Basics of financial accounting
- 1. BASICS CONCEPTS OF FINANCIAL ACCOUNTING 100% IN EASY WORDING
- 2. Prepared By Muhammad Mustafa For more Notes CONTACT NO +923457963314 Email ID : kamal786412@gmail.com Facebook Timeline link https://www.facebook.com/mustafa.34800 Facebook page link https://www.facebook.com/Study-Material- 858927181118918/?modal=admin_todo_tour Youtube link https://youtu.be/Bm1fUOwW3kE
- 3. What is Accounting • Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transaction and events, which are, in part at least, of a financial character, and interpreting the result thereof
- 4. What is Accounting • Accounting & Accountancy:- The two words ―Accounting‖ and ―Accountancy‖ are often used to mean the same thing. But it is not correct. Accountancy is a main subject and Accounting is one of its branches. The word ―Accountancy‖ is for wide and extensive compared to Accounting. It covers the entire body of theory and practice. i.e. Books Keeping, Accounting, Costing, Auditing, Book Keeping:-Bookkeeping is the art of recording monetary transactions in the books of accounts in a proper manner.
- 5. What is Business Any legal activity which is done for the purpose of earning profit is known as business. e.g. banking business, an insurance business, etc.
- 6. What is Proprietor He is owner of a business. He invests capital in it, gives his time and attention to it. He is entitled to receive the profit or bear loss arising out of it.
- 7. Accounting Systems • Cash System of Accounting:-Under this system of accounting, transactions are recorded only when cash is received or paid, whether they are related to current year or not. • Accrual System of Accounting:The system under which all items of revenues and expenses relating to the current accounting period whether received or paid in cash or not are taken into consideration while determing the profit or loss of the business, is called accrual system of accounting or Mercantile system of accounting
- 8. RULES OF DEBIT AND CREDIT FOR ASSETS FOR ASSETS ACCOUNTS: I Increase in an asset is debit………….……. Dr. Decrease in an asset is credit……….……...Cr. FOR LIABILITIES ACCOUNTS: Increase in a liability is credit…………….…. Cr. Decrease in a Liability is Debit...…….……...Dr. FOR PROPRIETORSHIP/CAPITAL ACCOUNT: Increase in Capital is Credit ……….………… Cr. Decrease in Capital is Debit ………………….Dr. FOR REVENUE ACCOUNTS Increase in Revenue is Credit…………………. Cr. Decrease in Revenue is Debit…………………..Dr. FOR EXPENSES ACCOUNTS Increase in Expense is Debit……………………. Dr. Decrease in Expense is Credit…………………..Cr.
- 9. Transaction • Any financial dealing between two person or things is a transaction. It may be relate to purchase and sells goods, receipt and payment of cash and rendering of service by one party to another • OR A business event which can be measured in terms of money and which must be recorded in books of account is called transaction.
- 10. Classification of Transaction • Transaction may be divided into two groups. (1) Cash Transaction: If the value of a transaction in met is cash immediately, it is called cash transaction. e.g. We buy furniture for Rs. 2000/- from Zubair and immediately pay him in cash. It is cash transaction. • (2) Credit Transaction :If a transaction is made with the consent to make the payment in some future time, against such transaction
- 11. Financial Accounting Basics Terms • Fixed Assets:- Assets which have long life and which are bought for use in business for long period of time are called fixed assetse.g. Land Buildings, Furniture etc. • Current Assets/ Circulatory/ Floating Assets:- Assets which have short life and which can be converted into cash quickly to meet the short terms liabilities are called current assets e.g stock, Debtor, Cash etc. These are also called circulatory or floating assets.
- 12. Types of Assets • Tangible Assets:-Assets which have physical existence and which can be seen, touched or felt are called tangible assets e.g land buildings, machinery. • Intangible Assets:- Assets which have no Physical existence and which cannot be seen, touched or felt are called intangible assets e.g Good will, patent right, Trade mark etc. • Liquid or Quick Assets:- Assets which can be converted into cash very quickly or which are already in the form of cash are called liquid or Quick assets. E.g cash in hand, cash at bank etc. • Wasting Assets:-Those assets whose value gradually reduce on account of use and finally exhausted completely are called wasting assets.
- 13. Liability and it’s types • Liabilities:- Liabilities are debts or obligation of a business which are payable to outsiders or the persons inside the business like owners of the business. • Fixed liabilities:- Fixed liabilities, which are repayable after a long Period. E.g. long term loan, capital etc. Current Liabilities:-The debts that are repayable within a short period are called current or short-term liabilities e.g Creditors, bills payable bank overdraft. • Contingent liabilities:Contingent liabilities is not a liabilities at present but may or may not become liability in future it depends upon certain future event.
- 14. What is Capital • It is the source of funds provided by the owner of the business and it is long term liability of the business which is re-payable to the owner at the time of dissolution of the business or any other case.
