Accounting I Module Handbook

Accounting I
MGT 130
Course Websites

Instructor: Javid Iqbal

Assistant Professor

VCOMSATS
Learning Management System

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Table of Contents

Instructors Detail/Biobraphy.............................................................................................................
Course Basics:....................................................................................................................................
Course PreRequisites..........................................................................................................................
Contacting the Module Instructor.......................................................................................................
Rationale Including Aims:..................................................................................................................
Learning outcomes:............................................................................................................................
Assessment Scheme............................................................................................................................
Reading Materials...............................................................................................................................
Course contents lecture wise:.............................................................................................................
Frequently Asked Questions...............................................................................................................
General Accounting Terms and Definitions.....................................................................................13

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INSTRUCTORS DETAIL/BIOGRAPHY:
Instructor :
Office:
Email
Phone/Mobile
Biography

Javid Iqbal
NISTE Building , H8, Islamabad
javidiqbal@comsats.edu.pk
0321-6064049
Javid Iqbal is an Assistant Professor of Accounting and Finance. He has done MS in
Accounting from University of Gothenburg Sweden. MBA from Sargodha University
and M.Com from Punjab University, Lahore. He is teaching different courses to
Master of Business Administration and Bachelor of Business Administration. He is
also a memeber of Business Development Centre of Department of Management
Sciences. His research interests are financial institutions, regulations and financial
crises. Javid has been selected one of the top five international students by Rotary

International Student House (RISH) Club. He has got distinction on his Msc thesis.

COURSE BASICS:
Course Code
Course Title
Credit Hours
Labs/Practical
Lectures

MGT 130
Accounting 1
3
No
2 per week

COURSE PREREQUISITE(S)
No

The movement towards a global economy and unprecedented explosion of multinational

companies has not only brought about immense opportunities to the business people all over the
world but also increase the density to the accountants due to explosion of information.
Globalisation is rapidly changing the scope and nature of accounting. Success is highly
dependant on the ability to understand and respond to business issues and its forces. Accounting
course I is designed for students to provide them the understanding to the complexities of data to
understand them for the users of business stakeholders. This is a 3 credit hour course.

Contacting the Module Instructor:

You can contact your module instructor in the following ways:
Email:
Meeting:

javidiqbal@comsats.edu.pk
By appointment only

Rationale Including Aims:

Accounting is concerned with the use of accounting information to the stakeholders within and
outside the organizations to make decisions for better decision making. It not only facilitates the
managers for planning regarding the operational and financial activities but also helps the
creditors and shareholders to decide about the financial decisions. A closely related intention of
the course is to give the students a good understanding regarding the use of accounting
information to management and owners for the decisions purpose about the organization.

Learning outcomes:
Upon successful completion of the course, students are expected to equip themself with the
knowledge and skills needed to manage the complexities of accounting information which is
used by the internal and external users of business for their decision making.
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Assessment Scheme
Mid-term examination I
Mid-term examination II
Assignements
Quizes
GDB
three hour examintion

10%
15%
10%
10%
5%
50%

Reading Materials
Core texts:
Meigs and Meigs: Accounting: The Basis for Business Decisions. Ed(Latest)
Warren Reeve Fess: Accounting, 21st Edition

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Course contents lecture wise:

