Step # 1

Accounting:
Accounting is the language of the business.
Business:
Every legal activity undertaken for earning profit is called business.
Proprietor:
Proprietor is the owner of a business who makes investment in the business.
Capital:
The goods and cash invested by the proprietor in the business are called capital.
Drawings:
The goods and cash taken away by the proprietor from the business for his personal use
are called drawings.
Assets:
Assets are the properties of a business both tangible and intangible.
(e.g.) Cash, Furniture, Machinery, Building, Good Will, Trade Mark etc.
Liabilities:
Liabilities are the debts of a business.
(e.g.) Loan, Bank over draft, outstanding expense.
Financial accounting:
An art of recording, classifying, summarizing, interpreting, and analyzing of financial
data of a business is called financial accounting.
Cost Accounting:
The analyzing and controlling of cost of production is called cost accounting.
Management Accounting:
Management accounting provides necessary information to the management for suitable
decision.
Accounting Period:
The period that is fixed to know the profit or loss of the business is called accounting
period.
Purchases:
The goods that are purchased for resale purpose are called purchase.
Cash Purchases:
When the goods are purchased with cash, they are called cash purchase.
Credit Purchases:
When the good are purchased on credit, they are called credit purchase.
Purchases Return or Return outward:
The goods that are returned to supplier due to any defect or any other reason are called
purchases returns.
Sales:
Selling of purchased or manufactured goods is called sales.
Cash Sales:
When the goods are sold for cash, they are called cash sales.
Credit Sales:
When the goods are sold on credit, they are called credit sales.
Sales Return or Returns inward:
The goods that are returned from customer due to defect or any other cause are called
sales return.
Invoice:
The document given by seller to buyer for credit sale is called Invoice.
Discount:
Any concession made on a price is called discount.
Trade Discount or Purchase Discount:
The discount made on the list price of goods is called trade discount or purchases
discount.
Cash Discount:
The discount that is given for early (prompt) payment is called cash discount.
Commission:
A fee paid to an agent on percentage basis against his services is called commission.
Expenditure:
An amount of money, which is spent to get an asset or service, is called expenditure.
Expense:
The expenditure whose benefit is enjoyed during an accounting period is called expense.
Debtor or Account Receivable:
The person to whom the goods are sold on credit is called debtor or account receivable.
Creditor or Account Payable:
 The person from whom the goods are purchased on credit is called Creditor or account
payable.
Voucher:
Voucher is the written evidence of a transaction.
Income or Revenue:
The money that comes into a business from the sale of goods or services is called income
or revenue.
Goods:
The things that are produced for sale or use are called goods.
Stock or Inventory:
The goods that a store or company has on hand is called stock or inventory.
Closing Stock:
The goods that a store or company has on hand at the end of accounting period is called
closing stock
Equity:
Any claim enforceable against the assets of a firm is called equity.
Or
Equity = Liability + Capital
Book keeping:
Recoding of monetary transactions in the books of accounts with a systematic manner is
called book keeping.
Cash system of Accounting:
Under this system, entries are made only when the cash is received or paid.
Accrual system of Accounting:
Under this system, entries are made on the basis of amount having become due for
payment or receipt.
Separate Entity Concept:
Under this concept, the business is treated as separate entity from its owner.
Dual Concept:
Under this concept “For every debit there is a credit”.
Going Concern Concept:
Under the system it is assumed that the business will be continue for indefinite time.
Step # 2
Transaction:
Any dealing between two or more person for goods or services is called transaction.
Cash Transaction:
Any dealing between two or more person for goods and services for cash is called cash
transaction.
Credit Transaction:
Any dealing between two or more person for goods and services on credit is called credit
transaction.
Accounting Equation:
Assets = Capital + liabilities
Step # 3
Single Entry System:
Under this system some times both aspects of a transaction are recorded, some times only
one aspect is recorded and some times no aspect is recorded in the books of accounts.
Double Entry System:
Under this system, both aspects of a transaction are recorded. One aspect is debit and
other is credit.
Account:
A summarized record of transactions relating a particuler person or thing is called
account.
Real Account:
Real account refers to the asset owned by the business.
(e.g.) Cash, Building, Machinery etc.
Personal Account:
Personal account refers the debtor or creditor of the business.
(e.g.) Habib Bank, Waseem, Farhan etc.
Nominal Account:
Nominal account refers to the income, losses, or expenses of the business.
(e.g.) Wages, Sale, Loss by fire etc.
 Step # 4
Rule of debit and credit according to British accounting system
Increase in Assets Decrease in Assets
Increase in Expenses Debit Decrease in Expenses Credit
Increase in Income Decrease in Income
Increase in Liability Credit Decrease in Liability Debit
Increase in Capital Decrease in Capital
Rule of debit and credit according to American accounting system
Real Account (Asset) Debit if comes in to the Credit if goes out of the business.
business.
Personal Account Increase in debtor Debit. Decrease in creditor Credit.
Increase in creditor Credit. Decrease in debtor Debit.
(Debtor or Creditor)
Nominal Account Increase in income Credit. Decrease in income Debit.
(Income, Loss, Expense) Increase in loss or Expense Decrease in loss or Expense
Debit. Credit.

