“Accounting is an art or science of recording , classifying, summarising and interpreting the business transactions in terms of monetary value or money.”
From the data recorded, people skilled in accounting should be able to infer whether the business’s financial performance is up to the mark or not. Plus they would use this data to ascertain the strengths and weaknesses of the business.
The part of accounting concerned with recording down data is called “Book keeping”. Almost a century ago, all of the data was recorded manually, thus the word book keeping.
Before we can move on, lets talk about types of businesses.
In lay man’s language, a business is any legal activity done in order to earn money.
Business can be classified into several types with respect to the owners.
- Sole Proprietor: Single owner e.g Hotels, Private shops, etc
Features: Unlimited liability
E.g a a sole proprietor Mr.Daniyal invests $400 into his business and suffers a loss of $800. This means the proprietor has to bear all of the loss alone.
- Partnership/Firm: 2-20 parties involved or 2-10 partners present in banking e.g construction firms.
Features: unlimited liability
- Company/Corporation where many people own the company(shares involved) g multinational companies; Nestle,etc
Features: limited liability
Share holders only share the amount of loss which they have invested. That is to say, if you have $5000 worth of shares, you can not loose more than $5000 if the company is in loss.
There are two types of companies :
- Public limited company
- Private limited company
The features of the two types of companies form a later portion of your syllabus so they will be discussed later.
Businesses can also be classified in terms of their nature:
- Trading: sale/purchase of finished or semi finished goods for profit e.g import/expert firms like mobile zone, united mobile.
- Manufacturing: to convert raw materials to useful commodity eg Pakistan steel, fauji fertilizers, Philips, marks & Spencer, etc.
- Services: Providing a service to the people for profit. Eg Hanif Rajput caterers, Roots School, etc.
To record data , we must know different fields under which to note down the transactions, lets take a look at the ones involved in your o level syllabus.
Assets
Consists of property of all kinds such as buildings,machinery,stocks of goods, motor vehicles, cash in bank and debtors.
Liabilities:
Includes amount the business owes to other firms or persons for goods/services supplied to the business and for expenses incurred by the business that have not yet been paid. Liabilities also include loans taken by the business.
Capital:
Often referred to as equity or net worth, it consists of all the money invested by the owner into the business plus any profits retained for expansion of business less profits/money taken out of the business.
Some important terms you need to know:
Debtors: People/firms who owe money to the business. Included as assets.
Creditors: people/firms to whom the business owes money. Included as liability.
Purchase: Something a business buys with the prime intention of selling. If a ice cream company buys van for selling ice creams, the van would not be included in the purchase account, rather a new account “Motor vehicle” would be made.
Sale: sale of those goods which were bought with the prime intention of selling and in which the business normally deals in e.g ice cream sold by the ice cream company. Selling the van (mentioned above) would not be included in sales.
Purchase return: When the business returns back, items purchased, to the supplier due to faults or low quality ,etc
Sales return: When customers return back, items sold, to the business.
Drawing: Money drawn out of the business by the owner for personal use.
Expenses: money spent on indirect uses for the business e.g ice cream company spent $200 on wages of its workers, $30 on repair of machinery, $45 on training of a new worker. All these add up as total expenses.
Now that you’re pretty much aware of the terms you’ll come across there is one more thing :
DEBIT : Recording the “Gain” aspect of a transaction, in the first line of the journal is called debit. Also the left hand side of T account. In lay man terms when a business receives you debit.
CREDIT : The second line of the journal, used to record the “loss” aspect of a transaction is called credit. Right hand side of the T account. In short, when a business looses , you credit.
POINTS TO REMEMBER :
INCREASE DECREASE
Assets Debit Credit
Expenses Debit Credit
Capital Credit Debit
Liability Credit Debit
Income Credit Debit