Lectures
Lectures 01

Lectures 02

Lectures 03

Lectures 04

Lectures 05

Lectures 06

Lectures 07

Topics covered
chapter 01
Business Organizations
Business Types
Business Stakeholders
GAAP and Accounting Standards
Purpose of Information
The Purpose of Accounting
Accounting System
Difference Between Financial Accounting, Managerial Accounting and Cost Accounting
Financial Statements
business transaction
Accounting Equation
Effects of Transactions on Owners Equity
Practice Questions
Tools for Financial Analysis and Interpretation
Debt to Equity Ratio
Practice Question of Accounting Equations
Affect of Transactions on Financial Statements
Statement of Cash Flows with its components
Accounts Classifications
Assets, Liabilities and Owners Equity
Revenues and Expenses
T Accounts
Rules of Debit / Credit Balance Sheet Accounts
End of chapter 01
chapter 02
Rules of Debit / Credit Income Statement Accounts
Double-Entry Accounting
Normal Balances of Accounts
System to Analyze Transactions
Journalizing of Transactions
Posting Journal Entry into Ledgers
Practice Question
Transactions
Rules of Debit and Credit
Journalizing
Posting into Ledgers
Balancing the Ledger Accounts
Trial Balance
Preparing Financial Statements from Trial Balance
Errors or Mistakes in Transactions
Errors that will not cause the trial balance to be unequal
Correction of Errors
Financial Analysis and Interpretation
Comparing an item in a current statement with the same item in prior statements is
called horizontal analysis.
End of Chapter 02
Chapter 03
The Matching Concept and the Adjusting Process
Reporting Revenue and Expenses
Cash Basis of Accounting
Accrual Basis of Accounting
Unadjusted trial balance
Chart of Accounts
The Matching Concept and the Adjusting Process
Reporting Revenues and Expenses
Deferred Expenses (Prepaid Expenses)

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Lectures 08

Lectures 09

Lectures 10

Lectures 11

Lectures 12

Lectures 13

Lectures 14

Lectures 15

Lectures 16

Deferred Revenue (Unearned Revenue)

Accrued Expenses (Accrued Liabilities)
Accrued Revenues (Accrued Assets)
Fixed Assets
Effect of Omitting Adjustment
Summary of Basic Adjustments
Adjusted Trial Balance
Vertical Analysis and Interpretation
End of Chapter 03
Chapter 04
Seven Basic Steps of the Accounting Cycle
Development of Income Statement
Development of Balance Sheet
Assets Classification
Liabilities Classification
Worksheet
Structure of Worksheet
Unadjusted Trial Balance
Adjusting entries and their affect
on adjustment column
Adjustment of entries on
Adjusted column
Structure of Worksheet
Unadjusted Trial Balance
Adjusting entries and their effect on adjustment column
Adjustment of entries on Adjusted column
Preparation of Income Statement Column
Preparation of Balance Sheet Column
Property, Plant and Equipment
Effect of Omitting Adjustment
Summary of Basic Adjustments
Preparation of Income Statement Column
Preparation of Balance Sheet Column
Closing Entries
After Closing Trial Balance
Unadjusted Trial Balance
Adjustments
Adjusted Trial Balance
Preparation of Income Statement Column
Preparation of Balance Sheet Column
Closing Entries
After Closing Trial Balance
Practice Question
Unadjusted Trial Balance
Adjustments
Adjusted Trial Balance
Preparation of Income Statement Column
Preparation of Balance Sheet Column
Closing Entries
After Closing Trial Balance
Practice Questions to Students
Sample Income Statements
Service Business (Banking)
Trading or Merchandizing Business
End of Chapter 04
Chapter 5 Accounting Systems and Internal Controls
Basic Accounting System
Objectives of Internal Control
Elements of Internal Control
1.
Control environment