Step # 5
Journal:
The book in which first of all a transaction is recorded according to date with short
explanation is called journal.
Day Book:
Journal is also called as daybook because transactions are recorded on daily basis.
Journalizing:
Recording of transaction in the book of journal is called journalizing.
Entry:
Recording of transaction in the book of journal is called entry.
Simple Entry:
An entry having one account debit and one account credit is called simple entry.
Compound Entry:
An entry having more than one account debit or credit or both is called compound entry.
Narration:
Short explanation of a transaction bellow each entry in journal is called narration.
Ledger Folio or Ledger Reference:
The ledger page number where the concerned account has been posted is written in this
column.
Step # 6
Ledger:
The book, which contains a summarized record of all business transactions, is called
ledger.
Posting:
Transferring of an account from journal to concerned account in the ledger is called
posting.
Journal Folio / Journal Reference:
The page number of journal from where the account has been posted into ledger is
written here.
Trail Balance:
A statement, through which arithmetic accuracy of accounts is checked is called trail
balance.
Step # 7
Bill of exchange:
An unconditional order signed by maker directing a certain person to pay a fixed sum of
money on a particuler date or on demand is called bill of exchange.
Drawer:
The person who draws the bill of exchange is called drawer.
Drawee:
The person on whom the bill is drawn is called drawee.
Payee:
The person who receives the amount of the bill of exchange is called payee.
Number of Stepies in bill of exchange:
There are three Stepies in bill of exchange i.e. Drawer, Drawee and payee.
Trade bill:
The bill, which is used to exchange the goods on credit basis, is called trade bill.
Accommodation bill:
The bill, which is drawn for mutual help of each other, is called accommodation of bill.
Tenor:
The period after which the bill is to be paid is called tenor.
(e.g.) Two months, Three months etc.
Maturity:
The due date of bill for payment is called maturity.
Days of grace:
The extra three days, allowed for the settlement of bill are called days of grace.
Endorsement of bill:
Transferring of bill of exchange by one person to another person for the
Settlement of debts is called endorsement of bill.
Bill Receivable:
The bill is called bill receivable according to drawer’s point of view.
Bill Payable:
The bill is called bill payable according to drawee’s point of view.
Dishonor of bill:
If the drawee refuses to pay the amount of bill, it is called dishonor of bill.
Noting Charges:
The fee paid to notary public to get the certificate of dishonor bill is called noting
charges.
Renewal of a bill:
To cancel the old bill and to draw a new bill for the extension of period is called
Renewal of bill.
Retiring of a bill:
To pay the bill before the maturity of bill under rebate is called retiring of bill is called
retiring of bill.
Rebate:
The concession given by drawer to drawee if he pays the bill before the date of maturity
is called rebate.
Insolvency:
Inability of a person to pay his all business debts is called insolvency.
Insolvent person:
The person who can not pay his all debts is called insolvent person.
Step # 8
Cash Book: Pass Book:
The book in which cash transactions of the The book in which the bank keeps the record of
business are recorded according to date is his customer’s account is called pass book.
called cash book.
Pay-In-Slip: Cheque Book:
Pay-in-slip is used to deposit the money in to Cheque book is used to withdraw the money
the bank account from the bank account.
Honored Cheque: Dishonor of Cheque:
The cheque en-cashed by bank is called The cheque refused by bank to cash due to any
honored cheque. specific reason, is called dishonor of cheque.
Single Column Cash Book:
The book having record of cash transactions only is called single column cash book
Double Column Cash Book:
The book having record of transactions made by cash and bank is called double
column cash book.
Triple Column Cash:
The book having record of transactions made by cash and bank as well as discount is
called triple column cash book.

Formats:
Dr. Single Column Cash Book Cr.
Date Details V.N. L.F. Amount Date Details L.F. V.N. Amount
 Dr. Double Column Cash Book Cr.
Date Details V.N. L.F. Discount cash Date Details V.N. L.F. Discount Cash

Dr. Triple Column Cash Book Cr.

