ULOOM AL-QADRIA

Al-Qadria Educations 2013

1
st
year Commerce Accounting
M. Azfar Javaid Attari Razavi Qadri



Unit 1
BASIC PRINCIPLES OF
ACCOUNTING

WhaL ls accounLlng? AccounLlng ls concerned wlLh Lwo separaLe
buL CCMLLMLn1A8? buslness acLlvlLles:
1he deLalled recordlng of all Lhe flnanclal LransacLlons of Lhe buslness (called
booee!ing).
1he preparaLlon of perlodlc sLaLemenLs (or accounLs) whlch summarlze Lhe
deLalled lnformaLlon, so LhaL Lhe flnanclal performance of a buslness can be
measured.

8ecordlng of Lhe flnanclal deLalls follows cerLaln procedures and Lhese records -
bookkeeplng's end producL - become Lhe raw maLerlal for Lhe producLlon of Lhe
flnal accounLs of Lhe buslness.

1hls module deals prlmarlly wlLh Lhe flrsL of Lhese Lwo aspecLs of accounLlng,
coverlng ln depLh Lhe purposes and convenLlons of accounLlng, Lhe sources and
recordlng of lnformaLlon and Lhe ways ln whlch records are verlfled. Powever, as Lhe
sub[ecL ls LreaLed ln an ln1LC8A1Lu way over Lhree modules, reference wlll
someLlmes be made ln Lhls module Lo Loplcs dealL wlLh fully ln Modules 2 and 3.

1hls unlL ls dlvlded lnLo flve secLlons:

SecLlon 1: lnLroducLlon Lo AccounLlng
SecLlon 2: 1he accounLlng equaLlon
SecLlon 3: 1he double enLry sysLem
SecLlon 4: 1he Ledgers
SecLlon 3: 1he 1rlal 8alance


ULOOM AL-QADRIA
Al-Qadria Educations 2013
1
st
year Commerce Accounting
M. Azfar Javaid Attari Razavi Qadri
Module 1 "nit 1 #

Section 1 Introduction to Accounting
8y Lhe end of Lhls secLlon, you should be able Lo:
explaln Lhe meanlng of Lhe Lerm accounLlng"
explaln Lhe ob[ecLlves of AccounLlng
explaln Lhe lmporLance of AccounLlng lnformaLlon Lo varlous users
ldenLlfy Lhe branches of AccounLlng
explaln Lhe prlnclples of buslness enLlLy and money measuremenL and
lllusLraLe wlLh examples
dlscuss eLhlcs ln Lhe [ob, Lhe combaLlng of fraud, and flnanclal rlsk
managemenL
explaln Lhe appllcaLlon of compuLers ln accounLlng records and Lhelr
usefulness ln buslness slLuaLlons
explaln Lhe advanLages of a compuLerlzed sysLem vs. a manual sysLem of
AccounLlng
explaln Lhe appllcaLlon and advanLages of compuLers as a Lool for
communlcaLlon Lechnology

The term Accounting
AccounLlng ls Lermed as Lhe analysls, classlflcaLlon and recordlng of flnanclal
LransacLlons, and Lhe ascerLalnmenL of how such LransacLlons affecL Lhe
performance and flnanclal poslLlon of a buslness.
AccounLlng ls Lherefore concerned wlLh:
recordlng of daLa
classlflcaLlon and summary of daLa
communlcaLlng whaL has been learned from Lhe daLa

Objectie! o" Accounting
1he followlng are some of Lhe ob[ecLlves LhaL you should achleve whlle sLudylng Lhls
sub[ecL:
use Lhe accounLlng rules or concepLs Lo analyze case sLudles and real
buslness evenLs
lnLerpreL and evaluaLe accounLlng sLaLemenLs, sysLems and reporLs
provldlng a means of developlng a crlLlcal and analyLlcal approach Lo
quanLlLaLlve problems
apply numerlc skllls requlred for AccounLlng - use AccounLlng Lo asslsL ln
declslon maklng and
descrlbe Lhe lmpacL of compuLers on AccounLlng







ULOOM AL-QADRIA
Al-Qadria Educations 2013
1
st
year Commerce Accounting
M. Azfar Javaid Attari Razavi Qadri
Module 1 "nit 1 $

Recording "in#nci#$ in"orm#tion
%ho need! "in#nci#$ in"orm#tion&

1he day-Lo-day records of flnanclal LransacLlons are a vlLal parL of runnlng any klnd
of buslness. Cf course lndlvlduals also have some flnanclal records. ay sllps show
wages recelved llke Lhe kumalo famlly ln Lhe plcLure below, bllls show a person's
spendlng, and regular sLaLemenLs Lell cusLomers how much Lhey have ln Lhe bank.