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Lectures 17

Lectures 18
Lectures 19
Lectures 20
Lectures 21

Lectures 22

Lectures 23

Lectures 24

Lectures 25
Lectures 26

Lectures 27
Lectures 28
Lectures 29
Lectures 30

2.
Risk assessment
3.
Control procedures
4.
Monitoring
5.
Information and communication
abuses or consequences
Clues to Potential Problems
Manual Accounting System
Format of Ledger with running balance
Special Journal
Subsidiary Ledger
Revenue Journal
Special Journal
Subsidiary Ledger
Revenue Journal
Special Journal
Subsidiary Ledger
Cash Receipt Journal
Special Journal
Subsidiary Ledger
Purchase Journal
Special Journal
Subsidiary Ledger
Cash Payment Journal
Computerized Accounting
End of Chapter 05
Chapter 06 (Receivables and Inventories)
Accounts Receivable
Notes Receivable
2/10, n/30
Estimate Based on Sales
Estimate Based on Aging of Receivables
Difference Between Merchandizing and Service Business
Accounting for Inventories
Terms of purchases
Terms of Sales
Calculation of Net Profit
Closing Entries
Cost, Product Cost, Period Cost
Components of Manufacturing Products
Cost of Good Manufactured
Cost of Goods Sold
Manufacturing Cost Flows
Income Statements
Practice Questions
Manufacturing cost Flows
Journal Entries
Inventory Control Important
Effect of Inventory Errors on Financial Statements
Defining Inventory
Inventory Systems
Cost Flow Assumptions
FIFO (Perpetual Inventory System)
FIFO (Periodic Inventory System)
LIFO (Perpetual Inventory System)
LIFO (Periodic Inventory System)
Average Inventory Method (Perpetual Inventory System)
Average Inventory Method (Periodic Inventory System)
End of Chapter 06
Chapter 07

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Lectures 31

Lectures 32

Control Over Cash

Retailers Sources of Cash
Controlling Cash Received in the Mail
Internal Control of Cash Payments
Basic Features of the Voucher System
Bank Reconciliation Statement
Reasons for Differences Between Depositors Records and the Bank Statement
Steps in a Bank Reconciliation
End of Chapter 07
Practice Questions of
Accounting Equation
Accounting Cycle
Complete Accounting Cycle
Inventories
Merchandizing Business
Manufacturing Business
Bank Reconciliation Statement
Completion of Course and Review of all previous lectures

Frequently Asked Questions

What is accounting?
Accounting is the art of recording, classifying, and summarizing, in a significant manner, and in terms of money,
transactions of a financial character, and interpreting the results. This definition is somewhat formal as compared to
simply saying that accounting is the "language of business," but it tells us something about what we will be doing in
the following chapters of the textbook. "Record" means to write it down in some form of business record. "Classify"
means to group all like transactions together, and "summarize" means to report the results of these transactions in the
form of financial statements. Chapter 1 shows us the effect that transactions have on the accounting equation and
what the financial statements look like, and Chapter 2 will show us how to record and classify business transactions
in the "significant manner" as stated in the above definition of accounting.
Why do we have an equation in order to do accounting?
The accounting equation does two things for us. It provides us with a balance point, which helps us maintain
mathematical accuracy, and it also allows the accounting system to provide us with more information. The equation
dates back to Luca Pacioli in 1494, when he said to assume that Assets = Equities. He invented double-entry
accounting, which evolved from this equation,
Equities are rights or claims to the assets of a business. When assets equal equities, assets are the properties that the
business owns and equities are the claims against those properties. There are two types of equities: creditors' equities
and owner's equity. Creditors' equities are usually referred to as liabilities, and these represent the creditors' claims to
assets if the business does not pay the creditors. Owner's equity is often called "owner's equity," but it can be
represented by other words as well, such as "capital," "net worth," or "proprietorship." The equation in Chapter 1
assumes a sole proprietor type of business enterprise, but if corporations were involved the owner's equity might be
referred to as "stockholders' equity." The following equations display variations in terminology, but all represent the
same basic accounting equation.
Sole Proprietor
A = L + OE

OE = Owner's Equity

A=L+C

C = Capital

A = L + NW

NW = Net Worth

A=L+P

P = Proprietorship

Corporation

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A = L + SE

SE = Stockholders' Equity

Where did the rules of debit and credit come from?

