Accounting Basic Definations by fiverra10



    Accounting means the various technical activities performed by accountants,
    including financial accounting, book keeping and management accounting.
    According to American Institute of Certificated Public Accountants (AICPA)
    “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 a financial character and interpreting the results thereof.”
    Accounting is also called the eyes and ears of management, and it is often
    called the language of business.

    Objectives of Accounting:-
    There are following objectives of accounting.

    1.   To record the business transactions in a systematic manner.
    2.   To determine the gross profit and net profit by a firm during a period.
    3.   To know the financial position of a firm at the end of the year.
    4.   To facilitate management control.
    5.   To assess the taxable income and sales tax.
    6.   To provide needful information to different parties, i.e. owners, management
         employees, investors, creditors and Govt & financial Institutions etc.

    Functions of Accounting:-
    There are following functions of Accounting.

    1.   Recording
    2.   Classifying
    3.   Summarizing
    4.   Interpreting
    5.   Information System

    Branches of Accounting:-
    1. Book Keeping
    2. Financial Accounting
    3. Cost Accounting
    4. Management Accounting
Adamjee Coaching Centre
1st Floor, Sami Chamber Opp. D.M.C. (Campus VIII), M.A Jinnah Road, Karachi. Tel: 021-3 2218260, 32637820
The Educating Zone Institute of Management Sciences (TEZIMS)
D-26, Shah Faisal Town, Block # 5, Behind Allah Wali Masjid, Karachi. Tel: 021-34576970, 0345-2419117
Father Coaching Centre
Queen Centre Office # 203, 204, M. T. Khan Road Karachi. Tel: 021-35644400, 021-35644466 Email:


Fundamental Accounting Equation

Assets = Liabilities + Capital/Proprietorship
Assets – Liabilities = Capital/Proprietorship

           Rules of Debit & Credit
  Accounts      Debited         Credited
        Assets            Increase               Decease
   Liabilities             Decease               Increase
        Income             Decease               Increase
        Capital            Decease               Increase
    Expenses              Increase               Decease

Steps of Accounting Cycle
   1.    Journalizing
   2.    Posting
   3.    Trial Balance
   4.    Adjustments
   5.    Adjusted Trial Balance
   6.    Financial Statements
   7.    Closing Entries
   8.    Post Closing Trial Balance

Assets are economic resources that are owned by the business and are expected
to provide positive future cash flows. Some resources are needed to start and
run the business. So that assets are also called as resources. There are two types
of assets:
1. Current assets
2. Fixed assets


Current Assets                          Fixed Assets
   Cash/Bank                            Land/Building/Shop
   Marketable Securities                Furniture & Fixture
   Accounts Receivable                  Machinery/Vehicles
   Notes/Bills/Interest Receivable      Sports Equipment
   Merchandise Inventory                Office Equipment (Such as
   Office Supplies                       Printer, Calculator, Fax,
   Unexpired/ Prepaid                    Photostat, Telex Machine,
     Rent                                Scanner etc.)
     Unused Supplies                    Loans to Employees
     Salaries                           Good Will
     Insurance                          Patents/Trade Marks

Liabilities are debts that represent negative future cash flows for the enterprise.
And liabilities mean the claims of the suppliers of cash or goods on account up
to his balance due on the date. There are two types of liabilities:

1. Current Liabilities
2. Long Term Liabilities

Current Liabilities                     Long Term Liabilities
   Accounts payable
   Notes/Bills payable                    Long term loan payable
   Interest payable                       House/Building Loan
   Rent payable                           Mortgage payable
   Salaries payable                       Debenture payable
   Unearned income
   Advance from customers
   Bank overdraft

Account is most popular technical term, which is used by accountants or
businessmen in accounting. The transactions, which are recorded in the
business separately, called as Account. Such as Cash, Purchase account, Sales
account etc.


In Accounting term/language, recording some information on the left hand side
of an account is known as Debit Account. Debit symbolized by capital D and
small r (Dr).

In Accounting term/language, recording some information on the right hand
side of an account is known as Credit Account. Credit symbolized by capital C
and small r (Cr).

Accounts Receivable:-
Amounts which a firm/person expects to collect from its customers for goods
and services sold to them on credit/on account is called as Accounts Receivable.
It is also called debtors; each customer who owes money to the firm is a debtor
of the firm.

