Any legal activity which is done for the purpose of earning money (profit) is called business.

Accounting is an art of recording, classifying and summarizing in terms of money' transaction and interpreting the results to different users

All those things which are purchased for resale purpose are called goods or merchandize.

A function of purchasing the goods/merchandise is called purchases Cash purchases: If goods are purchased from a supplier and payment is made to him as the same time , such purchases is known as cash purchases Credit Purchases: When the goods are purchased for which payment will have some future date are called credit purchases

When the goods purchased are found defective or unsatisfactory, they are returned to supplier are called purchased returns or returns outwards.

A function of selling the goods/merchandise is called sale. Cash sales: When the goods are sold for cash they are called cash sales Credit Sales: When the goods are sold without receiving the cash they are called credit sales.

When the goods sold are found defective or unsatisfactory, they are returned to supplier are called purchased returns or returns inwards.

Creditor Creditors are the persons from whom goods have been purchased on credit basis.

Debtors are the persons to whom goods have been sold on credit basis.

Capital is the amount of cash/goods/asset invested by the owner in the business is called capital

ANY DEALING BETWEEN TWO PERSON OR THINGS. IT MAY BE FOR CASH IT MAY BE ON CREDIT

DRAWINGS: good n cash taken away by the owner. GOOD/MERCHANDIZ : all thing in which business deals PURCHASES:
ASSETS: all the things own or possessed by the biz.
Any thing purchase for re sale purpose.

LIABILITIES: any debts due by biz. SALES: goods are sold for profit. RETURNS: if return by customer its sales return and if return to seller/supplier its purchases reutrn

REVENUE:
Any income generating by biz. DISCOUNT: Any reduction in price. TRADE DISCOUNT: Any concession in listed/printed price,at the spot.

CASH DISCOUNT: Deduction allowed by the creditor to the debtor for prompt payment. ALLOWANCE: Any reduction in price due to defect.

DEBTORS: from whom the biz receive. CREDITOR: To whom the biz pay. EXPENDITURE/COST: Any assets acquired. EXPENCES: Used/enjoyed benefit of expenditure

STOCK/INVENTORY: Unsold goods. ACCOUNT: Brief record of transaction; about person or things. EQUITY: Part, share or investment

TRANSACTION

BALANCE SHEET

JOURNAL

PROFIT/LOSS STATMENT

LEDGER

TRIAL BALANCE

OWNER MANAGEMENT LABOUR/EMPLOYEE CREDITORS SUPPLIER CUSTOMER GOVERNMENT

ACCOUNTING ACCOUNTING CONCEPTS: CONVENTIONS: BIZNESS ENTITY DISCLOSURE GOING CONCERN MATERIALITY MONEY CONSISTENCY MEASUREMENT CONSERVATISM COST DUAL ASPECT ACCOUNTING PERIOD MATCHING REALISATION

Business and business man/owner both are separate entities accounting deals and concerned with only business, financial matters. in short we done our work of accounting with business point of view.

It shows that the business will exist for a long time to come.

Accounting records only those transaction which can be expressed in terms of money. transaction or event which can not be expressed in money do not place in books of accounts.

recording of an assets at there purchasing price.

The life of the business is divided into equal segments, for studying the results after each segments. The time/duration of business period is twelve(12)months or a year.

Compare business expense of a particular period with its relevant periods revenue. Match the expenses with revenue

Record the revenue at the time of delivering of product to the customer.

Every transaction has two aspect. One what benefit business is receiving and other what benefit business is giving.

Disclose all the significant information. All the material information is clearly show/disclose, which are in the interest of its users.

Relevant importance of an item or event. Simply, expensive transaction have place as well as relatively important one.

The accounting practice remain unchanged from one year to another.

CAUTION APPROACH POLICY OF PLAY SAFE IGNORE ANTICIPATED PROFIT AND ACCOUNT FOR ALL POSSIBLE LOSSES

CASH BASIS OF ACCOUNTING Its a system in which entries/recording are made only when cash/cheque is received or paid.

ACCRUALS BASIS OF ACCOUNTING: Its a system in which entries are made when they occur.

