1️⃣ Principals of Accounting

1 Basic Accounting
Each transaction is firstly recorded in a journal, which is an original entry book.
The journal contains chronological or date-wise records of business transactions

Special Journals: Large businesses handle numerous daily transactions, so separate journals
for cash, credit purchases, and credit sales streamline recording and save time. These are
called Cash Book, Purchases book , sales Book. When goods are returned after purchase or
sale, separate books—Purchases Return Book and Sales Return Book—are maintained if
such transactions are frequent.
For other miscellaneous items not covered by these special journals, the general journal will be
used.

Subsidiary Ledgers and Control Accounts Subsidiary ledgers provide details supporting
control accounts in the general ledger. For example, an Accounts Receivable Control account
summarizes all customer balances, while a subsidiary ledger records individual customer
transactions. Posting is done daily for individual accounts and periodically for the control
account.
2 Completion of Accounting Cycle
adjusting entries, not just corrections, as they are a planned part of the accounting
cycle, they are performed at the end of the period.

Adjusting entries are made on accrual basis of accounting: accrual basis is performed
through two principals, one is matching principle for expenses and other is revenue
recognition principal for revenues.

Example: Salaries paid in next month, must be adjusted for the current month.

●​ Prepaid Expense: You pay BEFORE the expense is incurred.

●​ Accrued Expense: You pay AFTER the expense is incurred.

Key Adjustments Required:

Accrued Expenses (e.g., Salaries, Wages, Utility Bills) – Prevent overstatement of
income.
Prepaid Expenses (e.g., Rent, Insurance) – Allocate costs systematically over time.
Depreciation of Assets – Adjust based on asset usage (as per IAS 16 - Property, Plant
& Equipment).
Unearned Revenue – Recognized as income only when earned (IFRS 15 - Revenue
Recognition).

Accruals are both expenses and revenues. Thus accrual adjustments involve
increases in either receivables or payables.

Prepaid Expenses: Rent, insurance premiums, magazine subscriptions (recorded as

assets, later expensed).
Unearned Revenue: Advance payments from customers (recorded as liabilities, later
recognized as revenue).

all assets are deferred charges (debits) and all liabilities are deferred credits.

These adjustments are classified into deferred items (previously recorded data
requiring revision) and accrued items (transactions not yet recorded).
The Trading Account records all direct income and expenses related to a company's
core business operations, ultimately determining gross profit or loss. This is part of the
P & L statement.

Once gross profit/loss is calculated, it is included in the Profit & Loss Account, where
indirect expenses and incomes are recorded to determine net profit or loss.

Net profit is added to capital, while net loss reduces capital in the Balance Sheet.

Statement of Retained Earnings (Profit & Loss Appropriation) Under IFRS

The Statement of Retained Earnings, also known as the Profit & Loss Appropriation
Account, summarizes changes in a company’s retained earnings over a financial
period. It applies only to limited companies, where net profit is not transferred to the
capital account but recorded in retained earnings.
Dividend payment is included in this statement.
3 Accounting for Merchandise
A merchandising enterprise is a business that purchases finished goods at low
prices and sells them at higher prices to earn profit, a merchandising enterprise that
does not make or process the products itself.

Inventories are recorded in Cost of Goods sold as per two methods, first is Perpetual
method and second is periodic method.
Perpetual method involves real time counting of inventory, it is easy for high value,
large items like fans, coolers etc.
Period method involves counting of inventory at the end of the period, it is used for low
value, high volume items like grocery store items.

goods in transit (if ownership has passed to the business) are also included in
inventory.

The purchases account, a nominal or temporary account, is used only for merchandise
purchased for resale.

Inventory or Stock Losses: Under the periodic inventory method and IFRS, losses
from spoilage, theft, or employee pilferage are automatically reflected in Cost of Goods
Sold (COGS). This is because the physical count of inventory will not include the
missing items, and the ending inventory is therefore understated. As a result, the COGS
is overstated by the value of the lost inventory. Following entry is made to correct it:
Inventory loss Dr, Trading Account Cr.

The above entry reflects the loss in inventory, ensuring that the COGS is correctly
inflated to reflect the merchandise that is no longer available for sale.
4 Fixed Asset and Depreciation
Determining the Cost of Fixed Assets: Under IFRS, fixed assets should be recorded at
cost, which includes all expenditures incurred to acquire the asset and make it ready
for use. The cost of a plant asset comprises:
i. Purchase Price: The net purchase price, excluding any cash discounts. ii. Direct
Costs:
This includes delivery charges, installation fees, and sales taxes. iii. Insurance and
Taxes:
Insurance costs incurred during transit and any import duties or non-refundable taxes.
iv. Site Preparation and Installation:
Any costs necessary to bring the asset into operational condition, such as assembling
machinery or preparing land.
v. Construction Costs (if applicable): When an asset is constructed, the cost includes:
Construction expenses, Architect’s fees, Insurance during construction, Interest on
borrowed funds used for construction, Any additional costs required to prepare the
asset for use.

Subsequent Costs Incurred on Fixed Assets: Subsequent expenditures on fixed

assets should be classified based on their impact:
i. Capital Expenditures: If a cost increases the asset's efficiency, extends its useful life,
or enhances its value for multiple accounting periods, it should be capitalized. For
example, installing a new engine in a delivery truck should be recorded as an addition to
the asset’s cost.

ii. Revenue Expenditures: If a cost only benefits the current accounting period, it
should be recorded as an expense. For example, a routine tune-up of the truck's engine
should be debited to repair and maintenance expenses.

●​ Revenue Expenditure: If the expense merely maintains the asset's existing

capacity and useful life.
●​ Capital Expenditure: If the expense improves the asset beyond its original
condition or extends its useful life.

Depreciation​
Procedure in Pakistan: Depreciation Procedure in Pakistan Under IFRS, depreciation is
charged based on the asset’s useful life and expected consumption of economic
benefits. However, in Pakistan, full depreciation is charged for the year in which an
asset is purchased, regardless of the purchase date. Conversely, no depreciation is
charged in the year an asset is sold or disposed of, which differs from IFRS guidelines
requiring depreciation to be recorded up to the disposal date.

The salvage value, also known as residual value, scrap value, or trade-in value,
represents the expected amount realizable when the asset is disposed of.

A key factor in determining depreciation is estimating the useful life of the asset, which
may be expressed in years or units of service.

