Transaction
A transaction is any financial event or activity that can be measured in money and affects the financial position of a business.
Example: Buying goods, paying salaries, or receiving cash from customers.
Credit Purchase
A credit purchase occurs when a business buys goods or services and agrees to pay the supplier at a later date.
Example: Purchasing inventory from a supplier on 30-day payment terms.
Credit Sales
Credit sales happen when a business sells goods or services to a customer who agrees to pay in the future.
Example: Selling products to a customer on account (payment due after 15 days).
Purchases
Purchases refer to the goods bought by a business for the purpose of resale or use in production. These can be made for cash or on credit.
Example: Buying raw materials for manufacturing.
Sales
Sales are goods or services sold by a business to its customers, either for cash or on credit.
Example: Selling products to customers in a retail store.
Drawings
Drawings refer to the money or goods withdrawn from the business by the owner for personal use.
Example: The owner takes Rs. 5,000 from the business cash account for personal expenses.
Capital
Capital is the amount invested by the owner in the business. It represents the owner's claim on the business assets.
Example: An owner starts a business by depositing Rs. 100,000.
Expense
An expense is the cost incurred by a business in order to earn revenue. It reduces profit and owner's equity.
Example: Rent, salaries, utility bills.
Asset
An asset is a resource owned by a business that has economic value and is expected to provide future benefit.
Example: Cash, buildings, equipment, accounts receivable.
Liabilities
Liabilities are financial obligations or debts that a business owes to outside parties.
Example: Loans, accounts payable, salaries payable.
Prepaid Expense
A prepaid expense is a payment made in advance for goods or services to be received in the future. It is initially recorded as an asset.
Example: Paying rent for the next three months in advance.
Current Assets
Current assets are assets that are expected to be converted into cash, sold, or consumed within one year or within the normal operating cycle of the business, whichever is longer.
Example: Cash, Accounts Receivable, Inventory, Prepaid Expenses.
Non-Current Assets
Non-current assets are long-term assets that are not expected to be converted into cash within one year. These are used in the operations of the business.
Example: Land, Buildings, Equipment, Vehicles.
Current Liabilities
Current liabilities are obligations or debts that a business is expected to settle within one year or within the operating cycle.
Example: Accounts Payable, Short-term Loans, Salaries Payable, Utility Bills Payable.
Non-Current Liabilities
Non-current liabilities are long-term obligations that are not due for payment within one year.
Example: Long-term Loans, Mortgage Payable, Bonds Payable.
Discount
A discount is a reduction in the selling price given by the seller to the buyer. It may be offered to encourage early payment or as a promotional offer.
Example: A 5% discount for payment within 10 days.
Depreciation
Depreciation is the decrease in the value of a fixed asset over time due to wear and tear, usage, or obsolescence. It is treated as an expense in the accounts.
Example: Machinery losing value over 10 years.
Trade Discount
A trade discount is a reduction in the listed price of goods offered by a seller to a buyer, usually for bulk purchases or business promotion. It is not recorded in the books of accounts.
Example: 10% trade discount on buying 100 units.
Bookkeeping
Bookkeeping is the process of recording all financial transactions of a business in a systematic and chronological order. It includes recording sales, purchases, receipts, and payments to maintain accurate financial records.
Example: Recording daily cash sales in a cash book.
Accounts Receivable
Accounts receivable refers to the amount of money owed to a business by its customers for goods or services sold on credit. It is considered an asset.
Example: A customer who bought goods on credit and will pay in 30 days.
Accounts Payable
Accounts payable is the amount a business owes to its suppliers or creditors for goods or services purchased on credit. It is a liability.
Example: Paying a supplier 15 days after purchasing goods.
Accrued Expense
An accrued expense is an expense that has been incurred but not yet paid. It is recorded as a liability in the books.
Example: Salaries for June that will be paid in July.
Return
A return is the process of sending goods back to the seller or receiving them back from the buyer due to defects, damage, or other issues.
Sales Return
A sales return occurs when a customer returns goods sold to them, usually due to damage or dissatisfaction. It reduces total sales.
Purchase Return
A purchase return happens when a business returns goods purchased from a supplier. It reduces the purchases total.
