Q. What is Accounting ?

Accounting is an information system that measure, process & communicates financial

information about an identifiable economic entity to permit users of the system to make
informed judgments & decisions.

Definition: In 1970, the AICPA (American Institute of Certified Public Accountants) stated that
the function of accounting is “To provide quantitative information, primarily financial in nature,
about economic entities that is intended to be useful in making economic decisions.

Q. Who are the users of accounting information?/ Who uses accounting information?

The Users of Accounting Information:

The users of accounting information can be divided into three major groups:

1. Those who manages a business.

2. Those outside a business enterprise who have a direct financial interest in the business
such as:
 Present and Potential investors.
 Present and potential creditors.
3. Those persons, groups or agencies, that have an indirect financial interest in the business
such as:
 Tax authorities.
 Regulatory agencies.
 Economic planners.
 Customers.
 Other groups.

Users of Accounting Information

 Internal External Public Groups

⫸ Managing ⫸ Financing groups. ⫸ Regulatory
groups ⫸ Investors. agencies.
⫸ Board of ⫸ Potential Investors. ⫸ Tax authorities.
directors ⫸ Creditors. ⫸ Labor Union.

⫸ Partners ⫸ Potential Creditors. ⫸ Economic
⫸ Supervisors Planners
etc. ⫸ Employees
Q. Define/write short notes on/write some features or characteristics of Assets,
Liabilities, Owners’ equity, Expenses, Business transactions, Book keeping, Double entry
system, journal, ledger, trial balance, financial statements, income statement, balance
sheet etc.

Equity:
The residual interest in the assets of an entity that remains after deducting its liabilities. E=A-L.
Equity is anything that is invested in the company by its owner or the sum of the total assets
minus the sum of the total liabilities of the company and the example of which includes
Common stock, additional paid-in capital, preferred stock, retained earnings and the
accumulated other comprehensive income.

Retained Earnings – It is the portion of the income that is retained in the company to invest in
the business.

Expenses:
Decrease in owners’ equity that result from operating the business. Money spent or cost
incurred in an organization's efforts to generate revenue, representing the cost of doing
business. Expenses may be in the form of actual cash payments (such as wages and salaries),

Expenses are summarized and charged in the income statement.

Q. What is account?/classify accounts.

Accounts:
The basic storage units for data in accounting systems there is a separate accounts for each
asset, liability, component of owners equity, resonance & expense.

Accounts:

o Personal accounts (x,y etc)

o Property or real accounts (machine, furniture etc)
o Normal accounts (wages, salaries, discount etc)
Q. How can you determine debit and credit? What are the
Rules for determination of debit & credit (what are the Golden rules of
accounting):
Debit:

-Receiver of benefits
-What comes in?

-Expenses & losses

Credit:

-Giver of benefits

-What goes out?

-Gains & incomes

Debit indicates: Credit indicates:

-Assets increases -Assets decreases

-Liabilities decreases -Liabilities increases

-Proprietorship decreases -Proprietorship increases

-Income decreases -Income increases

-Expenses increases -Expenses decreases

-Purchase increases -Purchase decreases

-Drawing increases -Drawing decreases

-Losses increases -Losses decreases

-Sales decreases -Sales increases

-Capital decreases -Capital increases

-Profit decreases -Profit increases

Branches of accounting:
1. Management accounting: Refers to all types of accounting information that are
measured, processed & communicated for the internal use of management.
2. General /Financial accounting: The task of recording transaction, processing the
recorded data & preparing financial reports for the use of management, owners, creditors
& governmental agencies is called general accounting.
3. Auditing: The auditors seek to determine whether the statements fairly reflect the
financial position & operating results in accordance with GAAP.
4. Tax accounting: It refers to determination of the correct liability for taxes, especially
income taxes & social security taxes & preparation of necessary returns.
5. Cost accounting: Determining & controlling costs & assessing the performance of
managers who are responsible for costs is called cost accounting.
6. Budgetary accounting: It refers to a systematic forecasting of business operations in
financial terms.
7. Government & Municipal accounting: It specializes in the transaction of political units
e.g. states & municipalities. It seeks to provide useful accounting information with
regard to business aspect of public administration. The main accounting
problem in governmental unit is to maintain records to returns & preparation
of budgets for future revenue & expenditure

