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INTRODUCTION TO ACCOUNTING

What is Book keeping?

Book Keeping is a process of detailed recording of all the financial

transactions of a business.

What is meant by Accounting?

Accounting uses the detailed record of bookkeeping to prepare a financial

statement in order to identify profit and loss and the financial position of the
business.

OBJECTIVES OF ACCOUNTING

● To maintain a complete and proper record of all business

transactions.
● To calculate the profit of the business and measure the performance
of a business.
● To identify the financial position of a business.
● To provide the necessary information to the interested users for their
decision-making.

TRANSACTION:

“Every financial change which occurs in your business is a transaction”.

Transaction refers to any event which is measurable in terms of money and
which changes the financial position of a business concern.

Examples: Bought goods for $500 on credit. Paid wages in cash $200.
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DIFFERENCE BETWEEN BOOKKEEPING AND ACCOUNTING:

Bookkeeping is just the process of recording transactions in books of

accounts. On the other hand, accounting comprises the recording as well
as the preparation of financial statements and the analysis and
interpretation of the financial statement.

Book-keeping is the first stage of maintenance of books of account,

whereas accounting is the second stage of maintenance of books of
accounts.

Bookkeeping observes the principles of recording transactions laid down by

accounting. But accounting follows its own rules and principles.

STATE THE PURPOSES OF MEASURING BUSINESS PROFIT & LOSS

Profit is the incentive for business; without profit, people might not
be bothered to do business. Profit is the reward for taking risks.
Accurate and precise measurement of Profit and loss of a business is
an essential accounting activity because it helps many stakeholders
to make many important decisions. It provides owners with a good idea
of whether to keep running and expanding one particular business or cease
trading. Managers can take future decisions on the basis of the past
performance of the business. Suppliers and creditors can decide whether
to strengthen their relationship with a business or revise their decision. To
sum up, the main purpose of measuring the profit and loss of a business is
to help all stakeholders to analyze the past performance of a business and
to provide them with guidance for future decision-making.
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ROLE OF ACCOUNTING IN PROVIDING INFORMATION FOR

MONITORING PROGRESS & DECISION MAKING:

Accounting maintains complete and proper records of all the business

transactions and prepares financial statements to show the changes in
assets, liabilities, and equities of a business. It is a very important process
in an organization. It shows the profit and loss of a business. Accounting
plays an important role in decision-making and monitoring progress in an
organization. Accounting shows the progress of a business from year to
year and provides the financial result, and other valuable information to the
various interested groups like the management and staff of the firm, the
owners, the creditors, the government, and the consumers, etc. for this
reason accounting is regarded as the language of business. It enables the
management to monitor the strengths and weaknesses of a business and
minimize the errors and fraudulent activities of a business. As it helps the
management keep proper control over the use of the business properties, it
is called the eyes and ears of the business. It also helps the management
make a more effective plan for future benefit and growth. On the other
hand, accounting information satisfies some legal requirements and helps
other stakeholders to decide on their own interests like investment
decisions, loan & credit facilities, consumption of goods & services, taxation
& subsidies

Some of the important users of accounting information:

1. Owner: The owner wants to see both profitability and liquidity in

order to assess the business’s performance and progress.
2. Manager: The manager uses ratios to assess past performance, plan
for the future and take remedial action where necessary.
3. Bank manager: The bank manager needs to know whether the
business has enough security to cover the amount of the loan and
whether it can be paid when due.
4. Creditors: The creditor needs accounting information to assess the
liquidity position, to determine the credit limit and length of the credit
period.
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5. Workers: they need to see their job security like whether the business
is able to continue its operation in the future and can pay regular wages.

ACCOUNTING EQUATION: It States that after every transaction the total

of assets should be equal to capital and liabilities. It can be stated in the
form of an equation which is Assets = Capital + Liabilities.

A= C+L, A-C=L, A-L=C

ASSETS: Resources owned by a business are known as assets. There

are two types of assets.

1. Current assets: Assets that have a short life and benefit of which are
exhausted within one year. Example: cash, bank, closing stock,
debtors/ Trade receivables, prepaid expense, income receivable, etc.
2. Non-current assets: Assets that have a long life and benefits of
which are not exhausted within one year. Example: Building,
Equipment, furniture, fixtures, tools and fittings, goodwill (intangible
asset), etc.

