1) ACCOUNTING ASSUMPTION INCLUDING GOING CONCERN

The going concern principle is a fundamental financial statement assumption that assumes an

entity will remain in business for the foreseeable future. If the business shows signs that it is
not in the position to be assumed to continue to exist into the near future, this is known
as going concern risk.

2) ACCOUNTING CYCLE

Accounting Cycle
10 Steps

Accounting is an art as well as science which systematical process that identifies, records,

classifies and communicates the economic facts and figures of an organization.

Accounting cycle means the repetition of a complete sequence of accounting procedures in

appropriate order during each accounting period.

This process is a combination of a series of activities begin when a transaction takes place and
end with its inclusion in the financial statements at the end of the accounting period.

The sequence of accounting procedures used to record, classify and summarize accounting

information is often termed the Accounting Cycle.

The term indicates that these procedures must be repeated continuously to enable the business to
prepare new up-to-date financial statements at reasonable intervals.

10 Steps of Accounting Cycle are;

1. Analyzing and Classify Data about an Economic Event.

2. Journalizing the transaction.
3. Posting from the Journals to General Ledger.
4. Preparing the Unadjusted Trial Balance.
5. Recording Adjusting Entries.
6. Preparing the Adjusted Trial Balance.
7. Preparing Financial Statements.
8. Recording Closing Entries.
9. Preparing a Closing Trial Balance.
10. Recording Reversing Entries.
1. Analyzing and Classify Data about an Economic Event
Identifying the transactions from the events is the first step of the accounting
process. Events are analyzed to find the impact on the financial position or to be
more specific the impacts on the accounting equation.

Documents such as; a receipt, an invoice, a depreciation schedule, and a bank

statement etc. provide evidence that an economic event has actually occurred.

2. Journalizing the transaction

Transactions having an impact on the financial position of a business are recorded
in the general journal.

In the general journal, the transactions are recorded as a debit and a credit in

monetary terms with the date and short description about the cause of the
particular economic event.

3. Posting from the Journals to the General Ledger

Transactions recorded in the general journal are then posted to the general ledger
accounts. The accounts classify accounting data into certain categories and they
are recorded in general journal entries according to that classification.

Depending on the frequency of the transactions posting to ledger accounts may be

less frequent.

4. Preparing the Unadjusted Trial Balance

To determine the equality of debits and credits as recorded in the general ledger,
an unadjusted is prepared. It is a way to investigate and find fault or prove the
correctness of the previous steps before proceeding to the next step.

Unadjusted trial balance makes the next steps of the accounting process easy and
provides the balances of all the accounts that may require an adjustment in the
next step. The unadjusted balance sheet is for internal use only.

5. Recording Adjusting Entries

Adjusting entries ensure that the revenue recognition and matching principles are
followed. To find the revenues and expenses of an accounting period adjustments
are required.

Adjusting entries are required to be is because a transaction may have influence

revenues or expenses beyond the current accounting period and to journalize to
the events that not yet recorded.
 6. Preparing the Adjusted Trial Balance
An adjusted trial balance contains all the account titles and balances of the general
ledger which is created after the adjusting entries for an accounting period have
been posted to the accounts.

It is an internal document and is not a financial statement. It helps to create the

income statement and balance sheet and doesn’t provide enough information for
preparing the cash flow statement.

7. Preparing Financial Statements

Financial statements are prepared from the balances from the adjusted trial
balance. The financial statements are made at the very last of the accounting
period.

Cash flow statement, income statement, balance sheet and statement of retained

earnings; are the financial statements that are prepared at the end of the
accounting period. This is the output of the accounting process.

8. Recording Closing Entries

At the end of an accounting period, Closing entries are made to transfer data in
the temporary accounts to the permanent balance sheet or income statement
accounts.

Transferring the balances of the temporary accounts or nominal accounts (e.g.

revenue, expense, and drawing accounts) to owner’s equity or retained earnings
account is used because these types of accounts only affect one accounting period.

9. Preparing a Closing Trial Balance

To make sure that debits equal credits, final trial balance is prepared. As the
temporary ones have been closed only the permanent accounts appear on the
closing trial balance to make sure that debits equal credits.

10. Recording Reversing Entries

Posit closing entries is an optional step of the accounting cycle. A reversing
journal entry is recorded on the first day of the new period for avoiding double
counting the amount when the transaction occurs in the next period.

The primary objective of the accounting cycle in an organization is to process financial

information and to prepare financial statements at the end of the accounting period.

