Non-Commercial Organizations (Non-Profit Oriented)
- NGO’s (Non-government Organizations)
- Trusts
- Societies
Goodwill:
This is simply
the value attached to the good reputation earned through good and clean conduct
of business over a number of years. This good reputation also has a value and
becomes part of investment in business
Budget:
Budget Is a plan of income, expenses & other financial operation for
a future period.
Recommended : Mgt101 financial accounting Lesson no 3 Short Notes
MGT101 Short Notes Lecture - 4
SINGLE
AND DOUBLE ENTRY RECORD KEEPING
Single Entry Book Keeping/cash
accounting:
In
Single Entry Book Keeping Only one aspect of the transaction is recorded.
Double Entry Book Keeping/commercial
accounting:
In
Double Entry Book Keeping every transaction has two aspects i.e. receiving a
benefit and giving a benefit.
Debit:
It
signifies the receiving of benefit. In simple words it is the left hand side.
Credit:
It signifies
the providing of a benefit. In simple words it is the right hand side.
Dual Aspect of Transactions:
For every
debit there is an equal credit. This is also called the dual aspect of the transaction.
Recommended : MGT101 All Past Final Term Papers
MGT101 Short Notes Lecture - 5
Account:-
Record that
summarizes movement in an individual item is called an Account.
Classification
of Accounts:-
The accounts are classified into following
heads:
·
Assets
·
Liabilities
·
Income
·
Expenses
(further divided into capital and revenue expenses)
Assets:
Assets are the properties and possessions of the business to pay in future. Can be amount payable for material
purchased, expenses etc.
Properties
and possessions can be of two types:
·
Tangible Assets that have physical existence
(are further divided into Fixed Assets and Current Assets)(Furniture, vehicle
etc).
·
Intangible Assets that have no physical existence (copyright,
Good will etc).
Liabilities:
Liabilities
are the debts and obligations of the business. Liability is the
obligation of the business to provide a benefit or asset on a future date.
Asset vs liability:
Asset is a right to receive and liability is
an obligation to pay, therefore, these are opposite to each other.
Income
& Expenses:
·
Income/revenue is the value of goods and services
that a business charges from its customers.
·
Expenses
are the costs incurred to earn the
revenue.
Accounting
Equation:
Assets = Liabilities
+ Owner’s equity
Capital Expenditure:-
It is the expenditure to create an asset that
helps in generating future income and its life is more than 12 month. For
example machinery purchases, furniture purchases etc.
Revenue Expenditure:-
It is the day to day expenses whose benefit
is drawn immediately. For example, salary of the employee, rent of the
building, etc.
Recommended : Mgt 101 Introduction to Balance Sheet
MGT101 Short Notes Lecture - 6
FLOW
OF TRANSACTIONS
Event:-
Event is
the happening of any thing but in accounting we discuss monetary events
Monetary Events:-
If the
financial position of a business is change due to the happening of event that
Event is called Monetary Event
The Voucher:-
Voucher is
documentary evidence in a specific format that records the details of a
transaction.
The General Journal:-
The Journal
is used to record financial transactions in chronological (day-to-day) order.
All vouchers were first recorded in books of accounts. It was also called the
Book of Original Entry or Day Book.
Ledger:-
It is a
book that keeps separate record for each account (Book of Accounts).
BALANCE:-
The
difference between the debit and the credit sides, known as the BALANCE.
Recommended : MGT 101 Solved Papers
MGT101 Short Notes Lecture - 7
Accounting Period:-
·
Accounting
period is any period for which a Financial Statements are prepared. The length
of the accounting period can be anything between one day to one year.
·
The
legal or statutory definition of accounting year is a maximum of one year.
·
The
only exception in this case is the
·
Formation
of a new company which is formed before the start of accounting period.
Financial year (A
period of 12 month duration):-
In Pakistan, financial year starts
from 1st of July and ends on 30th of June.
Debit Balance:-
If debit
side of a ledger is greater than credit side, the balance will be written on
the credit side and it will be called Debit
Balance.
Credit Balance:-
If credit
side is greater than debit side, the balance will be written on the debit side.
This balance is called Credit Balance.
Trial Balance:-
At the end
of accounting period, a list of all ledger balances is prepared. This list is
called trial Balance.
Recommended : MGT101 Current and Past Final Term Papers 2016
MGT101 Short Notes Lecture - 8
Income &
Expenditure Vs Profit & Loss Account:-
·
Income
and Expenditure Account is used for Non-Profit Organizations like Trusts, NGOs
·
Profit
and Loss Account is used for Commercial organizations like limited companies.
