Introduction to Accounting

Hewad Khan Bazai

Lecturer
Department of Management Sciences,
BUITEMS, Quetta.
 Definition of Accounting

 Accounting is a systematic process of

measuring, classifying and communicating
financial information for the users.
 The Need for Accounting
 In all activities and organizations (business or non-business)
which require money and other economic resources, accounting
is required to account for these resources.

 In other words, wherever money is involved, accounting is

required to account for it.

 Accounting is often called the language of business. The basic

function of any language is to serve as a means of
communication. Accounting also serves this function.
 The Need for Accounting
Accounting helps answering questions like;

 Am I making or losing money from my business?

 How much my business worth?

 Should I put more money in my business or sell it and go

into another business?

 How much is owed to me, and how much do I owe?

 How can I change the way I operate to make more profit?

 Some Users of accountings
Owners: The owners provide funds or capital for the
organization. They possess curiosity in knowing
whether the business is being conducted on sound
lines or not, and whether the capital is being
employed properly or not.
 Some Users of accountings
Management: The management of the business is
greatly interested in knowing the position of the firm.
The accounts are the basis, the management can study
the merits and demerits of the business activity. Thus,
the management is interested in financial accounting to
find whether the business carried on is profitable or not.
The financial accounting is the “eyes and ears of
management and facilitates in drawing future course of
action, further expansion etc.”
 Some Users of accountings
Creditors: Creditors are the persons who supply goods on
credit, or bankers or lenders of money. It is usual that these
groups are interested to know the financial soundness before
granting credit. The progress and prosperity of the firm, two
which credits are extended, are largely watched by creditors
from the point of view of security and further credit. Profit and
Loss Account and Balance Sheet are nerve centers to know the
soundness of the firm.
 Some Users of accountings
Employees: Payment of bonus depends upon the size of
profit earned by the firm. The more important point is
that the workers expect regular income for the bread.
The demand for wage rise, bonus, better working
conditions etc. depend upon the profitability of the firm
and in turn depends upon financial position. For these
reasons, this group is interested in accounting.
 Some Users of accountings
Investors: The prospective investors, who want to invest
their money in a firm, of course wish to see the progress
and prosperity of the firm, before investing their amount,
by going through the financial statements of the firm.
This is to safeguard the investment. For this, this group
is eager to go through the accounting which enables
them to know the safety of investment.
 Some Users of accountings
Government: Government keeps a close
watch on the firms which yield good amount
of profits. The state and central Governments
are interested in the financial statements to
know the earnings for the purpose of
taxation.
 Accounting is important to whom?
Research Scholars: Accounting information,
being a mirror of the financial performance of a
business organization, is of immense value to the
research scholar who wants to make a study into
the financial operations of a particular firm as
such study needs detailed accounting information.
 Types of Business Organizations

Sole Trader/Proprietorship: is a business wholly

owned by a single individual. It is the easiest and the
least expensive way to start a business and is often
associated with small storekeepers, service shops, and
professional people such as doctors lawyers, or
accountants.
Types of Business Organizations
Partnerships: A partnership is a legal association
of two or more individuals called partners and
who are co-owners of a business for profit. Like
proprietorships, they are easy to form. This type
of business organization is based upon a written
agreement, partnership deeds, that details the
various interests and right of the partner.
 Partnership Act, 1932
Types of Business Organizations
Corporations: is the most dominant form of
business organization in our society. A Corporation is
a separate entity with most legal rights of a person
including the right to conduct business, own, sell and
transfer property, make contracts, borrow money, sue
and be sued, and pay taxes. Since the Corporation
exists as a separate entity apart from an individual, it
is legally responsible for its actions and debts.
 Companies ordinance, 1984
 Branches of Accounting
Financial Accounting:

 Financial accounting is the process of recording,

summarizing and reporting the various transactions
resulting from business operations over a period of
time. These transactions are summarized in the
preparation of financial statements
 Financial accounting aims at providing information
to parties outside the organization
 Branches of Accounting
Management/Managerial Accounting:

 aka Cost Accounting

 Managerial accounting is the process of identifying,
measuring, analyzing, interpreting and communicating
information for the pursuit of an organization's goals
 Management accounting information is aimed at
helping managers within the organization to make
decisions
Branches of Accounting
Auditing

 Itis said that the work of an auditor begins when

the work of the accountant ends.
 Auditing deals with the inspection of the financial
statements, which were prepared in financial
accounting, by independent certified public
accountants
 Accounts
 The accounting system uses Accounts to keep track of
information. Here is a simple way to understand what
accounts are. In your office, you usually keep a filing cabinet.
In this filing cabinet, you have multiple file folders. Each file
folder gives information for a specific topic only.

