OBJECTS ACCOUNTING

OBJECTS CNF ACCOUNTING

[l. Financial information is necessary, in order to run a business in an efficient manner. Reliable

information will be available only through keeping proper books of accounts.

Proper accounting is essential, if money is to be borrowed for the purpose of business. The tender will only agree to lend money when he is satisfied as to the solvency of the borrower. Information available from books of accounts is the means of measuring such solvency.

[3. Cash in hand can be verified and any defalcation can be detected, if proper books of accounts are maintained.

4. Payment of sales tax and income tax is only possible if books of accounts are maintained.

In case of any dispute, books of accounts can be produced hi the court of law as a documentary evidence.

Government fixes up fair prices, formulates industrial policy, prepares.economic plans, decides import-export quotas and does many other functions on the basis of accounting information available from books of accounts.

Proper Accounts

It is all the more necessary for an organisation or a concern to keep proper accounts. At the end e the year the true result of the economic activities of a concern must be made available otherwise it will nc be possible to run the concern. In case of a business concern the profit or loss at the end of a year must b ascertained, because, the amount of profit must be adequate in relation to that of investment made in th business. If it is not so or if there is a loss, it is an indication of some defects existing somewhere in ft management of the business. All such defects need to be detected and analysed and appropriate measure taken for their, rectification, but it is only possible, if proper books of accounts are maintained in th business concern. So, the importance of book-keeping to a business is the same as that of fresh air to > man to exist. Without book-keeping records a business would meet death, though not instantly, but m \ short time.

; Moreover, if proper books of accounts are not kept in a business, the amount of profit cannot I ascertained and it.will not be possible to distribute the profit among the owners of the business. The incon tax dues to the Government cannot also be paid. In the absence of books of accounts misuse or defalcatia of money will remain undetected. The owner and other parties interested will not. be able to have aq information about the condition of the business. For the same reason in the case of non-trading concert like, schools, clubs, colleges, universities, hospitals etc. the need for accounting is universally recognised. . Thus we see that the necessity of keeping accounts is not only confined to business concerns but is also useful for ail classes and grades of people and organisations.

SHORT QUESTIONS

short answers of the following questions
-What is meant by "Transaction**?... „ 21
Differentiate between "External transaction" & Internal transaction**?,..... 23
What is meant by 'Taper transaction"?..... , 23
What do you meant by "Monetary Events" & "Non-Monetary Events" 21
Differentiate between "Quantitative changes'* & Qualitative changes"?.... 22
What are the three basic elements of accounting equation? 24
Liabilities of a business Rs. 1,50,000 which are 0.25 of proprietorship what will be the amount
of: .; ™:......... 24,
'(a) Assets . (b) Capital
• Write a transaction that will: 30
Increase a liability and increase an asset?
Increase an asset and increase Proprietorship?
Decrease an asset and increase an asset?
Decrease an asset and decrease in owner's equity?
Increase an asset and increase a liability?
• What will be the amount of capital if assets are amounting Rs. 50,000 and liabilities
Rs. 35,000 ; , ^ 24
• What are the rules for deciding whether a transaction is cash or credit?. «««..«... ...23
• . Distinguish between cash transaction and credit transaction. ~ «...*.! .22
Define the term "Equities". - 833
mpute the missing amount in each of the following cases; 24
Assets Liabilities Owner's equity
(i) 1,05,000 ? 70,000
(u) ? 35,000 90,000
(Hi) 75,500 40,200 ? \ J
(iv) 99,500 ? 50500
(v) ? 95,000 1,03,000
Ant: fti) L= 35,000; (u) A = 1.25,000; (in) O.E - 35.300; (iv) L * 49.000; (v)A * 1,98.000]
THEORETICAL QUESTIONS
What is a transaction in a business? How does it differ from an event? what are the features bf a
transaction?
What are different types of business transactions?
State with reasons which of the following events may be regarded as transaction Mr. Akram, a
trader;

Mr. Akram started business with Rs. 100,000
He bought furniture for Rs. 10,000 and opened a bank account with Rs. 30,000 .
He placed an order with Rehman & Sons for the. purchase of goods worth Rs. 15000.
He appointed Rizwan as accountant at a salary of Rs. 1500 per month
He bought goods for Rs. 5000
Ana:
4, 5.

