Accounting Basics PDF

PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA Topic 1: Accounting basics 1. Fundamentals 1.1 Organization An organization is a group of people who work together 1.2 Types of organizations Business An organization selling goods or services w...

PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA Topic 1: Accounting basics 1. Fundamentals 1.1 Organization An organization is a group of people who work together 1.2 Types of organizations Business An organization selling goods or services with an objective of profit maximization Non-profit organization Nonprofit organizations are formed for a public benefit other than generating profit for owners 1.3 Types of business activities Manufacturing business In manufacturing business, raw materials are used to make a finished goods. The finished products are then sold to customer Trading business In trading business, finished goods are purchased and sold to customer without changing shape or design of the product Service providing business Service is provided to customers and fee is charged for services 1.4 Types of business structures Sole trader A business which has a single owner Partnership A business which has two or more owners Company A business which has registered itself as a company. Company may have one owner or multiple owners 1.5 Accounting Accounting is the process of recording financial transactions related to a business. 1.5 Business Transaction A transaction is an event that has a monetary impact on a business. Activity 1 Identify which of the following events should be classified as transactions: 1. A business purchased goods amounting to Rs. 20,000 for resale purpose 2. Business sold goods for Rs. 30,000 Page 1 of 50  PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA 3. Business purchased a new machine for Rs. 200,000 4. Business sold old furniture for Rs. 20,000 5. Interviewing candidates for position of sales man 6. Selected suitable candidate 7. Paid salary Rs. 70,000 to employee 8. Negotiated with bank for acquiring the loan of Rs. 800,000 9. Loan of Rs. 800,000 received from bank 10. Received letter from bank to repay loan on time 11. 50% loan was repaid by the business 1.3 Separate entity concept / Business entity concept Owner and business are separate from each other In accounting, we record transactions of business only Personal transactions of owner are not recorded in business If owner invest something (cash or valuable item) then this transaction shall be recorded because it has an impact on business If owner withdraws something (cash or valuable item) then this transaction shall also be recorded because it has an impact on business Activity 2 Identify which of the following transactions should be recorded by an accountant 1. Owner purchased new furniture for Rs. 80,000 for his residence 2. Owner deposited Rs. 100,000 in business bank account 3. Proprietor invested Rs. 30,000 cash in the business 4. Proprietor brought his personal car worth Rs. 1,500,000 in the business 5. Owner paid electricity bill of Rs. 20,000 for his residence 6. Owner withdrew Rs. 20,000 from business bank account 7. Owner took some equipment of Rs. 30,000 from the business for his personal use 8. Owner’s friend gifted him a watch of Rs. 30,000 1. Heads of accounting D Drawings C Capital E Expenses L Liabilities A Assets I Income D C 2.1 Capital Cash / valuable item invested by owner in the business is known as capital. In other words, capital is the total investment by the owner in the business. 2.2 Drawings Cash / valuable item withdrawn by owner from the business is known as drawings. In other words, drawing is the share that owner has taken out from the business. Page 2 of 50  PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA 2.3 Assets Resources or valuable items Owned and controlled by the business Which will provide future benefit to the business, are known as assets There are two types of assets Non-current assets Current assets There assets provide future benefit for more There assets provide future benefit up to than one year one year Examples: Examples: 1. Land 1. Closing stock/ closing inventory 2. Premises 2. Trade receivables/ debtors 3. Buildings 3. Other receivables 4. Plant 4. Cash in hand 5. Machinery 5. Cash at bank 6. Equipment 7. Furniture 8. Fixtures and fittings 9. Vehicles 2.4 Liabilities Financial obligations of business are known as liabilities Financial obligation means any cash or valuable item shall be transferred by the business to fulfil the obligation There are two types of liabilities Non-current liabilities Current liabilities These obligations shall be fulfilled after one These obligations shall be fulfilled within one year year Examples: Examples: 1. Loan from bank payable after 3 years 1. Loan from bank payable within 6 months 2. Trade payables / creditors 3. Other payables 4. Bank overdraft Page 3 of 50  PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA 2.5 Expenses Money spent to run business activities in order to generate income is known as expense There are two types of expenses Purchase expense Other expense Money spent to purchase goods for resale All expenses other than purchase expense shall purpose is known as purchase expense be called other expenses Note: Examples: Delivery charges, shipment cost, carriage inward, 1. Rent expense transportation inward etc. are also known as 2. Utility bills cost purchase expense 3. Salaries and wages 4. Commission 5. Carriage outward 6. Communication charges 7. Printing and stationery 8. Sales supplies 9. Travelling expenses 10. Advertisement cost 11. Finance cost 12. Insurance premium 13. Repairs and maintenance Activity 3 Distinguish between purchase expense and asset in following transactions 1. Purchased vehicle costing Rs. 800,000 by a business for resale purpose 2. Purchased vehicle costing Rs. 600,000 by a business for delivery of goods to customer 3. Purchased air conditioner costing Rs. 60,000 by a business for future benefit 4. Purchased land costing Rs. 1,000,000 by a business for resale purpose 5. Purchased machinery costing Rs. 900,000 by a business for production of goods 6. Purchased vehicle costing Rs. 400,000 by the business 7. Purchased equipment costing Rs. 200,000 by the business 8. Purchased goods costing Rs. 50,000 by the business Activity 4 Distinguish between asset, purchase expense and other expense in following transactions 1. Bought goods amounting to Rs. 10,000 for cash 2. Bought furniture amounting to Rs. 50,000 paying through cheque 3. Delivery charges of Rs. 5,000 were paid for purchasing goods 4. Paid Rs. 2,000 commission to sales agent 5. Paid rent of shop Rs. 40,000 6. Rs. 20,000 were spent on repairs of vehicle 7. Spent Rs. 10,000 for fueling of vehicles 8. Paid carriage inward of Rs. 4,000 9. Paid carriage outward of Rs. 5,000 10. Purchased equipment of Rs. 80,000 for resale purpose Page 4 of 50  PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA Remember: As a practical expedient, immaterial items are not recognized as non-current assets even if they meet the definition criteria, for example, staplers, calculators, wastebasket etc. 2.6 Incomes Money earned by the business is known as income There are two types of incomes Sales / revenue Other incomes Income earned from main business activity. All incomes other than sales / revenue shall be In other words, income earned by selling “goods called other incomes for resale” Examples: 1. Rent income 2. Interest received from bank Activity 5 Distinguish between sales and other income in following transactions 1. Sold goods to customer for Rs. 30,000 2. College received Rs. 200,000 fees from students 3. College sold books for Rs. 50,000 to students 4. Profit of Rs. 2,000 was received on amount deposited in saving account 3. Identification of accounting heads Scenario 1: Investment in business Cash (current asset)↑ Capital ↑ Bank (current asset) ↑ Non current asset ↑ 1. Owner invested Rs. 20,000 cash in business 2. Owner invested Rs. 5,000,000 in business through cheque 3. Owner invested his personal car worth Rs. 900,000 in the business 4. Owner brought furniture worth Rs. 60,000 for business use Page 5 of 50  PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA Scenario 2: withdrawals from business Cash (current asset) ↓ Drawings ↑ Bank (current asset) ↓ Non current asset ↓ 1. Owner withdrew Rs. 10,000 cash from business 2. Owner withdrew Rs. 50,000 from business bank account 3. Owner withdrew vehicle worth Rs. 700,000 from the business Activity 6 1. Mr. Ahmed invested PKR 10,000 in cash to start his business. 2. Mr. Khan withdrew PKR 2,000 cash for personal use. 3. Ms. Fatima introduced a computer system valued at PKR 5,000 as her capital contribution. 4. Mr. Ali withdrew equipment worth PKR 1,500 for personal use. 5. Ms. Zainab withdrew PKR 500 from business bank account for personal expenses. 