What is Accounting

The primary objective of accounting is to

provide information that is useful for
decision making purposes. Accounting is
not an end, but rather it is a means to an
end. The final product of accounting
information is the decision that is
enhanced by the use of that information,
whether the decision is made by owners,
management, creditors, governmental
regulatory bodies, labor unions, or the
many other groups that have an interest
in the financial performance of an
enterprise.
 What is Accounting
Because accounting is widely used to
describe all types of business activity, it is
sometimes referred to as the language of
business. Costs, prices, sales volume,
profits, and return on investment are all
accounting measurements. Investors,
creditors, managers, and others who have
a financial interest in an enterprise need
a clear understanding of accounting
terms and concepts if they are to
understand and communicate about the
enterprise. Accounting information is also
used by governmental agencies, nonprofit
 EXTERNAL USERS OF ACCOUNTING INFORMATION

What do we mean by external users and

who are they?
External users of accounting information
are individuals and other enterprises
that have a current or potential financial
interest in the reporting enterprise, but
that are not involved in the day-to-day
operations of that enterprise. External
users of financial information may
include.
Suppliers • Creditors • Customers • Potential
investors • Trade associations • Labor unions •
 Financial Statement
A financial statement is simply a
monetary declaration of what is believed
to be true about an enterprise. When
accountants prepare financial
statements, they are describing in
financial terms certain attributes of the
enterprise that they believe fairly
represent its financial activities. Financial
statements prepared for periods of time
shorter than one year (for example, for
three months or one month) are referred
to as interim financial statements
 Financial Statement
The primary financial statements are the following:
 Statement of financial position (balance sheet)

The balance sheet is a position statement that shows

where the company stands in financial terms at a
specific date.
• Income statement. The income statement is an
activity statement that shows details and results of the
company’s profit-related activities for a period of time
(for example, a month, quarter [three months], or
year).
• Statement of cash flows. The statement of cash
flows is an activity statement that shows the details of
the company’s activities involving cash during a period
of time.
 MCQs

Which of the following does not

describe accounting?
a) Language of business.
b) Is an end rather than a means to
an end
c) Useful for decision making
d) Used by business, government,
nonprofit organizations, and
individuals
 MCQs

To understand and use accounting information

in making economic decisions, you must
understand:

a) The nature of economic activities that

accounting information describes.
b) The assumptions and measurement
techniques involved in developing
accounting information.
c) Which information is relevant for a
particular type of decision that is being
made.
d) All of the above
 MCQs
External users of financial accounting
information include all of the following
except:
a) Investors
b) Labor unions
c) Line managers
d) General public.
 MCQs
Which of the following is an
external user of financial
accounting information?

a) Store manager
b) Chief executive officer
c) Creditor
d) Chief financial officer
 Statement of financial position
(Balance Sheet)

The purpose of this financial

statement is to demonstrate where
the company stands, in financial
terms, at a specific point in time.
Every business prepares a balance
sheet at the end of the year, and
many companies prepare one at the
end of each month, week, or even
day. It consists of a listing of the
assets, the liabilities, and the owners’
equity of the business.
 The Concept of the Business Entity

Generally accepted accounting principles require

that financial statements describe the affairs of a
specific economic entity.
This concept is called the entity principle. A
business entity is an economic unit that
engages in identifiable business activities. For
accounting purposes, the business entity is
regarded as separate from the personal activities
of its owners . For example, Vagabond is a
business organization operating as a travel
agency. Its owners may have personal bank
accounts, homes, cars, and even other
businesses. These items are not involved in the
operation of the travel agency and do not appear
in Vagabond’s financial statements.
 ASSETS
Assets are economic resources that are owned by a
business and are expected to benefit future
operations. In most cases, the benefit to future
operations comes in the form of positive future cash
flows. The positive future cash flows may come directly
as the asset is converted into cash (collection of a
receivable) or indirectly as the asset is used in
operating the business to create other assets that
result in positive future cash flows (buildings and land
used to manufacture a product for sale). Assets may
have definite physical characteristics such as
buildings, machinery, or an inventory of merchandise.
On the other hand, some assets exist not in physical or
tangible form, but in the form of valuable legal claims
or rights; examples are amounts due from customers,
investments in government bonds, and patent rights.
 Types of Assets
Current Assets
In accounting, some assets are referred to
as current. Current assets are short-term
economic resources that are expected to be
converted into cash or consumed within one
year. Current assets include cash and cash
equivalents, accounts receivable, inventory,
and various prepaid expenses.
 Types of Current Assets