Luca Pacioli developed double-entry accounting in 1494, and the rules of debit and credit were devised as part of the
double-entry system.
What is double-entry accounting?
Double-entry accounting assumes that every transaction will affect two or more accounts.
What is an account?
An account is a form of record in which increases and decreases can be recorded. All accounts have an increase side
and a decrease side.
What do the words debit and credit mean?
Debit is the word used to signify the left side of an account, and credit is the word used to signify the right side of an
account. Depending on the type of account, a debit or a credit can be either an increase (+) or a decrease (-).
Why do we have the rules of debit and credit?
We need a system in which the total of the dollar amounts in left-hand positions equal the total of the dollar amounts
in right-hand positions. This enables us to have a balance point. By designing the system so that debits = credits, we
have a way to check the mathematical accuracy of our journalizing and posting. If debits do not equal credits, we
know we have an error and can start looking for it.
What are normal balances?
A normal balance is always the same side of the account as the increase side of that account. For example, an asset
increases on the debit side and the normal balance is a debit. A liability account increases on the credit side and its
normal balance is a credit.
What is accrual basis accounting?
The accrual basis of accounting assumes that revenues are recorded when earned and expenses are recorded when
they have been incurred. This is in contrast to the cash basis of accounting, in which you recognize revenues and
expenses only when you receive or pay out cash. The cash basis does not give us a timely reporting of when the
revenue was really earned or when the expenses were really incurred. Recording revenues and expenses only when
we receive or pay out cash does not give us a good matching of revenues and expenses for profit (or loss)
measurement purposes. For this reason almost all businesses use the accrual basis, which gives us a good matching
of revenues and expenses in the proper month.
What is the matching concept (principle)?
The matching concept says that all expenses incurred in the production of revenues should be "matched" against
those revenues, and in the same time period. Reflecting on the definition of the accrual basis and the definition of
the matching concept, they sound very similar. Indeed they are. The matching concept is one of the most important
principles in accounting, and it is the matching concept that allows us to apply accrual basis accounting.
What are adjusting journal entries and why do we prepare them?
Adjusting entries are internal transactions that bring certain ledger account balances up to date. Since we record for a
month at a time before posting to the ledger, some accounts need to be "adjusted" before preparing financial
statements. The adjusting process looks at all balance sheet accounts and states them as accurately as possible, and

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this process automatically adjusts certain income statement accounts as well. Examples: decreasing the balance of
the supplies account and increasing the supplies expense account for the cost of supplies consumed during the
month, and increasing the salaries payable account and the salary expense account for salaries earned by employees
but not paid to them yet. Remember that all adjusting entries will affect at least one balance sheet account and one
income statement account. Adjusting entries apply accrual basis accounting to transactions that span more than one
accounting period. For example: supplies consumed one month will be reported as an expense, but supplies still on
hand will be reported as an asset and carried forward to the next month; accrued salaries are reported as an expense
in the month they are earned but will be paid in the following month.
What is a contra account?
A contra account has the opposite balance of all other accounts within that classification of accounts. For example:
Retained Earnings has a normal credit balance and Dividends has a normal debit balance; Equipment has a debit
balance and Accumulated Depreciation - Equipment has a credit balance. In these examples, Dividends is contra to
Retained Earnings, and Accumulated Depreciation - Equipment is contra to Equipment. A contra account has a
balance that is opposite the balance of the account to which it relates.
What is a work sheet?
A work sheet is a paper used to organize financial data to assist in determining what adjustments should be made to
the general ledger accounts and then assist in the preparation of financial statements and closing entries.
Do we really need to use a work sheet?
Yes and no. It all depends on the size of the business and the number of accounts in the accounting system. Many
small businesses can determine what adjustments they need to make to their books, journalize and post the
adjustments to the ledger, and prepare financial statements from the ledger accounts, without using a work sheet.
The work sheet approach is extremely useful to all medium-sized and larger businesses because the number of
accounts in the system prohibits working directly with the ledger. The work sheet can summarize all of the accounts
and balances for us to review and determine adjustments. Upon completing the work sheet, we have the updated
account balances readily available for preparing financial statements and the information for journalizing adjusting
and closing entries. The work sheet is a very useful tool for most businesses.
How can we prepare financial statements before we journalize and post our adjusting entries to the general
ledger?
Chronologically, the flow of financial accounting data would dictate that we record and post adjusting entries before
we prepare accurate financial statements. When we use the work sheet approach, we can prepare financial
statements before journalizing our adjustments because the work sheet provides us with updated balances. It is true
that when we prepare statements from the work sheet, some of the balances are not updated in the ledger accounts
yet; but they will be as soon as we record and post the adjustments, so this appearance of out-of-order data flow is
temporary. The completion of the accounting cycle always involves adjusting the books, preparing financial
statements, and closing the books. Management wants the financial statements as soon as possible, and the work
sheet allows us to prepare these statements before journalizing the adjusting entries. After preparing the financial
statements, we then adjust and close the books.
What are closing entries?
Closing entries are internal entries, which close out the balances of all temporary accounts. "Close" in accounting
means to cause the account to have a zero balance. There are four closing entries because there are four types of
temporary accounts.
Four Types of Temporary Accounts:
1.
2.
3.
4.