 For example you may have a file for utility bills, phone bills,
employee wages, bank deposits, bank loans etc. A chart of
accounts is like a filing cabinet. Each account in this chart is
like a file folder. Accounts keep track of money spent, earned,
owned, or owed. Each account keeps track of a specific topic
only.
 Account Types
Revenue:

 It means the amount which, as a result of operations,

is added to the capital. It is defined as the inflow of
assets which result in an increase in the owner’s
equity. It includes all incomes like sales receipts
interest, commission, brokerage etc., However,
receipts of capital nature like additional capital, sale
of assets etc., are not a pant of revenue.
 Expense

 The terms ‘expense’ refers to the amount

incurred in the process of earning revenue. If
the benefit of an expenditure is limited to
one year, it is treated as an expense (also
known is as revenue expenditure) such as
payment of salaries and rent.
 Assets
 An Asset is a property of value owned by a
business. Physical objects and intangible rights
such as money, accounts receivable,
merchandise, machinery, buildings, and
inventories for sale are common examples of
business assets as they have economic value
for the owner. Accounts receivable is an
unwritten promise by a client to pay later for
goods sold or services rendered.
 Assets
Assets are generally divided into
three main groups:

 Current
 Fixed
 Intangible
 Current Assets
 Refer to cash and other items that can be turned
back into cash within a year are considered a current
asset such as;

 Cash – includes funds in checking and savings accounts

 Accounts Receivables, which are amounts due from customers
 Inventories such as raw materials or merchandise on hand
 Prepaid expenses – supplies on hand and services paid for but
not yet used (e.g. prepaid insurance)
 Fixed Assets
 Refer to tangible assets that are used in the
business. Commonly, fixed assets are long-lived
resources that are used in the production of
finished goods such as;

 Buildings.
 Land
 Equipment
 Furniture
 Intangible Assets
 Refers to assets that are not physical assets like equipment
and machinery but are valuable because they can be licensed
or sold outright to others, such as;

 Copyrights
 Patents
 Trademarks
 Goodwill
 Liabilities
 A Liability is a legal obligation of a business to pay
a debt. Debt can be paid with money, goods, or
services, but is usually paid in cash. The most
common liabilities are notes payable and accounts
payable.

 Accounts payable is an unwritten promise to pay

suppliers or lenders specified sums of money at a
definite future date.
 Current Liabilities
 Current Liabilities are liabilities that are
due within a relatively short period of time.
The term Current Liability is used to
designate obligations whose payment is
expected to require the use of existing
current assets. Among current liabilities are
Accounts Payable, Notes Payable, and
Accrued Expenses.
 Long-Term Liabilities
 Long-Term Liabilities are obligations that will not
become due for a comparatively long period of time.
The usual rule of thumb is that long-term liabilities are
not due within one year. These include such things as
bonds payable, mortgage note payable, and any other
debts that do not have to be paid within one year.

 You should note that as the long-term obligations

come within the one-year range they become Current
Liabilities.
 CAPITAL

 Capital, also called net worth, is essentially

what is yours – what would be left over if
you paid off everyone the company owes
money to. If there are no business liabilities,
the Capital, Net Worth, or Owner Equity is
equal to the total amount of the Assets of the
business.
 The Accounting Equation

 Now let us discuss the accounting equation,

which keeps all the business accounts in
balance.

Assets = Liabilities + Owner’s Equity

 The Double Entry System
 Today’saccounting principles are based on the system
created by an Italian Monk “Luca Pacioli” who
developed this system over 500 years ago. Pacioli had
devised this method of keeping books, which is today
known as the Double Entry system of accounting.

 He explained that every time a transaction took place

whether it was a sale or a collection – there were two
offsetting sides. The entry required a two-part “give-
and-get” entry for each transaction
 The Double Entry System
 Here is a simple explanation of the double entry system.
Say you took a loan from the bank for $5,000 and we
already established that:

ASSETS = LIABILITIES + OWNER’S EQUITY

 Since the company borrowed money from the bank, the
$5,000 is a liability for the company. In addition, now
that the company has the extra $5,000, this money is an
asset for the company. If we were to record this
information in our accounts, we would put $5,000 in the
“Assets” side and $5,000 in the “Liabilities” side.
 Debit and Credit
 Recording of transactions require a thorough
understanding of the rules of debit and credit relating
to accounts.

 Both debit and credit may represent either increase

or decrease, depending upon the nature of account.

 For convenience ‘Dr’ is used for debit and ‘Cr’ is

used for credit.
Accounting Cycle
Thank you