•Cash and Cash Equivalents

•Marketable Securities
•Accounts Receivable
•Inventory
•Prepaid Liabilities/Expenses
•Other Short-Term Investments
 Fixed Asset

The term fixed asset refers to a long-term

tangible piece of property or equipment that
a firm owns and uses in its operations to
generate income. The general assumption
about fixed assets is that they are expected
to last, be consumed, or be converted into
cash after at least one year.

• Fixed assets are items that a company

plans to use over the long term to help
generate income.
• Fixed assets are most commonly referred
to as property, plant, and equipment.
 Rule of Debit or Credit for Asset

• When an asset is increased we have to

Debit it.
• When an asset is decreased we have to
Credit it.
 What Is a Liability?
A liability is something a person
or company owes, usually a
sum of money. Liabilities are
settled over time through the
transfer of economic benefits
including money, goods, or
services.
 Current Liabilities
Current liabilities are a company's
short-term financial obligations that
are due within one year or a normal
operating cycle (e.g. accounts
payable).
• Current liabilities are typically settled
using current assets, which are assets
that are used up within one year.
• Examples of current liabilities include
accounts payable, short-term debt,
wages payable, salaries payable,
interest payable etc.
 Long-Term Liabilities
Long-term liabilities are a
company's financial obligations that
are due more than one year in the
future.
• Examples of Long-Term Liabilities
Mortgages, car payments, or other loans
for machinery, equipment, or land are
long-term liabilities
 Rule of Debit or Credit for
Liabilities

• When the liability is increased we

have to Credit it.
• When the liability is decreased we
have to Debit it.
 OWNERS’ EQUITY
Equity is used as capital raised by a
company, which is then used to
purchase assets, invest in projects,
and fund operations. Equity is
important because it represents the
value of an investor's stake in a
company, represented by the
proportion of its shares
 OWNERS’ EQUITY
Owners’ equity represents the
owners’ claims on the assets of the
business. Because liabilities or creditors’
claims have legal priority over those of
the owners, owners’ equity is a residual
amount. If you are the owner of a
business, you are entitled to assets that
are left after the claims of creditors
have been satisfied in full. Therefore,
owners’ equity is always equal to total
assets minus total liabilities
 Rule of Debit or Credit for Equity/Capital

• When the Equity/Capital is

increased we have to Credit it.
• When the Equity/Capital is
decreased we have to Debit it.
 OWNERS’ EQUITY
Vagabond has total assets
of . . . . . . . . . . $300,000
And total liabilities
of . . . . . . . . . . . . . . . . . . (80,000)
Therefore, the owners’ equity must be
$220,000
 THE ACCOUNTING EQUATION
A fundamental characteristic of every
statement of financial position is that
the total for assets always equals the
total of liabilities plus owners’ equity.
This agreement or balance of total
assets with the total of liabilities and
owners’ equity is the reason for
calling this financial statement a
balance sheet. But why do total
assets equal the total of liabilities and
owners’ equity?
 THE ACCOUNTING EQUATION
The dollar totals on the two sides of the
balance sheet are always equal because
they represent two views of the same
business. The listing of assets shows us
what things the business owns; the listing of
liabilities and owners’ equity tells us who
supplied these resources to the business and
how much each group supplied. Everything
that a business owns has been supplied to it
either by creditors or by the owners.
Therefore, the total claims of the creditors
plus the claims of the owners always equal
the total assets of the business.
THE ACCOUNTING EQUATION
The equality of the assets on the one hand
and the claims of the creditors and the owners
on the other hand is expressed in the following
accounting equation.
Assets = Liabilities + Owners’ Equity
$300,000 = $80,000 + $220,000
 Income Statement
The income statement is a summarization of
the company’s revenue and expense
transactions for a period of time. It is
particularly important for the company’s
owners, creditors, and other interested
parties to understand the income statement.
Ultimately the company will succeed or fail
based on its ability to earn revenues in
excess of its expenses. Once the company’s
assets are acquired and business
commences, revenues and expenses are
important dimensions of the company’s
operations.
 Rule of Debit or Credit for Expense