Accounting equation:
Assets = Liabilities + Owners equity

Q. Which four transactions affects owners’ equity ?

Four types of transactions that affect owner’s equity:
Increase Decrease

Owner’s Owner’s Owner’s

investment equity withdrawals
s

Revenues Expenses
Q. Explain Accounting Equation (AE) with example./ Write the basic elements of
accounting/distinguish between accounts receivable & accounts payable/
distinction between assets & liabilities, liabilities & owner’s equity, income &
expense/
Introduction to the Accounting Equation
Accounting Equation represents the relationship between the assets, liabilities, and
owner's equity of a person or business. Accounting equation describes that the total value
of assets of a business is always equal to its liabilities plus owner's equity. Thus the
statement which shows assets = Liabilities + Owners’ equity is called AE

From the large, multi-national corporation down to the corner beauty salon, every business
transaction will have an effect on a company’s financial position. The financial position of a
company is measured by the following items:

1. Assets (what it owns)

2. Liabilities (what it owes to other)
3. Owners’ Equity (the difference between assets and liabilities)

The accounting equation (or basic accounting equation) offers as a simply way to understand
how these three amounts relate to each other.

Assets are a company’s resources-things the company owns. Examples of assets include cash,
accounts receivable, inventory, prepaid insurance, investments, land, buildings, equipment and
goodwill. From the accounting equation, we see that the amounts of assets must equal the
combined amount of liabilities plus owners (or stockholders) equity.

Liabilities of a company’s obligations-amounts the company owes. Examples of liabilities

include notes or loans payable, accounts payable, salaries and wages payable, interest payable
and income taxes payable (if the company is a re3gular corporation). Liabilities can be viewed
in two ways:

1. As claims by creditors against the company’s asset and

2. A source- along with owner or stockholder equity- of the company’s assets.
Owner’s equity or stockholder equity is the amount left over after liabilities are deducted
from assets:

Assets – Liabilities = Owners (or Stockholders’) Equity

Assets:
Probable future economic benefits obtained or controlled by a particular entity as a results of
past transaction or event.

Assets: Example of -
a) Current assets

1. Cash in hand, 2. Cash at Bank, 3. Accounts Receivables, 4. Note Receivables, 5. Closing

Inventories, 6. Supplies in hand, 7. Investment (short term), 8. Stationary at hand,

9. Prepaid expenses, 10. Outstanding incomes.

b) Fixed Assets

1. Land & Building, 2. Plant & Machinery 3. Furniture’s & Fixtures, 4. Office Equipments, 5.
Motor Vehicles, 6. Leaseholds etc.

Liabilities:
a) Current liabilities

1. Accounts payables, 2. Note payables, 3. Loans, 4. Mortgages, 5. Bank overdraft,

6. Outstanding expenses.

b) Fixed / Long Term Liabilities

1. Long term loans, 2. Debentures or bonds.

Owner’s Equity:
1. Capital / Common Stocks, 2. Net profit, 3. Retained Earnings, 4. Reserves, 5. Any Specific
Funds, 6. Drawings, Income, Tax.
Expenses---the money spent, or costs incurred, by a business in their effort to generate revenues
expenses represent the cost of doing business; they are the sum of all the activities that result in
(hopefully) a profit.

a) Office & Administrative

1. Office Staff Salary, 2. Directors Fees, 3, Legal Charges, 4. Printing & stationary, 5. Postage & Telegram, 6.
Accounting Charges, 7. Computer Hire Expenses, 8. Car Expenses- Office,

9. Office manager salary, 10. Auditor Fees, 11. Professional Fees, 12. Office rents & rates,

13. Depreciation-Office Assets, 14. Office Supplies & Expenses, 15. Donation- Office, 16. Postage, telex &
Telegram.

b) Selling & Distribution Expenses

1. Sales Manager Salary, 2. Marketing Director Fees, 3. Travelling Expenses – Sales Manager, 4.
Delivery Expenses, 5. Packing Expenses , 6. Cost of sample, 7. Depreciation- Delivery Van, 8.
Entertainment Expenses, 9. Salaries – Salesman, 10.Commission-Salesman, 11. Advertising, 12. Bad debts,
13. Fair Expenses.

c) Financial Expenses
1. Interest on Loan, 2. Interest on overdraft, 3. Interest on capital.

