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Principles of AccountingPrinciples of Accounting

With:With:SHAHI YAR KHANSHAHI YAR KHAN

Basic Accounting

Recommended BookAccounting:The basis for business decisionsEleventh EditionBy: 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 andcommunicating the results of thebusiness transactions.

Accounting also called the language ofbusiness

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 toprovide information to decision makers thatis 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 relatedaccounting reports that summarizes the financialresources, obligations, profitability and cashtransaction 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 businessto Owner

4. Statement of Cash Flow: Cash Transaction of aBusiness.

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 Principle2. Objectivity Principle3. Monetary Principle 4. Business Entity Concept

Accounting Equation

Assets = EquitiesAssets = 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 + Liabilities100,000 = 100,000 + 0

Example of Accounting Equation

Further the business borrows a loan from the bank of $ 40,000

Assets = O/Equity + Liabilities100,000 = 100,000 + 0

40,000 = 0 + 40,000----------------------------------------------------

140,000 = 100,000 + 40,000________________________________

Accounting Equation

Assets = O/Equity + Liabilities$ 80,000 = $ 60,000 + $ ?

80,000-60,00020,000

End of Chapter 1End of Chapter 1

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