Revenues
Expenses
Income Summary
Dividends

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Why do we record two entries when we make a sale?

We record two entries because we are using the perpetual inventory system. Under the perpetual inventory method,
we record the sale of the merchandise at the selling price and we also record the cost of the merchandise sold at our
cost. We do this so that we will know how much inventory we have on hand at all times, thus the name "perpetual"
inventory. If we used the periodic inventory system. The periodic inventory method does not give us up-to-date
inventory balances, and for that reason we are using the perpetual inventory method in Chapter 6.
What is the difference between a sales invoice and a purchase invoice?
The difference is who generated the piece of paper. The seller prepares an invoice for the goods to be sold to the
buyer. On the seller's books, this is a sales invoice, but on the buyer's books, it represents a purchase invoice, since
the buyer is purchasing the goods. The seller uses its copy of the invoice to record a sales transaction, and the buyer
uses its copy of the invoice to record the purchase of merchandise.
Why do we have a sales returns and allowances account?
This question can be followed up with: Why don't we just debit Sales when there is a return? Why do we have to use
a separate account? Sales Returns and Allowances is a contra account to Sales; thus, it has a normal debit balance.
This account contains the dollar amount by which customers accounts have been reduced for goods returned to us or
allowances made for damage, defects, etc. Since returns and allowances are not planned, and ideally we would never
have any, we want to know why we have them. If we debit the sales account for them, the dollar amounts are not
readily available when we prepare the income statement. The best way to know how much we have lost in sales due
to returns and allowances is to record that information in a separate account. These data are important to know in
managing a business. We want to keep the amount of returns and allowances to a minimum in order to achieve
efficiency and customer satisfaction.
Why do we record two entries when we make a sale?
We record two entries because we are using the perpetual inventory system. Under the perpetual inventory method,
we record the sale of the merchandise at the selling price and we also record the cost of the merchandise sold at our
cost. We do this so that we will know how much inventory we have on hand at all times, thus the name "perpetual"
inventory. If we used the periodic inventory system (discussed in a later chapter and in an appendix at the end of the
text), we would record only the sales entry. The periodic inventory method does not give us up-to-date inventory
balances, and for that reason we are using the perpetual inventory method in Chapter 6.
What is the difference between a sales invoice and a purchase invoice?
The difference is who generated the piece of paper. The seller prepares an invoice for the goods to be sold to the
buyer. On the seller's books, this is a sales invoice, but on the buyer's books, it represents a purchase invoice, since
the buyer is purchasing the goods. The seller uses its copy of the invoice to record a sales transaction, and the buyer
uses its copy of the invoice to record the purchase of merchandise.
Why do we have a sales returns and allowances account?
This question can be followed up with: Why don't we just debit Sales when there is a return? Why do we have to use
a separate account? Sales Returns and Allowances is a contra account to Sales; thus, it has a normal debit balance.
This account contains the dollar amount by which customers accounts have been reduced for goods returned to us or
allowances made for damage, defects, etc. Since returns and allowances are not planned, and ideally we would never
have any, we want to know why we have them. If we debit the sales account for them, the dollar amounts are not
readily available when we prepare the income statement. The best way to know how much we have lost in sales due
to returns and allowances is to record that information in a separate account. These data are important to know in
managing a business. We want to keep the amount of returns and allowances to a minimum in order to achieve
efficiency and customer satisfaction.
What is a bank reconciliation and how does it work?