CAPITAL: The total of resources invested into the business by its owner.

LIABILITIES: Total of funds owed by the business for buying any assets or
for incurring any expense not yet paid. There are 2 types of liabilities:

Current liabilities: are liabilities to be paid within one year. Example:

creditors/trade payables, accrue or outstanding expense, income received
in advance.

Non-current liabilities: that do not have to be paid within one year. Bank
loan, 5% debenture, loan from someone.
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Types of accounts:

1. Personal account: It relates to accounts of human beings, e.g.,

Mohon’s A/C, David’s A/C
2. Real, Asset or Property account: It relates to accounts both
tangible assets, eg., cash, bank, furniture, machinery, and intangible
assets, e.g., Goodwill, Patent rights, Copyrights, and Trademarks
account
3. Nominal or Fictitious account: It relates to accounts of all
expenses, losses, incomes, and profits, e.g., rent paid, discount
allowed, and interest received

HOW ARE THE TRANSACTIONS RECORDED?

The double-entry system of bookkeeping: All transactions are recorded

according to the double-entry bookkeeping system. Under this system,
every transaction has two aspects. One aspect receives the benefit and
another aspect gives the benefit. The receiver of the benefit is debited and
the giver of the benefit is credited with an equal value. The system of
making two or double entries of equal value in two different accounts on
opposite sides in the books of each of the contracting parties is known as
the double-entry system of bookkeeping.

Rules for debit and credit

1. Asset account: Increases—Dr, Decreases------Cr

2. Liabilities: Decreases—Dr, Increases----- Cr

3. All Incomes: Cr

4. All expenses: Dr
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What are the books of accounts?

1. Primary book: Journal/ daybooks/books of original entry/prime entry

2. Principal book /Main book: Ledger

1. JOURNAL: JOURNAL is the primary or subsidiary book of accounts where all

transactions are recorded chronologically after analyzing into debit and credit.

The layout of journal:

Mr Tehan

JOURNAL

Date Details Folio Debit Credit

2010 Purchase 4000

4000
JAN 1 F Jone

(Being goods bought on

credit)
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The following transactions took place during the month of January

Make the journal entries for the following transactions:

January 1. Mr. Tehan started his business with his own cash of $2000, bank balance $3000,
and took a loan from Amit of $5000 in cash.

3. Bought goods on credit from F jones $800.

4. Bought goods for cash $100 from C moody.

5. Bought goods from J peat by cheque $100.

6. Goods returned to C moody $50.

7. Sold goods on credit to H morgan for $500.

8. Sold goods to J NEWMAN for cash $100.

9. Sold goods to Charles by cheque $200.

10. Goods returned by H MORGAN $50.

11. Bought office furniture on credit from faster supplies ltd $3000.

12. Bought a van by cheque $2000.

13. Faulty furniture returned to faster supplies ltd. $100

15. L MOORE returned the machine to us $200

16. Paid $50 by cheque for bringing the machine into the business.

17. Paid cash of $100 for installing the machine in the business.

18. Paid $10 in cash for carrying goods into the business.

19. Paid carriage $20 for delivering goods to the customer in cash

21. The proprietor paid creditor C JONES $200 from his own pocket.

22. Paid a creditor, F JONES $200 by cheque.

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23. Cheque received from a debtor, H MORGAN$200

24. Paid cash into the bank$200

25 Took cash $100 and paid into the bank.

26. Took cash of $500 from bank

27. The proprietor took $400 from cash for personal use.

28. The proprietor took $400 from the bank for personal use.

29. The proprietor took or used goods/ services from the business costing $500 for his personal
use.

30.D WATSON lent us $1000 and paid us the money by cheque.

31. A part of the loan received from D WATSON was paid in cash $ 500.

31. Paid wages and salary in cash $1000.

31. Received commission by cheque$50

31. Paid into the bank$1000 by selling goods.

31. Bank charges $50 and bank interest$100.

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Meaning of ledger: Ledger is a book where each account appears on a separate page. It is a
permanent record of all transactions. It is a book of final entries and is also called the king of the
books of accounts.

Posting: posting is the act of transferring entries from the subsidiary books to the ledger.

