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UNIT -1Double Entry System of Accounting

1). Accounting: “Accounting is an art of recording, classifying, summarizing the financial transactions and interpreting the result their of ”.

Art: Way of doing a work in a particular way.Recording: Storing, writing in a book (Register), keeping safe or preserving the transactions in any form for future references.

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Classifying: Making the groups of the transactions like all the salaries of employees in salary account, rents in the in the rent account, purchases in the purchase account and sales in the sale account etc.

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Classifying: Making the groups of the transactions like all the salaries of employees in salary account, rents in the in the rent account, purchases in the purchase account and sales in the sale account etc.Summarizing: It means preparing the account to know the profit and loss of the business (Profit and Loss account) and position of the business (Balance sheet).Financial transactions: It means give and take in the business which can be measure in terms of money.

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Interpreting: It means analyzing the positive and negative aspects of the transaction of business.

2). Account: Account is a place or head under which transactions are recorded like purchase, sales, salary, rent, advertisement etc.Question: What is account?Answer: Account is a place or head under which transactions are recorded.

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Question: Give some examples of account.Answer: Purchase, sales, salary, rent, advertisement, packing, carriage, import duty etc.

Question: What is accountancy?Answer: The knowledge of accounting is called accountancy.

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Key Words used in accountingCapital: Money (Riyal or Dollar etc.) or goods (furniture, machine) used in business for further production and growth is called capital. For example if Mr. Ahmad has started business with 20,000 Riyal and some chairs and table of the value of 5000 Riyal, then his capital in the business is total 25,000 Riyal (20,000+5,000).Question: Mr. Atif started business with SR 10000, furniture SR 2000, Goods SR 1000. What is the capital of business?Answer: Capital =Cash+ Furniture+ Goods

10000+2000+1000 = SR 13000Note: Capital means cash and goods invested at the time of starting business.

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Assets: Any valuable having the monetary value for a long period is known as assets. It is of two types i.e. fixed assets and current assets.Fixed Assets: These are those assets which are fixed in nature like land, building, plant, furniture and machinery etc.Question: Give some examples of fixed assets.Answer: Land, building, plant, furniture, car, generator, airplane, ship, refrigerator, microwave oven, computer, laptop etc. are some of the examples of fixed assets.

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Current Assets: These are those assets which are temporary in nature and changed within the year like cash, bank balance, debtor and bills receivable etc.Question: Classify the following into fixed assets and current assets.Truck, Cash, Land, Building, Debtor, computer, Bank balance, Plant.Answer: Fixed Assets: - Truck, Land, Building, computer, Plant.Current Assets: - Cash, Bank balance, Debtor.

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Liabilities: These are the dues which are to be paid by the business unit to the owner and creditors. For example: bank loan, salaries left to pay to the employees, bank over draft (excess amount drawn than deposited) etc.

There are two types of liabilities i.e. internal liability (capital or owner’s equity) and external liability (creditors, bank loan, salaries left to pay to the employees, bank overdraft

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Question: Mr. Adil started business with his own money SR 20000 and took loan from Riyadh bank SR 10000 and purchased goods from Ahmad SR 5000 on credit. Find out the internal liabilities and external liabilities.Answer: Internal liabilities = SR 20000 External liabilities = SR 15000 (Loan from Riyadh bank SR 10000+ Credit purchase from Ahmad SR 5000)Note – Total liabilities SR 35000 of business.

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Owners/Proprietor: Owner is that person who invests the money in the business and gets the profit and bears the loss. For example: If Mr. Sufian started business with 50,000 Riyal then he (Mr. Sufian) is the owner/proprietor of the business.Creditor: Creditor is the person to whom the business owed. For example if business purchased goods from Mr. Habib on credit (Payment not made immediately), he (Mr. Habib) is the creditor of the business.

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Debtor: Debtor is that person who owes to the business. For example if Mr. Salman has purchased goods from business on credit he (Mr. salman) is debtor of the business. Purchase: When we buy some goods for the use of the business or for sale is called purchase.Sales: When the purchased goods are disposed off, is treated as sales.Goods: It is a general term used for the articles in which the business deals; that is, only those articles which are bought for resale for profit.

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Drawing: When cash or goods are withdrawn for the personal use of the owner is called drawing.

Profit: It is the surplus between sales and purchase. Profit = Sales – Purchase.

Loss: It is the deficit between purchase and sale or decrease in the value of assets due to any reason.

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Expenses: Money used on day to day requirements is called expense, for example payment for a cup of tea, food, hiring taxi and paying the electricity bill etc.Revenue: It is a monetary value of the products for services sold to the customers during the period. It results from sales, services and sources like interest, dividend and commission.Question: Ali sold goods SR 1000 and received interest SR 500, rent SR 200 and dividend (income on investment) SR 200. What is the total revenue of Ali.

Answer: Total revenue= SR 1900 (1000+500+200+200)

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ReviewQuestion: What is recording?Answer: Writing and preserving the tractions in the books of account is known as recording.Question: What is classification?Answer: Grouping of same nature of transactions under one place or head is called classification.Question: What is meant by summarizing?Answer: Preparation of profit and loss account and balance sheet is known as summarizing.

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Question: what are the different types of accounts? Answer: There are three types of accounts namely personal account, real account and nominal account.Question: what are the nature of cash, building, furniture and machinery in terms of account?Answer: All are real accounts.

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Question: What is real account?Answer: Real account is that account which is concerned with cash, goods, assets and properties.Question: What are the nature of salary, rent, carriage, packing, advertisement and loss by fire in term of account?Answer: All are nominal account.

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Question: What do you mean by nominal account?Answer: Nominal account is that account which is related to losses and expenses and gains and incomes.Question: What is the nature of STC, Firm, World Bank, UNO, King Khalid Eye hospital and KSU in terms of account?Answer: All are personal account.

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Question: What is personal account? Answer: Personal account is those accounts which are related to individuals, firms, companies and institutions etc.Question: Classify the followings into personal, real and nominal accounts. Husain, salary, car, Riyadh bank, cash, machinery, hospital, capital, drawings, purchase, goodwill and wages.

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Answer: Personal account- Husain, Riyadh bank, Hospital, capital and drawings. Real account- Car, Cash, Machinery and Goodwill.Nominal account- Salary, Purchase and wages.Question: What is double accounting concept?Answer: There is two part of each transaction i.e. every debit is followed by a credit. This is called double accounting concept of accounting.

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Question: What is Accountancy?Answer: The knowledge of accounting is called accountancy.Question: What is goodwill?Answer: Goodwill is a good name or the reputation of an individual, firm and company etc. in the eye of society.Question: What is the advantage of goodwill?Answer: With the help of goodwill one can earn more profit in less effort.

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Question: What do you mean by stock?Answer: Goods left unsold at the end of accounting year is called stock.Question: Select the true and false of the followings.(i) Firm is the Real account. (False)

Note: It is Personal account.(ii) Trade mark is Real account. (True)(iii) Carriage is Personal account. (False)Note: It is Nominal account.

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(iv)Machinery is Real account. (True)(v)Account is a place or head under which transaction are recorded. (True)(vi)“Debit what comes in and credit what goes out” is the rule for personal account. (False)Note: It is the rule for Real account.(vii)Tangible assets are those assets which can be seen and touched. (True)

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(viii) Intangible assets are those assets which cannot be seen and touched. (True)(ix) Goodwill is a tangible asset. (False)Note: Goodwill is intangible asset.

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