Accounting cycle is a continuous and fixed process which needs to be followed

accordingly. Maintenance of continuity accounting cycle is important.
 3) ACCOUNTING EQUATION

ASSET= LIABILITIES + CAPITAL

Rules of Debit & Credit:

Assets and Expenses:

 Increase Debit
 Decrease Credit

Liabilities, Capital & Revenue

 Increase Credit
 Decrease Debit

4) STRUCTURE OF PROFIT AND LOSS

The Structure of a Profit and Loss Account comprises of two important

elements:
A. Revenue Structure
B. Cost Structure

A. Revenue Structure

Sales or Revenue
 Local Sales XXXX

 Export Sales XXX

Total Sales XXXXX

B. Cost Structure:

Elements or Components of Cost Structure are:

1. Cost of Goods Sold

2. Operating Cost (also called Admin, Selling and
Distribution cost)
 3. Other Expenses
4. Financing Cost
5. Taxation Cost
6. Extra Ordinary Cost or Extra Ordinary Income (These are
non recurring cost and incur rarely)

Details of each Component of Cost Structure:

1. Cost of Goods Sold:

 Without Cost of Goods, no company can produce goods.

 This is always a major cost in the structure.

 For a Manufacturing Business, the Cost of Goods Sold is calculated in two

Steps:
 Step 1: Calculate Cost of Goods Manufactured
 Step 2: Calculate Cost of Goods Sold

 For all other Businesses, there is only one step of calculating the Cost of
Goods Sold

Cost of Goods Sold of a Manufacturing Business:

Step 1: Cost of Goods Manufactured

Cost of Raw material (Purchases) XXXX
Add: XXXX
All the Expenses relating to Purchases. Such as:
1.  Transportation Cost (also called carriage XXXX
inward)
 Import Duties and Other Charges if the XXXX
goods are imported from outside Pakistan
Add:
Cost of Human Resources
2. XXXX
Such as, Salary and Wages of all employees
directly engaged in the manufacturing process.
3 Add: XXXX
 Direct Expenditures or Factory Overheads
All expenses or costs which are related to
manufacturing of goods. Such as, Insurance of
Plant and Machinery, Fuel and Power or utility
expenses. Expenses without which goods cannot
be produced
Total Cost of Raw Material, Human Resources XXXXXX
and Direct Expenditure or Factory Overheads:
Add: XXX
Opening Stock of Work-in-Process
4
Less: XXX
Closing Stock of Work-in-Process
Cost of Goods Manufactured: XXXXXXX

Step 2: Cost of Goods Sold

Cost of Goods Manufactured XXXXXX
(calculated in Step 1 above)
Add: XXXX
Opening Stock of Finished Goods
Goods available for Sales: XXXXX
Less: XXXX
Closing Stock of Finished Goods
Cost of Goods Sold XXXXXXX

Cost of Goods Sold of a Trading Business:

Cost of Goods Sold

Purchases during the year XXXX
Add: XXXX
All the Expenses relating to Purchases. Such as:
1.  Transportation Cost (also called carriage XXXX
inward)
 Import Duties and Other Charges if the XXXX
goods are imported from outside Pakistan
 Add:
2. Opening Stock of Finished Goods
Goods available for Sales: XXXXXX
Less:
Closing Stock of Finished Goods
Cost of Goods Sold:

2. Operating Cost:
 This cost is also called:
 Selling, General and Administrative Expenses or
 Administrative, Selling and Distribution Cost.
 Without this cost, you cannot sale the goods.

3. Other Expenses:
 These are miscellaneous expenses which can not be recorded as operating or
cost of goods sold.
 Therefore, these expenses are reported separately.
 Amounts of these expenses are generally small

4. Financing or Borrowing Cost:

 This is a Non Discretionary Cost. Therefore, it is reported after the
Operating Cost.
 This cost includes cost of funds (also called markup) and Bank Service
charges and commissions.

5. Taxation Cost:
 This is a non discretion cost. Company does not have control over this cost.
Taxation cost includes payment of various taxes to central, provincial and
local governments.

6. Extra Ordinary Cost:

 These are rare costs.
 For example, cost due to flooding water entered the warehouses, factory or
offices
 Cost due to other acts such as terror attack
 Cost due to war and other contingencies.
 STRUCTURE OF BALANCE SHEET

Structure of a Balance Sheet:

The Structure of Balance Sheet includes three elements. These are:

1. Assets
2. Liabilities
3. Equity (Capital)

You can report the three elements in many different ways. Such as these:

Assets Liabilities

Equity

Liabilities Assets

Equity
 Assets

Liabilities

Equity

Detail of Balance Sheet Structure:

Assets Liabilities
1. Noncurrent Assets 1. Noncurrent Liabilities
2. Current Assets 2. Current Liabilities
Equity
1. Share Capital
2. Reserves
3. Retained Earning
 Assets Liabilities
Noncurrent Assets Noncurrent Liabilities
 Fixed Assets or Operating
 Long Term Borrowings
Assets
 Long Term Investment  Long Term Bonds
 Long Term Loans to
 Employees Long Term Benefits
Employees

Current Assets Current Liabilities

 Cash & Bank balances  Short term financing
 Short Term Investment  Accounts Payable
 Accounts Receivable
 Accrued Expenses
 Inventories
Equity
Share Capital
 Ordinary Shares
 Preference Shares
Reserves
 Revenue Reserves
 Capital Reserves
Retained Earnings or
 Accumulated Revenue