Provide information for;

Decision making Sources and resources Financial performance In and out flow of cash

BALANCE SHEET INCOME STATEMENT CASH FLOW STATEMENT CHANGE IN EQUITY STATEMENTS NOTES

Overview of Financial Statements

Most businesses prepare the following financial statements to report accounting information: 1. Income Statement 2. Balance Sheet 3. Statement of Cash Flows 4. Statement of Stockholders Equity 5. Statement of Retained Earnings

Overview of Financial Statements

A Balance Sheet (Statement of Financial Condition) identifies a companys assets and claims to those assets by creditors and owners at a specific date. (A = L + SE) (a snapshot)

Company XYZZ Balance Sheet At December 31, 2006 Assets Current assets: Cash Accounts receivable Merchandise inventory Supplies Prepaid rent Total current assets Long-term (Fixed) Assets: Property and equipment, at cost Less Accumulated depreciation Total Long-term (Fixed) Assets Total assets
Continued

$ 12,600 9,600 22,000 800 1,000 $ 46,000 300,000 (60,000) $240,000 $286,000

Liabilities and Stockholders Equity Current liabilities: Accounts payable Unearned revenue Interest payable Notes payable, current portion Total current liabilities Long-term liabilities: Notes payable, long-term Total liabilities Stockholders equity: Common stock Retained earnings Total stockholders equity Total liabilities and stockholders equity

8,500 3,800 700 4,000 $ 17,000 80,000 $ 97,000 150,000 39,000 $189,000 $286,000

ASSETS, LIABILITY and OWNERS EQUITY of

A lists of

bizness as of a specific date,usually at the close of the last day of a month or year.

Any properties & possessions of the business. CURRENT ASSETS:whose benefits are for/in one year.e.g.cash,bank,A/R,B/R, N/R,STOCK etc. FIXED ASSETS:whose benefits are for more than one year.e.g. plant,machinery,furniture,fix ture,fittings,vehicles,buildin g,land etc.

TANGIBLE ASSETS: THOSE WHICH HAVE PHYSICAL EXISTENCE,PROOF WITH FIVE SENCES.

INTANGIBLE ASSETS: THOSE WHICH HAVE NO PHYSICAL EXISTANCE,e.g.good will,patents,right,trad emark,copy right etc.

Any debts and obligation of the business. CURRENT LIABILITIES: FOR ONE YEAR;e.g.credit,B/P,N /P,creditors,b.o.d etc.

FIXED LIABILITIES: FOR MORE THAN ONE YEAR.e.g.loan,mortga ge,capital.etc.

A summary of the REVENUE and EXPENSES of a biz. For a specific period of time,such a month or a year.

Overview of Financial Statements

The Income Statement (Statement of Earnings) reports revenues and expenses for an accounting period as a means of determining how well a company has performed in generating profits for its owners.

Company XYZZ Income Statement For the Year Ended December 31, 2006 Sales revenue $700,500 Cost of goods sold (450,200) Gross profit 250,300 Depreciation Expense (60,000) Selling, general, & administrative exp. (90,300) Operating income 100,000 Interest expense (5,000) Pretax income 95,000 Income taxes (40% tax rate) (38,000) Net income $ 57,000 Earnings per share $ 14.25 Average number of common shares 4,000

A summary of CASH RECIEPT and CASH PAYMENTS,i.e.operating,investing and financing activities.of business for specific date,month or a year.

A summary of the changes in owner's equity of a biz. That have occurred during a specific period of time,month or a year.

ANY DETAIL OR EXPLATION OF ANY ACCOUNT OR ITEMS ARE DENOTED WITH NUMBERS IN ANNUAL REPORT,IT IS QUALITATIVE DATA.

