Accounting & Heads of Accounts - Chapter No.1- Introduction & Basic Concepts - ACCOUNTING I - For HSC part 1 (ICOM - 1)

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Chapter nNo.1: Introduction & Basic Concepts
I.COM-Part 1
Accounting & Heads of Accounts

• Accounting (Definition & Explanation)
• Heads OR Pillars Of Account / Financial Elements of Accounting

ACCOUNTING (Definition & Explanation)

Q.1: What is an Accounting Or Define accounting?
Ans: ACCOUNTING (Accounting is the language of business):
According to American Institute of Certified Public Accountant (AICPA)
"Accounting is the art of recording, classifying and summarizing of data in a significant manner and in terms of money transactions and events which are, in part at least, of financial character and interpreting the results thereof."

OR

Accounting is an art of recording, classifying and summarizing of data and interpreting business transactions in monetary terms.

OR

Accounting is an art of recording, classifying, summarizing and financial information of the organisation.

OR

Accounting may be define as a process of recording, classifying and summarizing the transactions and interpreting the result.

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Points To Remember in definition of Accounting:
Accounting is define as an art / a process of:

• Recording
• Classifying
• Summarizing
• Interpreting the results

Example:

1.  Recording
   Daily Cash Receipts & Payments: (Record Data)
   * Sales Rs. 2,000
   * Sales Rs. 1,000
   * Purchases Rs. 5,000
   * Sales Rs. 2,000
   * Sales Rs. 4,000
   * Purchases Rs. 2,000
   * Sales Rs. 6,000
   * Daily rent Rs. 500
   * Daily wage of employee A Rs. 200
   * Daily wage of employee A Rs. 300
   
   
2.  Classifying:
   SALES
   * Sales Rs. 2,000
   * Sales Rs. 1,000
   * Sales Rs. 2,000
   * Sales Rs. 4,000
   * Sales Rs. 6,000
   
   PURCHASES
   * Purchases Rs. 5,000
   * Purchases Rs. 2,000
   
   RENT
   * Rent Rs. 500
   
   WAGES
   * Employee A Rs. 200
   * Employee A Rs. 300
   
   
3.  Summarizing:
   * Total Sales = 2,000 + 1,000 + 2,000 + 4,000 + 6,000 = Rs. 15,000
   * Total Purchases = 5,000 + 2,000 = Rs. 7,000
   * Total Rent = Rs. 500
   * Total Wages = 200 + 300 = Rs. 500
   
   
4.  Interpreting:
   * Sales Rs. 15,000
   * Less Purchases = 7,000
   * Less Rent = Rs. 500
   * Less Wages = Rs. 500
   
   Profit = 15,000 - (7,000 + 500 + 500) = 15,000 - 8,000 = Rs. 7,000

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Head Of Accounts /
Financial Elements of Accounting
Classification Of Accounts

Q.2: Define heads or pillars of accounts OR Financial elements of accounting OR What is the classification of accounts?
Ans: Head Or Pillars of Accounts / Financial Elements of Accounting / Classification Of Accounts:
Following are the head or pillars of accounts or Financial elemnens of accounting:

1. Assets
2. Liabilities
3. Owner's Equity
4. Revenue & Income
5. Expenses / Expenditure

Q.3: Define Assets?
Ans: ASSETS (Resources owned by a company):
Something controlled by entity that provides benefits and whose cost can be measured are called assets

OR

Assets are the resources owned and controlled by the business which provide expected future economic benefits.

OR

An assets is a source with economic value that an individual, corporattion or country owns or controls with the expectation that it will provide a future benefits.

Type Of Assets:

1. Current Assets
2. Fixed Assets / Non-Current Assets

A- CURRENT ASSETS (Useful life less than one year):
Assets on the balance sheet that represent amounts that are cash or will be converted to cash, or that will be used up during the next year or during the operating cycle of the entity, whichever is longer

OR

Those assets which will be converted into cash within one year. Or those assets which will be move easily from place to another.