Double Entry
Double entry is the fundamental principle of accounting where every transaction affects at least two accounts: one debit and one credit, maintaining the accounting equation.
Entry
An entry is the recorded form of a financial transaction in the books of accounts. It includes the date, accounts affected, amounts, and a brief description.
Accounting Period
An accounting period is the specific time frame for which financial records are prepared and reported. It can be monthly, quarterly, or yearly.
Financial Statements
Financial statements are formal records that show the financial performance and position of a business. The main statements are the Income Statement, Balance Sheet, and Cash Flow Statement.
Single Entry
Single entry is a simple and incomplete system of accounting in which only one side of each transaction is recorded. It generally tracks only cash and personal accounts, and does not follow the double entry principle. It is often used by small businesses that do not maintain full books of accounts.
Example: Recording only cash received from a customer, without recording the corresponding sale.
Ledger
A ledger is a book or digital record where all transactions of a business are grouped and posted account-wise from the journal. It helps in tracking the balance of each account like cash, sales, purchases, etc.
Trial Balance
A trial balance is a statement that lists all the debit and credit balances of ledger accounts on a specific date to check the arithmetic accuracy of the books. If total debits equal total credits, the books are considered balanced.
Proprietor
A proprietor is the owner of a sole proprietorship business. They invest capital, manage operations, bear risks, and enjoy profits or bear losses of the business.
Personal Account
A personal account relates to individuals, firms, companies, or any other organization with whom the business has financial dealings. It includes accounts of debtors, creditors, banks, etc.
Example: Ali’s Account (individual), HBL Bank Account (organization), XYZ Ltd. Account (company)
Real Account
A real account relates to tangible and intangible assets of the business. These accounts do not close at the end of the year and are carried forward to the next accounting period.
Example: Cash, Land, Building (tangible assets), Goodwill, Trademark (intangible assets)
Nominal Account
A nominal account relates to expenses, losses, incomes, and gains of a business. These accounts are temporary and are closed at the end of the accounting year by transferring their balances to the Profit & Loss Account.
Example: Rent Expense, Salary Expense, Commission Received, Interest Income
Bad Debts
Bad debts are amounts owed by customers that are no longer collectible, usually because the debtor has become insolvent or is unwilling to pay. Bad debts are recorded as an expense in the books of accounts.
Example: If a customer fails to pay Rs. 5,000 and there is no chance of recovery, it is treated as a bad debt.
Carried Forward (c/f)
Carried forward refers to the process of transferring a balance or total from the bottom of one page, column, or accounting period to the top of the next. It indicates that the balance will continue into the next stage.
Example: If a ledger account ends with a debit balance of Rs. 5,000 on May 31, it is marked as:
Balance c/f Rs. 5,000
Brought Forward (b/f)
Brought forward means the balance or total that has been carried forward from the previous page or period. It is the opening balance for the current page or period.
Example: On June 1, the same Rs. 5,000 will appear as:
Balance b/f Rs. 5,000
Bank Advice
A bank advice is a written document or electronic message sent by a bank to inform a customer about a transaction made in their account, such as a deposit, withdrawal, charges, or interest.
Example: Notification of bank charges deducted from an account.
Credit Note
A credit note is a document issued by a seller to the buyer to indicate that the buyer's account has been credited, usually due to returned goods or an overcharge.
Example: Goods worth Rs. 1,000 returned by the buyer are acknowledged by issuing a credit note.
Debit Note
A debit note is a document sent by a buyer to the seller to request a reduction in the amount payable due to reasons like damaged goods, incorrect billing, or short supply.
Example: Buyer sends a debit note to the supplier for Rs. 500 worth of damaged items.
Bank Note
A bank note is a paper currency issued by a country’s central bank that serves as a legal tender for making payments.
Example: Rs. 100 currency note issued by the State Bank.
Statement of Account
A statement of account is a summary report sent by a seller (or service provider) to a customer that shows all transactions between them during a specific period. It includes invoices, credit notes, payments received, and the outstanding balance. It helps the customer keep track of how much is owed.
