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Lecture 2

Accounting Lecture

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Lecture 2

Accounting Lecture

Uploaded by

jiaali56789
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Week No.

2
Mr. Atif Iftikhar
monetary
Identification impact

Recording Journal

Classification Ledger

Summarizing Trial Balance

Interpretation Final Accounts

Communication Parties
Identification

Recording

Classification

Summarizing

Interpretation

Communication
• Book-keeping
Is the foundational process of recording financial
transactions in a systematic manner.

It involves keeping track of daily financial activities,


such as sales, purchases, and payments.

Think of it as the raw data collection phase.


• Accounting
Accounting is a broader field that encompasses
bookkeeping as well as the analysis, interpretation,
and communication of financial information.
• Accountants use book-keeping data to prepare
financial statements, assess financial performance,
and make informed business decisions.
Book-Keeping = First stage

Accounting = Final stage


Meaning

Book-Keeping Accounting

It refers to the
It is the Art of process of
Recording the summarizing,
financial interpreting and
transactions in reporting the
books of Account important
information about
the business.
Stage

Book-Keeping Accounting

It is the second
It is the Primary stage of whole
stage of whole accounting
accounting process process, as
accounting starts
where book-
keeping ends.
Nature of work

Book-Keeping Accounting

The work
The work performed under
performed under Accounting is
Book-keeping is analytical in
clerical in nature nature.
Requirement of knowledge

Book-Keeping Accounting

To perform
To perform Book- Accounting higher
keeping less level of
knowledge is knowledge is
required required
Objective

Book-Keeping Accounting

Is to ascertain the
Is to maintain the net profit or loss
proper and incurred to the
systematic record business and
of all the financial ascertain the
transactions. financial position
of business
Journal: A chronological record of all financial transactions.
Ledger: A book of accounts that organizes transactions by
type (e.g., cash, accounts receivable, inventory).
Trial Balance: A list of all accounts and their balances to
ensure the accuracy of the ledger.
Posting: The process of transferring entries from the journal
to the ledger.
REAL-WORLD EXAMPLE: A SMALL BUSINESS

Imagine you own a small coffee shop. Your bookkeeping


activities would involve:

Recording sales: Keeping a daily record of cash sales and


credit card transactions.
Tracking expenses: Recording purchases of coffee beans,
milk, cups, and other supplies.
Paying bills: Recording payments for rent, utilities, and
employee wages.
Preparing a trial balance: Ensuring that the total debits
equal the total credits.
REAL-WORLD EXAMPLE: A SMALL BUSINESS
While bookkeeping provides the raw data, an accountant
would use this information to:
Prepare financial statements: Create an income statement,
balance sheet, and cash flow statement.

Analyze financial performance: Evaluate the coffee shop's


profitability, liquidity, and solvency.

Make business decisions: Determine whether to expand


the business, hire more employees, or invest in new
equipment.
Definition: Assets are resources owned by a business that
are expected to provide future economic benefits.

Types:
Current assets (cash, accounts receivable, inventory), fixed
assets (property, plant, and equipment), intangible assets
(trademarks).

Example: A coffee shop's assets include cash in the register,


coffee beans, mugs, and the building it operates in.
Definition:
It's something the business has to pay back in the
future.

Types:
Current liabilities (accounts payable, notes
payable), long-term liabilities (loans, bonds).

Example: A coffee shop's liabilities include money


owed to suppliers for coffee beans and rent owed
to the landlord.
Definition:
Capital is the owner's investment in a business.

Types:
Owner's equity (for sole proprietorships),
partnership capital (for partnerships),
stockholders' equity (for corporations).

Example: If you start a coffee shop with $10,000 of


your own money, that $10,000 is your capital.
Definition:
Goods are tangible products that a business sells or
uses in its operations.

Types:
Inventory (goods held for sale), supplies (goods
used in operations).

Example: A coffee shop's goods include coffee


beans, milk, and cups.
Definition:
Revenue is the income earned by a business from
its operations.

Types:
Sales revenue, service revenue, interest income.

Example: A coffee shop's revenue comes from


selling coffee, pastries, and other products.
Definition:
Expenses are costs incurred by a business to
generate revenue.

Types:
Cost of goods sold, operating expenses (rent,
salaries, utilities), interest expense.

Example: A coffee shop's expenses include the cost


of coffee beans, milk, and wages for employees.
Definition:
Profit is the difference between revenue and
expenses.

Types:
Net income (profit after taxes), gross profit
(revenue minus cost of goods sold).

Example: If a coffee shop has $10,000 in revenue


and $8,000 in expenses, its profit is $2,000.
Definition:
A business entity is a separate legal and economic
unit that is distinct from its owners. It can be a
sole proprietorship, partnership, corporation, or
limited liability company (LLC).
A business entity possesses several key properties that
distinguish it from its owners. These properties
ensure its separate legal and economic existence.
A business entity is a separate legal person from its
owners.

Implications:
• Can sue and be sued in its own name.
• Can enter into contracts and own property.
• Has its own legal rights and obligations.

Example: A corporation can file a lawsuit against a


customer for non-payment.
The owners of a business entity are generally not
personally liable for the debts and obligations of the
business.

Implications:
• Protects owners' personal assets from business
liabilities.
• Reduces financial risk for investors.

Example: In a corporation, the shareholders are not


personally liable for the company's debts.
A business entity can continue to exist indefinitely,
even after the death or withdrawal of its owners.

Implications:
• Provides stability and continuity for the business.
• Facilitates long-term planning and investment.

Example: A corporation can continue to operate


even if its CEO retires or passes away.
Ownership interests in a business entity can be easily
transferred to others.

Implications:
• Increases liquidity and marketability of the
business.
• Facilitates the sale or transfer of ownership.

Example: Shareholders of a corporation can sell their


shares to other investors.
A business entity is typically managed by a board of
directors or other governing body, rather than by its
owners.

Implications:
• Separates ownership from management.
• Allows for professional management and decision-
making.

Example: A corporation is managed by a board of


directors, while its shareholders are the owners.
Assets = Liabilities + Owner's Equity
This equation represents the basic structure of a balance sheet

Assets: Resources owned by the business.


Liabilities: Debts owed by the business.
Owner's Equity: The residual interest in the assets of
the business after deducting liabilities.
The dual aspect concept is a fundamental
accounting principle that states every
financial transaction has two equal and
opposite effects on the business's financial
position.
Transaction 1: Purchase of equipment for cash.
Effect: Assets (Equipment) increase, Assets
(Cash) decrease.

Transaction 2: Borrowing money from a bank.


Effect: Assets (Cash) increase, Liabilities (Loans
Payable) increase.

Transaction 3: Selling a product for cash.


Effect: Assets (Cash) increase, Revenue (Sales)
increases, Owner's Equity (Retained Earnings)
increases.
Increases in assets or decreases in liabilities and
owner's equity.

Decreases in assets or increases in liabilities and


owner's equity.
Rule: For every transaction, the total debits must
equal the total credits.
Ensures accuracy: Helps prevent errors in financial records.
Provides balance: Maintains the equilibrium of the
accounting equation.
Facilitates analysis: Allows for the analysis of a
business's financial position and performance.
Complies with accounting standards: Adheres to
generally accepted accounting principles (GAAP).

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