6. XYZ & Co., a partnership firm, admitted a new partner, Mr. Hassan, who invested PKR 50,000 in partnership bank account. 7. Mr. Ahmed transferred PKR 2,000 from his personal bank account to the business bank account as additional capital. 8. Green Thumb Landscaping, a sole proprietorship, purchased gardening equipment for PKR 3,500 using owner’s personal funds. 9. Mr. Ahmed, the owner of Blue Star Corporation, withdrew company vehicle worth PKR 500,000 for personal use. 10. Mr. Khan introduced a piece of machinery valued at PKR 25,000 as his capital contribution. 11. Ms. Aisha, the owner of Aisha's Boutique, withdrew PKR 1,000 cash for personal expenses. 12. XYZ & Co., a partnership firm, admitted a new partner, Mr. Ali, who invested PKR 75,000 in cash. 13. Mr. Ahmed, the proprietor of Ahmed's Electronics, withdrew machinery worth PKR 3,000 for personal use. 14. Ms. Fatima, the sole proprietor of Fatima's Cafe, withdrew PKR 2,500 from business bank account for personal use. 15. Mr. Hassan, the owner of Hassan's Grocery, transferred PKR 5,000 from his personal bank account to the business bank account as additional capital. Scenario 3: Purchase of goods Cash (current asset) ↓ On cash Bank (current asset) ↓ Purchases ↑ On credit Trade payables (current liability) ↑ Page 6 of 50  PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA 1. Purchased goods costing Rs. 20,000 for cash 2. Purchased goods costing Rs. 10,000 and payment was made through cheque 3. Purchased goods on credit worth Rs. 50,000 from Ali and amount shall be paid afterwards 4. Purchased goods on credit worth Rs. 30,000 from Umair and amount shall be paid afterwards Scenario 4: Sale of goods Cash (current asset) ↑ On cash Bank (current asset) ↑ Sales ↑ On credit Trade receivables (current asset) ↑ 1. Sold goods to customer for Rs. 30,000 and received cash 2. Sold goods to customer and received cheque of Rs. 40,000 3. Sold goods on credit to Ahmed for Rs. 50,000 4. Sold goods on credit to Nureed for Rs. 60,000 Activity 7 1. Purchased goods on credit from Supplier A for Rs. 1,000. 2. Purchased goods on cash for Rs. 500. 3. Sold goods on credit to Customer X for Rs. 1,200. 4. Purchased inventory on cash for Rs. 2,500. 5. Bought goods on credit from Supplier B for Rs. 5,000. 6. Sold goods on credit to Customer Y for Rs. 2,800. 7. Purchased goods on credit from Supplier A for Rs. 1,500. 8. Sold goods on cash to Customer Z for Rs. 1,000. 9. Purchased goods on cash for Rs. 3,200. 10. Sold goods on credit to Customer X for Rs. 2,500. 11. Bought inventory on cash for Rs. 1,800. 12. Sold goods on credit to Customer Y for Rs. 3,500. 13. Purchased goods on credit from Supplier C for Rs. 2,000. 14. Bought goods on cash for Rs. 600. 15. Sold goods on cash to Customer Z for Rs. 1,200. Scenario 5: Payment made to credit suppliers Cash (current asset) ↓ Trade payables (current liability) ↓ Bank (current asset) ↓ 1. On 1st January, purchased goods from Mr. Ikhlaq on credit worth Rs. 50,000 2. On 20th January, paid Mr. Ikhlaq Rs. 50,000 through cheque against goods purchased on credit 3. On 5th January, purchased goods from Mr. Saleem on credit worth Rs. 20,000 4. Paid Rs. 20,000 in cash to Mr. Saleem against goods purchased on credit Page 7 of 50  PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA Scenario 6: Payment received from credit customers Cash (current asset) ↑ Trade receivables (current asset) ↓ Bank (current asset) ↑ 1. On 3rd January, goods sold to Mr. Zohaib on credit worth Rs. 60,000 2. On 15th January, received cash Rs. 60,000 from Mr. Zohaib against goods sold on credit 3. On 10rd January, goods sold to Mr. Kamran on credit worth Rs. 80,000 4. On 20th January, received cheque of Rs. 80,000 from Mr. Kamran against goods sold on credit Activity 8 1. On June 1, sold goods worth Rs. 500 on credit to Customer A. 2. On June 2, received a payment of Rs. 200 from Customer A for the goods sold on credit. 3. On June 3, sold services worth Rs. 800 on credit to Customer B. 4. On June 4, received Rs. 400 from Customer B for the services provided on credit. 5. On June 5, sold products worth Rs. 1,200 on credit to Customer C. 6. On June 7, received a payment of Rs. 600 from Customer C for the products sold on credit. 7. On June 7, sold merchandise worth Rs. 600 on credit to Customer D. 8. On June 9, received Rs. 300 from Customer D for the merchandise sold on credit. 9. On June 10, sold goods worth Rs. 2,500 on credit to Customer E. 10. On June 12, received a payment of Rs. 1,200 from Customer E for the goods sold on credit. 11. On June 2, purchased inventory worth Rs. 300 on credit from Supplier X. 12. On June 15, made a payment of Rs. 200 to Supplier X for the inventory purchased. 13. On June 4, bought inventory worth Rs. 1,000 on credit from Supplier Y. 14. On June 17, paid Rs. 500 to Supplier Y for the inventory acquired. 15. On June 6, purchased inventory worth Rs. 700 on credit from Supplier Z. 16. On June 19, settled a payment of Rs. 400 to Supplier Z for goods purchased on credit 17. On June 8, obtained inventory worth Rs. 2,000 on credit from Supplier W. 18. On June 22, made a payment of Rs. 1,000 to Supplier W for the inventory purchased. 19. On June 11, procured goods worth Rs. 5,000 on credit from Supplier V. 20. On June 25, paid Rs. 3,000 to Supplier V for the goods procured. Scenario 7: Purchase return Cash (current asset) ↑ On cash Bank (current asset) ↑ Purchases ↓ On credit Trade payables (current liability) ↓ 1. On 1st Feb, goods purchased for cash Rs. 5,000 from supplier A 2. On 5th Feb, goods purchased for Rs. 5,000 from supplier A were returned to him 3. On 10th Feb, goods purchased for Rs. 10,000 from supplier B by paying through cheque 4. On 12th Feb, goods purchased for Rs. 10,000 from supplier B were returned to him Page 8 of 50  PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA 5. On 15th feb, goods purchased for Rs. 20,000 from Mr. Ali on credit 6. On 20th Feb, goods costing Rs. 20,000 purchased from Mr. Ali were returned to him Activity 9 1. Bought goods for cash Rs. 50. 2. Returned Rs. 10 worth of defective goods for a cash refund. 3. Purchased goods worth Rs. 500 from ABC Suppliers on credit. 4. Returned Rs. 100 worth of damaged goods to ABC Suppliers. 5. Ordered goods worth Rs. 1,000 from XYZ Furnishings and paid through cheque. 6. Returned Rs. 200 worth of incorrect goods to XYZ Furnishings 7. Bought goods for cash Rs. 30 from a nearby supermarket. 8. Returned Rs. 5 worth of expired goods to the supermarket for a cash refund. 9. Purchased goods worth Rs. 2,000 from DEF Electronics on credit. 10. Returned Rs. 300 worth of damaged goods to DEF Electronics. 11. Purchased goods worth Rs. 1,500 from LMN Suppliers and paid through cheque. 12. Returned Rs. 200 worth of excess goods to LMN Suppliers. 13. Bought books for resale for Rs. 25 cash from a bookstore. 14. Returned a duplicate book worth Rs. 10 to the bookstore for a cash refund. 15. Purchased software for resale worth Rs. 3,000 from GHI Software Solutions on credit. 16. Returned Rs. 500 worth of incompatible software licenses to GHI Software Solutions. Scenario 8: Sale return Cash (current asset) ↓ On cash Bank (current asset) ↓ Sales ↓ On credit Trade receivables (current asset) ↓ 1. On 1st Jan, sold goods to customer A against cash Rs. 12,000 2. On 4th Jan, customer A returned goods sold to him for Rs. 12,000 and we paid him in cash 3. On 5th jan, sold goods to customer B against cheque of Rs. 20,000 4. On 7th Jan, customer B returned goods sold to him for Rs. 20,000 and we returned payment through cheque 5. On 10th Jan, sold goods on credit to Mr. Mohsin worth Rs. 10,000 6. On 12thJan, goods of Rs. 10,000 sold on credit to Mr. Mohsin were returned by him Activity 10 1. On June 1, 2023, we sold 10 units of product A for Rs. 100 each in cash. 2. On June 3, 2023, a customer returned 2 units of product A that were previously sold for cash. We refunded Rs. 200 in cash. 3. On June 5, 2023, we sold 5 units of product B to Customer X on credit for Rs. 150 each. 4. On June 7, 2023, Customer X returned 1 unit of product B that was previously sold on credit. 5. On June 10, 2023, we sold 8 units of product C for Rs. 75 each and received payment through cheque. Page 9 of 50  PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA 6. On June 12, 2023, a customer returned 1 unit of product C that was previously sold for cash. We refunded Rs. 75 through cheque. 7. On June 15, 2023, we sold 3 units of product A to Customer Y on credit for Rs. 100 each. 8. On June 18, 2023, Customer Y returned 1 unit of product A that was previously sold on credit. 9. On June 20, 2023, we sold 6 units of product B for Rs. 125 each in cash. 10. On June 22, 2023, a customer returned 2 units of product B that were previously sold for cash. We refunded Rs. 250 in cash. 11. On June 25, 2023, we sold 4 units of product C to Customer Z on credit for Rs. 80 each. 12. On June 27, 2023, Customer Z returned 1 unit of product C that was previously sold on credit. 