Lecture 2 financial accounting

Basics of Accounting

Debit It signifies the receiving of benefit. In simple words it is the

left hand side. DEBIT is a record of an indebtedness; specifically an entry on the left-hand side of an account constituting an addition to an expense or asset account or a deduction from a revenue, net worth, or liability account.

Credit It signifies the providing of a benefit. In simple words it

is the right hand side. CREDIT, in accounting, is an accounting entry system that either decreases assets or increases liabilities; in general, it is an arrangement for deferred payment for goods and services.

Capital

No business can run without money or resources being invested therein.

Whatever money or resources from ones’ own pocket are put in a business is referred to as CAPITAL.

Capital is the investment of the Owner in the business.

This capital or investment must earn a return or profit on its use even if it is coming out of ones’ pocket.

This return is also known as PROFIT. So no capital should be without a profit or a return

CapitalMr. Rizwan Invests Rs. 200,000 to commence

his business.???On 1st January, 1991 A Salman started

business with a capital of 250000 rs.???? On 1st January, 1991 A Salma started

business with the investment of 250000 rs.????

AssetsAssets are the properties and possessions of

the business to pay in future. Can be amount payable for material purchased, expenses etc.

Properties and possessions can be of two types: Tangible Assets that have physical existence Intangible Assets that have no physical

existence

AssetsCurrent AssetsFix Assets

AssetsPurchase building for cash80000Purchase Furniture for cash 60000Purchase goods for cash 65000Purchase equipment for cash 40000Goods purchases for cash 60000Purchase goods from Rehman 40000Sale goods to Rehman 36000Cash received from Rehman 36000

Purchases

Goods purchased are called purchases. When the goods are purchased for the cash they are the called cash purchases but if they are purchased for which payment will have to made at some future date it is known as credit purchase.

Sales Goods sold are called sales. When goods are

sold for cash they are called cash sales, but when they are sold without having received payment they are credit sales.

Liabilities Liabilities are the debts and obligations of the

business. Liability is the obligation of the business to provide a benefit or asset on a future date.

Asset is a right to receive and liability is an obligation to pay, therefore, these are opposite to each other.

LiabilitiesHe borrows Rs 100,000 from Mr. Saleem. He pays 100000 to Mr. Saleem.

ExpensesExpenses are the costs incurred to earn

revenue. In order to earn revenue, one has to spend

some money such as the cost of goods that are sold or the money paid to the individuals who are providing services plus other costs. These costs that are incurred spent by the business to earn the revenue are the expenses of the business.

ExpensePaid Electricity BillPaid salary to Usman.Paid advertising expense,

RevenueRevenue means any type of income directly

or indirectly of the business.

RevenueSold goods for cash 18000Cash received against rent 5000Interest received from bank 4000

DrawingThe cash or goods taken away by the

proprietor from the business for his personal use are called his drawing.

Cash withdrawn by the owner (Mr. Rizwan) 6000 Rs

Good taken by the Proprietor 2000rs.

Debtor (Account Receivable)A person who owes money to another is a

debtor.When we say that we owe Mr. Rahim 200rs,

which means that we have received from Mr. Rahim 200rs, which we have to repay.

We stand as debtor to Mr. Rahim for 200 Rs.It is also termed as Account Receivable.

CreditorA person who pays out something or to whom

money is owing as a creditor. It is also termed as Account Payable.

EquityA claim which can be enforced against the

assets of the firm is called equity,In other words, the rights to proprietors are

called equities.Equity are of two typesThe Right of Creditors

The equities of creditors represent debts of the business and are called liabilities.

The Right of OwnersThe equities of the owners is called capital,

proprietorship or owner’s equity.

QuestionJan 01 Mr. Salman started his Business with

cash Investment 20000 Rs.05 Purchased merchandise (goods) for cash

500 Rs.06 Sold Merchandise on cash 200.08 Purchase Furniture on cash 5000.10 Sold Merchandise on credit to Rashid 3000.12 Paid Salaries 500 in cash14 Received Cash from Rashid 1000rs as part

payment.