OBJECTS & CONCEPT DETAILS

OBJECTS OF ACCOUNTING
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 lender will only agree to lend money when he is satisfied as to the solvency of the borrower. Information ivailable from books of accounts is the means of measuring such solvency.
Cash in hand can be verified and any defalcation can be detected, if proper books of accounts are maintained.
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 in 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.
IMPORTANT ACCOUNTING TERMS AND CONCEPTS
BUSINESS ENTITY:
Profit making organisations are known as businesses. There are three main types of businesses;• . _• L-ervkvs (such as dr\ cleaners. Motor works.ru'p.s. Beauty :-;i!ons, airlines etc.); those selling
poo such as food sellers, automobile dealers etc.); those manufacturing goods (such as automobile ••ribcxurers, fans industries, sugar mills etc.).
business entity is an economic unit which enters into business transactions that must be
wearaec summarised and reported, The entity (organisation) is regarded as separate from its owner or
-j entity owns its own properly and has its own debts. The purpose of accounting is to provide
•etu ^formation about an organisation (an entity) to people who need such information but not about the
•cko&l affairs of the owner or owners. So it should be remembered that accounting is done for business
«ncs (what is happening in the business organisation) and it is not concerned with the personal or
imc miners of the owner. For example, the owner purchases furniture for business use(this is a business
tf tad it should be recorded in books of accounts. But if he purchases furniture for his domestic use, it
•nil xi r< considered as a business activity and will not be recorded in books of accounts. In the same
•« owner may have a personal bank account, a car, a house, and other property, but since these things
t part of the business, they are not included in the record of the business unit. So, each organisation
• ch accounting is done is an independent entity, separate from its owners, managers, customers,
•BriKrs. 2nd all other persons and entities with which it deals.
FORMS OF BUSINESS ORGANISATION
There are three main forms of business organisation;
Stogie or sole proprietorship:
The simplest form of business organisation "to organise and operate" is a single or sole IMneunhip. This is the most common form of ownership and is found in business such as small retail •m». *er.-.ce stations etc. The owner is the only one in control and makes all management decisions.

CONNECTED WITH A MONETARY EVENT OR TRANSACTION

CONNECTED WITH A MONETARY EVENT OR TRANSACTION:
Accounting must be in relation to a monetary event or transaction and the event or transaction must
be measurable in terms of money. In other words, no accounting is possible for an event or transaction
,h is not measurable in terms of money, e.g. passing an examination, delivering lecture in a meeting,
ning a game etc. These are events no doubt, but since these are not measurable in terms of money, there
^b fto question of their accounting.
TRANSACTIONS ARE PROCESSED IN THREE DIFFERENT STAGES: Recording:
In the first stage the transactions are recorded chronologically in the books of accounts. Classifying:
In the second stage the transactions of the same or sfmilar nature are classified and recorded I «parately.
Summarising:
'
In the third stage all the necessary date and information are summarised on the basis of classified .•ccrd of transactions and communicated to management and other interested persons.
Interpretation:
In order to assertion the true position of a concern all the accounting data and information relating c • are analysed and interpreted.
All the above functions are performed on the basis of certain well-defined and well-coordinated -wes and principles. An accountant must be familiar with all these rules and principles. In accounting we udy all these rules and principles.
I fc»k-Keeping:
Book-keeping is the art of recording monetary transactions in the books of account in a proper TMT.Ter. The books of accounts are recorded in such a way as will enable us to ascertain the complete and I awnrate result in the least possible time with minimum labour and cost.
Many authors have defined the terms 'Book-keeping' in different ways;
1. "Book-keeping means the recording of transactions, the record making phase ofAccounting (it is only a small part of the field of Accounting and probably, the simplestpart." - Meigs, Johnson and Meigs.
2. "Book-keeping is the recording branch of Accounting." -- Encyclopaedia Britannica.
3. "Book-keeping is the art of recording in books of accounts the monetary aspect ofcommercial or financial transactions." Northcot,
BOOK-KEEPING VERSUS ACCOUNTING
A great deal of efforts goes into gathering and processing information about a concern before the
end up in an accounting report. Much of the work required is clerical in nature and can be performed
rffice workers, machine and computers. The functions of Book-Keeping is to properly record the
iMDL-.il transactions in the books of account. But the function of Accounting is more extensive it has other functions to do except recording transactions, e.g. classification, summarisation and
UBBHOfttation'pof transactions. Thus we see that Book-Keeping is confined to recording aspect of Accounting
a a small and the simplest pan of Accounting. Both represent two different phases of the main subject
•ftcsxntancy". Book-Keeping is the first stage, while Accounting is the final stage, that is why, it is said