Methods of Computing Depreciation (IFRS): IFRS allows multiple depreciation methods

to reflect how the asset’s economic benefits are consumed.
The three most commonly used methods are:
1. Straight-Line Method: The asset’s depreciable cost is allocated evenly over its useful
life. It is commonly used for assets that provide equal service throughout their life, such
as buildings.
2. Units-of-Production Method: Depreciation is based on actual usage or production
output, making it suitable for assets where wear and tear depend on usage, like
machinery.
3. Declining-Balance Method: A higher depreciation expense is charged in the earlier
years, which is useful for assets that lose value more quickly, such as computers or
vehicles. It is also called reducing balance method, accelerated method. The
declining-balance method does not account for salvage value when calculating
depreciation. The depreciation rate is applied to the asset's remaining book value, not
its original cost, which reduces the depreciation expense each year.

Depletion method: This method is used for natural resources and wasting assets like
mines, quarries.

? For financial reporting purposes, the gain on the exchange of plant assets cannot be
recognized. Unlike the non recognition of gain on the exchange of a plant asset, the
loss is recognized immediately. ?
5 CAPITAL AND REVENUE,
CORRECTION OF ERRORS
6 Cash and Bank transactions
Contra Entries. Contra entries are those entries that affect both sides of the cashbook
simultaneously. For instance, when the cash in hand is deposited into the bank account,
the bank account is debited and the cash account is credited with the same amount or
when the cash is withdrawn from the bank for office use the cash account is debited and
the bank account is credited for this single transaction. These types of entries are called
contra entries. No posting of these items is necessary. Such entries are marked in the
cashbook with the letter "C" in the folio column.

Bank Pass Book" (bank statement) is a copy of the customer's account in the bank's
ledger.

Usually, both balances of Cash and Pass book do not equate due to the timing
differences and the errors.
Bank reconciliation statement: When there is a discrepancy between the balance of the
cash book and the passbook, the depositor prepares a statement to clarify the reasons
for the differences and to reconcile the balances. This explanatory statement is known
as a "bank reconciliation statement."
7 ACCOUNTS FOR NON-PROFIT
MAKING ORGANIZATION
8 Partnership Accounting
Nominal Partner The person who lends his name and reputation to the firm but neither
invests any capital or takes any part in day-to-day conduct of a business is called a
nominal partner. He does not share in the profits and losses of the firm.
Holding out Partner or Partner by Estoppels A person who represents himself as
partner although he has no right in the partnership is called a holding out partner.
2️⃣ Financial Accounting
1 Accounting in Business
2 Adjusting Accounts and Completing
the Acct Cycle
no closing accounting entry would be necessitated for the drawings account as
drawing accounts are not involved in the companies’ accounts. It is possible only in
case of a sole proprietorship or the partnership organizations.
3 ACCOUNTING INFORMATION
SYSTEM
4 RECEIVABLES AND INVESTMENTS
Under direct write-off method the bad debts expense is usually recorded when the
receivables finally cannot be collected. Thus such bad debts expenses are recorded
quite later than the credit sales period. Usually the expenses should be recorded under
matching principle when revenues are being recorded under realization principle. The
direct write-off method is, therefore, a departure from the matching principle. However,
the materiality principle states that an amount can be ignored if its impact on the
financial statements is negligible and unimportant. The materiality constraint permits
the use of direct write-off method when bad debt expenses are small in relation to the
volume of sales and other expenses.

When the direct write-off method is used in the organization, the amount of accounts
receivable will be presented in the balance sheet at gross amount as no valuation
allowance will be used. Therefore, the receivables are not presented at the net
realizable value.

The alternate to the direct write-off method is the allowance method for computation of
doubtful amount of accounts receivables to charge it as periodic expense. The
allowance for doubtful accounts created at the end of accounting period is shown as
deduction from the gross amount of accounts receivables to present the accounts
receivables at net realizable value in the balance sheet. The allowance for doubtful
accounts is created and charged as bad debt expense during the same period when
sales were conducted and revenues were recognized. Thus the allowance method
adequately is in consonance with the concept of matching and realization principles as
the expenses are recorded during the same period when sales revenues were
recognized.

we may assume that the market value of such equity shares was amounting to Rs. 170
each as on 30 June, 2020. The increase in the market price by Rs. 19 per share is in
fact still unrealized gain because securities are not yet sold. Therefore, any unrealized
gain or loss (loss in case of decline in the market price of such securities) on marketable
securities will not be accounted for in the periodic income statement. However, the
unrealized gain or loss will be reported separately in the equity section of the Balance
Sheet. The value of securities will be reported in the current assets at market price with
notation of cost-price as well. This treatment is called the mark to market concept of
valuation of securities which is a departure from the cost concept of Generally
Accepted Accounting Principles.
Mark to Market: A concept of valuation of marketable securities at market value at the
end of accounting period and recognition of any gain or loss for increase or decrease in
the market value as compared with cost, as unrealized gain or loss in the balance
sheet. This is a departure from the cost concept of GAAP.
Unrealized gain/loss: The increase or decrease in the market value of equity securities
of other companies, at the year end reporting period than the purchase cost. This
increase or decrease in market value is capitalized in the Balance Sheet instead of in
the Income Statement of reporting period.

Realized gain/loss: The gain or loss actually realized on disposal of equity securities of
other companies. This gain or loss is presented in the income statement of the
disposal period.
5 ISSUANCE OF STOCKS
No accounting entry is passed for the authorized capital.

No – par Value Stock: No par value stock is not assigned any par value by the
company and its memorandum of association. Such shares can be issued at any
price without the possibility of a minimum legal capital deficiency (discount factor).
The Companies Act, 2017 does not contain any provision for issuance of no par value
stock in Pakistan. However, no-par shares were first authorized by the New York State
during 1912 and at present are authorized in nearly all of the States as well as in
Canada.

Stated Value Stock: The stated value stock is no-par Stock to which the directors
assign a “stated” value per share. The stated value per share becomes the minimum
legal capital per share.

The Premium on Common Stock is not a periodic revenue rather it is capitalized in

owner’s equity.
The discount on Common Stock is not treated as periodic expense rather it is
capitalized in the balance sheet and can be adjustable against the Premium on similar
Common Stock Capital.