He agreed to selj goods/or Rs. 10,000 jo Rashjji :
There was a theft of cash for Rs. 2000 in his business
He dismissed Riz wan from service
He paid Rizwan Rs. 5000 as compensation from his service
He withdrew cash of Rs. 2000 for his private use
{Transactions; 1,2,5,7,9,10]
What do you mean by an Accounting Equation?
Briefly describe the effects of various common transactions on accounting equation.
PROBLEMS
1. Show the affects of following transaction on Accounting Equation:
(i) Mr, Saleem started business with Goods Rs. 40,000 Building Rs. 100,000 & Rs. 110,000.
(B) Purchases goods on account for Rs. 30,000. {ii i) Sold goods on account for Rs. 40,000. (Iv) Cash of Rs. 20,000 deposited into bank. (v) Paid cash to supplier of goods Rs. 20,000. . (vi) Received cash from customers Rs. 30,000.
(vii) A part of building costing Rs. 30,000 was destroyed by fire. (vtti) He made additional invesdnent by cheque Ks. 24),(HM). (fa) Paid salaries Rs. 4,000 by cheque. (x) Goods returned to supplier amounting to Rs. 4,000. Ans: {Rs, 242,000],
2. Show the affects of following transactions on the Accounting Equation;
Mr. Naeem started business with cash Rs. 3,00,000
He purchased furniture for Rs. 15,000
'(c) He purchased goods worth Rs. 75,000 for cash
(d) He paw*>a^ good* worth R«.45,0«0 on credit
(«>' He bought office equipment for Rs. 22,500
(f) He sold goods for Rs. 45,000 costing Rs. 37,500
(g) He sold goods to Saleem for Rs. 30,000 costing Rs. 25,500 on credit basis
(b) He withdrew cash Rs.4,500 for his personal use
(I) He nude additions investment in cash Rs. 22,500 (j) Cash paid to creditors Rs. 37,500 (k) Cash received from Saleem Rs. 22,500 (I) He paid salaries Rs.4,500 (m) He paid rent of building Rs. 3,000. Ana: Rs< 330,000].
Transactions AND ACCOUNTING

SETTING UP A BRAND - NEW BUSINESS

Assume that Mr. Naveed decided to start a "shoes business" of his own, to belcnown as Naveed Company." The new business was started on 1st January, 2005, when Mr. Naveed invested Rs. in his business. Recall that the business entity is kept .separate from its owner.
The business unit has borrowed Rs. 5,00,000 from its owner. This is a first transaction of the It brought a double change in the financial position of the business-- an asset (cash) increased by ),OOG and a liability (owner's equity or capital) increased also by Rs. 5,00,000. In omer words, this is consisting of two elements;
The receipt of Rs. 500,000 cash
Supplied by the owner of the business.
ACTION NO. f
The initial accounting equation of the new business men appeared as follows;
Assets = iabjlil a + Owner's equity
Cash
Rs. 500.000
Nil
Capital Rt. 500.000
Equation.2
Mr. Naveed purchased a building for Rs. 2,00,000. This transaction brought two changes- cash decreased by Rs. 2,00,000 and Building (a new asset) increased by Rs.' 2,00,000. Now the equation
Assets
Cash -i- Building Ba. 300.000+ 200.000
Liabilities + Owner's equity
: Capital
Nil + Rs. 500.000
It may be noted that there is no change on the right side of the equation. Simply one asset (cash) converted into another asset (Building). The two sides of the equation remains equal.
COUMTDM EQUATION

BUSINESS TRANSACTIONS'UPON THE ACCOUNTING EQUATION

BUSINESS TRANSACTIONS 'UPON THE ACCOUNTING EQUATION
Recall that every business transaction brings about a double change in Ifae financial position of the s. The financial position of a business is represented by the accounting equation:
Assets s Liabilities + Owner's equity.
Regardless of whether a business 'grows or contracts this equality between the assets and the claims the assets is always maintained.. Any increase in the amount of total assets is necessarily lied by an equal increase on the other side of the equation, that is, by an increase in either the or the owner's equity. Any decrease in the amount of total assets is necessarily accompanied by an decrease in liabilities or owner's equity. Any expense incurred will decrease the owner's equity on one and decrease cash on the other side of the equation. Any revenue earned will increase the owner's on one side and increase assets on the other side.
The effect of transactions upon the accounting equation can best be illustrated by taking a brand-•business as an example:-

THE ACCOUNTING EQUATION

The three basic elements of accounting are assets, liabilities and owners' equity (capital). The assets represent the things of value that a business owns. The liabilities are me claims of the creditors against those assets. The owner's equity (capital) is the claim of the owner against those assets. Whatever is not claimed by uk creditors belongs to the owner. As a result, the total claims against the assets are always equal to the total assets. This equality between the assets and the liabilities and the owner's equity is expressed by the "accounting equation".
Assets * Liabilities + Owner's Equity.
The two sides of the accounting equation must always be equal because the rights to all the assets of a business are owned by someone. The creditors have a claim against the assets of a business until the liabilities have been paid. The owner has a claim against the remaining assets of the business. If no liabilities exist, then the owners' equity will equal to the total assets.
A. clear understanding of the accounting equation is essential, because most of accounting systems based on it The equation actually identifies the claims (or rights) against the assets held by a business. The two sides represent different versions of the same thing. The left side of the equation, assets, consists of the "resources" (properties) held by the business; the right side of the equation, equities (creditor's claim and owner's claim against the assets) consists of the "sources*1.
Resources Assets
= Sources
= Claims against assets
"The expression of the equality of mi entity's assets with the claims against them is referred to as the accounting equation,"
It should be remembered that the two sides of the equation are always equal because these two sides are merely two views of the same business resources. The assets side shows us "what resources" the business owns, the other side (liabilities and owner's equity) tells us "who supplied these resources'* to the business and how much each group supplied.
AND ACCOUNTING EQUATION