Current Assets are:

• Cash in hand.
• Cash at bank
• Accounts receivable (Oral commitment)
• Notes receivable (Written commitment)
• Bill receivable
• Merchandise Inventory (Goods bought for resale) / Stock
• Prepaid expenses (Payment in advance / rent or salary etc.)
• Supplies / Stationary / Unused (Office store shop) / Sales Supplies
• Advance to Supplier
• Petty Cash Fund
• Accrued Income (Receivable Income)
• Debtor
• Marketable securities (Prize bonds, etc.)
• Investment

Contra Current Assets:

• Allowances for bad debts

B- FIXED ASSETS (Useful life more than one year):
An asset of a business intended for continuing use, rather than a short-term current asset (such as merchandise) is called fixed asset.

OR

Those assets which will be converted into cash more than one year. Or those assets which will not be easily move from place to another.

Fixed Assets are:

1. Tangible fixed assets:
   Land, Building, Equipment (Office / Sales), Machinery, Vehicles, Furniture & Fixtures etc.
   
   
2. Intangible fixed assets.
   Goodwill, Copyright, Patents, Trademark, Franchising etc.

Contra Fixed Assets:

• Allowances for depreciation

Q.4: Define Goodwill, Copyright, Patents, Trademark?
Ans: Goodwill's:
When one company buys another and pays more than the market value of the net assets, It is called goodwill. Goodwill represents something valuable about the purchased company that is not tangible. like a reputation for good service or a loyal, well-trained workforce.

Copyrights:
An intangible asset that gives the owner the exclusive right to publish, produce, or sell intellectual property such as music, art, or books is called copyright.

Trademarks:
Trademark is a symbol, icon, word, or slogan that creates the Identity for a product or organization.

Patents:
The ownership of a process or product that is protected from use by others through registration with the government is called patents.

Q.5: Define liabilities?
Ans: LIABILITIES (Company's Finanacial obligations):
Liabilities are legal obligations to pay on demand or in future means commitment date.

OR

Any amount which is liable to pay is called liabilities.

OR

Liabilities are the obligation of the company or amount owned to creditors. Or liabilities are debt dues by a business to its proprietors.

OR

A liability is something a person or company owes, usually a sum of money.

TYPES OF LIABILITIES:

1. Current liabilities or short term liabilities
2. Long term liabilities

i- Current Liabilities OR Short Term Liabilities (Useful life less than one year / Which will be paid within one year):
Amounts owed by a business to other organizations and individuals that should be paid within one year from the balance sheet date.

Current liabilities are:

• Accounts payable (Oral agreement)
• Notes payable (Written agreement).
• Bill Payable
• Accrued expenses (services used but not yet paid /outspending or unpaid expense whose payment will pay later)
• Unearned income / Revenue (Advance payment service / Amount received in advance).
• Bank overdraft
• Expense Payable (All)
• Salaries Payable (All)
• Taxes Payable
• Creditors
• Bank Loan for one year

Example:
a- MOBILE BALANCE LOAN

• Mobile balance Rs.20
• Advance from company Rs.10
• Total balance used Rs.30

b- BANK CREDIT

• Bank account balance Rs.20,000
• Cheque issued Rs.25,000
• Overdraft Rs.5,000

ii- Long Term Liabilities / Non-Current Liabilities (Useful life more than one year / Which will be paid more than one year):
A sum that does not have to be repaid within the next accounting period of a business is called long term liabilities.
Long term liabilities are:

• Bank loan for more than one year
• Long Term Loan
• Mortgage payable
• Debentures
• Bonds payable.

Contra Liabilities:

• Discount on bond

(Note: Creditors who give amount, Debtors take amount)

Q.6: Define Owner's equity or capital or OR Define proprietorship or proprietary equity or insider's equity?
Ans: OWNER'S EQUITY / CAPITAL (Owner's interest in company):
Owner's equity is also called as Capital or proprietorship or proprietary equity or insider's equity. It is defined as:
The right of the owner in the business is known as owner's equity. The owner has the right to make investment in the business and only he has the right to make withdrawals from business. So he has right to enjoy the profit of the business.

