Principles of
Accounting
(ACC 111) – Concepts & Accounting
equation
GHIAS UL HASSAN KHAN
MBA, ACCA, AICS, MCE, MIE
PHD – IN PROGRESS
Quote of the day
A merchant who hoards goods in
order to raise their price is a sinner
Prophet Mohammad (PBUH)
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1. Re-cape from previous session
Agenda 2. User of accounting information
3. Regulatory framework
4. Assumptions, principles and qualities of financial information
5. Set of financial statements
6. Accounting equation
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Heads of accounts.
1. Assets 3. Liability
1. Current 1. Current
2. Fixed / non-current 2. Long-term / non-current
1. Tangible
1. Men made 4. Revenue / Income – inflow of cash
2. Natural and own it
2. Intangible
5. Capital / Owner’s equity
2. Expense – outflow of cash and
utilized
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Users of accounting information
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Regulatory framework
IAS IFRS GAAP
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Basic assumptions & Principles
1. Economic entity/Separate legal entity
2. Going concern
3. Monetary unit
4. Periodicity
5. Accrual
6. Revenue recognition
7. Expense recognition
8. Measurement
9. Full disclosure
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Qualities of financial information
To be relevant, accounting information must be capable of making a difference in a decision.
Qualities of financial information
Financial information has predictive value if it has value as an input to predictive
processes used by investors to form their own expectations about the future.
Qualities of financial information
Relevant information also helps users confirm or correct prior expectations.
Qualities of financial information
Information is material if omitting it or misstating it could influence decisions that users make
based on the reported financial information.
Qualities of financial information
Faithful representation means that the numbers and descriptions match what really existed or
happened.
Qualities of financial information
Completeness means that all the information that is necessary for faithful representation is
provided.
Qualities of financial information
Neutrality means that a company cannot select information to favor one set of interested
parties over another.
Qualities of financial information
An information item that is free from error will be a more accurate (faithful) representation of
a financial item.
Qualities of financial information
Information that is measured and reported in a similar manner for different companies is
considered comparable.
Qualities of financial information
Verifiability occurs when independent measurers, using the same methods, obtain similar
results.
Qualities of financial information
Timeliness means having information available to decision-makers before it loses its
capacity to influence decisions.
Qualities of financial information
Understandability is the quality of information that lets reasonably informed users see its
significance.
Set of financial statements
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Accounting equation
Assets = Liability + Capital
(Income add and expense minus)
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Accounting equation
Assets Liability Capital
Mr. Ahmed started business
with cash 20,000 and
Assets Liability Capital
building 75,000. 20,000 (Cash) 0 95,000
75,000 (Building)
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Accounting equation
Purchase Machinery from
Siemens corporation Rs.
Assets Liability Capital
20,000 on account (on credit) 20,000 (Machine) 20,000
(Accounts Payable)
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Accounting equation
Paid 2,000 for rent
Assets Liability Capital
Less 2,000 (Cash) Less 2,000
(Rent expense)
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Accounting equation
Sales to a customers for
10,000 cash
Assets Liability Capital
10,000 (Cash) 10,000 (Sales)
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Accounting equation
Services provided Rs, 45,000
and received cash 35,000
Assets Liability Capital
35,000 (Cash) 45,000
10,000 (A/R) (Service income)
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Accounting equation
Paid to Siemens corporation
Assets Liability Capital
Less 20,000 (Cash) Less 20,000
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Accounting equation
Mr. Ahmed draw Rs, 3,000
from business to pay his
Assets Liability Capital
medical bills Less 3,000 (Cash) Less 3,000
(Drawing/
Withdraw)
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Practice – Question 1
Habib Ullah Sadiq is wholesale trader; following transactions are record in Accounting
Equation?
[Link] (means started) business with cash Rs. 200,000 and Land Rs. 50,000.
[Link] merchandising for cash Rs. 80,000.
[Link] sales of worth Rs. 25,000.
[Link] goods on credit from Salman of worth Rs. 50,000.
[Link] on account to Ali Raza Rs. 12,000.
[Link] furniture of the value of Rs. 5,000 by cash.
[Link] cash form Ali Raza of Rs. 10,000.
[Link] defective furniture of worth Rs. 1,500.
[Link] wages Rs. 1,000, Rent 2,000 and Electricity Bill Payable Rs. 1,500.
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Practice – Question 2
Muhammad Farhan Abid had the following transactions. Use accounting equation to show
their effect on his Assets, Liabilities and Capital?
[Link] Rs. 15,000 in cash.
[Link] securities for cash Rs. 7,500.
[Link] a Land for Rs. 15,000: giving Rs. 5,000 in cash and balance on account.
[Link] securities costing Rs. 1,000 for Rs. 1,500.
[Link] an old car for Rs. 2,800 cash.
[Link] cash as salary Rs. 3,600.
[Link] cash Rs.500 for loan and Rs. 300 for interest.
[Link] cash for expenses Rs. 300.
[Link] cash for dividend on securities Rs.200.
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Practice – Question 3
Selected Transactions from Transport Services began on June 1, 2016, by Zahid Shah as?
[Link] Shah invested Rs. 600,000.
[Link] was Purchase by business for Rs. 430,000.
[Link] purchased on credit for Rs. 9,000.
4.A bill of Rs. 7,200 for transporting goods was sent to Mr. Ashraf Abbasi, a customer.
[Link] of Rs. 6,000 is received from the customer who was billed in d.
[Link] Rs. 22,300 is cash for transporting goods.
7.A payment of Rs. 5,000 was made on the equipment purchased in c.
[Link] expenses of different types for Rs. 1,700 in cash.
[Link] of Rs. 1,200 was withdrawn from business for Zahid Shah’s personal use.
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Practice – Question 4
Prove that the Accounting Equation is satisfied in all following transactions of Waheeda Ejaz owner of
business enterprises?
[Link] business with cash value of Rs. 500,000.
[Link] paid in advance for a year Rs. 6,000.
[Link] merchandising inventory for cash Rs. 80,000 and on account Rs. 20,000 from Mr. Tahir.
[Link] Marketable securities for cash Rs. 100,000.
[Link] Sales Rs. 30,000 (cost 20,000).
[Link] the period rent expires Rs. 2,000.
[Link] paid during the trading was Rs. 1,000.
[Link] cash dividend Rs. 4,000 on marketable securities.
[Link] to Rs. 19,500 to Mr. Tahir in full settlement.
[Link] cash for personal purpose by owner of worth Rs. 6,000.
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Rules of debit (Dr) and credit (Cr)
Heads Increase Decrease
Assets Dr Cr
Expense Dr Cr
Liability Cr Dr
Revenue / Income Cr Dr
Capital / Owner’s equity Cr Dr
For next sessions
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Thanks & continue to the next part
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