A newly established company is not allowed to issue its stock at discount. However, it
can later issue the stock at discount with the prior approval of its board of directors and
the Exchange Commission of Pakistan with cogent reasons.

The Companies Act, 2017 provides that the dividends shall be paid only from profits.
This means that in case of loss there would be no payment of dividend. The authority to
distribute earnings to the stockholders rests with the Board of Directors. Usually in its
meeting, the Board of Directors, based upon the periodic earnings; recommend
payment of a specific amount or percentage of dividend on Share Capital. This is finally
approved by the shareholders in its annual general meeting (AGM). The stockholders
have the right to reduce the amount of dividend but cannot increase the dividend as
recommended by the Board of Directors.

The payment date is within forty-five days of the declaration in case of a listed
company and within thirty days in case of any other company.

The Board of Directors can announce more than one interim dividend on the equity
shares. The directors can also revoke the decision to pay interim dividend before it is
paid. The interim dividend is paid within forty-five days of the declaration approval.
This interim dividend shall be adjustable from the final dividend when approved by the
stockholders in its annual general meeting.

The amount of proposed dividend would be reported as current liability in the balance
sheet.

The stock dividends and cash dividends are different from each other. The cash
dividend reduces the assets and equity while the stock dividend transfers some
portion from retained earnings to the Capital Stock within Owners’ equity section of the
balance sheet. This is termed as Capitalization of retained earnings

The Stock split reduces the par or stated value per share but does not change the
overall ownership of the stockholders in the Company. We may conclude that the
objectives of stock split are grossly identical to the stock dividends. When a Company
decides stock splits and conducts as well, no accounting entries for calling back the
earlier stocks and issuance of fresh are needed because there is no change in the
owners’ equity.

The cumulative preferred stock carries the privilege of dividend accumulation from
one year to the other. Since the dividend can only be paid out of profits, so in case of no
profit or sustaining loss, the dividend on cumulative preferred stock would go in arrears
to the next year when in case of sufficient profit, the priority shall be given for payment
of arrears of dividend on the cumulative preference Stock and then current year’s
dividend would be paid on preferred stock if resources of profit can so accommodate.
This facility would not be applicable on the non cumulative preferred stock as the
specified amount or rate of dividend would be payable to the non-cumulative preferred
stock only when current year’s profit accommodates such obligation.

The participating characteristics of the Preferred Stocks mean that in case of

excessive profits, the preferred stockholders will also share in the balance profits after
payment of dividend equal to the stated amount or percentage on the preferred stocks
and also the common stocks. This sharing of balance profit would be based on the
amount of capital contribution of the preferred and common stockholders. The
non-participating Preferred Stockholders would not be entitled for sharing in any
excessive profit and entire balance profit would go to the common stockholders.

The preferred stocks generally do not have the voting rights like common stocks.

The redeemable preferred stocks would be presented in the balance sheet of the
Company as long term liability instead of making part of the equity capital.
6 REPORTING STOCKHOLDERS’
EQUITY
The Treasury Stock may be defined as the shares of the company which were issued
in the past but later have been purchased by the company itself to reduce assets as
well as equity of the company. A company’s reacquired own shares are called treasury
Stock. The treasury stock is neither considered as an asset investment nor as an
unissued stock.
When the treasury Stock is purchased it reduces the equity balance and cash balance
of the company simultaneously.
The shares of Capital Stock held in the treasury are not entitled for dividend and also
lose the title of voting powers or to share in the assets of the company upon its
liquidation.

If treasury stock is retired at the end, the total of the balance sheet will remain the
same.

The Stock Option means some entitlement granted to a certain group of employees of
the organization to purchase some stock of the company during subsequent periods of
time say 5 years to 10 years at a predetermined price.
7 LONG TERM LIABILITIES
Interest on Bond reduces tax burden. The interest on bonds is allowed as business
expense of the organization by the tax laws when the funds generated from issuance of
bonds are used for business purposes. Contrary to it, the distribution of dividend on the
funds acquired on issuance of shares by a company is not subject to any tax rebate.

For bonds, the interest would be payable on the basis of its face price and at its
maturity the face price would be payable without regards to its issuance price i.e. at
discount or at premium.

The interest rate indicated on the bond indenture is called as contract rate, which is
also known as coupon rate, stated rate or nominal rate.

When the contract rate of interest is equal with the market rate of interest, the bond
sells at par value. However, when the contract rate of interest is greater than the
market rate of interest, the bond would sell at premium price. Contrary to it when the
contract rate of interest is lower than the market interest rate the bond would sell at
discount price.

The bonds payable is a long term liability which would be presented in the balance
sheet at its face value, while at the end of its 2nd last year the amount of bonds
payable would be presented as current liability as it would be payable at the end of its
coming year.

However, the discount amount is not the one time current period loss or expense. It
would be treated as deferred cost for capitalization in the balance sheet and would be
amortized over a period of bond years on a straight line method in the accounting
record according to the maturity life of the bonds.
At maturity of bonds, the discount on bonds Payable equals zero balance as it stands
squared off during the life of bonds gradually.

The premium amount is not treated as one-time current period gain rather it would be
capitalized and treated as deferred revenues in the balance sheet, which would be
amortized over the years of period in installments with semi-annual interest payments.
The semi-annual amortization of the deferred amount of premium on bonds would be
adjusted from the periodic six monthly interest payments.
The forgoing amortization of premium on Bonds is premised upon the straight line
amortization concept which is equally prorated over the life of bonds in installments
each of half year.
The bond's retirement before maturity is possible if the bond certificate stipulates
availability of callable options to the bonds issuing organization.
Another way of retiring the bonds may be the purchase of the company's own bonds
and then retire it. When the issuing Company calls back such bonds occasionally the
Company would have to pay some call premium for early retirement of bonds.

Sometimes the bond indentures stipulate the conditions of conversion option into
shares of the Company.
8 SATEMENT OF CASH FLOW
9 Fin St Analysis
3️⃣ Advance Accounting
1 joint venture Accounting
The joint venture is generally of a short duration. The parties are known as co
ventures. The joint venture business may be conducted for the construction of roads,
buildings, bridges, manufacturing specific products and conduct of some trading
business locally or abroad and several other projects. By its nature, the joint venture
business can be classified as a mini partnership but it is not a continuing arrangement
because the joint venture relationship ends when the specific project is completed.
Determination of profit or loss from joint venture business is relatively simple. All the
assets and liabilities of the joint venture are ultimately settled in cash or equivalent upon
completion of the joint venture activity.

