INTRODUCTION TO THE SYSTEM OF ACCOUNTING

THE SYSTEM OF ACCOUNTING
Volume – I
YEAR 2015
WRITTEN BY:
SYED AQEEL RAZA

THE SYSTEM OF ACCOUNTING
VOLIUM – I
Written by;
Syed Aqeel Raza
<THE SYSTEM OF ACCOUNTING < VOLIUM 1< SYED AQEEL RAZA<aqeelraza@live.com>

FATHER OF ACCOUNTING
Fra Luca Bartolomeo de Pacioli (sometimes Paccioli or Paciolo;
1445–1517) was an Italian mathematician, Franciscan friar,
collaborator with Leonardo da Vinci, and seminal contributor to
the field now known as accounting. He is referred to as the Father
of Accounting and Bookkeeping (he was the first to publish a work
on double-entry system of book-keeping). He was also
called Luca di Borgo after his birthplace, Borgo
Sansepolcro, Tuscany.

P R E F A C E
First and foremost, I want thank to Almighty Allah who attached
me to the Door-of-knowledge and encouraged me to serve
mankind by spreading education which made the human
supreme in creation.
The object of writing this book “The System of Accounting” is to
provide basic accounting concept in easy way of styles and
illustrations makes readers, students and business executives
acquainted with the concept of accounting.
This book is primarily written for the use of beginners of this
subject and for those who wish to have knowledge of it to keep
eyes on their finance applied in business.
At last in short, I shall say that this is my a little contribution
based on your suggestions.
I tried my best to avoid errors, but errors may be being human then
please notify and suggest anything for improvement with liberty on my
email addresses aqeelraza97@yahoo.com.

F O R W A R D
I am in great pleasure of presenting my Book “The
System of Accounting Volume 1 which I think, will
be proved different others because of the reason
that I tried utmost to select suitable words with
Urdu translation where necessary to make it
comprehensive to readers and the students of
commerce.
I hope my a little struggle for this noble cause will
be admirable with suggestions for improvement.

TABLE OF CONTENTS
LEVEL - I
PAGE
# LEVEL I
PAGE
#
INTRODUCTION INTRODUCTION
Meaning & Difinition NATURE OF ACCOUNTS 24
ACCOUNTING 1 ASSETS 25
BOOK KEEPING 2 Currrent Assets 26
BUSINESS 3 Fixed Assets 27
Business Terminology…..Service 4 Tangible Assets 28
Business Terminology…..Trading 5 Prepaid & Deffered Assets 29
Business Terminology…..Manufacturing 6 Intangible Assets 30
BUSINESS ORGANIZATIONS 7 LIABILITIES 31
SOLE OWNERSHIP 8 Short Term Liabilities 32
PARTNERSHIP 9 Long Term Liabilities 33
COMPANIES/CORPORATIONS EQUITIES/PROPRIETORSHIP 34
- Joint Stock Companies 10 Internal Equities 35
- Pvt. Limited Companies 11 External Equities 36
- Public Limited Companies 12 Capital 37
- Multinational Companies 13 Drawing 38
- State Cop./Nationalized Industries. 14 INCOME/REVNUE 39
FRANCHISES 15 Accrual Basis Accounting 40
CLASSIFICATION OF ACCOUNTS 16 Cash Basis Account 40
Real Accounts 16 Sale 41
Personal Accounts 16 Purchases 42
Nominal Accounts 16 EXPENSES 43
TRANSACTIONS 17 Direct Expenses 44
Cash Transaction 18 Indirect Expenses 45
Credit Transaction 19 ABBRIVATION USED IN ACCOUNTING 46-47
ENTRY 20
Single Entry 21 RULES FOR TRANSACTIONS 48
Double Entry 22
BUSINESS ENTITY 23

INTRODUCTION 1
ACCOUNTING I
Accounting is the “language of business “and the art
of recording, summarizing and analyzing business
information in a significant manner in terms of
money, transactions and events. The accounting
provides eyes and ears for management and is the
key of success of every business. The most common
accounting reports are called financial statement.
Translation

INTRODUCTION 2
BOOK-KEEPING
Book-Keeping is defined to record business dealings or
transactions under systematic prescribed procedures and
presentation in shape of money or money’s worth
instruments enables Accountant to extract complete
financial picture of a business.
Book-Keeping is the source of ascertain the working
results from the written records of transactions. It helps
and guides the management of the business to
determine their policies and to make decisions in
business operation.
Translation