Merchandise Inventory:-
The commodities bought in a business/firm for the purpose of reselling at a
profit is called Merchandise such as in case of bookseller, books, copies, pens,
pencils, erasers, registers, etc. are the Merchandise of a shop.

Prepaid Expense:-
The prepaid expenses are expenses, which have been paid in advance of their

Accounts Payable:-
The amount which a firm/person owes its creditors for assets and services on
credit is called as Accounts Payable.

Unearned Income:-
An unearned income results when payment is received for goods or services in
advance of their delivery are called as Unearned Income. Unearned income also
may be called deferred income.

Net Income:-
Net income is an increase in owner’s equity resulting from the profitable
operation of the business. Net income does not consist of any cash or any other
specific assets. Rather, net income is a computation of the overall effects of
many business transactions on owner’s equity.

Owner’s Equity:-
The amount invested by the owner in the business is called as Capital of the
owner. The rights of owner on the business properties called capital/owner’s
equity. Owner’s equity represents the owner’s claim to the assets of the
business; it is equal to the total assets minus liabilities.

Changes in owner‘s equity.
Owner’s Investments                   Business Earnings
Owner’s Withdrawals                   Business Losses

Whenever the proprietor of the business draws any amount or any asset from
his business for personal use is called Drawing.

Expenses are the cost of goods and services used up in the process of earning
revenue. Examples include cost of employees’ salaries, bank interest and rent of
the office building, etc. are expenses of the business. Expenses are often called
the “Cost of doing business,” that is the cost of various activities necessary to
carry on a business. Some expenses may be paid at the time when they become
due or some expenses may be deferred to future date according to agreement.

The term ‘Purchase’ means the acquisition of goods for the purpose of re-sale
either in the same form or after taking some required benefit or after performing
some activity. That is, if a furniture dealer purchases furniture for re-sale,
furniture in this case, it will be treated as ‘goods/merchandise’ but when the
same dealer purchases furniture for office decoration, the same will not appear
in Purchase Account since the furniture is not used for re-sale purpose. In other
words, the commodities, which are purchased for normal buying and selling
transactions, are known as ‘goods/merchandise’.


Credit Term & Cash Discount:-
Manufacturers and wholesalers normally sell their products to merchandisers on
account. The credit terms are stated in the seller’s bill, or invoice. Perhaps the
most common credit terms offered by manufacturers and wholesalers are 2/10,
n/30. This expression is read “2, 10, net 30,” and means that full payment is due
in 30 days, but that the buyer may take a 2% discount if payment is made within
10 days. The period during which the discount is available is termed the
discount period.

Sales Revenue
The revenue earned in a sales transaction is equal to the sales price of the
merchandise and is created to a revenue account entitled Sales. Sales revenue is
considered realized when merchandise is delivered to the customer, even if the
sale is made on account.

Sales Return and Allowance:-
Sales return and allowance is a contra-revenue account, it is deducted from
gross sales revenue as a step in determining net sales. Most merchandise
companies allow customers to obtain a refund by returning any merchandise
considered to be unsatisfactory. If the merchandise has only a minor defects,
customers sometimes agree to keep the merchandise if an allowance (reduction)
is made in the sales price.

Sales Discount:-
Sales discount is another contra-revenue account. In computing net sales, sales
discounts are deducted from gross sales with any sales returns and allowance.
(If the customer has returned part of the merchandise, a discount may be taken
only on the gross amount owed after the return).

Sales Taxes:-
Sales are levied by many states & cities on retail sales. Sales taxes actually are
imposed on the consumer, not on the seller. However, the seller must collect the
tax, file tax returns at the times specified by law, and remit to governmental
agencies the taxes collected. For cash sales, the sales tax is collected from the
customer at the time of sales transaction. For credit sales, sales tax is included
in the amount charged to the customer’s account.


Any exchange of values is called Transaction; there are two types of
transactions such as:
1. Cash transaction:-
Purchasing of assets like merchandise, land, building, furniture etc, on cash.
2. Credit transaction:-
Purchasing of assets like merchandise, land, building, furniture etc, on account.

The Journal:-
The term journal originated from the French word ‘Jour’, which means a ‘Day’.
In an actual accounting system, however the information about each business
transaction is initially recorded in an accounting record called journal. The
simplest type of journal is called a general journal. General journal is a
subsidiary book, which provides chronological (day by day) records of the
business transactions, while the ledger is a main book which provides analytical
records. Each transaction is posted in the sequence of date and happening of the
transaction with debit and credit rules. It is further divided in two types;
1. Standard form           2. Skeleton form

The process of the transferring the debits and credits from the general journal to
the ledger accounts is called posting. Each amount in the debit column of the
journal is posted by entering it on the debit side of an account in the ledger, and
each amount listed in the credit column of the journal is posted to the credit side
of a ledger account.

