Definition of 'Accounting'

To provide a record such as funds paid or received for a person or business. Accounting summarizes and submits this information in reports and statements. The reports are intended both for the firm itself and for outside parties.

'Accounting Equation'
The equation that is the foundation of double entry accounting. The accounting equation displays that all assets are either financed by borrowing money or paying with the money of the companys shareholders. Thus, the accounting equation is: Assets = Liabilities + Shareholder Equity. The balance sheet is a complex display of this equation, showing that the total assets of a company are equal to the total of liabilities and shareholder equity. Any purchase or sale by an accounting equity has an equal effect on both sides of the equation, or offsetting effects on the same side of the equation. The accounting equation is also written as Liabilities = Assets Shareholder Equity and Shareholder Equity = Assets Liabilities.

5 pillars of accounting

Assets liability capital income expense

Fitness Equipment Limited Year Ended March 31, 2008 2007 --------------------------------------------------------------------------------Revenue $ 14,580.2 $ 11,900.4 $ 8,290.3 Cost of sales (6,740.2) (5,650.1) (4,524.2) ------------------------ ----------Gross profit 7,840.0 6,250.3 3,766.1 ------------------------ ----------INCOME STATEMENTS (in millions) 2009

SGA expenses (3,034.0) ----Operating profit 732.1 ----Gains from disposal of fixed assets Interest expense (142.8) ----Profit before tax 589.3 ----Income tax expense (235.7) ----Profit (or loss) for the year 353.6 $ $

(3,624.6) ------------4,215.4

(3,296.3) -----------$ 2,954.0 ------$ -------

------------46.3 (119.7) ------------4,142.0 ------------(1,656.8) ------------2,485.2

-----------(124.1) -----------2,829.9 -----------(1,132.0) -----------$ 1,697.9

-------

-------

------$

Year Ended December 31, 2008 2007 --------------------------------------------------------------------------------------------Revenue $ 36,525.9 $ 29,827.6 $ 21,186.8 Cost of sales (18,545.8) (15,858.8) (11,745.5) ----------- ---------- -----------Gross profit 17,980.1 13,968.8 9,441.3 ----------- ---------- -----------Operating expenses: Selling, general and administrative expenses (4,142.1) (3,732.3) (3,498.6) Depreciation (602.4) (584.5) (562.3) Amortization (209.9) (141.9) (111.8) Impairment loss (17,997.1) ----------- ---------- -----------Total operating expenses (22,951.5) (4,458.7) (4,172.7) ----------- ---------- ------------

DEXTERITY INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In millions) 2009

Operating profit (or loss) 5,268.6

$ (4,971.4)

9,510.1 --------

------------- -----------Interest income 11.7 12.0 Interest expense (742.9) (799.1) --- -----------Profit (or loss) from continuing operations before tax, share of profit (or loss) from associates and non-controlling interest 8,778.9 $ 4,481.5 --- -----------Income tax expense (1,789.9) Profit (or loss) from associates, net of tax 0.1 (37.3) Profit (or loss) from non-controlling interest, net of tax (3.3) --- -----------Profit (or loss) from continuing operations $ 2,651.0 --- -----------Profit (or loss) from discontinued operations, net of tax 164.6 --- -----------Profit (or loss) for the year $ 2,815.6 25.3 (718.9) -----------

--------

$ (5,665.0) ----------(1,678.6)

$ --------

(3,510.5)

(20.8) (5.1) ----------$ (7,348.7) $ (4.7) -------5,263.8 -------(802.4) --------

----------(1,090.3) ----------$ (8,439.0) $

4,461.4

Sample balance sheet

The following balance sheet is a very brief example prepared in accordance with IFRS. It does not show all possible kinds of assets, liabilities and equity, but it shows the most usual ones. Because it shows goodwill, it could be a consolidated balance sheet. Monetary values are not shown, summary (total) rows are missing as well.
Balance Sheet of XYZ, Ltd. As of 31 December 2009 ASSETS Current Assets Cash and Cash Equivalents Accounts Receivable (Debtors) Less : Allowances for Doubtful Accounts Inventories Prepaid Expenses Investment Securities (Held for trading) Other Current Assets