Where each venturer records only those transactions which are affected by him then
the procedure is called a joint venture memorandum method.
2 CONSIGNMENT ACCOUNTS
The consignment business is the art of sending the merchandise by the owner to the
other party who agrees to collect, store and sell them on the risk and cost of the owner
on a commission basis.

The manufacturer or wholesaler who provides goods is called a consignor. The person
or firm to whom the goods are sent for sale is called a consignee. The relationship so
developed between the Consignor and Consignee is like a principal and agent. The
goods sent by the Consignor to the consignee do not belong to the consignee as the
title of goods always remains with the Consignor although the goods may be in the
possession of the Consignee.
3 BRANCH ACCOUNTS
4 Department Accounting
5 INSTALLMENT SALES
6 Contract Accounting
7 SHARE CAPITAL AND
DEBENTURES
The memorandum of association is named as the constitution/charter of the
company.

The articles of association portray rules and regulations for the internal working
and management of the company affairs. When a company limited by shares does not
frame and file the articles of its own, then the articles contained in Table A in the first
schedule of the Companies Act, 2017 shall become the adopted articles of association
of such company. The article can be amended through the special resolution of the
company.

Prospectus is the basic/document of the company used for raising capital. It also
describes the amount of authorized capital and details of shares intended to be sold in
each category.

No accounting entry is passed for the authorized capital.

Authorized Capital > Issued Capital > Subscribed Capital > Called up Capital > Paid up
Capital

The redeemable preferred stock would be presented in the balance sheet of the
company as a long-term liability instead of making it as part of the equity capital.

When the profitable operations yield profit, it is credited to the retained earnings which
surges the equity of the company. The declaration of dividends, however, reduces the
stockholder’s equity.

The Companies Act, 2017 does not contain any provision for issuance of no par value
stock in Pakistan.

The Companies Act, 2017 states that “debenture includes debenture stock, bond, terms
finance certificate or any other instrument of a company evidencing a debt whether
constituting a mortgage or charge on the assets of the company or not.” So the
debenture is an instrument/ indenture that indicates evidence of money borrowed by the
company containing terms of interest rate and its repayment period. The debenture
holder is, therefore, a creditor not the owner of the company.

Difference between a Debenture and Debenture Stock​

Following are the main differences between a debenture and a debenture Stock
a) Debentures need not be fully paid whereas debenture stock must be fully paid
b) Debentures can be transferred wholly whereas debenture Stock can be transferred in
fractions as well.
c) Debentures are identified by their distinct numbers whereas no such distinct
numbers are applicable for debenture Stock.

The procedure for issuance of debentures is similar to the issuance of shares of the
company. A prospectus for the required debentures is floated and the public is asked
to apply for the debentures.

The debentures are treated as long term loan liability instead of equity in the balance
sheet of the issuing company.

The discount on debentures is a capital loss and is presented on the Assets side of the
balance sheet under the heading “Deferred Cost” as a fictitious asset until it is written
off periodically or adjusted against the Premium on Debentures Account.
8 Company Accounts
The investment companies, which primarily deal in stocks and securities, sometimes
take power in their articles of association to distribute shares and debentures of other
companies in lieu of cash dividends. Such distribution is called a scrip dividend.

The dividend declared needs to be paid within forty five days in the case of a listed
company and within thirty days in the case of any other company. However, in certain
cases, some shareholders for some reason or the other escape to claim their dividend.
Such an amount will be called an unclaimed dividend which shall be presented in the
current liability section of the balance sheet of the company.

The pattern used for the presentation of Balance Sheet contents may be in (1) working
capital with assets financing format (2) liquidity format and (3) performance format.
9 FINANCIAL REORGANIZATION
The amalgamation means when two or more companies combine together and form a
completely new company.

In the process of amalgamation when A Company and B Company join together and a
new C Company is formed which takes over the assets and liabilities of A and B
Companies, it would be classified as amalgamation. The A and B Companies would no
longer exist while only the C Company would emerge.

absorption is a process where one company is liquidated and is merged with another
existing company which retains its entity. In another way, it may be stated that one
company is swallowed up and absorbed by another company. For instance, when A
company is absorbed by the B Company, the A company will no longer exist as prior to
its absorption with B company, the A company would compulsorily be liquidated
10 Accounting For Leases
A lease is a contract between two parties, the lessee and the lessor for the hire
of a specific asset. The ownership is retained by the lessor (owner) but the
rights of use are transferred to lessee (Renter) for an agreed period of time in
return of specified rentals.

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4️⃣ Advance Financial Accounting
1-Regulatory & Conceptual Framework
 The acronym "IAS" stands for International Accounting Standards. This is a set of
accounting standards set by the International Accounting Standards Committee
(IASC), located in London, England. The IASC has a number of different bodies, the
main one being the International Accounting Standards Board (IASB), which is the
standard-setting body of the IASC.

The IASB is the IFRS Foundation's independent standard-setting organisation, which

was created in April 2001 to replace the International Accounting Standards
Committee, which was founded in London in June 1973.

In the year 2001 IASC was restructured and IASB (International Accounting Standards
Board) was born.

IAS – Standards issued before 2001 (total 41 IAS issued)

IFRS –Standards issued after 2001 (total 13 IFRS issued)

SIC-Interpretations of accounting standards, giving specific guidance on unclear issues

(34 SIC)

IFRIC- Newer interpretations, issued after 2001 (15 IFRIC) All International Accounting
Standards (IASs) and Interpretations issued by the former IASC (International
Accounting Standard Committee) and SIC (Standard Interpretation Committee) continue
to be applicable unless and until they are amended or withdrawn.

IFRS has grown, particularly since their adoption by the European Union in 2005.

The United States still uses GAAP.

Last In, First Out (LIFO) is not permitted under the International Financial Reporting
Standards (IFRS) .