Ledger Account:-
The ledger is called the king of all books of account because all the entries from
the books of original entry must be posted to the various accounts into ledger.
Journal contains a chronological record while ledger contains a classified record
of all transactions. In other ways, we can say that ledger account means of
accumulating information needed by management in directing the business.
There are three forms of accounts.
1. Standard form
2. Skeleton form
3. Self Balancing form


Trail Balance:-
In order to test the arithmetical accuracy of our ledger we should prepare a
statement called the Trial Balance. A Trial balance is a 2 column schedule
listing the names and balances are listed in the accounts in the order in which
they appear in the ledger. Debit balances are listed in the left-hand column and
the credit balances in the right-hand column. The main purposes of a Trial
Balance are;

1. It proves the equality of debit and credit in ledger account.
2. To summarize the information of ledger for preparation of financial

Special Journal:-
A special journal is an accounting record or device designed to record a specific
type of routine transaction quickly and efficiently. Special journals are highly
specialized in terms of the transactions they can record. Some special journals
are maintained by hand. An example is the cheque register in your personal
cheque book. If maintained, this special journal provides an efficient record of
all cash disbursements made by cheque.

Subsidiary Ledger :- (Source of Needed Detail)
A subsidiary ledger contains a separate account for each of the items included
in the balance of a general account. For example an accounts receivable
subsidiary ledger contains a separate account for each credit customer. An
accounts receivable subsidiary ledger provides the information used in billing
credit customers and in reviewing their credit worthiness. The account includes
information on the dates and amounts of past charges and payments. In fact,
each account provides a complete history of the credit transaction between the
company and the individual customer.

Petty Cash:-
In almost all businesses, it is found necessary to keep small sum of ready
money with the cashier for the purpose of meeting small expenses such as
telegrams, postage, stationary, transportation & conveyance, supplies,
entertainment and Miscellaneous etc. The sum of money so kept in hand is
generally termed as the Petty Cash and the book in which petty cash
expenditures are recorded is called as Petty Cash Book.


Cash Book:-
In a medium size business the main object of maintaining a cash book is to
record date wise all cash daily business transactions. There are three amount
columns are maintained in cash book, debit and credit side for cash, bank and
discount both side after date, explanation and reference columns. A business
can see and check the most important item of the business in one book that how
much cash balance is in hand and cash at bank and total discount allowed or
received in a day or at the end of the month. It also saves the time of posting
journal entries and their postings to ledger.

Cash Short & over:-
It means balance of cash book not in the safe; either short or over.

Financial Statement:-
Financial statement is a Lens to View Business. There are three basic
statements that summarize information about a firm.
1. Balance Sheet
2. Income Statement
3. Statement of Cash Flows

Balance Sheet:-
Balance sheet summaries the assets owned by a firm, the value of these assets,
and the mix of financing debt, and equity used to finance these assets at a point
in time.

Income Statement:-
Income Statement provides information on the revenues and the expenses of the
firm, and the resulting income made by the firm during a particular period. The
period can be a quarter (if it is a quarterly income statement) or a year (if it is an
annual report).

Statement of Cash Flows:-
Cash flow statement specifies the sources of cash to the firm from both
operational and new financing, and the uses of this cash, during a period. The
statement of cash flows can be viewed as an attempt to explain how much the
cash flows were during a period and why the cash balance changed during the


                                  Mubeen & Co
                                  Balance Sheet
                                As on Dec-31-2011