Profit & Loss
Account:-
Profit
& Loss account is an account that summarizes the profitability of the
organization for a specific accounting period.
·
First
part is called Trading account in which Gross Profit is calculated. Gross
profit is the excess of sales over cost of goods sold in an accounting period.
·
2nd part is called Profit & Loss
account in which Net Profit is calculated. Net Profit is what is
left of the gross profit after deducting all other expenses of the organization
in a specific time period.
Profit:-
It is the
excess of income over expenses in a specified accounting period.
Profit= Income - expenses
Administrative
expenses:-
Administrative expenses
are the expenses incurred in running a business effectively. Main components of
this group are:
o Payment
of utility bills
o Payment
of rent
o Salaries
of employees
o General
office expenses
o Repair
& maintenance of office equipment & vehicles.
Selling expenses:-
Selling expenses
are the expenses incurred directly in connection with the sale of goods. This
head contains:
o
Transportation/carriage of goods sold
o
Tax/freight paid on sale
Financial expenses:-
Financial expenses
are the interest paid on bank loan & charges deducted by bank on entity’s
bank accounts. It includes:
o Mark up
on loan
o Bank
charges
MGT101 Short Notes Lecture - 9
Accounts
payable:-
All businesses have liabilities; even the most successful
companies’ purchase
stocks, supplies and receive services on credit. The liabilities
arising from such purchases are called Accounts payable.
Capital:-
It is the funds invested by the
owners of the business. Business has a liability to return these funds to the
owner.
MGT101 Short Notes Lecture - 10
Debtor:-
A person or
organization from whom money is receivable by the business is called a debtor.
Creditor:-
A person or organization to whom money is payable by the
business is called a
creditor.
MGT101 Short Notes Lecture-11
Rules of Debit &
Credit:-
• Any account that obtains a benefit
is Debit.
• Anything
that will provide benefit to the business is Credit.
• Expenditure
o Increase
in Expenditure is Debit
o Decrease
in Expenditure is Credit
• Income
o Increase
in Income is Credit
o Decrease
in Income is Debit
• Assets
o Increase
in Asset is Debit
o Decrease
in Asset is Credit
• Liability
o Increase
in Liability is Credit
o Decrease
in Liability is Debit
MGT101 Short Notes Lecture - 12
The
Accounting Equation
Capital:-
The amount of resources supplied by
the owner is called capital.
Asset:-
The actual resources which are in
the business are called assets.
Asset =
Capital
Long Term
Assets:-
These are the assets of the
business that are receivable after twelve
months of the balance sheet date. For example, if business has invested
some money for two
years in any saving scheme or has purchased saving certificates
for more than one year, it is a
long term asset.
Liabilities:-
It
is the name given to the amounts owing to these people for these assets.
Assets =
Capital + Liabilities
Long Term
Liabilities:-
These are the liabilities that will become payable after a period
of more than one year of the balance
sheet date. For example, if business has taken a loan from bank or
any third person and it is payable after ten years, it will be treated as a
long term liability for the business.
Working Capital:-
It is the net value of current
assets and current liabilities.
Current Assets:-
Current assets are the resources of
the business that are expected to be received within 12 months in an accounting
cycle.
Current liabilities:-
Current liabilities are the amount
owing to the business that is expected to be paid within one year In a
financial year.
Working
capital = current Assets – current liabilities
Stock:-
It is the value of goods available
to the business that are ready for sale.
OR
It is the quantity of unutilized or
unsold goods.
Opening Stock:-
It
is the value of goods available for sale in the beginning of an accounting
year.
Closing Stock:-
It is the value of goods unsold at
the end of accounting year.
Treatment of
depreciation:-
In
profit and loss Account it is considered as expense and in balance sheet it is
deducted from the concerned asset.
Drawing:-
Sometimes,
the owner wants to take cash or kind out of the business for personal use. This
known as drawing. Any money taken out as drawings will reduce capital.
MGT101 Short Notes Lecture - 13
Voucher:-
It is the first document to record
an entry.
·
Receipt
Voucher:-
It
is used to record cash or bank receipt.
·
Payment
Voucher:-
It
is used to record a payment of cash or cheque.
·
Journal
Voucher:-
It
is used to record transaction that do not affect cash or bank.