Example: A business sends a monthly statement of account to a client showing all sales, returns, and payments from June 1 to June 30, along with the remaining balance.
Special Journal
A special journal is a type of accounting journal used to record repetitive and similar types of transactions. Instead of recording all entries in the general journal, businesses use special journals to save time and improve efficiency. Each special journal is used for a specific type of transaction.
Cash Book
A cash book is a special journal that records all cash and bank transactions of a business in chronological order. It serves as both a journal and a ledger for cash and bank accounts.
Example: Receiving Rs. 5,000 in cash from a customer is recorded in the cash book.
Pass Book
A pass book is a record provided by the bank to the account holder that shows all banking transactions (deposits, withdrawals, charges, interest, etc.) from the bank's point of view.
Example: A bank crediting Rs. 2,000 interest will appear in the pass book.
Petty Cash Book
A petty cash book is used to record small day-to-day expenses, such as postage, stationery, and travel. It is maintained under the imprest system, where a fixed amount is given to the petty cashier.
Example: Recording Rs. 100 spent on tea and snacks.
Voucher
A voucher is a written document that serves as proof of a financial transaction. It authorizes or supports entries in the accounting books.
Example: A bill for electricity paid by the business is attached to the payment voucher.
Receipt
A receipt is a written acknowledgment that money has been received. It is issued by the seller or payee and is evidence of payment.
Example: A shop issues a receipt after receiving Rs. 1,000 in cash.
Bank Statement
A bank statement is a summary of all transactions in a bank account during a specific period. It includes deposits, withdrawals, bank charges, and the closing balance.
Example: Monthly bank statement received from the bank showing all debits and credits.
Folio
In accounting, a folio refers to the reference number or page number that links entries between books of accounts, such as the journal and the ledger. It helps in cross-referencing and tracking the original source of any transaction.
Types of Folio:
- Journal Folio (J.F.): The page number in the journal where the transaction was first recorded.
- Ledger Folio (L.F.): The page number in the ledger where the transaction has been posted.
Example:
If a cash payment is posted on page 5 of the journal and page 12 of the ledger, then:
- In the ledger, J.F. = 5
- In the journal, L.F. = 12
Cheque
A cheque is a written order issued by a bank account holder to their bank, instructing it to pay a specific amount of money to a person or organization mentioned on the cheque.
Types of Cheques:
- Bearer Cheque – Payable to the person holding it.
- Order Cheque – Payable to a specific person.
- Crossed Cheque – Can only be deposited in a bank account, not cashed directly.
Example:
Paying Rs. 10,000 to a supplier using a cheque drawn on your bank account.
Bank Reconciliation
Bank reconciliation is the process of matching and comparing the balances in the cash book (company records) and the pass book (bank statement) to identify and explain any differences.
Common reasons for differences:
- Cheques issued but not yet presented
- Deposits made but not yet credited by the bank
- Bank charges or interest recorded by the bank but not in the cash book
Purpose: To ensure the business’s cash records are accurate and up to date.
Current Account
A current account is a bank account used mainly by businesses and professionals to carry out frequent and large transactions. It allows deposits and withdrawals at any time and usually does not earn interest.
Example: Business account used for paying suppliers and receiving customer payments.
Account Holder
An account holder is the person or organization in whose name a bank account is maintained. They have the right to operate and manage the account.
Example: Mr. Ali, who has a savings account at HBL, is the account holder.
Savings Account
A savings account is a bank account meant for individuals to save money and earn interest on the balance. It has withdrawal limits and is suitable for personal savings.
Example: A student opens a savings account to deposit pocket money and earn interest.
Fixed Deposit (FD)
A fixed deposit is a lump-sum deposit made for a fixed period at a fixed interest rate. The money cannot be withdrawn before maturity without penalty.
Example: Depositing Rs. 50,000 for 1 year at 10% interest.
Interest
Interest is the amount earned or paid for the use of money. Banks pay interest on deposits (e.g., savings or FDs) and charge interest on loans.
Example: Bank pays 8% annual interest on a fixed deposit.
Commission
Commission is a fee charged by a bank or agent for providing a service such as issuing a demand draft, collecting a cheque, or handling foreign exchange.