                  Assets                                         Equities

Current Assets                                  Current Liabilities

Cash/Bank                          Rs. 110000   Accounts payable                   Rs. 28000
Marketing Securities               Rs. 10000    Notes payable                      Rs. 10000
Accounts Receivable     Rs.25000                Bills payable                      Rs. 5000
Less: Allow Bad Debts Rs.(5000)    Rs. 20000    Interest payable                   Rs. 12000
Bill /Notes Receivable             Rs. 5000     Tax Payable                        Rs. 1000
Commission Receivable              Rs. 5000     Rent payable                       Rs. 10000
Interest Receivable                Rs. 5000     Salaries payable                   Rs. 15000
Merchandise Inventory (Ending)     Rs. 20000    Unearned commission                Rs. 10000
Office Supplies                    Rs. 2000     Advance from customers             Rs. 10000
Unexpired Insurance/Rent           Rs. 1500     Bank overdraft                     Rs. 2000
Prepaid Expenses                   Rs. 1500
                                                Long Term Liabilities
Fixed Assets
                                                Long term loan payable             Rs. 100000
Land                               Rs.170000    House/Building Loan                Rs. 120000
Building/Shop           Rs.55000                Mortgage payable                   Rs. 45000
Less: Accumulated Dep   Rs. (5000) Rs. 50000    10% Debenture payable              Rs. 45000
Furniture & Fixture     Rs.30000
Less: Accumulated Dep   Rs. (3000) Rs. 27000    Owner’s Equity
Machinery/Vehicles      Rs.40000
Less: Accumulated Dep   Rs. (8000) Rs. 32000    Capital at start         Rs. 100000
Sports Equipment                   Rs. 6000     Add: Further investments Rs 00000
Office Equipment        Rs.60000                                         Rs. 100000
Less: Accumulated Dep   Rs (5000) Rs. 55000     Add: Net Income          Rs. 50000
Loans to Employees                 Rs. 10000    Less: Net Loss           Rs. (0000)
Good Will                          Rs. 15000    Less: Drawing            Rs. (5000)
Patents / Trade Marks              Rs. 15000    Adjusted Capital                   Rs. 145000

Total Assets                    Rs. 560000      Total Equities                   Rs. 560000

                                                                         10 | P a g e

                                  Mubeen & Co
                                Income Statement
                                As on Dec-31-2011
Sales                                                 Rs. 260000
Sales return & allowance                              Rs. (5000)
Sales discount & allowance                            Rs. (5000)
Net sale                                                            Rs. 250000
Less: Cost of Goods Sold
Merchandise inventory (Opening)                       Rs. 100000
Add: Net Purchases
Purchases                                Rs. 85000
Less: Merchandise drawn by Owner         Rs. (5000)
Add: Wages expense                       Rs. 1000
Add: Packing charges                     Rs. 1000
Add: Import / Excise duty                Rs.1000
Add: Fright/Transportation/Carriage in   Rs. 2000
Delivered cost                           Rs. 85000
Less: Purchase return & allowance        Rs. (2500)
Less: Purchase discount                  Rs. (2000)
Net purchases                                         Rs. 80000
Cost of Goods available for sale                      Rs. 180000
Less: Merchandise inventory (Ending)                  Rs. (20000)
Cost of Goods Sold                                                  Rs. (160000)
Gross Profit                                                        Rs. 90000
Less: Operating & Non Operating Expenses
Bad debts expenses                                    Rs.   5000
Depreciation expenses                                 Rs.   5000
Rent expenses                                         Rs.   9000
Office supplies expenses                              Rs.   2000
Salaries expenses                                     Rs.   3000
CDGK Tax Expenses                                     Rs.   3000
Utilities Expenses                                    Rs.   1000
Interest expenses                                     Rs.   6000
Insurance expenses                                    Rs.   6000    Rs.(40000)
Operating Income                                                    Rs. 50000
Add: Other income
Commission income                                     Rs. 5000
Rent income                                           Rs. 7000
Interest income                                       Rs. 3000
Total operating income                                              Rs. 15000
Net Income                                                          Rs. 65000

                                                                      11 | P a g e

                                 Zaheer & Co Ltd
                                   Balance Sheet
                                 As on Dec-31-2011