13. On June 30, 2023, we sold 10 units of product A for Rs. 100 each and received payment through cheque. 14. On July 2, 2023, a customer returned 2 units of product A that were previously purchased for cash. We refunded Rs. 200 by cheque. 15. On July 5, 2023, we sold 5 units of product B to Customer X on credit for Rs. 150 each. 16. On July 7, 2023, Customer X returned 1 unit of product B that was previously purchased on credit. Scenario 9: Purchase of non-current asset Cash (current asset) ↓ On cash Bank (current asset) ↓ Non-current asset ↑ On credit Other payables (current liability) ↑ 1. Purchased building costing Rs. 2,000,000 and paid through cheque 2. Rs. 30,000 cash paid to purchase furniture 3. A plant for Rs. 400,000 was purchased on credit from Tarshing Limited 4. Purchased machinery for Rs. 200,000 on credit from Rupal Limited Scenario 10: Payment for other expenses Cash (current asset) ↓ other expenses ↑ Bank (current asset) ↓ 1. Paid utility bills of Rs. 50,000 though bank account 2. Paid rent of shop Rs. 40,000 in cash 3. Paid Rs. 100,000 through cheque to advertisement agency 4. Salaries of Rs. 80,000 were paid through cheque Activity 11 1. Paid Rs. 10,000 by cash to purchase equipment. 2. Made a credit purchase of Rs. 5,000 for a machinery. 3. Issued a cheque of Rs. 7,500 for employee salaries. 4. Settled utility bills of Rs. 1,200 by cheque. 5. Paid Rs. 20,000 in cash for purchase of furniture. Page 10 of 50  PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA 6. Issued a cheque of Rs. 500 for stationery expenses. 7. Made a credit purchase of computer hardware for Rs. 2,500. 8. Paid monthly rent of Rs. 3,000 by cheque. 9. Settled advertising expenses of Rs. 2,000 through cheque. 10. Purchased printer for Rs. 15,000 in cash. 11. Issued a cheque of Rs. 2,500 for insurance premium. 12. Made a credit purchase of vehicles for Rs. 30,000. 13. Paid Rs. 8,000 in cash for employee salaries. 14. Settled utility bills of Rs. 1,500 by cheque. 15. Purchased office equipment for Rs. 4,000 in cash. 16. Issued a cheque of Rs. 600 for stationery expenses. Scenario 11: Loan obtained from bank Loan (liability) ↑ Cash/Bank (current asset) ↑ 1. Obtained loan of Rs. 500,000 in cash 2. Obtained loan of Rs. 2,000,000. The amount was received by cheque Scenario 12: Loan repaid to bank Loan (liability) ↓ Cash/Bank (current asset) ↓ 1. loan of Rs. 500,000 was repaid in cash. 2. A loan of Rs. 1,500,000 was repaid by cheque Activity 12 1. Obtained a Rs. 10,000 loan from ABC Bank for business expansion. 2. Repaid Rs. 500 towards the principal amount of the loan to ABC Bank. 3. Received a Rs. 5,000 loan from XYZ Credit Union 4. Made an interest payment of Rs. 200 on the loan to XYZ Credit Union. 5. Acquired a Rs. 2,500 loan from DEF Finance Company. 6. Returned Rs. 1,000 towards the loan principal to DEF Finance Company. 7. Borrowed Rs. 3,000 from GHI Credit Union. 8. Made a payment of Rs. 750 towards the principal amount of the loan to GHI Credit Union. 9. Received a Rs. 20,000 loan from MNO Bank. 10. Made an interest payment of Rs. 800 on the loan to MNO Bank. 11. Acquired a Rs. 4,000 loan from PQR Credit Union. 12. Returned Rs. 1,500 towards the loan principal to PQR Credit Union. 13. Received Rs. 25,000 loan from STU Finance Company. 14. Paid Rs. 2,000 interest on the loan to STU Finance Company. 15. Borrowed Rs. 6,000 from VWX Credit Union. 4. Double entry bookkeeping 4.1 Rules of debit and credit Page 11 of 50  PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA Drawings Capital Expenses ↑ Debit Liabilities ↑ Credit Assets ↓ Credit Income ↓ Debit Debit amount = Credit amount 4.2 Recording in general journal General journal Date Description Debit (Rs.) Credit (Rs.) 1-Oct-21 Cash 20,000 Capital 20,000 Step 1: Write date in date column Step 2: Write maximum possible detail of accounting head in description column Step 3: Write debit account head in first row and credit account head in second row Step 4: Write debit and credit amounts in debit and credit column Activity 13 Record following transactions in general journal for the month of June 1st June Started business with Rs. 75,000 cash and Rs. 900,000 in the bank. nd 2 June Received a loan of Rs. 200,000 from UBL Bank by cheque. 3rd June Bought an equipment for cash Rs. 30,000. 4th June Took Rs. 20,000 out of the bank and put it in the cash till. th 5 June Repaid part of UBL Bank loan by cheque Rs. 50,000. 7th June Bought goods on credit from ABC for Rs. 10,000 10th June Sold goods on credit to XYZ for Rs. 12,000 th 12 June Owner took cash from bank of Rs. 7,000 for his personal use. Activity 14 Record following transactions in general journal for the month of June 1st June Bought goods for cash Rs. 10,000 from Ahmed 2nd June We returned goods to Ahmed worth Rs. 3,000 3rd June Bought goods on credit from Muneeb for Rs. 30,000 th 4 June We returned goods worth Rs. 5,000 to Muneeb 5th June We Paid Rs. 20,000 to Muneeb in cash Activity 15 Record following transactions in general journal for the month of June 1st June Sold goods for cash Rs. 25,000 to Waqas 2nd June Waqas returned goods worth Rs. 7,000 to us rd 3 June Sold goods on credit Rs. 45,000 to Umair 4th June Umair returned goods worth Rs. 15,000 to us th 5 June Umair paid to us Rs. 20,000 by cheque Page 12 of 50  PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA 4.3 Recording in general ledger (T account form) Cash Date Description Debit (Rs.) Date Description Credit (Rs.) 1-Oct-21 Capital 20,000 Capital Date Description Debit (Rs.) Date Description Credit (Rs.) 1-Oct-21 Cash 20,000 How to open a T account Step 1: Open a T account, if not already opened Step 2: Post debit and credit amount in T account Step 3: Write opposite account name in description column Step 4: Write date in date column Cash Date Description Debit (Rs.) Date Description Credit (Rs.) 1-Oct-21 Capital 20,000 31-Oct-21 Balance c/d 20,000 20,000 20,000 1-Nov-21 Balance b/d 20,000 Capital Date Description Debit (Rs.) Date Description Credit (Rs.) 1-Oct-21 Cash 20,000 31-Oct-21 Balance c/d 20,000 20,000 20,000 1-Nov-21 Balance b/d 20,000 Activity 16: Date Description Debit (Rs.) Credit (Rs.) 1-Jan Cash 10,000 Capital 10,000 2-Jan Purchase 2,000 Cash 2,000 3-Jan Cash 10,000 Capital 10,000 4-Jan Cash 5,000 Sales 5,000 Prepare general ledger Activity 17: Date Description Debit (Rs.) Credit (Rs.) 1-Jan Bank 50,000 Capital 50,000 2-Jan Purchase 10,000 Trade Payables 10,000 3-Jan Purchase 20,000 Bank 20,000 Page 13 of 50  PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA 4-Jan Bank 60,000 Sales 60,000 Prepare general ledger Activity 18: Date Description Debit (Rs.) Credit (Rs.) 1-Jan Bank 100,000 Capital 100,000 2-Jan Purchase 20,000 Trade Payables 20,000 3-Jan Purchase 40,000 Bank 40,000 4-Jan Bank 120,000 Sales 120,000 Prepare general ledger How to close a T account Step 1: Add up both sides Step 2: Leave a line and write greater amount on both sides Step 3: Write balance c/d (carried down) on shorter side Balance c/d = Greater amount – Shorter amount Note: Balance c/d reflects the remaining balance in account at the period end Date of balance c/d shall be the last date of the period Step 4: Write balance b/d (brought down) on the opposite side of balance c/d Note: Previous period balance shall be called balance b/d Date of balance b/d shall be the first date of the period Note: T accounts provides balance at the end of each period (periodically) Activity 19: Date Description Debit (Rs.) Credit (Rs.) 1-Jan Bank 100,000 Sales 100,000 2-Jan Purchase 20,000 Bank 20,000 3-Jan Bank 40,000 Sales 40,000 4-Jan Purchase 5,000 Bank 5,000 Prepare general ledger Activity 20: Date Description Debit (Rs.) Credit (Rs.) 1-Jan Trade receivable 100,000 Sales 100,000 Page 14 of 50  PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA 2-Jan Bank 40,000 Trade receivables 40,000 3-Jan Trade receivables 60,000 Sales 60,000 4-Jan Bank 20,000 Trade Receivables 20,000 5-Jan Drawings 15,000 Bank 15,000 Prepare general ledger Activity 21: The following information relates to Hamza & Co., a retailer of television sets for the month of December 2010: Date Transaction Rs. 000 1 Started business with a capital at bank: 1,330 3 Bought television sets from Amin & Co., on credit. 2,200 4 Televisions sold to Ahmed Brothers on credit. 1,880 11 Payment received from Ahmed Brothers and deposited in the bank. 1,340 12 Paid cheque to Amin & Co. 784 19 Defected televisions returned by Ahmed Brothers. 220 22 Bought LCD televisions on credit from Amin & Co. 1,230 28 Sold LCD televisions to Ahmed Brothers on credit. 810 Required: (a) Prepare journal entries of the above transactions. (b) Post the information in the ledger accounts. (c) Extract a trial balance as at December 31, 2010. Activity 22: The following transactions in May 2021 are those of a new business entity, Garden Traders. Date Transactions 1 Set up the entity with capital in cash Rs. 2,500. 