There are two main approaches to accounting:

• Principles based approach such as that used by the IASB.
• Rules based approach such as that used in the USA.
 The parent business and its subsidiaries are presented as a single entity in
consolidated financial statements, but the parent company solely discloses its own
financial condition in unconsolidated financial statements. Assets, liabilities, equity,
income, and costs of unrelated companies, such as parent and subsidiary, are reported
in combined financial statements.
2 Accounting Information System
3 Accounting for Merchandising
Activities
4 Financial Assets
5 Consolidated Accounts
6 Changes in Retained Earnings
7 Banking Accounting
8 Insurance Accounting
The company selling the insurance is known as the insurer, the person or entity
buying the insurance policy is called the policy holder. The amount which is
paid by the policy holder to the company against the compensation of loss is
termed as premium.

act of 1938, Pakistan insurance act 1952, Insurance ordinance 2000.

Securities and Exchange Commission (Insurance) Rules, 2002

Insurance penetration in any country follows the S-curve. Insurance penetration

will be low at initial level of economic development, speed up as the economy
expands and again become low when countries become as developed.

Since 1992, all imports are required under law to be insured through insurance
companies operating in Pakistan.
5️⃣ Managerial Accounting
1 COST AND MANAGEMENT
Activity Based Costing (ABC)

Variable cost: The cost which fluctuates in direct proportion to the change in
level of activity. Variable cost is proportionately increased when quantity of
production is enhanced and vice versa.

Fixed cost: The fixed cost does not fluctuate in any proportion due to change in
level of activity within its relevant range, such costs usually remain constant
even if the production level is reduced or enhanced.

Semi variable costs are also called mixed costs.

The combination of cost of direct material and direct labor is called prime cost.

The combination of direct labor cost and factory overhead cost (commonly known
as manufacturing overhead cost) is called conversion cost.

product costs are assigned to the merchandise inventory and reported in the
balance sheet. When these goods are released from merchandise inventory and
are sold out then the inventory cost is converted into expense and classified as
cost of goods sold and reported in the income statement to match it with the
sales revenues. As the product costs are initially assigned to merchandise
inventories they are also known as inventorial costs.

The costs which are related to the time period and are incurred or committed as
such, these are known as period costs. Such costs are charged to the period
expense rather than to inventories. These costs will appear on the income
statement as expenses in the period in which they are incurred.

An opportunity cost may be defined as the measurable value of the alternative

given up to opt for another alternative which appears to be more beneficial.

The sunk cost is a cost which has already been incurred and cannot be avoided
regardless of what a manager decides to do. Therefore, the sunk costs are
irrelevant for making any business decision.
Cost of Goods Manufactured (CGM) Statement

Opening raw material inventory

Add: purchase of raw material
=Cost of material available for use
Less: cost of ending raw material inventory
=Cost of raw material used in production
Add: Direct labor cost
=Prime Cost
Add: Manufacturing overhead cost applied at 60%of direct labor cost.
=Manufacturing cost.
Add: cost of opening work in process inventory.
=Total manufacturing cost.
Less: cost of closing work in process inventory
=Cost of goods manufactured.

The cost of goods manufactured statement (CGM) is prepared in the

organization to determine the total cost incurred on the total units produced
during the period. Thus per unit cost computation is possible through dividing
the total cost of goods manufactured by the total units produced.

Cost of Goods Sold (CGS) statement:​

Sale
Less: Cost of goods manufactured (CGM)
Add: cost of opening finished goods inventory.
=Total cost of goods available for sale.
Less: cost of closing finished goods inventory.
=Cost of goods sold.

Income Statement
Sales revenues
Less: cost of goods sold (CGS)
=Gross income
Less: Operating & Administrative Expenses
=Net operating income before tax:
Less: Income tax
=Net operating income after tax:

There are two cost accumulation procedures, one is Job Order Costing and other
is Process Costing.

The job order costing system is used for desired products or services by the
customers. Every customer is identified by a specific job number.

Cost Information:​
Material cost.
+Labour cost.
+Overheads
=Total cost
Add: profit
=Price charged

Weighted Average Costing Method.

2 BY- PRODUC TS AND JOINT
PRODUCTS
The point of manufacturing process of main products, by-products and joint
products at which all of the aforesaid products can be identified and can be
separated into individual products is called a split off point.

The costs incurred after split off point are directly identifiable to the specific
products, therefore, such costs are denoted as separable costs.
3 Inventory Management
3 Cost Behavior
Variable Cost – its Implications
The cost which fluctuates in direct proportion to the change in level of activity is
called a variable cost. Thus, with increase or decrease in production of
merchandise, the variable cost will behave in the same pattern as the quantum of
production fluctuates.

In a trading concern the entire cost of goods sold would be classified as variable
cost.

The variable cost is usually not a controllable cost as by its nature its behavior
is identical to the production pattern.

The per unit variable cost remains constant while the total cost is proportionately
increased by the same percentage as that of the quantity.

Fixed Cost and Relevant Range

The cost which does not fluctuate in any proportion due to change in level of
activity is called a fixed cost.

However, per unit fixed cost will fluctuate when activity levels are modified.

Although some kinds of costs may have the appearance of being fixed, all costs
may be variable in the long run. For this reason, a particular kind of
expenditure should be classified as a fixed cost only within a limited range of
activity. This limited range of activity/capacity is referred to as the relevant
range.

The semi variable cost has both the characteristics of fixed and variable nature.
Therefore, the semi variable cost is usually called a mixed cost.

The semi variable/mixed cost is also known as step cost and this cost behaviour
displays a constant fixed cost to some extent, while after reaching that range it
abruptly changes and assumes the characteristics of variable nature. Thus a step
cost displays like a stair, a constant level of cost for a range of output and then
jumps to a higher level of cost at some point where it remains constant for a
similar range of output.
three methods are usually used and applied in the organizations for practically
computation/segregation of variable and fixed costs.
a) High-Low Method
b) Scatter Graph Method
c) Least-Square Regression Method

High Low Method:

Variable cost rate: Change in Cost/Change in Activity

Change is computed through High values - Lowest values of activity.

The equation for presentation and computation of mixed cost into fixed and
variable elements is: Y = a+bx
Y = Total mixed cost
a = Total Fixed cost element
b = Variable cost rate per unit of activity
x = Level of activity.

The disadvantage of using the High Low method is that there are only two data
points to ascertain the cost behaviour.

Scatter Graph Method

whole available data is plotted on the horizontal line of a graph.
X-axis is used to denote activity level which is called an independent variable.
The related cost being analyzed, called a dependent variable, is plotted on the
vertical line named as Y-axis on the graph.

A fixed cost constant line is drawn parallel to the X-axis horizontally.