• When the Expense is increased

we have to Debit it.
• When the Expense is decreased
we have to Credit it.
 What Is Revenue?
• Revenue is the money generated
from normal business operations,
calculated as the average sales
price times the number of units
sold. It is the top line (or gross
income) figure from which costs
are subtracted to determine net
income. Revenue is also known
as sales on the income
statement.
 Rule of Debit or Credit for
Sales/Revenue
• When the Sales/Revenue is
increased we have to Credit it.
• When the Sales/Revenue is
decreased we have to Debit it.
 Rules of Debit and Credit
Head of
Account Increase Decrease
Asset Debit Credit
Expenses Debit Credit
Capital/Equity Credit Debit
Liability Credit Debit
Sales/Revenue Credit Debit
 Question No: 1
Transactions Related to Investment
1. Mr.A invested cash into business Rs.
150,000

2. Mr.A invested cash Rs. 100,000 and

office equipment Rs.25,000

3. Mr.A started business with cash

100,000

4. Mr.A made an additional investment Rs.

20,000
Transactions Related to Investment
1. Mr.A invested cash into business
Rs. 150,000
Debit Credit

Cash 150,000
A,Capital
150,000
Transactions Related to Investment
2. Mr.A invested cash Rs. 100,000
and office equipment Rs.25,000
Debit Credit

Cash 100,000
Office Equipment 25,000

A,Capital 125,000
Transactions Related to Investment
3. Mr.A started business with cash
Rs. 100,000
Debit Credit

Cash 100,000

A,Capital
100,000
Transactions Related to Investment
4. Mr.A made an additional
investment Rs. 20,000
Debit Credit

Cash 20,000

A,Capital
20,000
Transactions Related to Purchases
1. Purchased office equipment
Rs.12,000 on cash

2. Purchased office furniture Rs.

10,000 on credit

3. Purchased merchandise
Rs.20,000 on credit

4. Purchase return to supplier Rs.

5,000
Transactions Related to Purchases
1.Purchased office equipment
Rs.12,000 on cash
Debit
Credit
Office Equipment 12,000
Cash
12,000
Transactions Related to Purchases

2. Purchased office furniture Rs.

10,000 on credit
Debit Credit
Office Furniture 10,000
A/C payable 10,000
Transactions Related to Purchases
3. Purchased merchandise
Rs.20,000 on credit
Debit Credit
Purchases 20,000
A/C Payable
20,000
Transactions Related to Purchases
4. Purchase returned to supplier
Rs. 5,000.
Debit Credit
A/Payable 5,000
Purchase Return
5,000
Transactions Related to Sale
1. Sold office equipment Rs.15,000
on cash
2. Sold office equipment Rs. 12,000
on account.
3. Sold merchandise on credit
Rs.10,000.
4. Sales Returned Rs.2,000.
5. Sold merchandise on cash
Rs.5,000 and Rs.2,000 on credit
6. Sold goods to Raja Sons
Rs.15,000 and received note.
Transactions Related to Sale
1.Sold office equipment Rs.15,000
on cash.
Debit
Credit
Cash 15,000
Office Equipment
15,000
Transactions Related to Sale
2. Sold office equipment Rs.12,000
on account.
Debit
Credit
A/C Receivable 12,000
Office Equipment
12,000
Transactions Related to Sale
3. Sold merchandise on credit
Rs.10,000.
Debit
Credit
A/C Receivable 10,000
Sales
10,000
Transactions Related to Sale
4. Sales returned Rs.2,000.
Debit
Credit
Sales Returned 2,000
A/C Receivable
2,000
Transactions Related to Sale
5. Sold merchandise on cash
Rs.5,000 and Rs.2,000 on credit.
Debit
Credit
Cash 5,000
A/C Receivable 2000
Sales
7,000
Transactions Related to Sale
6. Sold goods to Raja Sons Rs.
15,000 and received a note.
Debit
Credit
Note Receivable-Raja 15,000
Sales
15,000
Transactions Related to Expense
1. Paid Salaries to employees Rs.
25,000