2 Bought goods on credit from The Bushes Company Rs. 540 4 Sold goods on credit to The Office Company Rs. 430 9 The Office Company paid the Rs. 430 that it owed. Page 15 of 50  PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA 12 Payment was made to The Bushes Company Rs. 540. 18 Bought goods on credit from The Bushes Company Rs. 430 21 Sold goods on credit to Office Company Rs. 670 Required: a) Use T accounts to show how these transactions should be recorded in the main ledger accounts of the entity. b) Prepare a trial balance as at 31 May 2021. 4.4 Recording in general ledger (Running balance account) This is an alternative to T account and is widely used in practice. This provides with updated balance after each transaction. There is one additional column called Balance Debit balance and credit balance total of debit amounts > total of credit amounts = debit balance total of debit amounts < total of credit amounts = credit balance debit balance occurs on the credit side on account closing credit balance occurs on the debit side on account closing Trial balance Trial balance is a statement of all account balances in a business at a specific time. It ensures that total debits equal total credits. It is typically prepared at the end of an accounting period. Trial balance is used as a basis for preparing financial statements. It is starting point for producing financial statements It helps identify errors before generating final financial reports. Trial balance is taken as a test of arithmetical accuracy Errors in which debits and credits are not equal can cause the trial balance to not balance, hence trial balance ensures arithmetical accuracy of accounts Although a balanced trial balance indicates that the total debits and credits are equal, it doesn't guarantee that there are no errors in the accounts For instance, 1. the trial balance shall be equal if debit figure is incorrectly recorded in debit of another account; or if credit figure is incorrectly recorded in credit of another account 2. Trial balance still balances even if there is an error of omission Hence, trial balance is not a conclusive proof that double entry book-keeping is free from errors Page 16 of 50  PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA 5. Net sales & Net Purchases Net sales = Sales – Sale return Net Purchases = Purchases + Carriage inward – Purchase returns 6. Opening & Closing inventory / stock Closing stock Goods remained unsold at period end is closing stock Cost of these goods was included in purchases at the time when they were purchased These goods were not sold during the period so the cost of closing stock should not be included in cost of sales Closing stock is a valuable item so it is considered as current asset Opening stock Closing stock of previous period shall be considered opening stock of current period It is assumed that the opening stock units were sold in current period so its cost is added in cost of sales 7. Cost of “goods sold” Cost of goods sold or cost of sales is the actual cost incurred for purchasing the goods sold in the period Cost of goods sold = opening stock + Net Purchases – closing stock Cost of goods sold = opening stock + Purchases + Carriage inward – Purchase returns – closing stock Multiple choice questions 1. The opening stock of a company is Rs. 10,000. The closing stock is Rs. 12,000. Purchases amount to Rs. 50,000, and there are no purchase returns. Calculate the cost of goods sold. a) Rs. 48,000 b) Rs. 50,000 c) Rs. 52,000 d) Rs. 60,000 2. A company has an opening stock of Rs. 15,000, purchases of Rs. 80,000, and purchase returns of Rs. 5,000. The closing stock is Rs. 20,000. What is the cost of goods sold? a) Rs. 60,000 b) Rs. 70,000 c) Rs. 80,000 d) Rs. 90,000 Page 17 of 50 PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA 3. The opening stock of a company is Rs. 25,000. Purchases amount to Rs. 70,000, and there are no purchase returns. The closing stock is Rs. 30,000. Additionally, there were carriage inward charges of Rs. 2,000. Calculate the cost of goods sold. a) Rs. 43,000 b) Rs. 45,000 c) Rs. 67,000 d) Rs. 49,000 4. A company has an opening stock of Rs. 40,000, purchases of Rs. 100,000, and purchase returns of Rs. 8,000. The closing stock is Rs. 35,000. There were carriage inward charges of Rs. 4,000. What is the cost of goods sold? a) Rs. 53,000 b) Rs. 61,000 c) Rs. 101,000 d) Rs. 79,000 5. The opening stock of a company is Rs. 30,000. Purchases amount to Rs. 90,000, and purchase returns are Rs. 3,000. The closing stock is Rs. 35,000. Additionally, there were carriage inward charges of Rs. 2,500 and carriage outward charges of Rs. 1,500. Calculate the cost of goods sold. a) Rs. 55,000 b) Rs. 60,000 c) Rs. 63,000 d) Rs. 84,500 6. A company has an opening stock of Rs. 20,000. During the year, purchases amount to Rs. 100,000, and purchase returns are Rs. 5,000. The closing stock is Rs. 25,000. Additionally, there were carriage inward charges of Rs. 2,500 and carriage outward charges of Rs. 1,000. Calculate the cost of goods sold. a) Rs. 92,500 b) Rs. 97,500 c) Rs. 102,500 d) Rs. 107,500 7. The opening stock of a company is Rs. 50,000. Purchases amount to Rs. 120,000, and there are no purchase returns. The closing stock is Rs. 40,000. Additionally, there were carriage inward charges of Rs. 3,000. Calculate the cost of goods sold. a) Rs. 120,000 b) Rs. 123,000 c) Rs. 127,000 d) Rs. 133,000 8. A company has an opening stock of Rs. 15,000. During the year, purchases amount to Rs. 80,000, and purchase returns are Rs. 2,000. The closing stock is Rs. 18,000. Additionally, there were Page 18 of 50  PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA carriage inward charges of Rs. 1,500 and carriage outward charges of Rs. 800. Calculate the cost of goods sold. a) Rs. 76,500 b) Rs. 80,700 c) Rs. 81,700 d) Rs. 82,700 9. The opening stock of a company is Rs. 30,000. During the year, purchases amount to Rs. 150,000, and purchase returns are Rs. 10,000. The closing stock is Rs. 40,000. Additionally, there were carriage inward charges of Rs. 4,000 and carriage outward charges of Rs. 2,500. Calculate the cost of goods sold. a) Rs. 134,000 b) Rs. 138,500 c) Rs. 142,500 d) Rs. 146,500 10. A company has an opening stock of Rs. 25,000. During the year, purchases amount to Rs. 90,000, and there are no purchase returns. The closing stock is Rs. 30,000. Additionally, there were carriage inward charges of Rs. 1,200. Calculate the cost of goods sold. a) Rs. 86,200 b) Rs. 88,800 c) Rs. 90,800 d) Rs. 92,800 8. Gross profit & net profit Gross profit gross profit shows how much profit a company makes from its trading activity only before considering other expenses and other incomes Gross profit = Net Sales – Cost of sales Net profit Net profit reflects the actual profit earned by a company after considering all its incomes and expenses Net Profit = Net Sales + Other incomes – Cost of sales – Other expenses Net profit = Net Sales – Cost of sales + Other incomes – Other expenses Net profit = Gross profit + Other incomes – Other expenses Multiple choice questions 11. Sales: Rs. 50,000 Sales Return: Rs. 2,000 Opening Stock: Rs. 10,000 Closing Stock: Rs. 12,000 Purchases: Rs. 30,000 Page 19 of 50 PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA Purchase Return: Rs. 1,500 What is the gross profit? a. Rs. 6,500 b. Rs. 8,000 c. Rs. 21,500 d. Rs. 11,000 12. Sales: Rs. 80,000 Sales Return: Rs. 3,000 Opening Stock: Rs. 20,000 Closing Stock: Rs. 15,000 Purchases: Rs. 40,000 Purchase Return: Rs. 2,500 What is the gross profit? a. Rs. 21,500 b. Rs. 22,000 c. Rs. 34,500 d. Rs. 24,000 13. Sales: Rs. 120,000 Sales Return: Rs. 5,000 Opening Stock: Rs. 15,000 Closing Stock: Rs. 18,000 Purchases: Rs. 80,000 Purchase Return: Rs. 3,000 What is the gross profit? a. Rs. 23,000 b. Rs. 41,000 c. Rs. 25,000 d. Rs. 26,000 14. Sales: Rs. 70,000 Sales Return: Rs. 2,500 Opening Stock: Rs. 25,000 Closing Stock: Rs. 20,000 Purchases: Rs. 35,000 Purchase Return: Rs. 1,000 What is the gross profit? a. Rs. 21,500 b. Rs. 22,500 c. Rs. 28,500 d. Rs. 24,500 15. Sales: Rs. 90,000 Page 20 of 50 PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA Sales Return: Rs. 4,000 Opening Stock: Rs. 12,000 Closing Stock: Rs. 14,000 Purchases: Rs. 50,000 Purchase Return: Rs. 2,000 What is the gross profit? a. Rs. 28,000 b. Rs. 29,000 c. Rs. 40,000 d. Rs. 31,000 16. XYZ Ltd. provided the following financial figures for the year: Sales: Rs. 500,000 Sales Returns: Rs. 20,000 Opening Stock: Rs. 50,000 Closing Stock: Rs. 70,000 Purchases: Rs. 300,000 Purchase Returns: Rs. 10,000 Other Incomes: Rs. 5,000 Salaries: Rs. 100,000 Utility Bills: Rs. 20,000 Advertisement Cost: Rs. 15,000 What is the net profit for the year? a. Rs. 80,000 b. Rs. 105,000 c. Rs. 120,000 d. Rs. 135,000 17. ABC Corporation reported the following financial information: Sales: Rs. 