OR

Proprietor or partner or owner who invest money into bussiness are called owner's equity. Or Values invest by owners in business are called owner's equity.
It is calculated by subtracting total liabilities from the total assets of the firm.
Owners Equity (O.E) = Total Assets - Total Liabilities (From Accounting Equation)

Owner's Equity are:

• Capital
• Drawing

Contra Owner Equity:

• Owner's Drawing

Example Of Owner's Equity

• Capital
• Profit / Loss
• Reserves / Retained Earning
• Additional Investment
• Stockholder equity

Q.7: Clasify account according to owner's equity?
Ans: ACCOUNTS ACCORDING TO OWNER'S EQUITY:
Account according to equity are:
1. Capital: - Investment by owner for business purpose.
The money, property and other valuables which collectively represent the wealth of an individual or business is called capital.
Example:

• Owner invested cash Rs.200,000 to start a business.
• Owner invested furniture Rs.30,000 and Equipment Rs.80,000 in the business.

2. Drawings - Withdraw for personal use.
An asset (cash or goods) withdrawn from an incorporated business by its owner is called drawings. It is contra account of capital. It means that it decreases the balance of capital.
Example:

• Owner withdrew cash Rs.10,000 from business for personal use.
• Owner withdrew merchandise Rs.5,000 and Computer Rs. 10,000 from business for personal use.

Q. 8: Define revenue and income?
Ans: REVENUE & INCOME (Money Earned from business activities):
Revenues are the total amounts that a business earns from selling goods and inventory to customers and also provide services to its customers.

OR

Revenue is the total amount of income generated by the sales of goods and services related to the primary operations of the business.

OR

Revenue is the total amount of money received by the company for goods sold or services provided during a certain time period.

OR

Revenue is the total amount a company earns from its main operations, like selling goods or services, before deducting any expenses. It's the top line in thr income statement.

Revenue & Incomes are:

1. Sales Revenue{Sale of merchandise only [Trading (Merchandise), Manufacturing (Finish goods)]}
2. Fees Income
3. Commission Income
4. Consultancy Income / Service income / Repair income
5. Rent income
6. Interest income
7. Advertising income
8. Net income
9. Salary income
10. Other income etc.

Contra Revenue:

• Sales return & allowance
• Sales discount

Example Of Revenue:
👉Selling 200 T-shirts at Rs. 1500/- each ➩ Revenue = 200 x 1500 = Rs. 300,000/-

(Note: Revenue is total amount received while Income is the remaining amount after expenditure from the total amount.)

Q.9 Define expenses or expenditure?
Ans: EXPENSES / EXPENDITURE (Cost incurred to earn revenue):
Expenditure is an outflow of money, or any form of fortune in general, to another person or group as payment for an item, service, or another category of cost.

OR

Expenses are the outflows or using up of assets as part of normal operation to generate revenue. They include operating and non operating cost, and reduce net income.

OR

The cost paid to earn revenue from business activities is called expenses.

OR

An expenses is the reduction in the value of an assets as it is used to generate revenue. Or the consumes part of an asset is called expense.

OR

Expense represent the costs of doing or operating business.

Example:

• Assets - 10,0000 (Supply)
• Expense - 4000 (spend on shop furniture)

Example of Expenses:

1. Purchases (Purchases of mechandise only)
2. Salaries Expenses
3. Interest Expenses
4. Commission Expenses
5. Rent Expenses
6. Advertising / Advertisement Expenses
7. Transportation / carriage / Freight / Cartage Expenses
8. Repair & Maintenance expenses
9. Utilities Bills Expenses
10. Depreciation Expenses
11. Bad debt Expenses
12. Govt. Taxes
13. Office Supplies Expenses
14. Marketing Expenses
15. Travelling Expenses
16. Insuranace
17. Other / Miscellaneous Expenses

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REFERENCE

• Special Thanks To Sir Sameer Hussain (a4accounting - Youtube Channel)
• Special Thanks To Master Coaching Center (Youtube Channel)
• Special Thanks To Sir Irfan Jan
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• Special Thanks To Sir Amjad Niaz (Masters in commerce - Youtube Channel)