Patnership A/c elements

PARTNERSHIP ACCOUNTS!
Essentials of Partnership
Rules Applicable in the Absence of an Agreement
Final Accounts of Partnership<• Distribution of Profits
Fixed and Fluctuating Capitals
Admission of a new Partner
Goodwill and its Treatment in Books of Account
Method of Valuation of Goodwill
Revaluation of Assets and Liabilities
Calculation of new Profit Sharing Ratio
Readjustment of Partners Capitals
Retirement of a Partner
Accounting Problems on Retirement
Change in Profit Sharing ratio on Retirement
Distinction between Gaining and Sacrificing ratio
Death of a Partner
Calculation of Deceased's Share of Profit
Joint Life Policy and its Accounting Treatment
Distinction between Dissolution of Partnership & Dissolutionof Firm
Modes of Dissolution of a Firm
Settlement of Accounts on Dissolution
Preparation of Realisation Account
Dissolution of Firm when all the Partners are Solvent
Dissolution of Firm when one Partner is Insolvent
Dissolution of Firm when all the Partners are Insolvent•> Gradual Realisation of Assets and iecemeal Distribution

Accounting elements Page 2

Renewal of a BUI
Difference between Dishonour and Renewal of a Bill
Insolvency of one Party
Retiring a Bill under Rebate
Accommodation Bills
Effect of Insolvency
Bills Receivable and Bills Payable Books
Promissory Note
SPECIAL JOURNALS 1
Subdivision of Journal
How the Transactions are Entered in Special Journals and Posted to the Ledger?
Documents for Sales and Purchases-The Invoice
Purchases Journal
Distinction between Purchases Journal and Purchases Account•fr Sales Journal (Book)
Purchases Returns or Returns Outward Journal
Rules for Posting the Purchases Returns Journal
Sales Returns Journal (Book)
CASH BOOK AND BANK
RECONCILIATION STATEMENT
Cash Book
Definition
Is Cash Book a Journal or a Ledger?
Distinction Between a Cash Book and a Cash Account•fr Types of Cash Book,
Opening an Account with a Bank, Accounting Treatment of Cheques
Dishonour of Cheques
Classification of Cash Book
Bank Reconciliation Statement
Distinction between Cash Book and Pass Book
What is Meant by 'Reconciliation'?

Accounting elements

Need and Importance of Accounting
Accounting: A Business Language
Book-Keeping
Book-Keeping Versus Accounting .
Accounting Versus Accountancy
Branches of Accounting
Objects of Accounting
Important Accounting Terms and Concepts
TRANSACTIONS AND ACCOUNTING EQUATION
What is an Event
Features
Classification
Rules for Deciding whether a Transaction is Cash or Credit
The Accounting Equation
Kffect of Business Transactions Upon the Accounting Equation
Setting up a Brand New Business
ANALYSIS OF BUSINESS
TRANSACTIONS AND DOUBLE ENTRY SYSTEM
A nalysis of Transactions
Double Entry System
Advantages of Double Entry System
Single Entry System
Distinction between Double Entry System and Single Entry System
What is an Account?
Classification of Accounts
Rules for Debiting and Crediting
Explanation of Rules

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BARTER SYSTEM......