1,200,000 Sales Returns: Rs. 50,000 Opening Stock: Rs. 100,000 Closing Stock: Rs. 150,000 Purchases: Rs. 700,000 Purchase Returns: Rs. 20,000 Other Incomes: Rs. 10,000 Salaries: Rs. 200,000 Utility Bills: Rs. 30,000 Advertisement Cost: Rs. 25,000 What is the net profit for the year? a. Rs. 245,000 b. Rs. 260,000 c. Rs. 275,000 Page 21 of 50 PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA d. Rs. 290,000 18. XYZ Retailers provided the following financial figures: Sales: Rs. 800,000 Sales Returns: Rs. 30,000 Opening Stock: Rs. 80,000 Closing Stock: Rs. 100,000 Purchases: Rs. 400,000 Purchase Returns: Rs. 15,000 Other Incomes: Rs. 8,000 Salaries: Rs. 120,000 Utility Bills: Rs. 15,000 Advertisement Cost: Rs. 10,000 What is the net profit for the year? a. Rs. 268,000 b. Rs. 242,000 c. Rs. 256,000 d. Rs. 270,000 19. ABC Manufacturing reported the following financial information: Sales: Rs. 2,500,000 Sales Returns: Rs. 100,000 Opening Stock: Rs. 200,000 Closing Stock: Rs. 300,000 Purchases: Rs. 1,200,000 Purchase Returns: Rs. 40,000 Other Incomes: Rs. 15,000 Salaries: Rs. 300,000 Utility Bills: Rs. 40,000 Advertisement Cost: Rs. 35,000 What is the net profit for the year? a. Rs. 940,000 b. Rs. 960,000 c. Rs. 980,000 d. Rs. 500,000 20. ABC Company has a gross profit of Rs. 50,000. They earned Rs. 5,000 from rent income, incurred Rs. 10,000 in salaries, Rs. 2,000 in utility bills, and Rs. 3,000 in advertisement costs. What is the net profit of ABC Company? a. Rs. 50,000 b. Rs. 49,000 c. Rs. 40,000 d. Rs. 30,000 Page 22 of 50  PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA 21. XYZ Corporation's gross profit for the year is Rs. 80,000. They received Rs. 10,000 as other income and had expenses of Rs. 25,000 in salaries, Rs. 5,000 in utility bills, and Rs. 3,000 in advertisement costs. What is the net profit of XYZ Corporation? a. Rs. 60,000 b. Rs. 57,000 c. Rs. 52,000 d. Rs. 42,000 22. The gross profit of PQR Enterprises is Rs. 120,000. They earned Rs. 15,000 from other incomes and incurred Rs. 40,000 in salaries, Rs. 10,000 in utility bills, and Rs. 5,000 in advertisement costs. What is the net profit of PQR Enterprises? a. Rs. 85,000 b. Rs. 85,000 c. Rs. 75,000 d. Rs. 80,000 23. LMN Corporation has a gross profit of Rs. 150,000. They received Rs. 20,000 as other income and had expenses of Rs. 45,000 in salaries, Rs. 15,000 in utility bills, and Rs. 10,000 in advertisement costs. What is the net profit of LMN Corporation? a. Rs. 100,000 b. Rs. 95,000 c. Rs. 90,000 d. Rs. 80,000 24. XYZ Company's gross profit for the year is Rs. 200,000. They earned Rs. 25,000 from rent income and incurred Rs. 60,000 in salaries, Rs. 12,000 in utility bills, and Rs. 8,000 in advertisement costs. What is the net profit of XYZ Company? a. Rs. 145,000 b. Rs. 150,000 c. Rs. 130,000 d. Rs. 120,000 9. Equity Equity in accounting refers to the portion of a company's value that belongs to its owners Equity = Capital + Net profit - Drawings Equity = Capital + Incomes – expenses - Drawings Multiple choice questions: 25. Given the following information, what is the equity? Page 23 of 50 PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA Capital: Rs. 50,000 Net Profit: Rs. 10,000 Drawings: Rs. 5,000 a) Rs. 45,000 b) Rs. 55,000 c) Rs. 60,000 d) Rs. 65,000 26. In a business, the capital is Rs. 100,000, net profit is Rs. 20,000, and drawings amount to Rs. 15,000. What is the equity? a) Rs. 85,000 b) Rs. 105,000 c) Rs. 115,000 d) Rs. 120,000 27. For a company, the capital stands at Rs. 75,000, net profit is Rs. 8,000, and drawings are Rs. 2,500. Calculate the equity. a) Rs. 80,500 b) Rs. 81,500 c) Rs. 82,500 d) Rs. 85,500 28. The capital of a business is Rs. 200,000, net profit amounts to Rs. 30,000, and drawings are Rs. 20,000. Determine the equity. a) Rs. 190,000 b) Rs. 210,000 c) Rs. 220,000 d) Rs. 230,000 29. In a firm, the capital is Rs. 150,000, net profit is Rs. 25,000, and drawings equal Rs. 10,000. What is the equity? a) Rs. 160,000 b) Rs. 165,000 c) Rs. 170,000 d) Rs. 175,000 30. Given the following information, what is the equity? Sales: Rs. 200,000 Cost of Sales: Rs. 120,000 Expenses: Rs. 50,000 Drawings: Rs. 10,000 Capital: Rs. 150,000 Page 24 of 50 PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA a. Rs. 60,000 b. Rs. 170,000 c. Rs. 80,000 d. Rs. 90,000 31. In a business, the sales amount to Rs. 500,000, cost of sales is Rs. 300,000, expenses total Rs. 100,000, and drawings amount to Rs. 50,000. The capital is Rs. 200,000. Calculate the equity. a) Rs. 50,000 b) Rs. 70,000 c) Rs. 100,000 d) Rs. 250,000 32. For a company, the sales are Rs. 1,000,000, cost of sales is Rs. 600,000, expenses total Rs. 200,000, and drawings amount to Rs. 50,000. The capital stands at Rs. 500,000. Determine the equity. a) Rs. 250,000 b) Rs. 350,000 c) Rs. 450,000 d) Rs. 650,000 33. The sales of a business amount to Rs. 800,000, cost of sales is Rs. 500,000, expenses total Rs. 150,000, and drawings are Rs. 75,000. The capital is Rs. 400,000. What is the equity? a) Rs. 125,000 b) Rs. 475,000 c) Rs. 225,000 d) Rs. 275,000 34. In a firm, the sales total Rs. 1,500,000, cost of sales is Rs. 900,000, expenses amount to Rs. 300,000, and drawings equal Rs. 100,000. The capital is Rs. 600,000. Calculate the equity. a) Rs. 300,000 b) Rs. 400,000 c) Rs. 500,000 d) Rs. 800,000 10. Financial statements Financial statements are prepared at the end of accounting period to show the financial performance and financial position of the business There are 2 financial statements in your syllabus i.e. o Statement of comprehensive income / Profit & loss account o Statement of financial position / balance sheet Page 25 of 50  PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA Statement of comprehensive income/ Profit & loss account A profit or loss account is a financial statement that shows a company's incomes, expenses, and whether it made a profit or incurred a loss during a specific period. It provides an overview of the company's financial performance. Format of Statement of comprehensive income / Profit & loss account Rs. Net Sales 100 Less: Cost of sales (20) Gross profit 80 Add: Other incomes 10 Less: Other expenses (30) Net profit 60 Activity 16 Trial Balance Extract as of December 31, 2022: Account Debit (Rs.) Credit (Rs.) Sales 60,000 Purchases 35,000 Opening Stock 10,000 Salaries Expense 5,000 Advertisement Cost 3,000 Traveling Expense 1,000 Carriage Inward 500 Carriage Outward 600 Closing stock is Rs. 4,000 Prepare statement of comprehensive income for the year ended December 31, 2022 Activity 17 Trial Balance Extract as of December 31, 2022: Account Debit (Rs.) Credit (Rs.) Sales 120,000 Purchases 70,000 Opening Stock 20,000 Salaries expense 10,000 Utility bills 6,000 Insurance expense 2,000 Carriage Inward 1,000 Carriage Outward 1,200 Closing stock is Rs. 8,000 Prepare statement of comprehensive income for the year ended December 31, 2022 Page 26 of 50  PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA Activity 18 Trial Balance Extract as of December 31, 2022: Account Debit (Rs.) Credit (Rs.) Sales 120,000 Sales return 10,000 Purchases 70,000 Purchase return 5,000 Opening Stock 20,000 Salaries Expense 10,000 Repairs and maintenance 6,000 Traveling Expense 2,000 Carriage Inward 1,000 Carriage Outward 1,200 Closing stock is Rs. 8,000 Prepare statement of comprehensive income for the year ended December 31, 2022 Statement of financial position A statement of financial position, also known as a balance sheet, is a financial statement that shows a company's assets (what it owns), liabilities (what it owes), and shareholders' equity (the company's net worth) at a specific point in time, providing a snapshot of its financial health. Format of Statement of financial position / balance sheet Rs. Assets Non-current assets 80 Current assets 20 Total assets 100 Equity & Liabilities Equity 60 Non-current liabilities 30 Current liabilities 10 Total equity & liabilities 100 Activity 19 ABC – Trial balance as at 31 December 2022 Rs. Rs. Inventory as at 1 January 2022 15,000 Drawings 22,000 Plant & Machinery 146,000 Trade receivables 51,000 Trade payables 42,000 Cash 6,200 Page 27 of 50  PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA Capital as at 1 January 2022 120,000 Further information:. Inventory at 31st December 2022 was valued at Rs. 16,000. Net profit is Rs. 79,200 Required: Prepare statement of financial position as at 31 December 2022 Activity 20 PQR – Trial balance as at 31 December 2022 Rs. Rs. Inventory as at 1 January 2022 30,000 Drawings 44,000 Land & Buildings 292,000 Trade receivables 102,000 Trade payables 84,000 Bank 12,400 Long term bank loan 100,000 Capital as at 1 January 2022 140,000 Inventory at 31st December 2022 was valued at Rs. 32,000. Net profit is Rs. 158,400 Required: Prepare statement of financial position as at 31 December 2022 Activity 21 The following trial balance has been extracted from the