Types of ledgers/ Subdivision of ledger

The different types of ledgers most businesses use are

● Sales ledger. This is for customers (debtors) accounts

● Purchases ledger. This is for suppliers' (creditors) accounts

● General ledger. This contains the remaining double-entry accounts, such as those
relating to expenses, sales, purchases, returns, fixed assets, and capital.

Advantages of dividing the ledger into three types:

1. Future reference making to any of the accounts becomes easier.

2. More than one clerk can work at a time so quick recording and internal cross-checking
are possible.

There are two methods of presenting ledger accounts.

1. The layout of a ‘T’ account LEDGER is as follows:

Mr.Jone
Debit Credit
Date Details folio $ Date Details folio $

2. Three-column running balance method: This method uses three money columns side by side – one
for debit, one for credit, and one for balance after each transaction. The advantage of this method is that it
shows the balance of the account after every transaction. The format is given below:

Mr. Jone

Date Details Folio Debit $ Credit $ Balance $

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Notes: Sometimes students may be asked to open a specific account instead of all accounts.

Trial Balance

1. Define trial balance.

A trial balance is a list of balances of the accounts in the ledger at a certain date. It is a statement
that checks the arithmetical accuracy of double-entry bookkeeping.

2. What are the purposes of a trial balance?

● The trial balance is prepared to check the arithmetical accuracy of the double-entry book
keeping.
● It helps in locating the arithmetical error
● It is useful in preparing final accounts.

3. Write down the limitations of trial balance.

The balancing of the trial balance is not proof that the entries in the ledger accounts are
completely free from error because there are some errors which are not disclosed by the trial
balance.

4. Explain what is indicated if the total of a trial balance agree.

It indicates that the double entry book keeping is arithmetically correct.

5. Explain what determines whether the balance of an account is entered in the debit or credit
column of a trial balance.
If an account has debit balance (debit side is more than the credit side), it is entered in debit
column. On the other hand, if an account has credit balance (credit side is more than debit side),
it is entered in credit column of a trial balance.

6. What could be the reasons for an imbalance of a trial balance? / Errors affecting trial
balance or require a suspense account
● An error of addition within the trial balance
● An error of addition within one of the ledger account
● Making a single entry for a transaction
● Entering a transaction twice on the same side.
7. Write a few steps for locating errors.
● Check the addition of the trial balance
● Check the addition of the balance of each ledger account
● Check that every ledger account balance has been entered in the correct column of the
trial balance.
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8. Explain different types of errors not affecting trial balance or not revealed by a
trial balance.
1. Error of commission: when transaction is recorded in the wrong account
of the same type of accounts. Example :( cheque received from Asif
credited to Akib account)
2. Error of Principle: when transaction is recorded in the wrong type of
account. Example (repairs to motors debited to motors account)
3. Error of omission: when a transaction is completely omitted from the
records. Example (cash received from Tehan not recorded in the
books)
4. Error of original entry: When a transaction is recorded using incorrect
amount. Example (Bought goods using taka 500 recorded as taka 50)
5. Error of complete Reversal: When transaction is recorded in the wrong
side of each account. Example (Cheque received from Sakib, bank a/c
credited and Sakib a/c was debited)

6. Error of compensation: when two or more errors cancel each other out.
Example: purchase overcast by $500 and sales overcast by$500

Notes:

The following accounts usually have the debit balance: assets, expenses,
drawings, purchase and sales returns.

The following accounts usually have the credit balances: liabilities, incomes,
capital, sales and purchase returns.
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Problem 1.
Mr Ashis has the following balances on 31st December 2010
Prepare a trial balance and show the capital at 31st December 2010
Sales 90000
Purchase 50000
Stock/ inventory 10000
Wages 10000
General expenses 5000
Repairs and Maintenance 5000
Machinery and Equipment 60000
Building 50000
Debtors/account receivable 20000
Creditors/account payable 25000
Return inward 5000
Return outward 5000
Cash 50000
Bank overdraft 10000
Drawing 4000
Rent paid 20000
Loan from Mohan 5000
Commission received 200
Discount allowed 400
Discount received 300
Provision for doubtful debts 600
Provision for depreciation 800

Capital(balancing figure)
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Ashis’s
Trial balance at 31st December 2010
Details Folio Debit ($) Credit ($)
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