TRANSACTIONS AND ACCOUNTING EQUATION

TRANSACTIONS AND ACCOUNTING EQUATION
The main function of an accountant is to record properly the financial transactions of a business in the books of accounts and to ascertain its true result at the year end. Thus transaction is the tion of accounting - the first and formest element of accounting. In a word, it is the life and blood of ting. Hence the accountant must have a fair idea about the term "transaction."
In ordinary language "transaction" means exchange of something. But in Accounting it is used in a sense. If the financial position of a business concern changes on the happening of en event \ it measurable in terms of money, that event is regarded as a "transaction " in Accounting.
Or
A business event which can be measured in terms of money and which must be recorded i* r of account is called a "transaction ".
IT IS AN EVENT?
In ordinary language "Event" means anything that happens. Human life is fall of events. So many take place in the family and social life of a person. The events may be classified into two:
Monetary Events:
Events which are related with money, i.e. which change the financial position of a person are as "monetary events". For example, daily shopping, marriage ceremony, birthday anniversary, anniversary etc,
Non-Monetary Events:
Events which are not related with money i.e. which do not change the financial position of a person >wn as "non-monetary events". For example, winning a game, delivering a lecture in a meeting etc.
In business accounting only those events which change the/manciaj position of the business and t call tor accounting are recognised as "Events". In other words, all monetary events are regarded as tess transactions."
Remember, it is not that anything which- results in exchange of something will be regarded as action. On the other hand, something may be regarded as a transaction even though it involves no age. For example, Rehman sends a price-list to his customer, Akram. This involves exchange of price-sweet Rehman and Akram, yet it is not regarded as a transaction, because it is not measurable in of money and it does not change the financial position of both the persons. Again, suppose, goods Rs. 1000 are destroyed by fire. This does not involve any exchange, yet it is regarded as a* transaction, te it is measurable in terms of money and it changes me financial position of the business.
It must be noted that an event* although measurable in terms of money, may not be regarded as a on. For example, we receive an order for supply of goods worth Rs. 1000. Although it is able in terms of money, it is not regarded as 3 transaction, since it has not changed the financial 41. It will, however, be regard as transaction when the goods are supplied according to that order
It appears from the above discussion that the following two conditions must be satisfied in that an event may-be regarded as a transaction in Accounting;
The event must be measurable hi terms of money.
The financial position of the business must change on account of that event..
Features:
To. become a transaction an event must have the following features; 1. THERE MUST BE TWO PARTIES:
No transaction is possible without two parties. Just as it takes two hands to clap, so it takes parties for a transaction to take place. There cannot be a giver unless there is,a receiver. Suppose. borrows Rs. 10,000 from a bank. This is a transaction, since there are two parties here - X and bank.
2.
money 3.
THE EVENT MUST BE MEASURABLE IN TERMS OF MONEY;
An event will not be regarded as a transaction, unless it is capable of being measured in terms
THE EVENT MUST RESULT IN TRANSFER OF PROPERTY OR SERVICE:
Suppose, we buy a motor-car from Saleem for Rs. 40000. This results in transfer of property Saleem to us, so it is a transaction. Again suppose, we pay salary to our employee Rs. 2000. This results \ transfer of service - the employee renders service and we receive it So it is a transaction.
4. THE EVENTS MUST CHANGE THE FINANCIAL POSITION OF THE BUSINESS:
Transaction takes place only when there i& a change, in the financial position of the business. change in financial position may be of two kinds:
(a) Quantitative change:
This changes the total value of assets and liabilities of a business concern. Suppose, machinery Rs 20,000 is destroyed. This reduces the total value of the assets of the business. As a result, the final position changes and hence it is a transaction, .
(b) Qualitative change:
This causes increase or decrease in the different elements of assets, or liabilities, but the value \ total assets and total liabilities remains unchanged. Suppose, we buy machinery worth Rs. 50,000. results in exchange of properties - cash Rs. 50,000 goes out of our possession and at the same til machinery of an equal value comes into our possession. This does not change the total value of our as but most causes a qualitative change in our financial position, hence it is a transaction.