Inconveniences of Barter System;

Before the introduction of money, the following difficulties and inconveniences we

experienced in the barter system.

Double CojncWence of Wants/The direct exchange.pf one commodity for anoth

requires direct satisfaction of both the parties in the'bargain^ The exchange can or

be effective if a person is able to spare what the other person wants and at the san

time needs what the other can sparer For instance, a person has surplus wheat wi

him and wishes to exchange it with cloth He will have to find a person who not or

possesses sufficient cloth but also desires wheat. This double coincidence, as

obvious, is very difficult to attain in this civilised world especiallywhere the range

human wants is very wide The transactions cost of double coincidence of wants a

very high

Lack of Common Measure. Another difficulty which arises under the system

Darter is the absence of common measure which can help in the estimation

relative values of the two commodities/ For instance, a man has a horse with him ar

the other a cow and both are willing to trade. A man who has a horse assigns th

value of one horse as two cows. The other who has a cow desigris the value of or

cow as one horse and both stick to their respective valuations/In the absence

common measure of value, the exchange between the two parties cannot take plac

' unless both of them assign the same value to different commodities which th(

3. Lack of Sub-divisions. One serious drawback of barter is that even when doub

coincidence of wants exists' between the two parties, the exchange may not tat"

place even then. This is particularly the case in those commodities which cannot t

sub-divided/ For instance, a person has a cow with him and he wishes to get 40 kik

of wheat It is clear that the value of the cow is much more than the value of 40 kik of wheat. What part of the cow should be given in exchange for 40 kilos of wheat? Just imagine, if the cow is cut into pieces, what value can it command?

Lack of Store of value. Another serious inconvenience which arises under barter is

that the goods particularly perishable ones cannot be stored for a longer period. They

lose their value as time passes on.

Specialization not possible. Under the barter economy each person is a jacK of all

trades and master of none. A high degree of specialization cannot be achieved under

it.

Payments in the future. Under the system of barter, it is very inconvenient to lend

goods to other people. With the lapse of time, the value of the commodities may fall.

So it becomes difficult to make payments in the future.

Difficulties of Transfer of Wealth. There is great difficulty in transferring wealth

from one place to another under barter. For instance, if a person has to take one

hundred heads of cattle from Faisalabad to Karachi, how much difficult would he

feel? The risk and inconvenience of transportation is a major difficulty of barter

system.

Difficulties in tax collection. Another difficulty which arises under barter system is

that the tax cannot be collected in the form of goods, If the commodities are collected

from the tax payers, they will not only lose value as time passes on but are difficult to

store also.

The inconveniences of barter account for the emergency of money With the introduction of money, the difficulties of double coincidence of wants, the inconveniences of tack of division, the drawbacks of store of value etc.. etc., have been removed to a great extent.

How money has removed the difficulties of barter system?

The use of money has converted a barter economy into a monetary economy. The money has over come the difficulties of barter system in the following ways.

Use of money. Money is used now as a (i) Medium of exchange. The goods and

services are now purchased and sold with the help of money The difficulty of double

coincidence of demand has been removed with the help of money, (ii) Money now

serves as a common measure of value. The problem of comparing the prices of

goods and services in the market is now simplified, fiii) With the help of money, the

exchange of present goods on credit has been made easier. The problem of

deferred payments has been satisfactorily solved with the help of money, (iv) Money

as a liquid store of value has facilitated its possessor to purchase any other asset at

any time, (v) Through money value can be easily and quickly transferred from one

place to another.

Liquidity to wealth. Money imparts liquidity to various forms of wealth such as land,

machinery, stocks stores etc. These forms of wealth can be easily converted into

money.

Establishment of financial institutions. The introduction of money has made it

possible to establish financial institutions like the central bank, commercial banks etc

which deal in currency and near money assets such as bills of exchange, bond,

shares etc.