Incomes: money received, especially on a regular basis, for work or through investments.
Accounting income is the profit a company retains after paying off all relevant expenses from
sales revenue earned. It is synonymous with net income.

Operating income = Total Revenue – Direct Costs – Indirect Costs

or

Operating income = Gross Profit – Operating Expenses – Depreciation

or

Operating income = Net Earnings + Interest Expense + Taxes

Revenue is the money that a company receives from selling goods or services throughout the course
of business. ... Net income equals the total company revenues minus total company expenses.

Non Operative Income-

1. Commission received,

2. Other service revenues,

3. Discount received.
 Sample of Profit & Loss Account

Particulars Taka Particulars Taka

To management expenses: 1. By Gross Profit
1. Office Expenses Brought down from
2. Salaries & Wages Trading Account
3. Rents & Taxes 2. Discount Received
4. Lightings & Insurance 3. Dividend on
5. Car Upkeep Investment
6. Printing & Stationary 4. Interest on Money
7. Telephone Charge Deposited
8. Postages & telegrams 5. Interest on Renewal
9. Legal Expenses of Bill
10.Director’s Fees & 6. Income from any
Expenses Other Source ( Rent
11.Managing Agent’s & Commission,
Remuneration Interest on Loan
12.Audit Fees received etc)
13.General Expenses 7. Bad Debts Received
To Financial Expenses: 8. Interest of Drawing
1. Cash of Discounting Bill Received
2. Cash Dividend Allowed 9. Profit on Sale of any
3. Interest on Capital Asset
4. Interest on borrowed Capital 10.Apprenticeship
5. Loss in Charge premium
6. Discount on Issue of 11.Profit on Exchange
Debentures 12.Royalties Received
7. Preliminary Expenses 13.Consignment
Written Off Account (Profit on
To Selling & Distribution Expenses: Consignment)
1. Packing Charge 14.Joint Venture
2. Warehouse & Store Rent Account (Profit on
3. Carriage outwards Joint Venture)
4. Export Charge
5. Cost of Samples
6. Cost of Catalogues
7. Advertising
8. Travelers Salaries,
Expenses & Commission
9. Bad Debts
10.Upkeep of Motor Lorries/
Van
To Depreciation of Assets
To Net Profit ( Balancing figure)
Carried to Capital Account

Total Amounts Total Amounts

 Trading Account
Particulars Taka Particulars Taka
To (1) Opening Stock: By Sales= (##)
(+)Raw materials = (##) (-) Return in Wards= (##)
(+)Work-in-progress= (##) Sub Total= (##)
(+)Finished goods = (##) Closing Stocks:
Sub Total = (##) (+)Raw materials = (##)
(2)purchase =(##) (+)Work-in-process= (##)
(+)Raw materials= (##) (+)Finished goods = (##)
Sub Total= (##) Sub Total= (##)
(3)Freight & Duty
(3)Carriage in Wards
(5)Wages
(3)Factory Lighting
(7)Water, Oil, Fuel etc
(8) Depreciation on Factory
Building
(9)Gross Profit (Balancing
figure) C/d
Total Amounts Total Amounts

Balance Sheet
As on 31st Dec, 2013
Assets Taka Liabilities + Capital Taka
Current Assets: Current Liabilities:
Cash & Bank Bill payable
Investment Creditors (##)
Bills Receivables Outstanding Liabilities
Sundry Debtors ### Fixed Liabilities:
(-)Provision for doubtful Any other long term Loans
debts###
Sub Total = (##) Capital =(##)
Stock-in-trade (+)Net Profit= (##) (##)
Prepaid expenses/Advance (-)Drawing = (##)
payment Sub Total=

Fixed Assets:
All Assets Minus
Depreciation.
Goodwill
Total Amounts Total Amounts