ledger of Herbert, a sole trader, as at 31 May 2013, the end of his most recent financial year. Herbert: Trial balance as at 31 May 2013 DR Rs. (000) CR Rs. (000) Land and buildings 90,000 Equipment 57,500 Inventory as at 1 June 2012 27,400 Revenue 405,000 Purchases 259,600 Wages and salaries 52,360 Loan interest 1,560 Other operating expenses 38,800 Trade receivables 46,200 Trade payables 33,600 Cash in hand 151 Page 28 of 50  PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA Bank overdraft 14,500 Carriage out 5,310 Drawings 28,930 10% loan 15,600 Capital as at 1 June 2012 139,111 607,811 607,811 Inventory as at 31 May 2013 was valued at Rs. 25,900,000. Required Prepare Herbert’s statement of comprehensive income for the year ended 31 May 2013 and his statement of financial position as at that date. Activity 22 Following is the trial balance of Sofia Trader (ST) for the year ended 30 June 2018: Debit Credit ---------- Rs.'000 ---------- Equipment 17,000 Vehicles 3,000 Inventory - 1 Jul 2017 5,500 Trade receivables 5,350 Cash and bank balances 620 Capital 20,140 Drawings 352 Trade payables 3,500 Other payables 1,520 Sales 32,350 Purchases 21,000 Returns 950 750 Salaries and utilities 2,790 Rent 1,000 Other expenses 480 Insurance 300 Interest income on bank deposit 82 58,342 58,342 Cost of closing physical inventory was Rs. 7,400 Required: Prepare statement of profit or loss for the year ended 30 June 2018 Prepare statement of financial position as at 30 June 2018. Page 29 of 50  PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA 11. Accounting equation Accounting equation ensures that the total value of a company's assets is equal to the combined value of its liabilities and owner's equity. It provides a fundamental framework for recording and understanding financial transactions and forms the basis for preparing financial statements such as the balance sheet. Assets = Equity + Liabilities 12. Classification of business transactions 1 Simple transactions Complex transactions A transaction is simple where a buyer sells goods A simple transaction becomes complex when and services and the buyer pays for it the buyer buys something in a credit or qualifies immediately in cash. for a discount. 2 One-off transactions Ongoing transactions A transaction occurring on a single occasion is Ongoing transaction is a transaction of called one-off transaction. continuing nature. for example, buying land and building for setting for example, payment of monthly rent or up a factory. electricity bill. 3 Capital transactions Revenue transactions A transaction that has a long-term effect is called day to day transactions are called revenue capital transactions. transactions. As a business, you might purchase some Similarly, you might purchase some goods on a machinery. This machinery can be used for a long daily basis, as such transactions are incurred time (4-6 years), therefore such a transaction is daily, they are called revenue transaction. called capital transaction. Revenue receipts Capital receipts Revenue income is income arising from the Capital receipts are receipts of ‘long term’ normal operations of a business from its nature, such as money from a bank loan, or new investments, for example, revenue from money invested by the business owner (which is sale of goods or interest received called ‘capital’). Receipt which is not a capital receipt Capital expenditure Revenue expenditure Expenditure which provides benefit for more than one year. Page 30 of 50  PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA expenditure made to acquire or improve long expenditure which provides benefit upto one term assets year Improvement means: 1. Increase in useful life expenditure which is not a capital expenditure 2. Increase in capacity 3. Increase in product quality 4. Reduction in operating cost Activity 13 Classify the following transactions as either ‘capital’ or ‘revenue’. Sr. # Transaction Capital /Revenue 1 Vehicle A engine is repaired 2 Loan borrowed from bank for five years 3 Interest paid on loan 4 Cash received from customer 5 Cash paid to employees for their wages 6 The purchase of machinery for use in the business 7 Monthly electricity bill paid 8 The purchase of a soft drinks vending machine for the canteen 9 The stock of soft drinks purchased for resale, along with above- mentioned vending machine 10 Cost of alteration in office van to increase carrying capacity 11 Small but expensive alterations to a manufacturing machine which increased the output of that machine by 15% 13. Accounting concepts 1) 1) Separate Entity Accounting Concepts : Separate Entity Accounting concepts means that business enterprise is a separate entity with its own identity, apart from its owner. For accounting purpose, Business enterprises and its Owners are not same. Accountants should treat a business as distinct from its owner. Financial transactions which affect the business are recorded in the business books of accounts and should not include owner’s personal transactions in the business books of accounts. 2) Accrual Accounting Concepts : Page 31 of 50  PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA As per this concept, revenues and expenses should be recognized when they are earned or incurred and not when cash or a cash equivalent is received or paid. Most Business entities maintain books of account on an accrual basis. 3) Matching Concept : As per this concept, all expenses for an accounting period are matched with the revenue of that period. The result of this matching is net profit or net loss. This concept does not concentrate on actual inflow or outflow of cash. 4) Duality Concept : As per this concept, every transaction which is recorded in the books of account has two-sided effect. This concept is the base of double entry accounting system. Every transaction has two aspects: Case Aspect 1 Aspect 2 Conclusion 1. Increase in asset Decrease in another asset Inverse relation between one asset and another asset 2. Increase in asset Increase in liability Direct relationship 3. Decrease in asset Decrease in liability between asset & liability 4. Increase in asset Increase in equity Direct relationship 5. Decrease in asset Decrease in equity between asset & equity 6. Increase in liability Decrease in another Inverse relation between liability one liability & another liability 7. Increase in liability Decrease in equity Inverse relation between 8. Decrease in liability Increase in equity liability & equity 5) Prudence Concept : As per this concept, an entity must not overestimate its revenues, assets and profits, besides this it must not underestimate its liabilities, losses and expenses. 6) Consistency : The consistency principle states that, once you adopt an accounting principle or method, continue to follow it consistently in future accounting periods so that the results reported from period to period are comparable. Page 32 of 50  PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA Example – Methods of depreciation such as written-down-value method, straight-line method, etc or Methods of valuation of inventories such as FIFO or Average cost etc. 7) Materiality : According to materiality concept, all the items having significant importance on the business entity should be disclosed in the financial statements and any insignificant or irrelevant item should not be disclosed in the financial statements. Whether item is significant or not is a matter of judgement. 8) Substance over form: Financial statements of a business should reflect the underlying realities of accounting transactions. Even if the information appearing in the financial statements not comply with the legal form in which they appear. 9) Completeness: Financial statements are complete and include every item that should be included in the statement for a given accounting period. 10) True and fair view: True and fair view in accounting (specifically auditing) means that a financial statement is free from material misstatements and faithfully represents the financial performance and positioning of an entity Multiple choice questions: 35. Which of the following is not a business transaction? (a) Incurring interest on a business loan (b) Hiring a new employee (c) Purchasing office supplies (d) Receiving fees for services 36. Expenditures which provide benefits in future period are called: (a) Revenue expenditure (b) Outstanding expenditure Page 33 of 50 PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA (c) Current expenditure (d) Capital expenditure 37. Which one is a capital transaction? (a) Purchase of goods (b) Payment of wages (c) Sale of goods (d) Purchase of machinery 38. The equity of a business would change as a result of: (a) A credit supplier being paid by cheque (b) Non-current assets being purchased on cash (c) Non-current assets being purchased on credit (d) Wages being paid in cash 39. Cash invested in the business by the owner is called (a) Current asset (b) Non-current asset (c) Liabilities (d) Capital 40. Cash or goods taken away by the proprietor is called (a) Drawings (b) Sales (c) Charity (d) Expense 41. Which of the following is an element of the statement of financial position? (a) Income (b) Expense (c) Gains (d) Liabilities Page 34 of 50 PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA 42. Which from the following is not a current asset? (a) Equipment (b) Inventory (c) Cash (d) Trade receivables 43. Which from the following is not a non-current asset? (a) Intangibles (b) Property (c) Inventory (d) Equipment 44. The basic accounting equation is given by the formula: Equity + Long term liabilities = ________________ + Current assets – Current liabilities. 