Debit balance when
carried forward, is writer on the debit side.
Credit balance when
carried forward, is written on the credit side.
Difference between
expenses & Purchases:-
·
If
business purchases items for its own use (items that are not meant to be
resold) are charged to expense account.
·
If
business purchases items for resale purposes are charged to purchases account.
Raw material:-
It is the basic part of an item,
which is processed to make a complete item.
Work in process:-
At
the end of the year, some part of raw material remains under process, I-e, it
is neither in shape of raw material nor in shape of finished goods.
Finished Goods:-
It
contains items that are ready for sale, but could not be sold in that
accounting period.
Purchase of stock:-
Debit: Stock Account
Credit: Cash/supplier/creditor Account
Payment to creditors:-
Debit: cost of goods sold
Credit: Stock
Account
Cost of goods sold:-
·
In
trading concern, It is the value of goods unsold
·
In
manufacturing concern, it is the value of raw material consumed plus any other
manufacturing cost
MGT101 Short Notes Lecture - 15
Stock
Journal Entries:-
(In
case of Trading Concern)
Purchase Of Goods:
Debit: Stock/Material Account
Credit: Cash/Bank/Creditor
Consumption of goods:
Debit: Cost of goods sold
Credit: Stock
Payment in case of credit purchase:
Debit: Creditors Account
Credit: Cash/Bank
(In
case of Trading Concern)
Purchase of raw material:
Debit: Stock/Material Account
Credit: Cash/Bank/Creditors
Other direct costs incurred:
Debit: Relevant cost/Expenses Head
Credit: Cash/Bank/Payables
Raw material issued and other costs allocated
to production of units:
Debit: Work in process
Credit: Stock Material Account
Debit: Work in process
Credit: relevant expense head Account
When production is completed:
Debit: Finished Goods Stock Account
Credit: Work in process Account
Entry for cost of sale:
Debit: Cost of Goods sold Account
Credit: finished Goods stock Account
Entry for sale of goods:
Debit: cash/Account receivable Account
Credit: Sale account
Return of Purchase Material:
Debit: Goods return Account
Credit: stock material Account
And
Debit: Cash/Bank Account
Credit: Goods Return Account
If
our suppliers supplies us some other material
in exchange of material returned:
Debit: Raw material Stock Account
Credit: Goods return Account
MGT101 Short Notes Lecture - 16
COST OF GOODS SOLD STATEMENT
cost of
goods sold statement:-
The statement shows
the value of raw material consumed, amount spent on labor and other factory
expenses, finished goods produced and goods unsold (in stock).
Standard format of cost of goods sold
statement is given below:
Raw Material: O/S Raw
Material
+
Purchases
+ Cost
Incurred to Purchase RM
- C/S
Raw Material
Cost
of Material Consumed
Conversion Cost: + Direct Labor Cost
+
Factory Overheads
Total
Factory Cost
Work in Process: + O/S of WIP
- C/S
of WIP
Cost
of Goods Manufactured
Finished Goods: + O/S of Finished Goods
- C/S of
Finished Goods
Cost of
Good Sold
Cost of material
consumed:-
It is the cost of
material used for consumption that has been put in the production process.
Over Heads:-
Over Heads are
the other costs incurred in relation of manufacturing of goods. Examples are
factory utilities, supervisor salaries, equipment repairs etc.
Total factory cost:-
It is the
cost of material consumed plus labor and over heads. In other words it is the
total cost incurred in the factory.
Cost of goods
manufactured:-
It is total
factory cost plus opening stock of work in process less closing stock of work
in process.
Cost of goods sold:-
It is the
cost of goods manufactured plus opening stock of finished goods less closing
stock of finished goods.
Prime/Basic
Cost = Cost of Direct
Material Consumed + Direct Labor cost
Conversion cost:-
It is the cost incurred to convert raw material to finished goods.
Conversion
cost = Labor cost +
factory overhead
Valuation of Stock:-
Any
manufacturing organization purchases different material through out the year.
The prices of purchases may be different due to inflationary conditions of the
economy. The question is, what item should be issued first & what item
should be issued later for manufacturing. For this purpose, the organization
has to make a policy for issue of stock. All the issues for manufacturing and
valuation of stock are recorded according to the policy of the organization.
Mostly
these three methods are used for the valuation of stock:
• First in
first out (FIFO)
• Last in
first out (LIFO)
• Weighted
average
First in first out
(FIFO)
The FIFO method is based on the
assumption that the first merchandise purchased is the first merchandised
issued. The FIFO uses actual purchase cost.
