PRINCIPLE OF ACCOUNTING

BASIC ACCOUNTING TERMINOLOGIES AND DEFINITIONS

BASIC ACCOUNTING TERMINOLIGIES AND DEFINATIONS

Accounting The process of recording, classifying, reporting, and interpreting financial data of an organization. Bookkeeping The record making phase of accounting. Entering transactions into journals. Paying bills. Preparing sales invoices Business Transactions An exchange of goods, services, money, or the right to collect money Accounting equation Assets = Liabilities + Owner's Equity.

Asset A property or resource owned by an individual or organization. There are two types of assets 1) Fixed Assets are assets held on a long term basis, such as land, buildings, machinery, plant, furniture and fixtures. These assets are used for doing business and not for re-sale in normal course of operation. 2) Current Assets are assets held on a short term basis such as debtors (account receivable), bills receivable (notes receivable), stock (inventory), temporary investment in securities, cash and bank balances. Normally the short term refers to an accounting year. Liability These are the obligations or debts that the enterprise must pay in money or services at sometime in the future. A debt owed by the organization. There are two types of liabilities

Long term liabilities are those that are usually payable after a period of one year, for example, a term loan from financial institution or debentures (bonds) issued by the company. Short term liabilities are obligations that are payable within a period of one year, for example, creditors (accounts payable), bills payable (notes payable), cash credit overdraft from a bank for a short period.

Capital Investment by the owners for the use in the firm is known as capital. Equity A right, claim, or interest in a property. As it pertains to Owner's Equity, it would be an interest in the organization. Owners equity is the ownership claim on total assets. It is equal to total assets minus total external liabilities: E=A-L this is also called residual interest. Owner's equity is equal to capital. Account Payable A debt owed to a creditor for goods or services purchased on credit. Account Receivable An amount due from a debtor for good or services sold on credit Accrual Accounting The process of recognizing, in the financial statements, revenue when it is earned and expenses as they are incurred regardless of when the cash changes hands. Cash Accounting A method of accounting in which sales are recorded when the money is actually received, not when the services are delivered. Expenses are recognized when paid, not at the time they are incurred Journal Book of original entry in your standard accounting system, in which business transactions are first recorded, and from which transactions are posted to ledger accounts. Account An accounting devise used to record and summarize increases and decreases in revenue, expense, asset, liability, and equity items. Ledger A group of accounts used by a business to record its transactions. (like summarizing your checkbook entries into separate lists by name or type of entry) Posting The act of transfer amounts from a journal to a ledger account.
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PRINCIPLE OF ACCOUNTING
BASIC ACCOUNTING TERMINOLIGIES AND TrialDEFINATIONS of your ledger accounts with the balance Balance It is a list in each account, and the total of all debit and credit balances, Prepare to check mathematical accuracy. This is a Chart of Accounts with balances. Chart of Accounts A list of all accounts being used in a particular standard accounting system, in this order: assets, liabilities, equity, revenue, expenses. Purchases are total amounts of goods procured by a business on credit and for cash, for use or sale. In a trading concern, purchases are made of merchandise for resale with or without processing. In a manufacturing concern, raw materials are purchased, processed further into finished goods and then sold. Purchases may be cash purchases or credit purchases. Stock (inventory) is a measure of something on hand-goods, spares and other items-in a business. It is called stock on hand. In a trading concern, the stock on hand is the amount of goods which have not been sold on the date on which the balance sheet is prepared. This is also called closing stock (ending inventory). In a manufacturing company, closing stock comprises raw materials, semi-finished goods and finished goods on hand on the closing date. Similarly, opening stock (beginning inventory) is the amount of stock at the beginning of the accounting year. Sales are total revenues from goods sold and/or services sold or provided to customers. Sales may be cash sales or credit sales. Revenues These are the amounts the business earns by selling it products or providing services to customers. These are called 'sales revenues'. Other items and sources of revenues common to many businesses are: sales, fees, commission, interest, dividends, royalties, rent received, etc. Expense Goods or services consumed in operating an enterprise. These are costs incurred by a business in the process of earning revenues. Generally, expenses are measured by the cost of assets consumed or services used during an accounting period. The usual items of expenses are: depreciation, rent, wages, salary, interest, costs of heat, light and water, telephone, etc. Voucher A business form on which a transaction is summarized, its correction verified, and its recording and payment approved. The most widely used voucher is a bill received for goods or services purchased. The bill would be compared to the purchase order, if applicable, verifying that the bill is correct, then the information would be entered into an accounting software system as a voucher, to be paid at a later date. Purchase order A standard accounting system form. This business form is used by a purchasing department to place an order. It authorizes the supplier to ship the merchandise ordered. Invoice the original billing from the seller to the buyer, outlining what was purchased and the terms of sale,
payment, etc.

