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Principles of AccountingPrinciples of Accounting
With:With:
SHAHI YAR KHANSHAHI YAR KHAN
Basic Accounting
Recommended Book
Accounting:
The basis for business decisionsEleventh Edition
By: Meigs William Haka Bettner
Focus of Study
Chapters to be focused…
1,2,3,4,5
Chapter # 1
Accounting:
The Language of Business
Accounting
The Art of Recording Classifying Summarizing and Communicating the results Of business transactions
Accounting
Accounting is the art of recording, classifying, summarizing and communicating the results of the business transactions.
Accounting also called the language of business
Accounting
The Art of Interpreting the financial activities Measuring the financial activities Getting the results from such activities And communicating these results
Accounting
The Art of interpreting, measuring and communicating the results of financial activities.
Accounting
Is a process That create Useful Financial information For its users
(basic purpose of Accounting)
The Purpose of Accounting
The basic purpose of Accounting is to provide information to decision makers that is useful in making economic decisions.
Accounting Information needed by:
Management
Investors Creditors Government Agencies Researchers Labor Etc
Internal
External
Types of Accounting
Financial AccountingGeneral Purpose (Profit, loss, assets, obligation etc)
Management AccountingHelps in Planning and Control
Tax AccountingHelps in preparation of Income Tax Return etc
Economic Activities
Human Activities
Non-Economic Activities Economic Activities
Profession Business
Functions of Accounting System
In every Accounting System, the economic activities of the organization are Recoded in the books of accounts.
Next, the recorded data are Classified in the system to accumulate sub-total for various types of economic activities.
Finally, the information is Summarized in Accounting Repots i.e. designed to meet the information needs of the various decision makers.
Business
Business is a legal financial activity, for which on specific education is required and in which return is also not definite
Financial Statements
A set of Financial Statements consist of four related accounting reports that summarizes the financial resources, obligations, profitability and cash transaction of a business in the few pages
1. Balance Sheet: Financial resources and obligations2. Income Statement: Profitability of business
3. Statement of Owner’s Equity: Obligation of business to Owner
4. Statement of Cash Flow: Cash Transaction of a Business.
Distinguish b/w Accounting and Book-keeping
Book-keeping
It refers to the daily operation of an accounting system i.e. Recording and classifying
It requires little skill of accounting
Accounting
It refers to the preparation of Accounting system
Recording and classifying the transactions
Summarize the data Prepare the Final Reports It requires Professional
Judgment and high skill of accountancy
GAAP: Generally Accepted Accounting Principles
GAAP are the “ground rules” for financial reporting.
Generally Accepted Accounting Principles provide the general frame work that determines;
1. What information is to be included in the financial statements? &
2. How these information are to be presented ?
Basic Accounting Concepts
1. Cost Principle
2. Objectivity Principle
3. Monetary Principle
4. Business Entity Concept
Accounting Equation
Assets = Equities
Assets = Owner’s Equity + Liabilities
This is the characteristic of the Balance Sheet that Assets always be equal to Liabilities plus Owner’s Equity
Example of Accounting Equation
Mr. “A” is started the business by investing $ 100,000…
Assets = O/Equity + Liabilities
100,000 = 100,000 + 0
Example of Accounting Equation
Further the business borrows a loan from the bank of $ 40,000
Assets = O/Equity + Liabilities
100,000 = 100,000 + 0
40,000 = 0 + 40,000
----------------------------------------------------
140,000 = 100,000 + 40,000
________________________________
Accounting Equation
Assets = O/Equity + Liabilities
$ 80,000 = $ 60,000 + $ ?
80,000
-60,000
20,000
End of Chapter 1End of Chapter 1
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