Last in first out
(LIFO)
The LIFO method is based on the
assumption that the recently purchased
merchandise
is issued first. The LIFO uses actual purchase cost.
Weighted average
method
This average cost is computed by
dividing the total cost of goods available for sale by the number of units in
inventory.
MGT101 Short Notes Lecture - 17
DEPRECATION
Fixed Assets:-
Fixed Assets are
those assets which are:
• Of long
life
• To be
used in the business to generate revenue
• Not
bought with the main purpose of resale.
Fixed
assets are also called “Depreciable
Assets”
Accumulated Depreciation:-
It is the
depreciation that has been charged on a particular asset from
the time of
purchase of the asset to the present time.
Amortization:-
No
depreciation is charged for ‘Land’. In case of ‘Leased Asset/Lease Hold Land’
the amount paid for it is charged over the life of the lease and is called Amortization.
Methods of
calculating Depreciation:-
1: Straight
line method/Original cost method/Fixed installment method:-
Depreciation
= (cost – Residual value) / Expected useful life of the asset
Residual value:
It is the cost of
the asset after the expiry of its useful life.
2: Write
Down value/Reducing method/diminishing method:-
WDV =
Original cost of fixed asset – Accumulated Depreciation
Entries for Recording
Disposal:-
Debit: Fixed Asset Disposal A/c
Credit: Fixed Asset Cost A/c
(With
the cost of asset)
Debit: Accumulated Dep. A/c
Credit:
Fixed Asset Disposal
A/c
(With
the depreciation accumulated to date)
Debit: Cash / Bank / Receivable A/c
Credit:
Fixed Asset Disposal
A/c
(With
the price at which asset is sold)
MGT101 Short Notes Lecture -19
METHODS
OF CHARGING DEPRECIATION
Capital
Work in Progress Account:-
If an asset is not completed at
that time when balance sheet is prepared, all costs incurred on that asset
up to the balance sheet date are transferred to an account called Capital
Work in Progress Account.
Debit: Relevant asset account
Credit: Capital
work in progress account
MGT101 Short Notes Lecture - 21
REVALUATION
OF FIXED ASSETS
Fair Value:-
It is the
value, at which an asset would bring to the management, when sold to a
knowledgeable party in a fair deal.
Rules for Revaluation:-
•
Revaluation has to be carried out at regular intervals
• The
change in the value should be permanent
• Whole
class of asset has to be revalued
Capital Expenses / Capitalized:-
Capital Expenses
are those expenses for which benefit is enjoyed for more than one accounting
period. For example, the business has bought a car. Now, car will be used for
many years. So, it is a capital expense.
Capital Expenditures are incurred in
two ways:
• When an
asset is acquired, and
• When an
improvement is made in an existing asset.
Revenue / Deferred Expenses
/
Charged Off:-
Revenue Expenses
are those expenses for which, the benefit is enjoyed within one accounting
period. For example, the business has purchased stationery for office use. Now,
the stationery is used within one year in the office. So, this will be a
revenue expense.
Revenue Expenses are those expenses
that are:
• Incurred
in day to day running of the business.
• Incurred
to maintain fixed assets in their original / useable condition.
Prepaid Expenses:
Prepaid Expenses are
amounts that are paid in advance to a vender or creditor for goods and services.
E-g. insurance.
Capital Receipts:-
Receipts
which are non-recurring and whose benefits are enjoyed over a long period are
called ‘Capital Receipts’. For instance, Capital invested, Loan from bank, Sale
proceed of fixed assets etc. Capital receipts are shown on the liability side
of the balance sheet.
Revenue Receipts:-
Receipts
which are recurring by nature and which are available for meeting all day to
day expenses of a business concern are known as ‘Revenue Receipts’. For
example, sale proceeds of goods, interest received, rent received etc.
MGT101 Short Notes Lecture - 22
BANK RECONCILIATION STATEMENTS
Bank statement:-
It is the
detail of transactions in one’s account provided by the bank.
Unpresented Cheques:-
a cheque is issued but it has not been presented
in the
account, such kind of cheques are called Un-presented Cheques.
Un-Credited Cheques:-
a cheque that has not been cleared in
the bank
account as
yet.
Recommended : CS101 Short Notes For Mid Term From Lec 1 To 22
Download MGT101 Short Notes for Mid term lec 1 to 22
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