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A bank reconciliation is commonly used for detailing the items responsible for the difference between the cash
balance reported in the bank statement and the balance of the cash account in the general ledger. All reconciling
items in the balance per books portion of the bank reconciliation require formal journal entries in order to adjust the
cash account to the true balance. These adjustments are not the same as adjusting entries in previous chapters, and
are therefore called "reconciling entries."
What are the two inventory systems, and why have two of them?
The two systems of inventory are: (1) perpetual inventory and (2) periodic inventory. Each system has certain
advantages and disadvantages. The perpetual inventory system provides up-to-date inventory information but
requires more time and record keeping to use it. The periodic inventory system is simpler to use but does not provide
us with the number of units on hand unless we physically count the inventory. A business has a choice between the
two systems. A perpetual inventory system is the best if a business can afford the cost of maintaining it.
What is the difference between the two inventory systems?
Under the perpetual inventory system, all merchandise increases and decreases are recorded. When a sale is made,
we not only record the sale, we also record the decrease in the inventory account. The merchandise inventory
account at any point in time reflects the merchandise on hand at that date. When the periodic inventory system is
used, only revenue is recorded each time a sale is made. No entry is made at the time of the sale to decrease the
inventory account. A physical count is taken at the end of the accounting period to determine the cost of
merchandise sold and the cost of inventory on hand.

What are the three methods of valuing ending inventory?

The three most common methods to assign costs to inventory are: (1) first-in, first-out (FIFO), (2) last-in, first-out
(LIFO), and (3) average cost.

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General Accounting Terms and Definitions

Accounting Cycle - Composed of several Accounting Periods spanning over twelve consecutive months.
st
th
Corporations currently operate on a fiscal year beginning on July 1 and ending June 30 .
Accounting Period - Expenditure and revenue measurement within a pre-determined time frame. There may be
several Accounting Periods in an Accounting Cycle.
Assets - Tangible or intangible property that a Corporation controls.
Fixed Assets - Purchases whose historic cost is above the Corporation established threshold or
$1,000.00. This may include furniture, office equipment (e.g. copiers, computers, fax machines, and
telephone systems), trade fixtures (items attached to the building or real estate such as signs), and
vehicles.
Intangible Assets - Assets that cannot be physically measured: goodwill, patents, copyrights, and
organizational costs.
Liquid Assets - Assets that can be readily spent or transferred to cash such as bank accounts (e.g.
checking accounts, savings accounts, certificates of deposit, money market accounts, and current asset
management accounts), and securities (e.g. stocks and bonds).
Tangible Assets - Assets that may be physically measured by inventory: furniture, office
equipment, and vehicles.
Depreciation - Mathematical formula measure of a tangible asset=s loss of value over time to properly match
revenues against the appropriated assets lost value (estimated expense). This is done for office equipment,
furniture, and vehicles.

Expenditure - The use of assets to obtain an established goal.

Fiscal Year - Twelve consecutive months designated as the operational year that is not a calendar year. The State
of West Virginia uses a governmental accounting year beginning on July 1 and ending June 30.
Liability - A debt or outstanding balance owed to another party requiring a future cash flow for satisfaction or
extinguishment. This may be considered short-term (less than twelve months) or long term (greater than twelve
months).
Net Income - This is also called 'Profit' or 'Net Profit'. It is the total income minus the total expenses
Profit & Loss Statement. This is also called the 'Income Statement' or 'P&L'. It is the total income minus the total
expenses for the business.
Retained Earnings - These are profits from the business that have been kept or 'retained' in the business and not
paid out to the owners.
Trial Balance - This is a list of the general ledger accounts showing the debits in one column and the credits in
another. The main objective of a trial balance is to ensure that the total credits and total debits balance (eg. total
debits = total credits). It also validates that the double entry accounting is working correctly.

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