2. Paid office rent expenses Rs.

10,000 by cheque.
Transactions Related to Expense
1.Paid salaries to employees Rs.
25,000
Debit
Credit
Salaries Expense 25,000
Cash
25,000
Transactions Related to Expense
2. Paid office rent expenses Rs.
10,000 by cheque.
Debit
Credit
Office rent 25,000
Bank
25,000
Transactions Related to Revenue
1. Received cash Rs.10,000
against services rendered to
clients.

2. Collection of rent income

Rs.25,000
Transactions Related to Revenue
1.Received cash Rs.10,000
against services rendered to
clients.
Debit
Credit
Cash 10,000
Service revenue
10,000
Transactions Related to Revenue
2. Collection of rent income Rs.
25,000
Debit
Credit
Cash 25,000
Rent income
25,000
Transactions Related to Prepaid and
Unearned
1. Paid advance rent for 12-months
Rs.60,000

2. Received in advance Rs. 10,000

as commission.
Transactions Related to Prepaid and
Unearned
1. Paid advance rent for 12-months
Rs.60,000

Debit
Credit
Prepaid Rent 60,000
Cash
60,000
Transactions Related to Prepaid and
Unearned
2. Received in advance Rs.10,000
as commission.

Debit
Credit
Cash 10,000
Unearned commission income
10,000
Transactions Related to
Withdrawals
1. Withdrew cash Rs.5,000 for
private use.

2. Withdrew cash Rs. 2,000 from

the bank for office use.
Transactions Related to
Withdrawals
1. Withdrew cash Rs.5,000 for
private use.

Debit
Credit
Drawing 5000
Cash
5000
Transactions Related to
Withdrawals
2. Withdrew cash Rs. 2,000 from
the bank for office use.

Debit
Credit
Cash 2000
Bank
2000
 Question No: 2

Transactions related to
investment
The following records are available
from the records of ABC Company for
the month of March 2023.
1. Mr.A invested cash Rs.70,000 and
office furniture Rs. 20,000.
2. Mr. A started business with cash Rs.
100,000
3. Mr.A made an additional investment
Rs.20,000
 Question: 2

Transactions related to
Purchase

1. Purchased office supplies Rs.

10,000 on cash.
2. Purchased merchandise Rs.
2,000 on cash.
 Question: 2

Transactions related to Sale

1. Sold office supplies Rs.10,000

on account.
2. Sold merchandise on cash Rs.
60,000
3. Sold merchandise on cash
Rs.5,000 and 2,000 on credit.
4. Sold goods to Raja Sons
Rs.15,000 and received note
 Question: 2

Transactions related to
Expenses

1. Paid salaries to employees Rs.

200,000
2. Paid utilities expenses Rs.10,000
by cheque
 Question: 2

Transactions related to
Revenue

1. Received cash Rs.10,000

against services rendered to
clients.
2. Collection of commission income
Rs.70,000
 Question: 2