                 Equities                                         Assets
Shareholder’s Equity                            Fixed Assets
Authorized capital                           Land                                  Rs. 170000
100000shares @10                 Rs. 1000000 Building/Shop          Rs.55000
                                             Less: Accumulated Dep Rs (5000)       Rs. 50000
Issued & Paid-up Capital                     Furniture & Fixture    Rs.30000
Shares capital                    Rs. 200000 Less: Accumulated Dep Rs. (3000)      Rs. 27000
Retained earning       Rs. 50000             Machinery/Vehicles     Rs. 40000
Add: Net income        Rs. 25000             Less: Accumulated Dep Rs. (8000)      Rs. 32000
Less: Net loss        Rs. (0000) Rs. 75000 Sports Equipment                        Rs. 6000
                                             Office Equipment      Rs.60000
Shares premium         Rs. 15000             Less: Accumulated Dep Rs (5000)       Rs. 55000
Less: Shares discount Rs.(10000) Rs. 5000    Loans to Employees                    Rs. 10000
                                             Good Will                             Rs. 15000
Long Term Liabilities                        Patents / Trade Marks                 Rs. 15000
Long term loan payable            Rs. 50000
Debenture payable                 Rs. 100000 Preliminary expenses                  Rs. 10000
Mortgage/bonds payable            Rs. 90000
Premium on redemption             Rs. 25000 Loss on debenture                      Rs. 10000
                                             Debenture discount                    Rs. 10000
Current Liabilities
Accounts payable                  Rs. 25000     Current Assets
Notes/Bills payable               Rs. 10000     Cash                               Rs. 70000
Interest payable                  Rs. 10000     Bank                               Rs. 200000
Advance from customers            Rs. 2000      Marketing Securities               Rs. 10000
Rent payable                      Rs. 12000     Accounts Receivable     Rs.90000
CDGK Tax                          Rs. 1000      Less: Allow Bad Debts Rs.(2000)    Rs. 70000
Salaries payable                  Rs. 15000     Bills Receivable                   Rs. 25000
Stock/cash dividend               Rs. 25000     Notes Receivable                   Rs. 30000
Unearned commission               Rs. 8000      Commission Receivable              Rs. 55000
Bank overdraft                    Rs. 2000      Interest Receivable                Rs. 55000
                                                Merchandise Inventory (Ending)     Rs. 20000
Reserves & Funds                                Unused/On hand Office Supplies     Rs. 12000
Reserve for contingencies         Rs.   25000   Unexpired/Prepaid Rent/Salaries    Rs. 13000
Reserve for plant extension       Rs.   50000
Reserve for building expansion    Rs.   50000
Reserve for income tax            Rs.   20000
Total Assets                     Rs. 800000 Total Equities                     Rs. 800000

                                                                        12 | P a g e

                            Mubeen & Co
                  Computation of Cost of Goods Sold
                  For the period ended Dec-31-2011

Cost of Goods Sold
Merchandise inventory (Opening)                      Rs.100000
Add: Net Purchases
Purchases                               Rs.85000
Less: Merchandise drawn by Owner        Rs. (5000)
Add: Wages expense                      Rs. 1000
Add: Packing charges                    Rs. 1000
Add: Import duty                        Rs. 1000
Add: Fright/Transportation-in           Rs. 2000
Delivered cost                          Rs.85000
Less: Purchase return & allowance       Rs. (2500)
Less: Purchase discount                 Rs. (2000)
Net Purchases                                        Rs. 80000
Cost of Goods available for sale                     Rs.180000
Less: Merchandise inventory (Ending )                Rs. (20000)
Cost of Goods Sold                                   Rs. 160000

                         Mubeen & Co
          Computation of Statement of Retained Earning
              For the period ended Dec-31-2011

Retained Earning at start                            Rs.100000
Add: Income for the period                           Rs. 50000
Unadjusted Retained Earning                          Rs.150000
Less: All Reserves
Reserve for plant extension             Rs.15000
Reserve for building extension          Rs.20000
Reserve for income tax                  Rs.10000
Reserve for contingencies               Rs.15000     Rs. (60000)
Retained Earning at end                              Rs. 90000

                                                             13 | P a g e
             For Bank Reconciliation Statement

Always To Be Added In Bank Statement
   Unclear cheques/not yet credited by bank
   Late deposit (In last 2 or 3 days of the month)
   Bank deposit
   Deposit in transit
   Wrongly debit by banker

Always To Be Deducted From Bank Statement
   Balances ( Overdraft/Debit )
   Outstanding/unpresented/unpaid cheques
   Wrongly credited by banker
   Not yet paid by bank

Always To Be Added In Cash Book
   Direct deposit by a customer
   Profit/interest/credited/given by bank
   Notes/interest/dividend collected by bank
   Borrowed from bank or Loan granted by bank

Always To Be Deducted From Cash Book
   Balances (Overdraft/Credit )
   Dishonored/returned cheques/N.S.F Marked by bank
   Zakat Deduction/ Tax Deduction
   Service/collection/mark up/repair charges debited by bank
   Notes/interest/dividend/insurance premium paid by bank
   Cash withdraw from bank

                                                                14 | P a g e

To top