statement that covers a short period of time is
called interim statement for example monthly
statement, quarterly statement and semiannual or by
annual statement.
13. Following are the general types of financial statement.
Balance Sheet
The financial statement that described the financial position of the
company at specific date or we can say a balance sheet, also referred to
as a statement of financial position, reports on a
company's assets, liabilities, and ownership equity at a given point in
time.
14. Income statement
Also known as a statement of comprehensive income, statement of
revenue & expense, P&L or profit and loss report, reports on a
company's income, expenses, and profit or loss over a period of time.
A profit and loss statement provides information on the operation of
the enterprise.
These include sales/revenue and the various expenses incurred during
the stated period.
15. Cash Flow statement
Cash flow statement provide information about the inflow and out flow
of cash or we can say it shows how the cash changes during the
particular time period.
A cash flow statement reports on a company's cash flow activities,
particularly its operating, investing and financing activities.
16. A statement of changes in equity, also known as equity
statement or statement of retained earnings, reports on the changes
in equity of the company during the stated period.
Capital/Owner’s capital increased because of additional investment
from owner side and profit of the business and decreased because of
loss and owner’s drawing/ withdrawls.
17. Notes to the financial statements
Notes to financial statements are additional information added to the
end of financial statements that help in explain specific items in the
statements as well as provide a more comprehensive assessment of a
company's financial condition.
18. Classification of accounts/five major accounts:
Assets
Assets are the resource controlled (control is often incidental with the
ownership) by the business which is used in the business to earn
income and to generate cash and its value can be measured.
Or we can say that anything that has a value, in possession or in custody
of the business (purchases, rental, lease etc.) and generate revenue for
the business.
For example, Land, Building, Machinery, Equipment, Vehicles, Goods
Available for Sale (inventory), Cash, amounts owed to the business
(accounts receivables), software etc.
19. We can divide the assets into the following four categories.
Current Assets
Amount invested in short term assets which is intended and rotated to
earn revenue (e.g. Cash, A/R, N/R, Stock (Inventory), Supplies, etc.).
Or we can say that all those assets if its life is up to or less than a year.
NOTE: The Current asset and fixed asset vary from business to business.
Example: For a dealer in refrigerator it is a current asset which becomes
fixed asset for you when you buy.
20. Fixed Assets
Amount invested in Long Term Assets which is not intended to be sold
within a Year (e.g. Machinery, Land, Furniture, Computer etc.).
Or we can say that all those assets if its life is more than a year.
21. Liability
Liabilities are amounts owed to others/creditors for resources provided
to the business.
For example, equipment loans, working capital loans, negative bank
balances, amounts owed against the purchase of inventory (accounts
payable), income tax payable, salaries and wages payable.
22. Current liability
A company's debts or obligations that are due or to be paid within one
year.
Current liabilities appear on the company's balance sheet and
include short term debt, accounts payable, note payable,
accrued liabilities (salary payable, tax payable) and other short term
debts.
23. Long term liability or Non-current liabilities
The liabilities which are expected to be settled within a period of more
than one year.
For example, bank loan, equipment loans, etc.
24. Capital/Owner’s Equity
The money which is invested by the owner in the business or it is the
claim of owner upon the assets of the business.
25. Revenue
Amount earned by the business from the sales of its products and
rendering of services to customers.
What is meant by Income/Loss?
If Revenue exceeds Expenses= Income/ Profit
If Expenses exceed Revenue= Loss
26. Expense
Amounts expended/spent by the business to earn the revenue. For
example, rent of office, salaries of employees, utilities charges, and
communication expenses.
27. 1 Business started with the investment AFN 40,000.
8 Purchased goods from Sabawoon. AFN 3,500.
9 Purchased goods for cash 2,000.
10 Purchased goods from Karim 3,500.
12 Sold goods for cash AFN 7,000.
15 Sold goods to Saliman AFN 12,500.
17 Goods returned to Sabawoon 500
20 Goods returned by Saliman AFN 1000.
22 Paid for office stationary AFN 250.
23 Purchased a typewriter for office use for cash AFN 2,500.
24 Paid Sabawoon . AFN 2800; Discount received AFN 200.
26 Computer bought for Cash AFN 4050.
27 Bought Motor car for cash AFN 5000
28 Outstanding Salary 500
31 Paid rent AFN 200; Transportation 240
28. 1 Capital introduced in startup of the business AFN 65,000.
8 Purchased goods from Atal. AFN 8000 on credit.
9 Purchased goods for cash 2500.
12 Sold goods for cash AFN 17,000.
15 Sold goods to Noor AFN 7,500 on account.
16 Goods returned to Atal 900
17 Paid Atal . AFN 3,100; Discount received AFN 100.
20 Goods returned by Noor AFN 1000.
22 Paid for Food AFN 250.
23 bought a Furniture foroffice use AFN 2500.
26 Computer bought for Cash AFN 4,050.
27 Bought Machinery for 5,000
28 Paid Electricity charges 800
29 Salary paid in advance AFN 1,500
31 expenses incurred as Accrued Rent AFN 1,200.
29. Adjusting Entries
Many transactions affects the revenues or expenses of two or more
accounting periods .e.g Depreciable assets, Supplies, Insurance policy,
Prepaid expenses, Unearned revenue etc.
Therefore Adjusting Entries are needed at the end of each accounting
period.
30. The purpose of these entries is to assign to each accounting period the
appropriate amount of revenue and expenses.
These entries “adjust” the balances of various ledger accounts,
therefore it is known as an Adjusting Entries.
31. Types of Adjusting Entries
The exact number of Adjustments needed at the end of each accounting
period depends on the nature of the company’s business activities.
However most adjusting entries fall into one of the four general categories.
1. Entries to apportion (distribute) recorded cost (Differed Expenses)
2. Entries to apportion unearned revenue (Deferred Revenues)
3. Entries to record unrecorded expense (Accrued Expenses)
4. Entries to record unrecorded revenue (Accrued Revenues)
Now we will discuss the above mentioned four kinds of adjusting entries
one by one in details.
32. Entries to record unrecorded expense
(Accrued Expenses)
These type of adjusting entries recognizes expenses that will be paid in future
transaction;
Salaries of employees and interest on borrowed money are common examples
of expenses
33. Conclusion
Books of account refer to the records or books in which all financial
information (transactions) of a business or an entity is recorded and
maintained.
The exact number of Adjustments needed at the end of each accounting
period depends on the nature of the company’s business activities.
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