Recording Business Transactions

ACCOUNT 
An account is an individual record or form to record and summarize information for each asset, liability, or owner's equity transaction. Each account will have a title and number.
 Debit means left side
 Credit means right side. 

A “T” ACCOUNT is so named because it looks like a capital T. Use this form of an account to help you determine whether the amount is placed on the left (debit) or right (credit) side of the account. 

It is important that you think of debits and credits as only meaning left and right! Double-entry accounting
means that there will be at least two (2) accounts affected by each transaction.
 

FINANCIAL STATEMENTS

Summaries of financial activities are called financial statements which are prepared on a regular basis at the end of an accounting period. The accounting period typically is one year; however, it can be any length of time for which records are maintained. Usually the minimum is one month and the maximum length of time is one year for financial statements. There are several financial statements. You are going to prepare the
Income Statement, Statement of Owner's Equity,
and
Balance Sheet.
These must be completed in that order. Notice the page in your book that shows the three statements and how the information goes from one source to another. It is very important to always check your numbers since an incorrect number will affect more than one statement.

income Statement
This is a summary of a business's revenue and expenses for a specific period of time. It only shows revenue and expenses. These should be listed in order from largest to smallest. (This should be done in this chapter because accounts are not given account numbers.)
Net Income
is realized when revenue exceeds expenses.
Net loss
is realized when expenses exceed revenue.
Statement of Owner's Equity
 This is a summary of the changes that have occurred in the owner's equity during a specific period of time. This statement will show either an increase or decrease in the capital account.
Balance Sheet
 This statement is a listing of the firm's assets, liabilities, and owner's equity at a specific point in time. Total Assets must equal the addition of Liabilities and Owner's Equity.
NOTE:
Be sure that you are looking carefully at the examples given in the book when completing your assignments. You must write legibly and use a ruler to draw the lines. Notice that there are double rules to show that items have balanced. Be sure to read and study the Summary and Key Terms at the end of each chapter.
 

BUSINESS TRANSACTIONS AND THE ACCOUNTING EQUATION

A transaction is any activity that changes the value of a firm’s assets, liabilities, or owner’s equity. Each transaction has a dual effect
on the basic accounting elements. A transaction may affect more than two accounts in a transaction. This is called a combined entry.
Withdrawal (Drawing)
 is the removal of business assets for personal use by the owner. This transaction decreases the asset taken and the value of the business. Each transaction increases or decreases (or both) the basic elements in the accounting equation. The effect of recording a business transaction must always leave the two sides of the accounting equation in balance. To understand how a transaction affects the accounting equation, go through each of the examples in the textbook. Be sure to pay attention to the ““Notes” and “Cautions” that are given. 

THE ACCOUNTING EQUATION

Assets = Liabilities + Owner’s Equity 
This equation must always balance!

THE ELEMENTS OF ACCOUNTING

ASSETS
Assets are items with money value that are owned by a business. Some examples are: cash, accounts receivable (selling goods or services on credit), equipment (office, store, delivery, etc.), and supplies (office, store, delivery, etc.).

LIABILITIES
Liabilities are debts owed by the business. Paying cash is often not possible or convenient, so businesses purchase goods and services on credit. The name of the account used is Accounts Payable. Another type of liability is Notes Payable. This is a formal written promise to pay a specific amount of money at a definite future date.
OWNER’S EQUITY
The difference between Assets and Liabilities is Owner’s Equity. The can also be called capital, proprietorship, or net worth.

The Nature of Accounting

Accounting is the process of recording, summarizing, analyzing, and interpreting financial (money-related) activities to permit individuals and organizations to make informed judgments and decisions. By law all businesses must keep accounting records. Decisions are based on accounting information for profit and non-profit companies alike. There are different forms of business organizations:

Private business
object is to earn a profit

Sole Proprietorship
owned by one person

Partnership
co-owned by two or more persons

Corporation
owned by investors called stockholders (The business—not the owners—are responsible for the company’s obligations.) There are different types of business organizations:

Service business
doctors, lawyers, barber shop, etc. 

Merchandising business
purchases goods for resale 

Manufacturing business
produces a product to sell 

Financial Accouting Process

	1(a)     Describe “The Financial Accounting Process” in detail.
Financial Accounting Process	The “Financial Accounting Process” refers to the role of accounting which links decision makers with economic activities and with the results of their decision.  The accounting measure and describe the results of economic activities of business and that results facilitate businessmen in making economic decision such as measuring result and evaluating performance of the business.