Example: A bank charges Rs. 100 commission for issuing a pay order.
Bank Charges
Bank charges are fees deducted by a bank for account maintenance, services, or transactions.
Example: Monthly bank maintenance fee of Rs. 50 is deducted from a current account.
Charges
Charges is a general term for any kind of fee or deduction imposed by a bank, business, or service provider for services rendered.
Example: ATM withdrawal fee, cheque book issuance fee, or late payment charges.
Revenue
Revenue is the total amount of income earned by a business through its normal operations, such as the sale of goods or services, before any expenses are deducted.
Example: A company earns Rs. 100,000 from selling products. That is its revenue.
Profit
Profit is the financial gain a business makes when its revenue is greater than its expenses. It is also called net income.
Formula: Profit = Revenue – Expenses
Example: If revenue is Rs. 100,000 and expenses are Rs. 70,000, the profit is Rs. 30,000.
Loss
Loss occurs when a business's expenses exceed its revenue, meaning it has spent more than it earned.
Example: If revenue is Rs. 50,000 and expenses are Rs. 60,000, the business incurs a loss of Rs. 10,000.
Accounting Cycle
The accounting cycle is a step-by-step process used by businesses to identify, record, summarize, and report financial transactions for a specific accounting period. It helps in preparing accurate financial statements and ensures consistency in bookkeeping.
Opening Stock
Opening stock is the value of goods or materials that a business has on hand at the beginning of an accounting period. It becomes the starting inventory for calculating the cost of goods sold.
Example: If a shop has Rs. 20,000 worth of unsold goods on January 1, that is the opening stock.
Closing Stock
Closing stock is the value of unsold goods at the end of an accounting period. It is shown as an asset in the balance sheet and also used in calculating COGS.
Example: If a business has Rs. 15,000 worth of goods left on December 31, that is the closing stock.
Cost of Goods Sold (COGS)
COGS is the total cost of producing or purchasing goods that were sold during an accounting period. It is used to calculate gross profit.
Formula: COGS = Opening Stock + Purchases + Direct Expenses – Closing Stock
Example: If Opening Stock = Rs. 10,000, Purchases = Rs. 50,000, Direct Expenses = Rs. 5,000, and Closing Stock = Rs. 15,000
Then COGS = 10,000 + 50,000 + 5,000 – 15,000 = Rs. 50,000
Wages
Wages are payments made to workers or laborers for their services, especially related to production. In accounting, wages related to manufacturing are treated as direct expenses.
Example: Paying Rs. 8,000 to factory workers for making products.
Carriage
Carriage is the cost of transporting goods. It is divided into two types:
Carriage Inwards – Cost of bringing goods into the business (part of direct expenses).
Carriage Outwards – Cost of delivering goods to customers (treated as selling expense).
Example: Paying Rs. 500 to bring raw materials to the factory is carriage inwards.
Gross Profit
Gross profit is the profit earned from core business activities, such as selling goods or services, before deducting indirect expenses like rent, salaries, or utilities.
Formula: Gross Profit = Revenue (Sales) – Cost of Goods Sold (COGS)
Example: If Sales = Rs. 100,000 and COGS = Rs. 70,000, then:
Gross Profit = Rs. 30,000
Net Profit
Net profit is the final profit of a business after deducting all expenses, including operating expenses, interest, taxes, and depreciation.
Formula: Net Profit = Gross Profit – Operating Expenses – Other Expenses + Other Income
Example: If Gross Profit = Rs. 30,000, Operating Expenses = Rs. 10,000, and Other Expenses = Rs. 2,000,
Net Profit = Rs. 18,000
Define ledger account, its need and importance.
Ledger Account
A ledger account is a detailed individual record for each item or account (such as cash, sales, expenses, etc.) where all related transactions are posted from the journal. It shows the debit and credit entries, allowing the calculation of the current balance of each account.
Example: Cash Account, Sales Account, Rent Expense Account
Need for Ledger Account
- To organize transactions account-wise instead of date-wise.
- To get a complete picture of each account’s activity.
- To calculate the balance of each account (e.g., cash in hand, total sales).