Financial statements Financial statements are written records of business finances, including balance sheets and profit and loss statements. They show you the health and value of your business (Balance Sheet) and how much profit you're making (Income Statement).
There are two basic financial statements which are prepared by an enterprise: 1. Income Statement, and 2. Balance Sheet. 3. Cash flow

Income Statement A basic accounting financial statement showing revenues earned by a business, the expenses incurred in earning that revenue, and the corresponding net income or loss. Invoice An itemized statement of goods or services bought and sold Balance Sheet A basic accounting financial report showing the assets, liabilities, and owner equity if an organization on a specific date.
B-75, Block L, North Nazimabad, Near 5Star/ Landi Kotal Roundabout, Karachi. TEL: 021-36725954 Cell# 03002407058

PRINCIPLE OF ACCOUNTING
BASIC ACCOUNTING TERMINOLIGIES AND CashDEFINATIONS of cash received and disbursed Flow - a summary

showing the beginning and ending amounts

Sample Chart of Accounts

Assets Current Assets
**Petty Cash **Business Checking Account **Business Savings Account **Accounts Receivable **Inventory **Equipment **Furniture & Fixtures **Buildings & Improvements **Vehicles **Accumulated Depreciation (Contra Account)

Fixed Assets

Liabilities Current Liabilities

**Accounts Payable **Credit Cards Payable **Payroll Taxes Payable **Sales Tax Payable **Note Payable Vehicle Loan **Note Payable Mortgage Loan **Note Payable Owner

Long Term Liabilities

Equity

For a Sole Proprietor: **Capital (the owners equity in the business) ***Contributions (sub-account for additional money put into the business) ***Draws (sub-account for money taken out of the business) For a Partnership: **Capital Owner 1 ***Contributions Owner 1 ***Draws Owner 1 **Capital Owner 2 ***Contributions Owner 2 ***Contributions Owner 2 For a Corporation: **Capital Stock (actual stock issued to the owners) **Retained Earnings (accumulation of the business profit or loss from year to year) **Dividends (moneys taken out of the business and dispersed to owners)

Revenue

(what accounts you have here will be determined by your type of business) - - - for this example, lets assume you run a repair shop - - **Services **Parts / Products Sold **Sales Returns

Cost of Goods Sold

B-75, Block L, North Nazimabad, Near 5Star/ Landi Kotal Roundabout, Karachi. TEL: 021-36725954 Cell# 03002407058

PRINCIPLE OF ACCOUNTING
BASIC ACCOUNTING TERMINOLIGIES AND DEFINATIONS **Materials **Labor **Outside Services / Subcontractors **Shop Supplies **Small Tools

Expenses

**Advertising **Automobile Expense **Bank Service Charges **Computer Expenses **Contributions **Depreciation **Dues & Subscriptions **Federal Unemployment Taxes **FICA Expense (employers portion of social security tax) **Insurance (you could set up sub-accounts for auto, business, health, life, etc.) **Interest Expense **Licenses & Permits **Meals & Entertainment **Office Expenses **Postage **Professional Services (accountant, attorney, consultants) **Repairs & Maintenance **Rent **Salaries - Office **Salaries Officers or Owners **State Unemployment Taxes **Telephone **Travel **Utilities **Workers Compensation (if your state has this fund) **Interest Income **Other Income (depends on your situation)

Other Income

This sample chart of accounts is a starting point of some of the most common general ledger accounts that used in various small business bookkeeping systems.