45. Economic resources controlled by a business are called its ________. 46. According to the ________ concept, the business is regarded as separate from the personal affairs of its owners. 47. A business has capital of Rs.10,000. Which of the following asset and liability figures could appear in this business’s statement of financial position? Assets (Rs.) Liabilities (Rs.) (a) 6,000 16,000 (b) 6,000 4,000 (c) 10,000 10,000 (d) 14,000 4,000 48. Which of the following is incorrect? Assets (Rs.) Liabilities (Rs.) Capital (Rs.) (a) 7,850 1,250 6,600 (b) 8,200 2,800 5,400 (c) 9,550 1,150 8,200 (d) 6,540 1,120 5,420 Page 35 of 50 PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA 49. The correct form of accounting equation is (a) Assets + Liabilities = Equity (b) Assets – Liabilities = Equity (c) Assets – Trade payables= Equity (d) Assets + Receivable = Equity 50. Which of the following is not true: (a) Revenue – Expenses = profit (b) Revenue – Profit = Expenses (c) Sales + Gross Profit = Revenue (d) Revenue = Profit + Expenses 51. Expenses paid by a business decrease: (a) Cash (b) Equity (c) Cash and equity (d) Capital and Accounts payable 52. If during the accounting period the assets increased by Rs.7 million, and the owner's equity decreased by Rs.3 million, then the liabilities must have; (a) Increased by Rs.10 million (b) Increased by Rs.4 million (c) Decreased by Rs.4 million (d) Decreases by Rs.10 million 53. An entity (with 31 December year-end) has bought the machine for Rs. 1,000,000 with the down payment of Rs. 200,000and remaining payment Rs. 800,000 would be made after a month. The transaction happened on 15 December 2011. What would be the effect on the of transaction? (a) Machine increased by Rs.800,000 and liabilities decreased by Rs.800,000 (b) Machine decreased by Rs.800,000 and liabilities increased by Rs.800,000 Page 36 of 50 PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA (c) Machine increased by Rs.1,000,000 and liabilities increased by Rs.800,000 while cash is decreased by Rs.200,000 (d) Machine increased by Rs.800,000 and liabilities increased by Rs.800,000 while cash is decreased by Rs.200,000 54. Purchase of machinery for cash (a) Increases total assets (b) Decreases total assets (c) Increases assets and liabilities (d) Keeps total assets unchanged 55. The investment of cash into the business results in a/an (a) Increase in cash and a decrease in equity (b) Increase in cash and an increase in equity (c) Decrease in cash and an increase in equity (d) Increase in fees earned and an increase in equity 56. Services rendered for cash will result in a/an (a) Increase in cash and a decrease in capital (b) Increase in cash and an increase in fees earned (c) Decrease in cash and an increase in fees earned (d) Increase in fees earned and an decrease in equity 57. One of the local fast-food outlets hired a first-year accounting student to oversee the cash- collection procedures. When the firm pays the student his weekly wage, the transaction will (a) Increase an asset, increase a liability (b) Decrease an asset, decrease a liability (c) Increase an asset, increase owner's equity (d) Decrease an asset, decrease owner's equity 58. QK Company records the transaction as a debit to Consultant Expense for Rs. 500,000 and an equivalent credit to Accounts Payable. What would be impact on elements of financial statements? (a) Increase a liability, increase owner’s equity (b) Decrease an asset, decrease a liability (c) Increase a liability, decrease owner's equity Page 37 of 50 PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA (d) Decrease an asset, decrease owner's equity 59. Which of the following will cause owner's equity to increase? (a) Revenue (b) Expense (c) Drawings (d) Asset’s depreciation 60. The owner contributes his personal car to the business (a) Increase an asset, increase a liability (b) Decrease an asset, decrease a liability (c) Increase an asset, increase owner's equity (d) Decrease an asset, decrease owner's equity 61. The company purchases a non-current asset on credit (a) Decrease an asset, decrease a liability (b) Increase an asset, increase owner's equity (c) Decrease an asset, decrease owner's equity (d) Increase an asset, increase a liability 62. What double entry would be made to record the purchase of an item of machinery on credit? (a) Debit machinery, credit cash (b) Debit machinery, credit accounts payables (c) Debit purchases, credit trade payables (d) Debit trade payables, credit machinery 63. What transaction is presented by the entries: debit bank, credit Receivables? (a) Sale of goods for cash (b) Purchase of goods for cash (c) Receipt of cheque from receivables (d) Payment of cheque to payables 64. A debit entry usually represents increase in: (a) Assets and Income Page 38 of 50 PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA (b) Liabilities and Income (c) Assets and Expenses (d) Liabilities and Expenses 65. The double entry to record the withdrawal of cash from a business bank account by the owner is? (a) Debit: drawings Credit: bank (b) Debit: drawings Credit: capital (c) Debit: liability Credit cash (d) Debit: capital Credit: drawings 66. A business sells Rs. 100,000 worth of goods to a customer, the customer pays Rs. 50,000 in cash immediately and will pay the remaining Rs. 50,000 in 30 days’ time. What is the double entry to record the purchase in the customer’s accounting records? (a) Dr. cash Rs. 50,000; Cr. payables Rs. 50,000; Cr. purchases Rs. 50,000 (b) Dr. payables Rs. 50,000; Dr. cash Rs. 50,000 ;Cr. purchases Rs. 100,000 (c) Dr. purchases Rs. 100,000; Cr. payables Rs. 50,000; Cr. cash Rs. 50,000 (d) Debit purchases Rs. 100,000; credit cash Rs. 100,000 67. A business has purchased machinery on credit. Which of the accounts mentioned below are affected by the transactions? (a) Trade payables (b) Purchases (c) Machinery (d) Capital 68. Payment of insurance through the bank involves entries in which of the two accounts (a) Insurance account (Debit) and petty cash account (Credit) (b) Insurance account (Debit) and bank account (Credit) (c) Insurance account (Debit) and rent account (Credit) (d) Insurance account (Debit) and capital account (Credit) Page 39 of 50 PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA 69. X Ltd. purchases a vehicle for Rs. 1.5 million for business use, paying by cheque, what is the double entry: (a) Purchases account (debit) and bank account (credit) (b) Vehicle account (debit) and bank account (credit) (c) Vehicle account (credit) and bank account (debit) (d) Debit vehicle account (debit) and petty cash account (credit) 70. The double entry for return of goods purchased from Khan Limited on account is: (a) Cash (debit) and purchases (credit) (b) Accounts payable (debit) and purchases (credit) (c) Accounts payable (debit) and purchases return (credit) (d) None of the above 71. The double entry for payment of a telephone bill is; (a) Telephone expense (debit) and cash (credit) (b) Office equipment (debit) and cash (credit) (c) Office supplies (debit) and cash (credit) (d) Cash (debit) and utilities (credit) 72. Khalid is a dealer in electronic goods (refrigerator, washing machine, air conditioners, televisions, etc.). He purchased two air conditioners and installed in his showroom. In the books of Khalid, the cost two air conditioners will be debited to (a) Drawing account (b) Capital Account (c) Fixed assets (non-current assets) (d) Purchases account 73. An asset was purchased for Rs. 1,000,000 with the down payment of Rs. 200,000 and bills accepted for Rs. 800,000/-. What would be the effect on the total asset and total liabilities in the statement of financial position? (a) Assets increased by Rs.800,000 and liabilities decreased by Rs.800,000 (b) Assets decreased by Rs.800,000 and liabilities increased by Rs.800,000 (c) Assets increased by Rs.1,000,000 and liabilities increased by Rs.800,000 (d) Assets increased by Rs.800,000 and liabilities increased by Rs.800,000 Page 40 of 50 PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA 74. 