So noL only can Lhe kumalo's galn a clear plcLure of Lhelr presenL flnanclal poslLlon,
Lhey can also use such lnformaLlon Lo plan for Lhe fuLure - Lo see lf Lhey can afford a
famlly vacaLlon or, perhaps nexL year, a new car.















Fin#nci#$ in"orm#tion "or bu!ine!!e!
8uslnesses operaLe ln a slmllar way Lo Lhe kumalo's, buL wlLh more formal sysLems
for recordlng and uslng Lhelr flnanclal lnformaLlon. Lven ln a small buslness Lhe
owner could noL remember Lhe deLalls of every LransacLlon, so some form of record
ls needed.

1he developmenL of moneLary sysLems (gradually replaclng dlrecL exchange, known
as barLer) allowed Lhe resulLs of Lrade and commerce Lo be measured more exacLly,
buL lC8MAL recordlng meLhods followed only slowly. 8y Lhe end of Lhe flfLeenLh
cenLury, however, uCu8LL Ln18? 8CCkkLLlnC had become an esLabllshed
meLhod of recordlng and remalns Lhe basls of Loday's accounLlng sysLems.

1he naLure of Lhe flnanclal records kepL wlll depend on Lhe Lype of buslness belng
consldered. lor example, Lhe owner of a reLall shop wlll need deLalls of dally sales
recelpLs, asslsLanLs' wages and oLher expenses such as renL and lnsurance. A
manufacLurlng buslness, on Lhe oLher hand, wlll lnclude records of lLs raw maLerlal
purchases, flnlshed producL sales, equlpmenL and machlnery and a deLalled analysls
of lLs expenses.




ULOOM AL-QADRIA
Al-Qadria Educations 2013
1
st
year Commerce Accounting
M. Azfar Javaid Attari Razavi Qadri
Module 1 "nit 1 %













&ut remember: WhaLever Lhe slze and Lype of buslness, Lhe prlnclples of Lhe sysLem
are Lhe same:












Im'ort#nce o" Accounting to #riou! in"orm#tion
u!er!
lnformaLlon needs Lo be communlcaLed Lo lnLeresLed parLles. no buslness can
operaLe ln lsolaLlon. lL needs oLher people and buslnesses Lo operaLe. LeL us look aL
each of Lhe exLernal and lnLernal users of Lhe daLa and how Lhe books of Lhe
buslness wlll be lmporLanL Lo Lhem.

'nternal users
- ()ner: 1he owner obvlously needs Lo see wheLher hls/her lnvesLmenL has made a
proflL or a loss.


Recording t*e day-to-day
financial transactions
Enabling !re!aration of
!eriodic financial summaries
and inter!retation of it
&((++EE,'-.
ACC("-/'-.


ULOOM AL-QADRIA
Al-Qadria Educations 2013
1
st
year Commerce Accounting
M. Azfar Javaid Attari Razavi Qadri
Module 1 "nit 1 0

Em!loyees: As Lhe employees are worklng for Lhe buslness, Lhey have a
dlrecL lnLeresL ln Lhe flnanclal affalrs of Lhe buslness.
E(tern#$ u!er!
&ans and ot*er financial institutions: 1hey wlll be lnLeresLed ln wheLher Lhe
buslness wlll be able Lo repay loans, or wheLher lLs flnanclal poslLlon ls sound
when loans are requesLed.
,otential investors1,ros!ective buyers of t*e business:
1hey wanL Lo see wheLher Lhelr lnvesLmenL wlll be worLhwhlle and wlll also
be lnLeresLed ln Lhe progress Lhe buslness has made, or wheLher Lhe buslness
ls maklng a proflL.
/*e government 2Receiver of Revenue3: 1he governmenL wlll need bank
sLaLemenLs ln order Lo calculaLe Lhe Laxes LhaL Lhe buslness needs Lo pay,
namely vA1 and Lax on proflLs.
Customers and su!!liers: 1hey wanL Lo ensure LhaL a buslness ls solvenL
prlor Lo enLerlng a Lradlng relaLlonshlp. 1hls lncludes acLual and poLenLlal
cusLomers and suppllers.
/*e local community: 1hey may be concerned abouL Lhe effecLs of
redundancy, closlng down of facLorles, eLc.
&usiness com!etitors: 1hey measure Lhelr own performance agalnsL LhaL of
Lhelr rlvals.
Economic analysts: 1hey aLLempL Lo esLabllsh Lrends by an analysls of Lhe
resulLs of parLlcular buslnesses.
Members of t*e general !ublic: 1hey may requlre lnformaLlon relaLlng Lo
envlronmenLal, ecologlcal or oLher aLLlLudes revealed ln annual company
reporLs.
4uture !artners: 1hey wanL Lo see wheLher Lhelr lnvesLmenL wlll be
worLhwhlle and wlll also be lnLeresLed ln Lhe progress Lhe buslness has made,
or wheLher Lhe buslness ls maklng a proflL.