The x-axis is the horizontal line on a graph, while the y-axis is the vertical line.

Average total cost – Fixed Cost = Average variable cost

Variable cost per unit/activity = Average Variable cost / Average Unit/Activity

The scatter graph method is an improvement over the high and low points method as it
considers all the available data instead of just taking two data points of high and low.
The management needs the information regarding the variable and fixed cost elements
to ascertain the cost impact on fluctuation in activities. Such information is available in
the income statement prepared and organized in the cost behaviour format of
production, administrative and marketing where the costs are segregated and presented
separately in variable and fixed components. Such an income statement is identified as
a contribution format. The contribution format income statement is used by the
management for all of its functional requirements of evaluating, planning, controlling and
decision making.

In a traditional income statement where the cost is organized by functions. And in the
Contribution format, cost is organized by the behavior.

The contribution margin is the balance amount after subtracting the variable
manufacturing and selling costs from the total sales revenues.

CM= Sales - Variable cost (including selling cost, as it is also variable)

The contribution margin amount as a percentage of sales amount is referred to as

contribution margin ratio (CM Ratio). CM x 100/Sales

The break even level is the sales volume amount and units at which point the sales
revenues are just equal to the costs of activity. There is neither any profit nor any loss.

It informs the turning point of profit or loss. Any greater amount of sales revenues than
the break even sales will produce profit and any drop of sales revenues than the break
even level will land the enterprise in loss.

Breakeven Sales = Fixed cost / CM Ratio

Breakeven Unit = Fixed Cost/ CM per Unit

The point on graph, where the sales revenue line drawn vertically intersects the
variable cost line indicates the break even point of this activity.
4 BUDGETING
Some organizations use a continuous budget, in which a month or quarter in the
future is added as the month or quarter just ended is dropped and the budget for
the entire period is revised and updated as needed.

Usually it may be assumed on the basis of market practices that 20% sales are
made on cash while 80% sales on credit basis. The credit sales may be on a
30 to 90 days period which may be collected 30% during the quarter of sale while
68% during the next quarter. The balance 2% may become bad debts as
irrecoverable.
5 CONTROLS THROUGH STANDARD
COSTING
It may be noticed that all unfavourable variances have been debited and all
favourable variances have been credited in the accounting record while the
products have been charged at the standard costs. Since the unfavourable and
favourable variances are related to products manufactured during the period,
therefore, these are to be closed at period end. The unfavorable variances
represent excessive production cost while the favourable variance indicates
savings in production cost. At year end, adjusting entries are made to eliminate
standard cost variances. These accounting entries depend on whether the
variances are , in total, insignificant or significant. If the combined impact of the
variances is insignificant, unfavorable variances are closed as debit to the cost of
goods sold account, while the favourable variances are closed as credit to the
cost of goods sold account. Thus unfavourable variances decrease operating
income because of the higher than the expected cost whereas favorable
variances increase operating income because of the lower than expected costs.
6 Controls through Standard Costing
7 COSTS IN DECISION MAKING
The absorption costing and variable costing are the two costing systems
which are generally used by manufacturing organizations for costing of their
products. The basic difference between the two costing systems is the treatment
of fixed costs. The absorption costing is a traditional costing system which is
used by organizations for external reporting purposes whereby the profitability
is usually greater than the other variable costing system. Contrary to it, the
variable costing system is used for internal management reporting purposes
which demonstrates the performance of operating management. The operating
results of both the costing systems are reconciled at the period end through the
difference in the cost of ending merchandise inventories. The variable costing is
commonly used by management for evaluating certain business decisions based
upon the considerations of any incremental cost on additional production while
the fixed costs are altogether ignored being irrelevant costs as these costs are
already absorbed by the existing activities. In this context the make or buy
decisions are taken on the basis of only relevant cost concepts which comprise
the elements of variable cost. The impact of opportunity cost for utilization of
vacated resources on buying certain parts of the product is significant for
decision making of internal production or outsourcing.

Variable costing:
The per unit product cost under variable costing would, therefore, be different
from the absorption costing method, rather lower, because the product cost
under variable costing would not include any fixed manufacturing overheads
cost. The fixed manufacturing overhead cost is treated as a period cost and,
therefore, is fully charged to the current accounting period without relating it to
the units produced, units sold or units unsold. The variable costing is thus also
frequently referred to as direct costing or marginal costing. Since the fixed
overhead costs are more closely associated with the passage of time than with
the production activity therefore, such costs are charged as period expense
rather than to inventories.
8 Activity Based Costing
9 PROFITABILITY
6️⃣ Cost Accounting
1 Cost: Concepts and Classifications
2 CGM & CGS
Cost of Goods Sold Statement for Trading Concerns

Beginning inventory
+ Purchases
- Ending inventory
= Cost of goods sold

Cost of goods manufactured (CGM) is the total production cost of the goods that
were completed and transferred to finished goods inventory during the period.

Raw materials inventory, beginning

Add: Purchases of raw materials
Add: Freight in/Transportation in/Carriage in
Less: Purchase Return and Allowance/Purchase Discount
=Raw materials available for use
Deduct: Raw materials inventory, ending
=Raw materials used in production
+Direct labour
= Prime Cost
+ Manufacturing overhead:
+ Add: Work in process inventory, beginning
= Cost of Goods available for Manufacturing
Deduct: Work in process inventory, ending
= Cost of goods manufactured
Add: Finished goods inventory, beginning
= Cost of Goods available for Sale
Deduct: Finished goods inventory, ending
= Cost of Goods Sold
3 JOB ORDER COSTING
The Job Order Costing system is a cost accumulation procedure which is used
and applied in the manufacturing industries and service organizations where
heterogeneous goods are produced and services are rendered in consonance
with the specific requirements of the customers.

Contrary to it, the process costing system is a cost accumulation procedure

which is adopted in the manufacturing industries where homogenous goods are
produced in massive volume having the features and specifications as
developed and designed by such organizations, keeping in mind the general
requirements and necessities of consumers.

The job order costing is usually applied in the industries and organizations like
construction of buildings, roads, bridges etc, furniture manufacturing, garments
tailoring shops, printing jobs, repair and maintenance workshops, medical
services hospitals, law firms, engineering consultants and auditing & accounting
firms etc. The jobs undertaken by such industries and organizations are delivered
to the customers immediately after completion. In the Job Ordering Costing
system, each Job is considered a cost centre.