INTRODUCTION 3
BUSINESS
Business means profit in term of money or money’s
worth thing through the satisfaction of human
wants under classification of Service, Trading and
Manufacturing. Any activity undertaken under
legal frame of work with the aiming of earning
profit is come under business classification such as
hawker, shopkeeper, wholesaler, dealer,
manufacturer, repair centre, banker etc.
.
Translation

INTRODUCTION 4
SERVICE
The term of business “service” describes work that
supports a business but does not produce tangible
commodity. In economics, a service is an intangible
commodity. The business engaged rendering their skills
or mechanical/technical services to his customers such as
dry cleaner, Machinery repairers, accountants,
advocates, auditors, doctors etc.
Translation

INTRODUCTION 5
Trading
The term of business “trading” describes the
business engaged in purchasing and selling of
commodities usually defined two kinds of business
wholesale or import & export who maintain a stock
and deliver their products to shops or large end
customers.
. Translation

INTRODUCTION 6
Manufacturing
The term of business “manufacturing” describes the
business engaged in producing merchandise most
commonly applied to industrial production in which
raw materials are transformed into finished goods on
a large scale. Such finished goods may be used for
other manufacturing concern or sold to wholesalers,
wholesalers in turn sell them to retailers and retailers
sell to end users.
.

INTRODUCTION 7
BUSINESS ORGANIZATION
There is need of an organization for operating of different nature of business and
job. A business organization may be defined as single individual or group of
persons having talent of different natures in order to provide goods and services to
make profit.
Actually in business, the sense of organization is a business unit operated by one
person, two or more persons making firm, concern, enterprise, company.
The main types of business organization are;
a) Sole Ownership
b) Partnership
c) Companies/Corporations
d) Franchises
Translation

INTRODUCTION 8
SOLE OWNERSHIP
This is a business owned by one person who
provides capital for the business and usually directs
and supervises its activities. The owner of the
firm/organization is known is “sole trader” who is
responsible for all losses and profits of the business.
Translation

INTRODUCTION 9
PARTNERSHIP
A partnership in business occurs when two or more
persons carry on business in common with a view to make
profit and every investor is called “partner.” The firm
itself is called “partnership. The partners usually provide
the capital and direct and supervise the activities of the
business or by anyone who will act for all or by an
employee. The investment or working of each partner may
be equal or not equal on the basis of profit and loss sharing ratio.
Translation

INTRODUCTION 10
COMPANY/CORPORATION
JOINT STOCK COAMPANIES
The joint stock company is an organization, whose capital is
contributed by several persons who owned under Companies
Act 1984. The investors are called “Share holders/Stock
holders.”
Translation
<THE SYSTEM OF ACCOUNTING < VOLIUM 1< SYED AQEEL RAZA<aqeelraza@live.com

INTRODUCTION 11
COMPANY/CORPORATION
PRIVATE LIMITED
The Private Limited Company consists of not less than two
persons and more than fifty persons. A private company must
have the word limited (Ltd.) included in its name. The shares in
this type of company cannot be offered to the public for sale.
The company is usually owned and operated by family
members.
Translation

INTRODUCTION 12
PUBLIC LIMITED
The Public Limited Company consist minimum number of
persons is two. However, there is no limit as to the number of
persons that can be in a public company. It must have the word
Public Limited Company (PLC) at the end of its name. The
company can offer shares and debentures for sale to the general
public.
Translation

INTRODUCTION 13
MULTINATIONAL CORPORATION
A multinational firm is one which owns controls and
operates enterprises in several countries in order to
increase market share and improve overall profits.
The parent company makes all the decisions which
are carried out by the management of the subsidiary
companies.
Translation
<SYSTEM OF ACCOUNTING < VOLUME 1< SYED AQEEL RAZA<aqeelraza@live.com>

INTRODUCTION 14
STATE CORPORATION/NATIONALISED INDUSTIRES
The State Corporation or nationalized industries are
owned, controlled and managed by the government
or state. The main of the public corporation is to
provide specific goods and/or services that meet the
need of the country, at a reasonable price.
Translation
<SYSTEM OF ACCOUNTING < VOLUME 1< SYED AQEEL RAZA<aqeelraza@live.com>