- 15. TYPE OF CAPITAL • TRADING CAPITAL The profit of the funds of a concern which is represented by fixed or floating assets is called trading capital. • FIXED CAPITAL The portion of the funds of a concern, which is represented by fixed assets, is called fixed capital. • CIRCULATING CAPITAL The portion of the funds of a concern which is represented by floating or circulating assets is called circulating capital.
- 16. TYPE OF CAPITAL • WORKING CAPITAL The excess of the floating assets over the floating liabilities is called working capital • LOAN CAPITAL Debentures or other fixed loans are called loan capital • WATERED CAPITAL It is represented by fictitious assets.
- 17. What is Purchases In accounting language the word ―purchases‖ has special meaning. When tradable goodsare brought in business it is called that purchases have been mad
- 18. Types of Purchases • Cash Purchases:- If goods are purchases from a supplier and payment is made to him at the same time, such purchases are known as ―cash purchases • Credit Purchases or Purchases on Account When goods are purchased from seller/supplier and payment is not made to him at the same time, rather the payment is arranged to be made at some future date, such purchases are known as ―credit purchases‖ or ―purchases on account‖.
- 19. Purchases Return & Discount • Purchases Return or Returns Outwards Goods once purchased may subsequently be sent back to the seller for certain reasons, i.e. goods are defective, not according to specification, damaged or below standard. Such return of goods to the seller is known as ―purchases return. • Purchases Discount:- The concession given by the supplier to the buyer on purchases of goods is known as purchases discount.
- 20. What is Sale When goods of the business are sale out to someone others for earning profit, this is known as sale is made the business
- 21. Types of Sales • Cash Sales:- If goods are sold to customers at a specific price and price of goods is received from them at the time of sale of goods, such sales are known as ―cash sales‖. • Credit Sales:-If goods are sold to customers and he does not pay the price of goods at the same time but to make payment on some future date, the sales are called ―credit sales‖ or ―sales on account
- 22. Sales Return & Discount • Sales Returns or Return Inwards: • If a customer to whom goods have been sold finds that the goods are defective, unsatisfactory, below standard Or not according to the specification, he may return these goods to the seller. Such return of goods is known as ―sales return. • Trade Discount: Discount allowed by manufacturer or wholesaler at the time of selling goods to retailer as a deduction from the list price or catalogue price is called trade discount.
- 23. Financial Accounting Basics Terms • Debtors/Accounts Receivable: A person who owes money to another is debtor when we say that we owe Mr. Amir Rs. 5000/ we mean that we have received from Mr. Amir 5000/ which we have to repay. We stand as debtor to Mr. Amir for Rs. 5000/ it is also termed as account receivable. Creditors/Accounts Payable: A person who pays out something or to whom money owing is a creditor. It is also termed as accounts payable.
- 24. Financial Accounting Basics Terms • Commission:-It is form of remuneration for services rendered by one person to another. • Expenses:-Expenses are the cost of the goods and services used up in the process of obtaining revenue. e.g. Salaries, Insurance, rent etc.
- 25. Financial Accounting Basics Terms • Goods merchandise: • It includes all merchandise commodities, which are purchased by the business for selling purpose. • Stock Inventory:(List of Goods) Goods or merchandise on hand that is goods remaining unsold is called stock in trader inventory. • Bad debt: A bad debt is a business loss. The debts, which are irrecoverable from debtors, are called ―bad debts‖
- 26. Financial Accounting Basics Terms • Debit Note:-If goods bought on credit are returned to seller for any solid reason the buyer debit the seller account and inform the seller through a note. This note is called debit note. • Credit Note: - If goods sold on credit are returned by the buyer, the seller credits the buyer account and informs the buyer through a note. This note is called credit note.
- 27. Financial Accounting Basics Terms Depreciation:- Gradual decrease in the machinery value of an asset due to usage in business is known as depreciation. Depreciation is a loss to the business. Fluctuation:- The decrease or increase in value of an asset not due to use in business is known a fluctuation
- 28. Financial Accounting Basics Terms Petty cash book: - A book, in which small cash payments recorded, which are not convenient to record in the main cash book directly (like postage traveling expenditure purchase of stationery are recorded) is petty cash book. Imprest system; A system in which a fixed sum of money is given to cashier for the month is called Imprest system Contra Entry;- Anentry in which cash a/c and bank a/c involved and it is recorded on both sides of cash book is called contra entry
- 29. Financial Accounting Basics Terms • Cash Discount: - It is a deduction or allowance given by a creditor to a debtor before the due date. • Trade Discount:- Discount allowed by manufacturer or wholesaler at the time of selling goods to retailer as a deduction from the list price or catalogue price is called trade discount.
- 30. Financial Accounting Basics Terms • Accrual Revenues:- The revenue, which we have been earned in the current year but has not been received in cash within the current year, it will be received in next year, is known as accrued revenue e.g. accrued commission (CR), Rent receivables etc. • Accrual Expenses or Outstanding Expenses:- The expenses which have been incurred during the current year but have not been paid till the end of the current year are called outstanding expenses payablee.g. Wages Payable, accrued Salaries etc.