Contract costing is the application of job costing to relatively large cost units,
particularly units that take a considerable length of time to complete, sometimes
more than one accounting period, and are constructed away from the enterprise’s
premises e.g buildings, roads, bridges and other civil engineering works. It may
usually involve sub-contracts as well, for expeditious completion. The profit of
contracts business is ascertained periodically on the basis of stage of completion
of jobs by comparing the incurred cost with the proportionate contract
price/revenues.

Batch costing is the method of costing used when a number of identical units
pass through a process or factory works as a distinct and identifiable batch. In
this method the batch cost is computed as a single job until such time as it is
physically broken up. Then the cost per unit is calculated by dividing the total
batch cost by the equivalent number of good units completed in the batch. The
batch costing is most commonly found in pharmaceutical industries and where
small engineering parts are manufactured.
 In batch costing both the job order costing and the process costing systems can
be applied by the manufacturing organization. If the batch being manufactured is
against the specific order of a customer with specifications and features of the
product as prescribed by him, then a job order costing system will be applied. In
case, however, when the products containing general specifications usually
needed by several customers are being manufactured in lots or batches then the
Process Costing system will be applied.
4 PROCESS COSTING
In most manufacturing organizations where identical goods are manufactured,
the production costs are accounted for using the Process Cost accumulation
procedures.

If the amount of under-applied or over-applied overhead at the end of the year is

small relative to the total production cost, it would be charged to the Cost of
Goods Sold Account. If the amount is larger, it must be allocated to the Ending
Inventories and the Cost of Goods Sold Account proportionately for external
reporting purposes.

Besides in certain industries, the cost of labour and overheads are combined
together and named as conversion cost.

The section titled “Cost Accounted for as under” shows the disposition of this
total cost.

The cost of normal lost units is added to the cost of good units i.e the
completed units. No cost of normal lost units is shared by the work in process
ending inventory.

The loss from abnormal spoiled units is separately identified and charged to
Factory overhead or to the current period expense account which is reported
as a separate item in the cost of production report.

There are two methods for costing of units completed out of opening work in
process inventories and the other units completed out of current production
activities. These two costing methods are the following:-
A) Weighted Average costing method.
B) First in first out costing method.
5 MATERIALS Controlling and
Quantitative Modeling
Ordering level = Maximum daily consumption X Maximum reordering time

Minimum level = Ordering level – (Average daily consumption X lead time)

Maximum level = Ordering level + E O Q – (Minimum daily consumption X lead

time)

Danger level = Average daily consumption X Lead time for urgent delivery

The total annual inventory cost is computed when annual ordering cost and
annual carrying cost is merged together.

The inventory turnover ratio is computed by dividing the total cost of material
consumed during the period by the average cost of material inventory. This ratio
indicates how much efficiently the stock policy is being adopted by the
management of the enterprise. A higher ratio of inventory turnover shows the
number of times in a year the stock was used up and replenished.

If it is considered that the value of discrepancies upon counting of inventory is of

a negligible value then the Cost of Goods Sold Account is debited and the
Material Inventory Account is credited. In case considerable value of
discrepancies is noticed then the cost is charged to the Administrative Expense
Account which reflects mismanagement in the organization.
6 MATERIAL COSTING, STORING
AND ISSUING
Consumable Materials: Which are used in running the factory which may
include soap, cotton waste and brushes etc. These are also called supplies and
indirect materials.

Theoretically the cost of materials received includes the invoice price plus all
incidental costs incurred for acquisition, handling, transportation-in/freight,
insurance and taxes.

discounts are normally not entered by the purchaser in any accounting record.
Instead these are treated as price reductions. Thus the price paid to the supplier
is recorded net of these discounts. The trade discount is not an income because
the income arises from selling activities not from the purchasing activities.

The sales tax is finally borne by the purchaser/consumer. The general sales tax
paid on purchase of material is separately recorded in the books of accounts as it
is adjustable against the sales tax applicable on sale of merchandise after the
manufacturing process is completed. The sales tax paid at the time of purchase
of material or merchandise is debited to the Input sales tax account. The sales
tax collected at the time of sale of manufactured finished products is credited to
the Output sales tax account. The amount of Output sales tax is generally
greater than the amount of Input sales tax. Thus the Input sales tax already paid
is adjusted against the Output sales tax collected on sale of merchandise. The
balance amount of Output sales tax is deposited with the government to
discharge this liability.

Sales tax is a Value Added Tax (VAT), business work as collector of tax on the
behalf of the government.
Sales Tax Act 1990.
Punjab Sales Tax on Services Act 2012

complete accounting treatment of every transaction is carried out under a

perpetual inventory system. However, no accounting entry is needed under
this system for the closing balance of material inventory at the end of the period
because the material account reflects the balance cost of closing inventory while
the store ledger card also exhibits the quantity as well as cost of the closing
material inventory. Contrary to the above, under the periodic inventory system,
the material inventory available at the end of the period is physically counted and
casted. Thus accounting entry is recorded to recognize the cost of ending
inventory in the books of accounts and also to determine the cost of material
consumed.

As the oldest cost is charged to the production in FIFO, therefore, the production
cost may lag behind the current economic values. The lower cost of production
may indicate higher profitability and greater amount of tax liability.

In LIFO, the ending inventories are valued at old prices, usually, lower than
current prices, in view of the price escalation trend. Therefore, this method does
not represent the current economic values of inventories in the balance sheet.

Simple average method is generally used in small organizations and where the
periodic inventory system is operative.
The moving average costing method is generally used by the industries where
perpetual inventory systems are adopted and where the inflow and outflow of
materials are frequent.

The normal spoilage is usually unavoidable while the abnormal spoilage can
be controlled through the managerial techniques of adequate vigilance and
stage by stage inspection and tests.
7 LABOUR COSTS
 The labour time is perishable in the sense that it cannot be stored and once
lost, cannot be recouped.

The cost of indirect labour is included in the Factory Overhead Cost which is an
element of the manufacturing cost of products.

If the nature of the job is directly related to production of goods is classified as

Wages.
The remuneration of supervisors and clerical staff is termed as Salaries.
The wages are charged to Direct Labour Cost whereas the Salaries are included
in the Factory Overhead Cost as indirect Labour.