INTRODUCTION 15
FRANCHISES
A franchise is a right sold by one persons or firm called a franchisor. It is another
form of cooperation between a big firm and a sole trader. In franchising, a well-
known company allows someone to buy the right to use their trade names.
The potential franchisee pays to use the name, products or services of the major
company which receives a lump sum and a share of the profits of the business
sometimes called royalties.
The franchisee receives the majority of profits, but must also meet most of any
losses. In addition to allowing use of their name, products, techniques or services,
franchisors usually provide an extensive marketing back-up in return for the money
they receive.
Translation
<THE SYSTEM OF ACCOUNTING < VOLUME 1< SYED AQEEL RAZA<aqeelraza@live.com>

INTRODUCTION 16
CLASSIFICATION OF ACCOUNT
There are mainly three types of accounts.
1. Real Accounts
Accounts related to assets (tangible/touchable or intangible/none touchable) come under the category
of real account e.g. land, furniture, machinery, goodwill, patents etc. are real accounts.
2. Personal Accounts.
Accounts related to persons or organizations are called personal account.
3. Nominal Accounts
The nominal accounts represent losses, incomes, gains.
Translation

INTRODUCTION 17
TRANSACTIONS
Any exchange of values is called “transaction “or
the process of doing business with another person,
company, etc. sub divided into cash transaction and
credit transaction.
Translation

INTRODUCTION 18
Cash Transactions:
The transaction involves exchange of cash on the spot on receipt or
payment is called cash transaction as;
- Purchase of Merchandise, Land, Building, Furniture etc. on cash.
- Sold Merchandise, Furniture, Building, Equipment etc. on cash.
- Services rendered on cash.
- Received cash.
Translation

INTRODUCTION 19
Credit Transactions:
The transaction in which exchange valves involve but cash
payment of receipt is not made immediately and to be made later
is called Credit Transactions as;
- Purchase of Merchandise, Land, Building,
Furniture etc. on credit.
- Sold Merchandise, Furniture, Building,
Equipment etc. on credit.
- Services rendered on credit.
- Paid cash
Translation

INTRODUCTION 20
ENTRY
The posting of a business transaction in a book with the sequence of
date and with two kinds of changes “increase or decrease” known as
an entry. A written record of a commercial transaction is known as
“entry.”
Translation

INTRODUCTION 21
SINGLE ENTRY
A single entry book keeping system is a method of one side
accounting entry relating with cash receipt and payment, bank
receipt and payment and the accounts receivable and payable. It
does not involve accounting equation “Assets=Liabilities Owner’s
equity.”
This system of entry is used in small business where the business
transactions are low in volume and uncomplicated.
Translation

INTRODUCTION 22
DOUBEL ENTRY
The double entry system in book keeping means that every business
transaction involves two accounts (or more).
The double entry also allows for the accounting equation
“Assets=Liabilities Owner’s equity” to always be in balance
Another aspect of double entry is that the amounts entered into
general ledger accounts as debits must be equal to the amounts
entered as credits.
Translation

INTRODUCTION 23
BUSINESS ENTITY
Business entity means a business, division, unit or other aspect of
an organization. For example, a company with different divisions
of the business might define each division as an entity. Also, each
department or team within an organization might be its own entity.
A product can be an entity, as well as a company's investments or
assets.
The owner and the business are two separate entities such as
owner as capital and the accounts, maintained by an accountant
is related with him and business is other.
Translation

INTRODUCTION 24
NATURE OF ACCOUNT
The Account is a ledger record in a summarized form of all the
transactions showing debit and credit or increase or decrease in an
item based on assets, liabilities, proprietorship, revenues or
expenses. Each account has a separate name distinguish it from
other account.
Some examples of accounting element;
The value of furniture purchased for the business identified by Furniture a/c.
The amount is receivable from Mr. X identified by Mr. X a/c.
The amount of Capital invested in the business identified by Capital a/c.
The amount of expense incurred on account of salaries identified by Salaries a/c.
The value of sales made in business identified by Sales A/c.
The amount is available in the bank identified by Bank a/c.
The list of accounts can be endless or according to transaction or event.

