The word Accounting means: “ to count and report”

Historical Origin of Accounting: Man started to count his resources thousands of years ago. Initially, he was interested in counting how many sheep he had. Then he wanted to know how many men he had in his army. After that he was interested in counting his money, houses, property, etc. Gradually, better accounting methods were introduced to help manage the large assets owned by corporations. Thus, was the birth of modern day ACCOUNTING.

Accounting - Introduction Definitions of accounting: “The process of identifying, measuring, & communicating economic information to help people in making decisions and take appropriate action” “The process of recording and reporting business transactions of a monetary nature is called accounting.” So basically accounting is the language which uses alphabets of money to tell us the position of the business.

Accounting information helps: 1.The company management to know what are the strengths and weakness of the business and take appropriate action. 2. Creditors/lenders to think wisely before giving loans to the business. 3. Investors to understand the business position. and future prospects before investing their money with the company. 4. Government and Tax authorities to know how much the business is earning and the tax liability.

The Accounting Cycle : Every year the accounting department of a business follows a set of steps to record the business transactions. The set of steps is called the accounting cycle. In this semester we will focus on first 3 steps of this accounting cycle: 1. Journalising 2. Posting 3. Making a trial balance and using it to make the Financial statements of the business.

What is Journalising ? Journalising is the first step in the accounting cycle of a business. It means entering every business transaction in the Journal alongwith the date. The Journal is a register where every accounting entry is made as soon as it happens.

What is a voucher ? Whenever a business pays money to somebody or does any other monetary transactions there are documents that are evidence of such event. Such a document is called a voucher. For example, the cashier pays 100 AFs for transport expenses to the truck-operator and receives a receipt from the truck-operator. This receipt is a voucher for this transaction which proves that money was spent for transport expenses. Every accounting entry in the Journal should have a supporting voucher. If there is no voucher, the clerk making the entry could be asked to prove that the event actually happened.

An example of a Journal entry; For example on 09/08/08, $ 1,000 Cash was spent to purchase a computer for the business. DateExplanationRef.DebitCredit 09/08/08Computer a/c Cash a/c Computer purchased for the business $ 1000 The reference field usually states the account number of the specific account in the ledger (or the accounting software) of the business.

What is Posting ? Posting is the process of transferring of entries from the journal to the different accounts kept by the business. Posting is the second step in the accounting cycle of a business. The book (or the accounting software) in which all the accounts of the company are kept is called the Ledger.

Structure of an account in the records: Following is an example of a T account of Mr. Rahim: Dr.Cr. Rahim’s A/c

Rahim’s account with some information in it: Dr.Cr. Rahim’s A/c Cash Sales Total

The 2 sides of an account: 1.The Dr. side (debit side) is on left of the account. 2.The Cr. Side (credit side) is on right of the account. 3.The total of both sides should match each other. 4.The Dr. & Cr. Sides are the foundation of the Double Entry Book-keeping process.

The 3 types of Accounts: 1.Personal Account – for example, the account of Mr. Rahim. A personal account can be an asset or a liability. For example, personal account of a debitor is an asset while personal account of a creditor is a liability. 2.Real Account – This is an account of resources of a business. For example, cash account, inventory account, machine account. 3. Nominal Account – This is an income account or expense account. For example, sales account, salary account, interest expense account, etc.

The 3 Golden rules of Accounting: 1.Debit what comes in and Credit what goes out. For example, cash paid to purchase computer. Enter amount on debit side of computer account and on credit side of cash account. 2. Debit all expenses and Credit all incomes. For example, cash paid to meet rent expense. Enter amount on debit side of rent- expense account and on credit side of cash account. Another example, if cash received from sales of products. Enter amount on credit side of sales account and debit side of cash account. 3. Debit the receiver and Credit the giver. For example, cash paid to Rahim. Debit Rahim’s account and credit cash account with the amount.

Important definitions in accounting: 1. Assets : Assets are economic resources that are owned by the business and are expected to benefit future operations. For example, a machine is an asset for a company. 2 Current Assets : Cash and other assets that are converted to cash within the normal working cycle (operating cycle) of the business are called current assets. For example, goods are current assets. 3. Operating cycle – The normal period of time in which the company uses cash to get raw-materials and sells the final- goods to get revenue is called 1 operating cycle of the business. 4. Non- current assets – Assets of a business that are used for more than 1 operating cycle are called non-current assets. For example, a machine is a non-current asset.

Important definitions in accounting: (continued) 5. Other assets : these are the assets that the business does not use in the normal operations. For example, if the business has some property (a house, gold, etc.), it will considered as other assets of the business. 6. Liabilities : They are debts or loans the business has to re-pay to outside parties. For example, the loan taken by the business from a bank is a liability on the business. The word liability means responsibility to do something. 7. Current liability – These are debts which the business has to repay within one year (= 12 months). For example, money to be paid to suppliers of raw-materials is a current liability of the business.

Important definitions in accounting: (continued) 8. Non-current liability - These are debts which the business has to repay in a longer period of time (more than 12 months). For example, loan taken from a bank which needs to be repaid in the next 5 years. 9. Capital (or Owners’ equity) – These are the funds (money) put into the business by the owners of the business. For example, if Ali started his shop by spending 20,000 AFs on it, this amount shall be shown as capital in the accounts of the business (the shop). 10. Debitors – People (or organisations) who owe money to the business are the called the debitors of the business. For example, a customer buys goods and promises to pay later.

Important definitions in accounting: (continued) Debitors are the asset of the business as they shall pay money to the business in future. 11. Creditors – People (or organisations) to whom the business has to pay money are called the creditors of the business. For example, the bank which gave loan to the business is the creditor of the business. Creditors are the liabilities of the business. 12. Revenue – Money obtained by selling goods and service of the business is called revenue. For example, a company sells computers and gets revenue. Revenue is an additional to the total assets of the business.

Important definitions in accounting: (continued) 13. Expense – Money spent in the normal operations of the business to earn profits is called an expense. For example, money paid as rent of the factory is an expense. Expense is a deduction from the assets of the business. 14. Financial year – the accounting year for which the business keeps its accounts. Every financial year is of 12 months. A financial year can start from any month of the year depending on the need of the business. But some countries have only one financial year. For example, India has its financial year from April to March. A financial year is also called a fiscal year.

Important definitions in accounting: (continued) 15. Financial statements – The 3 reports made at the end of every financial year are called financial statements. These 3 reports are “ Income statement Balance sheet Statement of retained earnings of the business