U!ing "in#nci#$ in"orm#tion ) the *e+ ,ue!tion!
lL ls essenLlal Lo know Lwo Lhlngs abouL a buslness

1. ls lL maklng a 8Cll1?
#. WhaL are lLs ASSL1S, and are Lhey enough Lo meeL lLs LlA8lLl1lLS?
ln any buslness, flnanclal records are Lhe maln source of lnformaLlon provldlng
answers Lo Lhese key quesLlons.

1he proflL (or loss) of Lhe buslness ls measured over a cerLaln Llme perlod and ls
shown ln Lhe /rading and ,rofit and 5oss accounts.

1he summary of Lhe buslness' flnanclal poslLlon on a cerLaln daLe ls conLalned ln Lhe
&alance 6*eet.





ULOOM AL-QADRIA
Al-Qadria Educations 2013
1
st
year Commerce Accounting
M. Azfar Javaid Attari Razavi Qadri
Module 1 "nit 1 7

Br#nche! o" Accounting
1he sub[ecL AccounLlng covers a very broad range of relevanL and relaLed Loplcs. lL ls
dlvlded lnLo Lhe followlng Lhree branches:

Co!t #nd -#n#gement Accounting
1haL parL of AccounLlng LhaL has Lo do wlLh Lhe provlslon of lnformaLlon Lo
lnLeresLed parLles lnslde Lhe buslness, especlally Lo managers, Lo help Lhem wlLh
declslon maklng, plannlng, managemenL and conLrol, ls called cosL and managemenL
accounLlng.

Fin#nci#$ Accounting
llnanclal AccounLlng ls LhaL parL of AccounLlng LhaL has Lo do wlLh Lhe provlslon of
lnformaLlon Lo lnLeresLed parLles ouLslde Lhe buslness. We know LhaL parLles llke
prospecLlve buyers, Lhe 8ecelver of 8evenue, banks, fuLure parLners and lnvesLors
wlll need lnformaLlon LhaL wlll be provlded by Lhe flnanclal accounLanLs.

Auditing
AudlLlng ls LhaL parL of AccounLlng LhaL deLermlnes wheLher recorded lnformaLlon ls
a Lrue reflecLlon of Lhe buslness LransacLlons LhaL Look place durlng an accounLlng
perlod. AudlLlng ls done ln Lwo ways. lL can be done lnLernally, LhaL ls when Lhe
buslness lLself does lL, or exLernally - when Lhe buslness conLracLs an ouLslde
company Lo do lL. MosL companles make use of boLh meLhods.

The bu!ine!! entit+ 'rinci'$e
1he buslness enLlLy prlnclple dlsLlngulshes beLween Lhe accounLlng aspecLs of a
buslness and Lhose of Lhe owner(s), whlch are regarded as qulLe separaLe from Lhe
buslness. 1haL means LhaL Lhe buslness' flnanclal records wlll always be LreaLed
separaLely from Lhe owners' records - Lhus a sole Lrader's prlvaLe bank accounL ls
kepL compleLely separaLe from hls or her buslness bank accounL.

-one+ me#!urement
Cnly LhaL lnformaLlon whlch can be expressed ln Lerms of money ls recorded ln
accounLlng sLaLemenLs. 1he many oLher facLors LhaL affecL a buslness' performance,
buL whlch cannoL be measured or expressed ln moneLary Lerms, are lgnored.










ULOOM AL-QADRIA
Al-Qadria Educations 2013
1
st
year Commerce Accounting
M. Azfar Javaid Attari Razavi Qadri
Module 1 "nit 1 8

Ethic! in the job. comb#ting "r#ud #nd "in#nci#$ ri!*
m#n#gement

Ethic!
1he word eLhlcs" refers Lo a seL of moral prlnclples or values LhaL are embraced by
a cerLaln communlLy. 1he buslness communlLy, as parL of Lhe LoLal communlLy, also
abldes by cerLaln wrlLLen and unwrlLLen laws. Some of Lhese laws - or raLher norms
and values LhaL can be LaughL (noL lnherlLed) - are:

- honesLy
- self-conLrol
- LrusLworLhlness
- concern for oLhers
- keeplng promlses
- respecL for leglLlmaLe auLhorlLy
- falrness
- clvlllLy
- dlsclpllne
- morallLy
- accounLablllLy
- lnLegrlLy

1he purpose of eLhlcs ln buslness ls Lo dlrecL buslnessmen and women Lo ablde by a
code of conducL LhaL faclllLaLes and encourages publlc confldence ln Lhelr producLs
and servlces.

rofesslonal accounLlng organlzaLlons recognlze Lhe accounLlng professlon's
responslblllLy Lo provlde eLhlcal guldellnes Lo lLs members.