INTRODUCTION 25
ASSETS
Actually some Resources or things such as merchandise, land, building, office
equipment, cash etc. are needed to run any business called Assets.
Any item of economic value convertible in cash owned by an individual or
company is an asset equal Liabilities + Proprietorship under following
categories.
- Long-term/Non-current/tangible assets (Land, building, plant,
equipment)
- Prepaid and deferred assets (expenditures for future costs such as -
insurance, rent, interest)
- Intangible Assets (Trademarks, patents, copyrights, goodwill)
Translation

INTRODUCTION 26
CURRENT/LIQUID/MOVEABLE ASSETS
An asset such as receivable, inventory, cash, securities,
prepaid expenses and other expenses that could be
converted in cash in less than one year is current asset
or circulation asset.
Translation

INTRODUCTION 27
FIXED/NON CURRENT/IMMOVABLE ASSETS
An Asset such as land, building, equipment,
machinery, vehicles, and other such items enable
owner to carry on its operations. In accounting, fixed
asset does not necessarily mean immovable, any asset
expected to last, or be in use; more than one year is
considered as fixed asset. These assets are shown at
their book value (purchase price less depreciation).
Translation
INTRODUCTION 28

TANGIBLE ASSETS
Tangible Assets or touchable assets are cash, equipment, machinery, plant,
property and anything that has long term physical existence or is acquired for
use in the operations of the business and not for sale to customers. They can
be used as collateral to raise loans, and can be more readily sold to raise cash
in emergencies.
Translation
INTRODUCTION 29

PREPAID AND DEFFERED ASSETS
Prepaid recurring expenses such as insurance, interest
or rent carried forward as an asset under the
associated service of benefit is received called deferred
assets.
Translation
INTRODUCTION 30

INTANGIBLE ASSETS
Intangible assets are the long term resources of an entity but have
no physical existence such as trademarks, patents, copyrights,
goodwill. They derive their value from intellectual or legal rights. In
contrast to tangible assets, intangible assets cannot be destroyed by
fire, hurricane, or other accidents or disasters and can help build
back destroy tangible assets.
Translation
INTRODUCTION 31

LIABILITIES
Liabilities mean the claims of suppliers on account of
purchases for business operation under head of
account “A/c Payable with individual or company
names.
Translation

INTRODUCTION 32
Short-term/Current Liabilities
In accounting, current liabilities are often understood
as all liabilities of the business that are to be settled in
cash with the fiscal year.
Translation
INTRODUCTION 33

Long Term Liabilities
Long term liabilities are liabilities with a future benefit of over one
year such as notes payable that mature longer than one year.
The Examples of long-term liabilities are debentures, mortgage,
loans and other bank loans.
Long –term liabilities are a way to show that you have to pay
something off in a time period longer than one year.
Translation
INTRODUCTION 34

EQUITIES
Equity is the ownership or investor’s interest on values of assets or
resources of a business. After liabilities have been accounted for,
the positive remainder is deemed the owners' interest in the
business.
Assets are the resources owned by business and equities are the
sources from which those assets have been acquired.
There are two types of equities.
1- Internal Equities
2- External Equities
Translation
INTRODUCTION 35

EQUITIES
INTERNAL EQUITIES
The claim or interest/income of owner and
investor in the assets of the business to the
amount invested is known as “Capital”,
Proprietorship”, “Owner’s equities” or “Internal
equities.”
Translation

INTRODUCTION 36
EQUITIES
EXTERNAL EQUITIES
The claim of suppliers or loan of institutions from the
business assets are external equities called
liabilities, owner’s equity or external equities.
Translation

INTRODUCTION 37
CAPITAL
Cash or goods used in business to generate income by
investment of owner or partner are known Capital. In case of
public limited company, who has several investors and each
investor has shares of the company called share capital.
.
Translation

INTRODUCTION 38
DRAWING
The proprietor or partner of the business withdraws cash or
commodities for his personal use are known “Drawings. In case of
limited companies/corporations, no one can withdraw any value
from the business.
.
Translation

INTRODUCTION 39
REVENUE
Revenue is the amount of money that is brought into a company by its
business activities during a specific period, including discounts and
deductions of return merchandise. It is “top line” or “gross income”
from which costs are subtracted to determine net income.
In general, a transaction between two parties where the buyer
received goods, service and/or assets in exchange of money is sale.
In other words Revenue is also known as sales.
Translation