Date Details V.N L.F Discount cash Bank Date Details V.N L.F Discount cash Bank

Petty Cash Book:

The cash book having record of small payment like postage, tea, stationery etc is called
petty cash book.
Contra Entry:
The entry made on the both sides of cash book is called contra entry.

Ban Reconciliation Statement:

A statement that is prepared to find out the reasons of disagreement between cash book
and pass book balances is called bank reconciliation statement.
Imperest system
Under this system, a fixed amount is given to cashier for monthly petty expenses.
Unpresented Cheques:
The cheques not presented in the bank for payment up to the closing date of business
accounts are called unpresented cheques.
Uncredited Cheques:
If the amount of deposited cheques is not credited to the bank account up to the closing
date of business accounts are called uncredited cheques.
Bank statement:
The periodical return sent by bank to customer is called bank statement.
Step # 9
Accounting Cycle:
Transaction → Journal → Ledger → Trail Balance → Final Account
Trading Account:
The account, which is prepared to determine gross profit or gross loss of the business is
called trading account.
Profit and Loss Account:
The account, which is prepared to determine net profit or net loss of the business, is
called profit and loss account.
Balance Sheet:
A statement of assets, liabilities and capital, which shows financial position of the
business, is called balance sheet.
Marshalling:
Preparing of balance sheet with a systematic manner is called marshalling.
Tangible Assets:
The assets, which can be touched and felt, are called tangible assets.
(e.g.) building, cash, machinery etc.
Intangible Assets:
The assets, which cannot be touched, seen, and felt are called intangible assets.
(e.g.) good will, patent, copy right etc.
Fixed Assets:
The assets that are brought into the business for a long period are called fixed assets.
(e.g.) building, furniture, machinery etc.
Current Assets:
The assets having short life and easily convertible into cash recalled current assets.
(e.g.) bank, cash, B/R, debtors etc.
Liquid Assets / Quick Assets:
Cash and the assets that can be quickly converted into cash are called liquid assets or
quick assets.
(e.g.) bank, cash, B/R, etc.
Long Term liabilities:
The liabilities that are payable after a long period are called long-term liabilities.
(e.g.) Capital
Short Term liabilities:
The liabilities that are payable after a short period are called short-term liabilities.
(e.g.) Bill payable, Bank overdraft etc.
Direct Expense:
The expenses that related to purchases as well as production are called direct expenses.
Indirect Expenses:
All the expenses related to sales and office expenses are called indirect expenses.
Step # 10
Adjustment:
Correct recording of unrecorded, incomplete, or wrong-recorded entries is called
adjustment.
Outstanding Expenses:
Payable expenses are called outstanding expenses.
Prepaid Expenses:
Advance paid expenses are called prepaid expenses.
Accrued Income:
The receivable income is called accrued income.
Unearned Income:
Advance received income is called unearned income.
Depreciation:
It is the gradual and permanent decrease in the value of an asset from any cause.
Bad Debts:
Irrecoverable debts from debtors are called bad debts.
Doubtful Debts:
Expected irrecoverable debts from debtors are called doubtful bad debts.
Step # 11
Capital Expenditure:
The expenditure, which is done to get a fixed asset, is called capital expenditure.
(e.g.) Building, Furniture, Machinery etc.
Revenue Expenditure:
The expenditure, which is done to get a floating asset or to meet running expenses, is
called revenue expenditure.
(e.g.) Purchases, Wages, repairing etc.
Capital Profit:
A profit made from the sale of a fixed asset is capital profit.
Capital Loss:
A loss made from the sale of a fixed asset is capital loss.
Capital Receipt:
The amount received against sale of fixed asset or as a loan is called capital payment.
Capital Payment:
The amount paid against purchase of fixed asset or repayment of loan is called receipt.
Revenue Receipt:
The amount received against sale of good or services is called revenue receipt.
Revenue Payment:
The amount paid against purchase of good or services is called revenue payment.
Step # 12
Error of Omission:
If the complete transaction is omitted to record, it is called error of omission.
Error of commission:
Wrong recording of an account of a transaction is called error of commission.

Error of Posting:
The error during posting of an account is called error of posting.
Error of Principle:
The error against the principles of accounting is called error of principle.
Suspense Account:
Suspense account is used where there no any other account can be used during
rectification of errors.
Book keeping Error:
The error of a transaction in journal is called book keeping error.
Compensating error:
The error cancelled by another error is called compensating error.
Trial balance error:
The error that occurs in trail balance is called trial balance error.