	1(b)   Accounting has often been called the language of business.  In what respects would you agree with the statement?  How might it be argued that it is deficient?
The language of business	Accounting is often called as the “language of business” because affairs of a business organization are made understood to others as well as to those who manage it through accounting information which has to be suitably recorded, classified, summarized and presented.  In order to make this language to convey the same meaning to all people, it is necessary that it should be based on certain uniform scientifically laid down standards.  These standards are termed as accounting principles.  Accounting principles may be defined as those rules of action which are adopted by the accountants universally while recording accounting transactions and measuring business performance.
Accounting is deficient	In my view there is no way to stress that “Accounting” itself is deficient because it starts with correctly recording in books of accounting and ends with showing true picture of performance of the business in the form of financial statements such as Profit & Loss Accounts and Balance Sheet.  In other way we can say that if accounting is adopted on the basis of certain uniform scientifically laid down standards, it will be proved efficient and if it is adopted in a manner that is not based on prescribed standards, then it will be found deficient.

	1(c)   Give at least 5 examples of transaction that would have the following effects on the elements in a firm’s accounting system:-
(i)    Increase cash; decrease some other assets.	EXAMPLES OF TRANSACTION 1.   On July 2, collected cash of Rs. 15,000/- from accounts receivable. 2.   On July 3, sold machinery on cash of Rs. 100,000 to ABC Company. 3.   On July 4, sold land of industrial park on cash at a price of Rs. 150,000. 4.   On July 5, sold Suzuki Car on cash at a price of Rs. 125,000 to Mr. Rashid. 5.   On July 6, office equipment sold on cash at a price of Rs. 10,000/-
(ii)     Decrease cash; increase some other assets.	1.   On July 7, purchased building for office of Rs. 1,500,000 . 2.   On July 8, purchased machinery on cash of Rs. 100,000 from ABC Company. 3.   On July 9, purchased land for industrial park on cash at a price of Rs. 1,050,000. 4.   On July 10, purchased Suzuki Pick up on cash at a price of Rs. 125,000. 5.   On July 11, purchased office equipment on cash at a price of Rs. 15,000/-
(iii)     Increase in assets; increase a liability.	1.   On July 12, purchased building for office of Rs. 1,500,000 from ABC company on account. 2.   On July 13, purchased machinery of Rs. 100,000 from ABC Company on account. 3.   On July 14, purchased on account land for industrial park at a price of Rs. 1,050,000 from Mr. Khalid. 4.   On July 15, purchased Suzuki Pick up on account at a price of Rs. 125,000 from XYZ Car Dealer. 5.   On July 16, purchased office equipment on account at a price of Rs. 15,000/- from IBM Computers
(iv)      Increase an expense; decrease an asset.	1.   On July 1, paid Rs. 1,500,000. to employees as salaries. 2.   On July 3, paid office rent of Rs. 100,000 to ABC Company. 3.   On July 4, paid Electricity Bill of Rs. 10,000. 4.   On July 5, Advertising expenses of Rs. 125,000 to ABC Advertisers. 5.   On July 31, paid Water Bill of Rs. 200/-.
(v)       Increase an asset other than cash.	1.   On July 2, purchased building for office of Rs. 100,000 from ABC company. 2.   On July 3, purchased machinery of Rs. 10,000 from ‘C’ Company . 3.   On July 4, purchased land at a price of Rs. 150,000 from Mr. Khalid. 4.   On July 5, purchased Toyota Pick up at a price of Rs. 125,000 from XYZ Car Dealer. 5.   On July 6, purchased office equipment at a price of Rs. 150,000/- from IBM Computers
(vi)      Decrease an asset; decrease a liability	1.   On August 2, paid remaining liability of Rs. 3,000/- on account of purchase of building from ABC company. 2.   On August 3, paid remaining liability of Rs. 1,000 on account of purchase of machinery from ‘C’ Company . 3.   On August 4, paid remaining liability of Rs. 2,000 on account of purchase of land from Mr. Tariq. 4.   On August 5, paid remaining liability of Rs. 23,000 on account of purchase of Toyota Pick up from XYZ Car Dealer. 5.   On August 6, paid remaining liability of Rs. 21,000 on account of purchase of office equipment from IBM Computers