INTRODUCTION 40
REVENUE
ACCRUAL OR CASH REVENUE
Accrual basis is a method of recording accounting transactions when
revenue earned and expenses incurred. The accrual basis Revenue
requires the use of allowances for sales returns, bad debts, and
inventory obsolescence, which are in advance of such items actually
occurring.
The Alternative method of recording revenue transactions is cash
basis.
Translation

INTRODUCTION 41
SALE
A sale is the exchange of a commodity for money or service in return for money
or the action of selling something. If sale is made on cash basis known as “cash
sales” and sales under a certain understanding, on credit, known “credit sales.”
Sales Return & Allowance
When a consumer is not satisfied with a product and expects to receive the full
amount paid for the product known as Sales return or if the seller gets the claim
from the consumer about the defect, damage etc., the seller allows some rebate
in price of such goods it is known as Sales Allowance.
Sales Discount
Sales discount is a reduction in the price of a product or service that is offered
by the seller, in exchange for early payment by the buyer or to increase sales.
Translation

INTRODUCTION 42
PURCHASES
The activity of acquiring goods or services for business is purchases.
The purchases may be made on cash basis, if payment made
immediately, “called cash” purchases and later on called “credit
purchases.”
If the any item of purchased returns due to certain reasons known as
Purchase Return. If the item is not according to sample or other
reasons, the supplier or seller cut short the price of such item known
as Purchase Allowance.
Purchase Discount is the rebate amount allowed on purchase by the
seller.
Translation

INTRODUCTION 43
EXPENSES
An expense in accounting is the money spent or cost incurred in any entity’s efforts to
generate revenue. Expenses represent the cost of doing business in the sum total of the
activities directed towards making a profit.
Expenses associated with the main activity of the business are referred to as operating
expenses. Expenses associated with a peripheral activity are non-operating or other
expenses.
Operating expenses are often subdivided into categories such as fixed and variable expenses
or into selling, general and administrative expenses.
Funds used to acquire or upgrade physical assets such as building and machinery also
called capital expenses.
Profit = revenue – expenses
Expenses are mainly divided into two categories:-
1- Direct Expenses 2- Indirect expenses
Translation

INTRODUCTION 44
DIRECT EXPENSES
Direct expenses are expenses that are directly related to the creation
of a product or service or purchase of goods such as Purchase price
of goods, carriage on goods purchased, wages on goods, insurance of
goods in transit, custom duty, freight etc.
Translation

INTRODUCTION 45
INDIRECT EXPENSES
Indirect expenses are expenses that have no relationship with
purchase of goods. Examples of indirect expenses include rent of
building, salaries to employees, legal charges, insurance of building,
depreciation, printing charges and so on.
Translation

INTRODUCTION 46
ABBREVIATION USED IN ACCOUNTING
A/c Account
B/d Brought down
B/F Brought forward
C/D carried down
C/F carry forward
Dr. Debit
Cr. Credit

INTRODUCTION 47
ABBREVIATION USED IN ACCOUNTING
ALPRE Assets, liabilities, proprietorship, revenue, expenses
JV Journal Voucher
Fol. Folio/page
Inv. Invoice
Memo Memorandum
N.L. Nominal Ledger
P.C.B. Petty Cash Book
C.B. Cash Book
P.D.B. Purchase Day Book
S.D.B. Sales Day Book
P&L Profit & Loss
S.L. Sales Ledger

INTRODUCTION 48
RULES FOR TRANSACTIONS
1 ASSETS A INCREASES DEBIT DECREASES CREDIT
2 LIABILITIES L DECREASES DEBIT INCREASES CREDIT
3 PROPRIETORSHIP P DECREASES DEBIT INCREASES CREDIT
4 REVENUE R DECREASES DEBIT INCREASES CREDIT
5 EXPENSES E INCREASES DEBIT DECREASES CREDIT
= ALPRE ASSETS= LIABILITIES + PROPRIETORSHIP
ASSETS = EQUIUTIES
RESOURCES = SOURCES

INTRODUCTION TO THE SYSTEM OF ACCOUNTING

INTRODUCTION TO THE SYSTEM OF ACCOUNTING

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