A code of eLhlcs ls a cruclal elemenL ln Lhe formlng of a professlonal person.

LLhlcal guldellnes are Lhere Lo supporL Lhe declslon maklng process ln slLuaLlons LhaL
lnvolve eLhlcal quesLlons.

When soclal values deLerloraLe, lL becomes lncreaslngly dlfflculL Lo malnLaln hlgh
eLhlcal sLandards ln accounLlng and buslness.

8uslnesses need Lo know LhaL Lhe proflL moLlve, generally accepLed knowledge and
recognlzed sLandards of achlevemenL are noL Lhe only drlvlng forces Lowards
success, buL LhaL buslness also has a moral and soclal obllgaLlon Lowards Lhe
communlLy from wlLhln whlch lL operaLes.

LLhlcs are essenLlal for Lhe efflclency of an organlzaLlon. eople need Lo know LhaL
whaL Lhey are dolng ls soclally meanlngful and worLhwhlle. LLhlcs are also essenLlal
for lnLerpersonal relaLlonshlps, LrusLworLhlness and honesLy.



ULOOM AL-QADRIA
Al-Qadria Educations 2013
1
st
year Commerce Accounting
M. Azfar Javaid Attari Razavi Qadri
Module 1 "nit 1 9
Comb#ting "r#ud
lraud ls aL presenL one of Lhe ma[or causes of buslness fallure. lL lnvolves dellberaLe
decepLlon. Lmployees, managers, dlrecLors and lnLernaLlonal crlme syndlcaLes are all
poLenLlal whlLe-collar crlmlnals.

lraud ls deflned as unlawful and lnLenLlonal mlsrepresenLaLlon whlch causes acLual
pre[udlce, or whlch ls poLenLlally pre[udlclal Lo anoLher."

lraud comprlses Lhe followlng elemenLs:

"nla)fulness - 1he acLlon musL be seen Lo be wrong ln Lhe eyes of Lhe law, and of
socleLy.

Misre!resentation - A false sLaLemenL made by one person Lo anoLher. 1he
mlsrepresenLaLlon may Lake Lhe form of word, words and conducL, or [usL conducL. A
mlsrepresenLaLlon may also be a fallure Lo dlsclose cerLaln lnformaLlon ln
clrcumsLances where Lhere ls a duLy Lo do so.

'ntent - 1he person maklng Lhe mlsrepresenLaLlon musL have lnLended or foreseen
LhaL Lhe vlcLlm would be decelved.

,re:udice - 1he vlcLlm would have suffered pre[udlce by reason of alLerlng hls
poslLlon Lo hls deLrlmenL afLer relylng upon Lhe mlsrepresenLaLlon. oLenLlal
pre[udlce ls also sufflclenL lf lL ls reasonably posslble LhaL Lhe vlcLlm, relylng on Lhe
mlsrepresenLaLlon, would have suffered harm.
lraud ls a punlshable crlme.

Are#! /here "r#ud c#n occur in # bu!ine!!:
AsseL mlsapproprlaLlon
- cash/lnvenLory supplles/asseLs can be sLolen
- mlsuse of flxed asseLs
lraudulenL flnanclal sLaLemenLs
Cheque fraud
CompuLer crlme

Fr#ud c#n be comb#ted b+ me#n! o" the "o$$o/ing:
good sLaff developmenL programs
sound muLual lnLer- and lnLra-personal relaLlonshlps beLween employers and
employees
regular sLockLaklng
lnLernal audlL
exLernal audlL
anLl-corrupLlon laws




ULOOM AL-QADRIA
Al-Qadria Educations 2013
1
st
year Commerce Accounting
M. Azfar Javaid Attari Razavi Qadri
Module 1 "nit 1 ;

solld presenLaLlon Lechnlques and procedures
approprlaLe reacLlon plannlng

Fr#ud 'reention0 A "our1!te' #''ro#ch

6te! 1: Screen ouL fraudsLers before hlrlng Lhem
6te! #: 8educe opporLunlLles for fraud
6te! $: CreaLe an anLl-fraud" envlronmenL
6te! %: rosecuLe all fraudsLers