Payment on the basis of work done irrespective of the time taken by the work.
This method is called a piece rate system.

Taylor’s differential Piece Rate System was introduced by Dr. F.W. Taylor, the
father of scientific management in America.

Halsey Premium Plan. This plan was introduced during 1891 by F.A Halsey. It is
a simple combination of time and piece rate system. The incentive wages
(bonus) are paid at half the time saved.

Halsey-Weir Plan : This incentive wage plan was introduced by M/S G & J Weir
in combination with Halsey Premium Plan. Under this plan the bonus is paid for
the work at 30% of the time saved.

Rowan Plan is similar to that of Halsey Premium plan to the extent that a
standard time is fixed for the completion of a job and bonus or premium is paid
for savings in time. If the worker completes the job in less than the standard or
allowed time a percentage equal to the percentage of savings is added to the
time taken.

The Merrick’s differential piece rate system has been designed in the similar
pattern as that of the Taylor differential piece rate system. The variance is only
that Taylor prescribes two differential rates i.e lower piece rate for inefficient
workers while higher piece rate for efficient workers. Merrick developed three
different rates i.e lowest rate for beginners, the middle rate for developing
workers and higher rate for the efficient employees. The performance of workers
is determined in terms of percentages.

Gantts Task and Bonus Plan This incentive wage plan is designed to consider
the performance levels of all workers who are classified usually in three
categories i.e. below standard, standard and above standard output. Day’s wage
rate is also fixed and below standard production workers are paid on the basis of
time to earn minimum guaranteed wages.

Emerson’s Efficiency Plan : This system is designed to offer some motivation to

inefficient workers to progress their output, while greater compensation in the
shape of bonus is allowed to the most efficient workers. The standard production
is predetermined which is termed as 100% efficiency. The workers who perform
below the two-third of efficiency (say 67% of standard) are paid at the guaranteed
time wages. The workers who achieve 67% of standard or above are paid wages
along with bonus.

Measured Day Work or the High Wage Plan This plan is designed to combine the
best features of incentive plans and straight time wages. Standard time is fixed
for producing each unit. Workers are paid on hourly base rate as a starting point.
Total standard hours allowed for work done in a week or month are compared
with actual hours worked. When the worker exceeds a stated minimum ratio for a
fixed period, he is allowed wage increase usually at 10% per hour as bonus.

Group Bonus Plan In certain manufacturing industries where measurement of

efficiency and contribution of individual workers is not possible, as the
performance of a work is a collective effort of a group of workers, in such
industries introduction of a group bonus plan for incentives is applied. Standard
hours are determined in unit production. The hourly rate of wages is also fixed.
The group of workers when completing the job in less than standard time they
are allowed a collective bonus at the hourly rate of wages for the time saved.
The bonus earnings will be distributed amongst the group workers on some
equitable basis, which may be equally, on the basis of time rate of each worker or
on the basis of total wages earning of each worker.
Idle time represents the time lost by workers during which no production
activities were performed, but wages were paid by the factory. Since the workers
were present in the shop, therefore they were entitled for the wages.
The idle time in fact also sometimes becomes a reason for putting the workers
on overtime for which double remuneration will have to be paid to the workers.
Thus it increases the product cost which could have been avoided. In spite of
best efforts of the management and shop supervisors certain idle time cannot be
eliminated and considered as a normal factor in the factory. The idle time cost is
charged to FOH Cost.
8 FACTORY OVERHEADS
9 FACTORY OVERHEADS –
DEPARTMENTALIZATION
7️⃣ Accounting and Finance
1 Managing the Org
2 Costing Systems
When Sales Equal Production, profit under absorption and variable costing
method is same.

When Sales exceeds production, variable costing profit is greater than

absorption costing profit.

When Production exceeds sales, absorption costing profit is greater than

variable costing profit.

Absorption unit cost is higher than variable unit cost.

Variable costing uses cost behavior to classify costs.

Absorption costing is for external purposes and variable/marginal costing is used

for internal purposes.

Absorption costing alliance fixed cost to product cost, while variable costing does
not include fixed cost.
3 ABC costing
4 CVP analysis
Contribution margin = Revenues - Variable Cost

Economies of Scale: achieving certain efficiency as production level rises.

Behavior of Total revenues and total cost is linear on graph in relation to output
level.

Breakeven Units: Total Fixed cost / Contribution margin per unit

Breakeven Revenues: Total Fixed cost / Contribution margin percentage

Degree of Operation Leverage: Contribution Margin / Operating Income

5 Relevant Cost
Costs that differ between alternatives are called relevant costs.

Needs to complete remaining chapters.

8️⃣ Public Sector Accounting
Formula & Ratios
Glossary and Terms
Misc Notes
Luca Pacioli's double-entry system in 1494.

DEA LER

(Drawings, Expense, Assets Dr. with increase and Cr. with decrease) all have Dr
Balance.

(Liability, Equity, Revenues Cr. with increase and Dr. with decrease) all have Cr
Balance.

Revenue/Sales/Income all are the same [Link] return will be opposite of it.

Expense/Loss are the same here.

Purchase return is opposite of Assets

The Drawings account is a contra-equity account (meaning it has a debit balance and
reduces the total equity). Drawing is a temporary account and closed at the end of the
period.

Sales returns and allowances are a contra account and are accordingly deducted from
gross sales in the income statement.

IAS: International Accounting Standards, governed by International Accounting

Standard Board (IASB). The older standards are called IAS (issued from 1973-2001).
The newer and revised standards are called IFRS (International Financial Reporting
Standards)

ISA: International Standards on Auditing, governed by International Auditing and

Assurance Standards Board (IAASB).

Common discount terms like 2/10, n/30 mean the customer can take a 2% discount if
payment is made within 10 days; otherwise, the full amount is due in 30 days.

Purchase Discounts Merchandise purchases are usually made on credit and commonly involve
purchase discounts for early payment. It is almost always worthwhile for the company to take a
discount if offered. For example, the terms 2/10, n/30 offer a 2 percent discount for paying only
twenty days early (the period including the eleventh and the thirtieth days). This is an effective
interest rate of 36 percent (there are 18/twenty days/periods in a year) on a yearly basis.

To properly account for missed discounts, purchases should initially be recorded at the net
price (after discount), not the gross price. This allows businesses to track both the discounts
taken and those lost.