Transactions related to
prepaid and unearned

1. Paid advance rent for 12-months

Rs.80,000
2. Received in advance Rs.70,000
as commission
 Question: 2

Transactions related
withdrawals

1. Withdrew cash Rs.5,000 for

private use.
2. Withdrew cash Rs.2,000 from
the bank for office use.
 Question No: 3
The following data is available from the records
of ABC Company for the month of April 2023.
April 1) Mr. Arshad started his business with cash
Rs. 100,000 and office furniture Rs. 150,000.
April 3) Additional investment made by the owner
is Rs. 50,000
April 5) Deposited cash into bank Rs. 500,000
April 6) Purchased goods in cash Rs. 20,000 and
Rs. 10,000 on credit
 Question No: 3
April 8) Purchased office supplies and issued a
cheque Rs. 2,000
April 9) Purchased merchandise on credit from
Bilal Rs. 10,000
April 10) Sold goods on credit to Mr. Ali Rs.
150,000
April 15) Cash collected from Mr. Ali Rs. 150,000
April 16) Sold goods to Ahmed Rs. 500,000 on
credit
April 17) Withdrew cash from bank Rs. 2,000 for
office use
 Question No: 3
April 18) Withdrew cash from business for personal use
Rs. 25,000
April 20) Paid utilities expenses of Rs. 10,000
April 21) Paid rent in advance for the entire year Rs.
60,000
April 23) Received commission in advance Rs. 20,000
April 25) Cash collected from Ahmed and allowed
discount of Rs. 10,000
April 26) Paid to Bilal Rs. 9,000 in full settlement of his
account
Required: Prepare general journal entries for the
month of April 2023.
 Question No: 4
General Entries, Ledger posting and Trial Balance
Mr. Ahmed started business on March 1st, 2023,
with the investment of cash Rs. 50,000 and office
equipment Rs. 50,000 and performed the following
transactions during the month.
March 2) Purchased merchandise on cash Rs.
25,000
March 2) Purchased merchandise on credit Rs.
15,000
March 3) Purchased office supplies for cash Rs.
2,000
 Question No: 4
March 18) Sold merchandise on cash Rs. 20,000
March 20) Paid to supplier against purchases Rs.
10,000
March 30) Paid rent for the month Rs. 1,500
Required: 1 ) Record the above transactions in
general journal
2) Post the transactions to general
ledger (T-account)
3) Prepare Trial balance at
March 31, 2023
 Question No: 5
General Entries, Ledger posting and Trial Balance
Mr. Ahmed started business on March 1st, 2023,
with the investment of cash Rs. 150,000 and office
equipment Rs. 50,000 and performed the following
transactions during the month.
March 2) Purchased merchandise for cash Rs.
25,000 and on credit Rs.10,000
March 3) Purchased office equipment for cash Rs.
12,000
March 12) Purchased office furniture on account
Rs. 5,000
 Question No: 5
March 18) Sold merchandise on cash Rs. 30,000
March 20) Paid to supplier against purchases Rs. 10,000
March 25) Sold merchandise on account Rs. 15,000
March 30) Paid salaries for the month Rs. 15,000

Required: 1) Record the above transactions in general

journal
2) Post the transactions to general ledger (T-
account)
3) Prepare Trial balance at March 31, 2023
 Question No: 6 (Adjusting Entries)
The following information is available from the record
of Shams and Co. on December 31, 2020.
1. Rent payable amounted to Rs. 1,000
2. Outstanding insurance expense amounted to Rs
6,000
3. Rent earned but not yet received Rs.2000
4. Insurance prepaid to the extend of Rs.3000
(Prepaid Insurance Rs 4000)
5. Rent expired Rs.7000 (Prepaid rent Rs 10000)
6. Insurance premium paid in advance for 2 years
on 1st Nov 2020 (Prepaid insurance Rs.12000)
 Question No: 7 (Adjusting Entries)
The following information is available from the record of Shams and Co.
on December 31, 2020.
1. Salaries payable amounted to Rs. 80,000
2. Outstanding insurance expense amounted to Rs 5,000
3. Unpaid wages Rs.2000
4. Salaries earned by the employees but not yet paid Rs. 10,000
5. Commission receivable Rs.5000
6. Rent income not yet received Rs. 12,000
7. Rent earned but not yet received Rs.10,000
8. Accrued interest income Rs.5,000
9.Insurance prepaid to the extent Rs.2,000 (Prepaid Insurance Rs. 5,000)
10. Rent Expired Rs. 4,000 (Prepaid Rent Rs. 10,000)
11. Insurance Premium paid in advance for 1 year on 1 st Oct, 2020 (Prepaid
insurance 120,000)
12. Insurance premium paid in advance for 2 years on 1 st Nov, 2020(Prepaid