Fin#nci#$ Ri!* -#n#gement

1he maln alm of any buslness ls Lo make proflL. ln order Lo achleve Lhls, a company
needs Lo have clear ob[ecLlves. Powever, no maLLer how clear your ob[ecLlves are,
wlLh human belngs around Lhere wlll always be unwanLed acLlvlLles llke LhefL,
dlshonesLy, fraud and corrupLlon. lL ls Lherefore lmporLanL Lo anLlclpaLe and keep Lo
Lhe mlnlmum as far as posslble Lhe occurrence of Lhls Lype of unwanLed acLlvlLy.

1hese rlsks are called flnanclal rlsks and can be mlnlmlzed Lhrough financial ris
management. Companles should ldenLlfy and manage Lhese rlsks ln such a way LhaL
Lhey may noL derall any progress Lowards achlevlng Lhelr ob[ecLlves. 8lsks noL known
and managed leave loopholes for LhefL, fraud eLc.

1he maln quesLlon Lo be asked wlLh regard Lo flnanclal rlsk managemenL ls Lhls:
WhaL could cause my company Lo lose asseLs (money, sLock, Llme) or whaL wlll
make my buslness vulnerable Lo lose Lhese asseLs?"

1he followlng are guldellnes ln how Lo manage flnanclal rlsks:
1. Assess and analyze Lhe sysLems ln use.
#. ueLermlne or forecasL whaL mlghL go wrong.
$. Assess Lhe polnL of enLry of asseLs. Pow are Lhey recorded?
%. Close down Lhe rlsks by dolng Lhe followlng:

ueflne Lhe rlsks ln order Lo avold Lhem.
8e pro-acLlve. eople are ouL Lo beaL any sysLem. 1ry Lo beaL Lhem aL Lhelr
own game.
ueslgn sysLems, pollcles, rules, procedures and regulaLlons Lo llmlL rlsks of
fraud, LhefL, corrupLlon, eLc.
All employees of Lhe company should undersLand and comply wlLh Lhe
abovemenLloned.
1hese sysLems, pollcles, rules and procedures should be LransparenL and
ob[ecLlve.





ULOOM AL-QADRIA
Al-Qadria Educations 2013
1
st
year Commerce Accounting
M. Azfar Javaid Attari Razavi Qadri
Module 1 "nit 1 1<

Com'uter! #nd Accounting

A''$ic#tion o" com'uter! in Accounting record! #nd their
u!e"u$ne!! in bu!ine!! !itu#tion!
CompuLers are used ln every sphere of socleLy - and all over Lhe world. 1herefore, as
AccounLlng ls an lnLegral parL of Lhe world ouL Lhere, compuLers are used Lo record,
sLore and reLrleve AccounLlng lnformaLlon efflclenLly and effecLlvely.
ln AccounLlng, compuLers are used for Lhe followlng appllcaLlons:

CompuLerlzed ledgers and seLs of books (source documenLs Lo flnanclal
sLaLemenLs)
SpreadsheeLs
uaLa base
SLock handllng
8eporLs

Ad#nt#ge! o" # com'uteri2ed !+!tem er!u! # m#nu#$
#ccounting !+!tem

accuraLe and Llme-savlng, provldlng Lhe sysLem ls masLered
processlng of LransacLlon much qulcker Lhan manual
lnformaLlon can easlly be sLored and reLrleved
saves space, compared Lo many cumbersome flles used ln manual operaLlons
back-up coples assure LhaL lnformaLlon cannoL be losL
comparlsons wlLh prevlous years can be done
programs wlLh bullL-ln conLrols can easlly deLecL errors
assures beLLer supervlslon when compuLers are llnked
beLLer declslon-maklng, as deLalled reporLs are lnsLanLly avallable

A''$ic#tion #nd #d#nt#ge! o" com'uter! #! too$! "or
communic#tion techno$og+. "or e(#m'$e e$ectronic
b#n*ing #nd e1m#i$

Llme-savlng, as sLaff members need noL Lo go Lo Lhe bank for bank
sLaLemenLs, for example, because sLaLemenLs can be drawn aL any Llme
maklng use of Lhe osL Cfflce ls mlnlmlzed, because e-malls can be senL more
qulckly and an answer recelved almosL lmmedlaLely
credlL Lransfers can be done elecLronlcally aL any Llme of Lhe day - no need
Lo go Lo Lhe bank
only necessary Lo wrlLe ouL a llmlLed number of cheques, as paymenLs are
done elecLronlcally