- To make it easy to prepare a Trial Balance and Financial Statements.
Importance of Ledger Account
- Helps in summarizing all transactions related to a particular item or account.
- Ensures accuracy in accounting by separating and balancing accounts.
- Forms the basis for preparing Trial Balance, Income Statement, and Balance Sheet.
- Useful in auditing and detecting errors or fraud.
- Aids in decision-making by providing detailed financial information.
Define and explain trial balance.
Trial Balance
A trial balance is a statement that lists the closing balances of all ledger accounts (both debit and credit) on a specific date. Its main purpose is to check the arithmetic accuracy of the books under the double-entry system. In a correctly prepared trial balance, the total of debit balances equals the total of credit balances.
Explanation
- It is usually prepared at the end of an accounting period (monthly, quarterly, or annually).
- It includes balances of all types of accounts: assets, liabilities, income, expenses, capital, etc.
- A trial balance helps detect errors such as omissions, wrong postings, or calculation mistakes.
- It is a stepping stone to preparing the final accounts (i.e., income statement and balance sheet).
Example Format:
| Account Name | Debit (Rs.) | Credit (Rs.) |
|---|---|---|
| Cash | 10,000 | |
| Sales | 25,000 | |
| Purchases | 15,000 | |
| Capital | 30,000 |
Define special journal in detail.
Special Journal
A special journal is a type of accounting journal used to record repetitive and similar types of transactions. Instead of recording all entries in the general journal, businesses use special journals to save time and improve efficiency. Each special journal is used for a specific type of transaction.
Types of Special Journals with Examples:
- Sales Journal – For recording credit sales.
Example: Sold goods to Ali on credit Rs. 5,000. - Purchases Journal – For recording credit purchases.
Example: Purchased goods from Khan Traders on credit Rs. 8,000. - Sales Returns Journal (Return Inward) – For goods returned by customers.
Example: Ali returned goods worth Rs. 500. - Purchases Returns Journal (Return Outward) – For goods returned to suppliers.
Example: Returned goods to Khan Traders worth Rs. 300. - Cash Book – For all cash and bank transactions.
Example: Received Rs. 10,000 from a customer. - General Journal – For all other transactions.
Example: Recorded depreciation on equipment Rs. 1,000.
Describe the final account and its elements.
Final Accounts
Final accounts are the financial statements prepared at the end of an accounting period to determine the financial results (profit or loss) and the financial position of a business. They summarize all business transactions recorded throughout the period.
Elements of Final Accounts
1. Trading Account
This account shows the gross profit or loss of the business. It includes sales, purchases, opening and closing stock, and direct expenses (like wages, carriage inwards).
Formula: Gross Profit = Net Sales – Cost of Goods Sold (COGS)
2. Profit and Loss Account
This account shows the net profit or net loss. It starts with gross profit from the trading account and subtracts indirect expenses (like salaries, rent, depreciation). It also includes other incomes like interest or commission received.
3. Balance Sheet
This is a statement of the financial position of a business on a particular date. It shows assets, liabilities, and owner's equity.
Formula: Assets = Liabilities + Capital
Define transaction and its kinds.
Transaction
A transaction is any business activity or event that involves the exchange of money or money's worth and can be recorded in the books of accounts.
Example: Buying goods, receiving cash, paying salaries, etc.
Kinds of Transactions
1. Cash Transaction
When payment is made or received immediately in cash or through bank.
Example: Buying office supplies and paying cash on the spot.
2. Credit Transaction
When payment is not made or received immediately but is deferred to a future date.
Example: Selling goods to a customer on credit.
3. Internal Transaction
A transaction that occurs within the business and does not involve any external party.
Example: Depreciation charged on machinery.
4. External Transaction
A transaction that involves an outside party or person.
Example: Purchasing goods from a supplier.
What is an event? Describe monetary event and non-monetary event.
Event
An event is any occurrence or happening that affects a business. It may be internal or external, and it may or may not involve money. In accounting, only those events that can be measured in monetary terms are recorded.
1. Monetary Event
A monetary event is one that can be measured in terms of money and affects the financial position of a business. These are recorded in the accounting records.