The Basic Accounting Equation

Stockholders Equity
Owners Claims on the Assets of a Business

Assets

Liabilities

Economic Resources Owned by a Business

The Financial Obligations or Debts of a Business

Like balance sheet but in form of equation. RESOURCES = SOURCES ASSETS = EQUTIES(LIABILITIES) ASSETS = LIABILITIES + CAPITAL

A=

A = L + O L = A O O = A L EXPESES ARE ALWAYS LESS IN OWNERS EQUITY REVENUE ARE ALAYS ADD IN OWNERS EQUITY

In single entry book keeping system, as is clear from the name, only one aspect of the transaction is recorded. This actually is not a system but is a procedure by which small business concerns, like retailers and small shopkeepers, keep record of their sale / income. In this system there are usually two to three registers Khata. In one register cash received from customers is recorded whereas the other one is a person-wise record of goods sold on credit Udhar Khata. There may or may not be a register of suppliers to whom money is payable. Which means that only one aspect of transaction i.e. either cash receipt or the fact that money is receivable from someone is recorded.

The concept of double entry is based on the fact that every transaction has two aspects i.e. receiving a benefit and giving a benefit. The accounting system that records both the aspects of transaction in the same books of accounts is called double entry system. The account that receives the benefit is debited and the account that provides the benefit is credited. Debit and Credit are denoted by Dr and Cr respectively. The ultimate result of the system is that for every Debit (Dr) there is an equal Credit (Cr).

Debit and credit are formal bookkeeping and accounting terms that have opposite meanings and come from Latin. Debit comes from debere, which means "to owe". The Latin debitum means "debt". Credit comes from the Latin word credere, which means "to believe". It is more common to use the terms in the plural, Debits and Credits. DEBIT is abbreviated as Dr., while credit is abbreviated as Cr

But we can develop an understanding as to what does these terms stand for. DEBIT It signifies the receiving of benefit. In simple words it is the left hand side. CREDIT It signifies the providing of a benefit. In simple words it is the right hand side. Debit and Credit will be explained in details and with examples in our future discussions.

We can devise the basic principle of double entry book-keeping from our discussion to this point. Every Debit has a Credit which means that All Debits are always equal to All Credits.

An accounting system keeps separate record of each item like assets, liabilities, etc. For example a separate record is kept for cash that shows increase and decrease in it. This record that summarizes movement in an individual item is called an Account.

We have to date studied following classification of accounts:

Assets, Liabilities, Income, Expenses

Expenses can be further divided into capital and revenue expenses. We have already studied about these classifications in different lectures but to refresh your memory we will gather them at one place.

ASSETS Assets are the properties and possessions of the business. LIABILITIES Liabilities are the debts and obligations of the business. Liability is the obligation of the business to provide a benefit or asset on a future date.

Asset is a right to receive and liability an obligation to pay, therefore these are opposite to each other.

Any account that obtains a benefit is Debit. OR Anything that will provide benefit to the business is Debit. Both these statements may look different but in fact if we consider that whenever an account benefits as a result of a transaction it will have to return that benefit to the business then both the statements will look like different sides of the same picture.

For credit Any account that provides a benefit is Credit. OR Anything to which the business has a responsibility to return a benefit in future is Credit. As explained in the case of Debit, whenever an account provides benefit to the business the business will have a responsibility to return that benefit at some time in future and so it is Credit.

Similarly we have established that whenever a business transfers a value / benefit to an account and as a result creates some thing that will provide future benefit; the thing is termed as Asset.
When an asset is created or purchased, value / benefit is transferred to that account so it is Debited

if the asset is sold, which is termed as disposing off, Therefore, the asset account is debit

i. Increase in Asset is Debit

ii. Decrease in Asset is Credit

When a liability is created the benefit is provided to business by that account so it is Credited iii. Increase in Liability is Credit
When the business returns the benefit or repays the liability, the liability account benefits form the business so it is Debited

iv. Decrease in Liability is Debit

the benefit from expenses is for a short run. Therefore Expenditure is just like Asset but for a short run.
Now we can lay down our rule for Expenditure:

Reversing the above situation if return any item that we had purchased we will receive cash in return. Cash account will receive benefit from that Expenditure account. Therefore Expenditure account will be credited

i. Increase in Expenditure is Debit

ii. Decrease in Expenditure is Credit

Income accounts are exactly opposite to expense accounts just as liabilities are opposite to that of assets. Therefore using the same principle we can draw our rules of Debit and Credit for Income iii. Increase in Income is Credit iv. Decrease in Income is Debit

 DEBIT

FOR ASSETS AND EXPENSES CREDIT FOR INCOME,CAPITAL AND LIABILITY