30% of the total assets of Akbar Merchant have been financed by liabilities. The total liabilities of the business are Rs. 600,000. What is the amount of owners’ equity? a. Rs. 1,800,000 b. Rs. 2,000,000 c. Rs. 2,600,000 d. Rs. 1,400,000 75. Which of the following is correct 1. Goods taken by owner from the business reduce the equity 2. Expenses paid by business reduces the equity a. Only 1 b. Only 2 c. Both are correct d. None is correct 76. Which of the following is correct 1. Business expense paid by the owner increases the equity 2. Personal expenses of owner paid by business reduces the equity a. Only 1 b. Only 2 c. Both are correct d. None is correct 77. Equity will _______ as a result of decrease in assets or increase in liability a. Increase b. Decrease 78. Equity will _______ as a result of increase in assets or decrease in liability a. Increase b. decrease 79. Assets will _______ as a result of increase in liability or increase in equity a. Increase b. Decrease 80. Which two of the following transactions will affect the assets and liabilities of the business at the same time a. Purchase of office furniture on credit b. Credit sale of inventory c. Receipt of cash from customer d. Repayment of principal amount of a loan 81. Which of the following is correct? 1. Credit entries decreases liabilities and increases assets 2. Debit entries increases assets and decreases liabilities a. Only 1 b. Only 2 c. Both are correct d. None is correct 82. Payment to supplier from bank overdraft results in? a. Decrease in asset and increase in liability Page 41 of 50 PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA b. Decrease in asset and decrease in liability c. Increase in liability and increase in another liability d. Decrease in liability and increase in another liability 83. Which of the following is a business transaction? 1. Bank set the limit of overdraft of Rs. 10 million 2. Interest charged by bank on overdraft a. Only 1 b. Only 2 c. Both are correct d. None is correct 84. Drawing is a concept of: a. Business entity b. Matching c. Prudence d. Materiality 85. A businessman purchased a vehicle for his private use by drawing cash from business. This transaction is related to which of the following concept? a. Business entity concept b. Matching concept c. Consistency concept d. Prudence concept 86. The matching concept matches a. Assets with liabilities b. Expenses with capital c. Capital with assets d. Incomes with expenses 87. Which of the following statement is correct? 1. All revenues are income but all incomes are not revenue 2. Distribution of profit is also an expense as it decreases the assets of business a. Only 1 b. Only 2 c. Both are correct d. None is correct 88. Which of the following is correct? 1. Asset is an economic resource controlled by an entity 2. Equity is residual interest in assets of company after deducting current liabilities a. Only 1 b. Only 2 c. Both are correct d. None is correct 89. Equity = Asset – Liabilities. Select the most suitable answer a. If assets increase, equity increase b. If equity is decreased, liabilities must have increased Page 42 of 50 PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA c. Profit is when assets exceed liabilities d. Loss in when liabilities exceed assets 90. As per accruals concept, revenues and expenses should be recognized when they are earned or incurred and not when cash or a cash equivalent is received or paid. a. True b. False 91. Which of the following is incorrect? Equity Liability Asset A Increase in increase No effect Increase profit B Decrease in decrease No effect decrease profit C Increase in increase Increase No effect profit D Decrease in decrease Increase No effect profit 92. Decrease in asset might result in: a. Decrease in liability b. Decrease in equity c. Increase in another asset d. All of above 93. Which of the following is correct with regards to decrease in owners’ equity 1. Goods withdrawn by owner for personal use 2. Expenses paid by the business a. Only 1 b. Only 2 c. Both are correct d. None is correct 94. Increase in asset or decrease in equity results in _________ in liabilities a. Increase b. Decrease 95. Rent earned from the personal property of Mr. Sanitizer (Owner of the business) is included as income in Business’ statement of profit or loss. Above statement is violation of which of the following Accounting Concept? a. Materiality concept b. Prudence concept c. Business entity concept d. Consistency concept 96. Which of the following will be capitalized as cost of vehicles? a. Repair of vehicle’s engine b. Fueling of vehicles c. Replacement of engine oil Page 43 of 50 PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA d. Replacement of tires 97. Which of the following should not be capitalized? a. Monthly electricity bill b. Replacement of vehicle’s engine c. Cost of alteration in office van to increase carrying capacity d. Carriage paid on purchase of plant 98. Which two of the following are business transactions? a. A businessman purchased a vehicle for his private use. However, vehicle is also used by him for coming to the office b. Furniture and fixtures laying in the office were destroyed in fire. Furniture was owned by one of the partners and it was not in the use of business. c. Electricity bill of one of the firm’s partners was paid from the business cash d. The proprietor provides a generator to office. The generator is presently not in the working condition and would have to be repaired before it can be used 99. The cost of wastebasket having an estimated useful life of 5 years is charged off as an expense upon purchase. This is an example of the application of the a. Materiality concept b. Prudence concept c. Business entity concept d. Consistency concept 100. Prudence concept means that? 1. Expense and liabilities must not be understated 2. Incomes and assets must not be overstated a. Only 1 b. Only 2 c. Both are correct d. None is correct 101. Economic resource owed by the business to someone else is a/an? a. Asset b. Liability c. Income d. Expense 102. What is posting? a. Shifting Trial balance to financial statements b. Shifting ledger to trial balance c. Shifting journal entries to ledger d. Recording journal entries 103. Which concept states that assets and liabilities are recorded in book-keeping? a. Prudence concept b. Matching concept c. Materiality concept d. Book-keeping concept 104. Which two of following are NOT included in cost of purchases a. Purchase price Page 44 of 50 PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA b. Carriage inward c. Carriage outward d. Admin & general expenses 105. Which of the following is true with reference to trial balance? (Pick two) a. Trial balance is taken as a test of arithmetical accuracy b. It is considered as a starting point for producing financial statements c. It provides conclusive evidence that double entry book-keeping is free from errors d. Error of omission cause trial balance to not balance 106. A debit item in trial balance will? a. Increase liability, increase asset and decrease equity b. Increase asset, increase equity and decrease liability c. Increase equity, decrease asset and decrease liability d. Increase asset, decrease liability and decrease equity 107. Which of the following items will appear on opposite sides of trial balance? a. Purchases and drawings b. Sales and return outwards c. Carriage inward and carriage outward d. Trade receivables and return outwards 108. Which of the following items will appear on the same side of the trial balance? a. Capital & Return inward b. Carriage inward & return inward c. Drawings & Trade payables d. Carriage outward & return outward 109. If credit side of an account exceeds the debit side, then the resulting balance is? a. Debit b. Credit c. Positive d. Negative 110. Which of the following is taken as test of arithmetical accuracy a. General Journal b. General Ledger c. Financial statements d. Trial balance 111. Which of the following statement is correct? 1. Trial balance ensures arithmetical accuracy 2. Error of omission has effect on trial balance a. Only 1 b. Only 2 c. Both d. None 112. Which of thew following is correct 1. Trial balance is a part of accounting process 2. Trial balance is a starting point of preparation of financial statements a. Only 1 Page 45 of 50  PRC 4 Introduction to Accounting Topic 1: Accounting basics Daniyal Zahid Butt, ACA b. Only 2 c. Both d. None 113. Which of the following statements is correct regarding trial balance? a. Every credit balance represents income b. Return inward has a debit balance c. Carriage outward has a credit balance d. Gross profit appears on credit side of trial balance 114. Debit always means: a. Left side of an account b. Right side of an account c. Increase in account’s balance d. Decrease in account’s balance 115. When debit balances are equal to credit balances in trial balance then it means that a. Account balances are correct b. No mistakes in recording transactions