Basic Accounting Analysis

B-75, Block L, North Nazimabad, Near 5Star/ Landi Kotal Roundabout, Karachi. TEL: 021-36725954 Cell# 03002407058

PRINCIPLE OF ACCOUNTING
BASIC ACCOUNTING TERMINOLIGIES AND DEFINATIONS

Here are 7 tools to use to monitor business.

1. Balance Sheet The Balance Sheet also shows you more details, like how much cash you have, how much customers owe you (accounts receivable), how much in bills you owe (accounts payable), how much you owe in loans, and how much your business has earned up to now (equity or retained earnings). 2. Cash Balance How much is in your checking and savings accounts? Cash is vital to your small business health. You can't survive without it. This is an accounting basic. Even if you buy on credit, you still have to pay the bills. If you have to keep borrowing, your debt will overtake your assets, and your net worth will disappear. And banks don't like negative cash flow. So monitor your cash balance. Reconcile your bank statement every month. Know when your business cycles up and down, and plan ahead to make sure you have the cash you need to move ahead. 3. Income Statement The next step in your basic accounting analysis is to take a look at your Income Statement each month. This is your bottom line. But it's so much more than that. Your basic accounting analysis should dig deeper than just your Profit or Loss number. Look at your total revenue and total expenses. Are they increasing or decreasing? Ask your accountant for a comparative Income Statement. This shows the comparison of this month and this year to date with last year, this month, and last year, year to date. 4. Statement of Cash Flow This financial statement is another step in your basic accounting analysis. It takes the change in your cash balance for a time period, usually a year, and dissects that change into 3 areas - operations, financing, and investments. From this statement you can see whether your business is holding its own, or needs influxes of cash from sources outside day to day operations to keep afloat. 5 - Employee Turnover Another part of your basic accounting analysis is taking a look at your employee turnover. Do employees stay a while or leave right away? Certain employees are a very important part of your business. They may be the ones greeting customers, or helping customers on the phone, buying your materials, or selling your product. The longer they work for you the more wealth of knowledge they have, the more your customers count on them, and the harder they'll be to replace. Each new employee needs training. That takes time and money. In some businesses, your employees are your business. If you have trouble keeping people, find out why and rectify the problem. You'll save money in the long run. And remember, you're employees are out there talking about you. Make sure it's positive!

6 - Supplier Relations How well do you get along with your suppliers? When you need something in a pinch, are they willing to work with you or do they not return your phone calls?

B-75, Block L, North Nazimabad, Near 5Star/ Landi Kotal Roundabout, Karachi. TEL: 021-36725954 Cell# 03002407058

PRINCIPLE OF ACCOUNTING
BASIC ACCOUNTING TERMINOLIGIES AND DEFINATIONS No basic accounting analysis would be complete without

looking into the strength of your supply chain. Make sure you pay on time, and take a little time to develop a personal relationship. I'm not talking buddies, here, but make some time for those sales reps. If they know you, they're more apt to go to bat for you in a pinch to get what you need. 7 - Customer Relations How are your customers? Do they come back for more? Do they send their friends to you? Are they angry or happy with you? This is an important part of your basic accounting analysis because there is no business without customers. There is no sales income without customers. Again, word of mouth is the greatest advertising. Make sure your customers are happy and giving you the thumbs up to their friends and business associates. Keep in touch with them, and let them know how important they are to you. These 7 tools are by no means inclusive of a basic accounting analysis, but they will give you a rounded, realistic view of how your business is doing. If you have positive net worth, a decent amount of cash in your checkbook, a profit, great employees that stick with you, suppliers ready to back you up, and customers raving about you, how can you go wrong? And if you don't have all these things? Find out why. That's the great part of doing a simple accounting analysis on a regular basis. Nothing about business is static. It's always changing. Keep up. Spot problems when they're small and fixable.

B-75, Block L, North Nazimabad, Near 5Star/ Landi Kotal Roundabout, Karachi. TEL: 021-36725954 Cell# 03002407058