Examples:
- Receiving Rs. 20,000 from a customer.
- Paying monthly rent of Rs. 5,000.
- Purchasing inventory worth Rs. 10,000.
2. Non-Monetary Event
A non-monetary event is one that affects the business but cannot be measured in money, so it is not recorded in accounting books.
Examples:
- A manager resigns from the company.
- The CEO of the company delivers a motivational speech.
- A machine breaks down temporarily.
Define journal, its importance and objectives.
Journal
A journal is the book of original entry where all financial transactions are recorded in chronological order for the first time. Each transaction is recorded with a debit and credit using the double-entry system.
Example:
Rent A/C Dr. Rs. 2,000
To Cash A/C Rs. 2,000
Importance of Journal
- It provides a complete and detailed record of every transaction.
- Maintains chronological order, which helps track the sequence of events.
- Acts as a legal record in case of disputes.
- Helps in transferring entries to the ledger accurately.
- Useful for preparing financial statements.
Objectives of Journal
- To maintain a systematic record of transactions.
- To ensure accuracy by applying the double-entry principle.
- To provide a basis for posting to ledger accounts.
- To show a clear explanation (narration) of each transaction.
- To help in auditing and verification of accounts.
Definition of Journal (General Journal)
Definition of Journal (General Journal)
The Journal is the book of original entry where all business transactions are first recorded chronologically, before posting to ledger accounts. Each transaction is recorded using the double-entry system, meaning every debit has a corresponding credit.
Format of a General Journal Entry
| Date | Particulars | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|
| 2024-05-01 | Cash A/C Dr. To Capital A/C (Being capital introduced) |
10,000 | 10,000 |
Subsidiary Journals (Special Journals)
Subsidiary Journals are specialized journals used to record recurring and similar types of transactions. Instead of recording every transaction in the general journal, businesses use these to streamline accounting.
Types of Subsidiary Journals with Examples
1. Sales Journal
Records credit sales of goods only.
Example: May 10: Sold goods worth Rs. 5,000 to Ali on credit.
| Date | Customer Name | Invoice No. | Amount (Rs.) |
|---|---|---|---|
| May 10 | Ali | INV#102 | 5,000 |
2. Purchases Journal
Records credit purchases of goods.
Example: May 12: Purchased goods worth Rs. 8,000 from Khan Traders on credit.
| Date | Supplier Name | Invoice No. | Amount (Rs.) |
|---|---|---|---|
| May 12 | Khan Traders | INV#209 | 8,000 |
3. Sales Returns Journal (Return Inward)
Records goods returned by customers.
Example: May 15: Ali returned goods worth Rs. 500.
| Date | Customer Name | Credit Note No. | Amount (Rs.) |
|---|---|---|---|
| May 15 | Ali | CN#301 | 500 |
4. Purchase Returns Journal (Return Outward)
Records goods returned to suppliers.
Example: May 18: Returned goods worth Rs. 300 to Khan Traders.
| Date | Supplier Name | Debit Note No. | Amount (Rs.) |
|---|---|---|---|
| May 18 | Khan Traders | DN#410 | 300 |
5. Cash Book
Records all cash and bank transactions.
Example: May 20: Received Rs. 10,000 from a customer in cash.
| Date | Particulars | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|
| May 20 | Cash Received | 10,000 |
6. General Journal (Journal Proper)
Used for transactions not recorded in any other journal.
Example: May 25: Depreciation on equipment Rs. 1,000.
| Date | Particulars | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|
| May 25 | Depreciation A/C Dr. To Equipment A/C (Being depreciation recorded) |
1,000 | 1,000 |
Summary Table
| Subsidiary Journal | Used For | Example Transaction |
|---|---|---|
| Sales Journal | Credit sales | Sold goods to Ali on credit |
| Purchases Journal | Credit purchases | Bought goods from Khan Traders on credit |
| Sales Returns Journal | Returns from customers | Ali returned goods |
| Purchase Returns Journal | Returns to suppliers | Returned goods to Khan Traders |
| Cash Book | Cash and bank transactions | Received or paid cash |
| General Journal | All other transactions | Depreciation, adjustments, etc. |
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