Non-Current Assets (Fixed Assets) Property, Plant and Equipment (PPE) Less : Accumulated Depreciation Investment Securities (Available for sale/Held-to-maturity) Investments in Associates Intangible Assets (Patent, Copyright, Trademark, etc.) Less : Accumulated Amortization Goodwill Other Non-Current Assets, e.g. Deferred Tax Assets, Lease Receivable LIABILITIES and SHAREHOLDERS' EQUITY LIABILITIES Current Liabilities (Creditors: amounts falling due within one year) Accounts Payable Current Income Tax Payable Current portion of Loans Payable Short-term Provisions Other Current Liabilities, e.g. Unearned Revenue, Deposits Non-Current Liabilities (Creditors: amounts falling due after more than one year) Loans Payable Issued Debt Securities, e.g. Notes/Bonds Payable Deferred Tax Liabilities Provisions, e.g. Pension Obligations Other Non-Current Liabilities, e.g. Lease Obligations SHAREHOLDERS' EQUITY Paid-in Capital Share Capital (Ordinary Shares, Preference Shares) Share Premium Less: Treasury Shares Retained Earnings Revaluation Reserve Accumulated Other Comprehensive Income

Assets

Current assets
1. 2. 3. 4. Cash and cash equivalents Accounts receivable Inventories Prepaid expenses for future services that will be used within a year

Non-current assets (Fixed assets)

1. 2. 3. 4. Property, plant and equipment Investment property, such as real estate held for investment purposes Intangible assets Financial assets (excluding investments accounted for using the equity method, accounts receivables, and cash and cash equivalents) 5. Investments accounted for using the equity method 6. Biological assets, which are living plants or animals. Bearer biological assets are plants or animals which bear agricultural produce for harvest, such as apple trees grown to produce apples and sheep raised to produce wool.[17]

[edit] Liabilities

See Liability (accounting)

1. Accounts payable 2. Provisions for warranties or court decisions 3. Financial liabilities (excluding provisions and accounts payable), such as promissory notes and corporate bonds 4. Liabilities and assets for current tax 5. Deferred tax liabilities and deferred tax assets 6. Unearned revenue for services paid for by customers but not yet provided [edit] Equity

The net assets shown by the balance sheet equals the third part of the balance sheet, which is known as the shareholders' equity. It comprises:
1. Issued capital and reserves attributable to equity holders of the parent company (controlling interest) 2. Non-controlling interest in equity

Formally, shareholders' equity is part of the company's liabilities: they are funds "owing" to shareholders (after payment of all other liabilities); usually, however, "liabilities" is used in the more restrictive sense of liabilities excluding shareholders' equity. The balance of assets and liabilities (including shareholders' equity) is not a coincidence. Records of the values of each account in the balance sheet are maintained using a system of accounting known as double-entry bookkeeping. In this sense, shareholders' equity by construction must equal assets minus liabilities, and are a residual. Regarding the items in equity section, the following disclosures are required:
1. 2. 3. 4. 5. 6. 7.
8. 9.

Numbers of shares authorized, issued and fully paid, and issued but not fully paid Par value of shares Reconciliation of shares outstanding at the beginning and the end of the period Description of rights, preferences, and restrictions of shares Treasury shares, including shares held by subsidiaries and associates Shares reserved for issuance under options and contracts A description of the nature and purpose of each reserve within owners' equity
Rules of Debit and Credit

10. Fromour discussion up to this point, we have established followingrules for Debit and Credit: 11. Anyaccount that obtains a benefit is Debit. 12. OR 13. Anythingthat will provide benefit to the business is Debit. 14. 15. Boththese statements may lookdifferent but in fact if we consider that whenever an account

16. benefits as a result of a transaction, it willhave to return that benefit to the business then both the 17. statementswill look like differentsides of the same picture. 18. 19. For credit 20. Anyaccount that provides a benefit is Credit. 21. OR 22. Anything to which the business has a responsibility to return a benefit in future is Credit. 23. 24. As explained in the case of Debit, whenever an account provides benefit to the business the 25. businesswill have a responsibility to returnthat benefit at some time in future and so it is Credit. 26. Rules of Debit and Credit forAssets 27. 28. Similarly we have established thatwhenever a business transfers a value / benefit to an accountand 29. as a result creates some thingthat will provide futurebenefit; the `thing' is termed as Asset. 30. 31. By combining both these rules we can devise followingrules of Debit and Creditfor Assets: 32. o When an asset is created or purchased,value / benefit is transferred to that account, so it is 33. Debited 34. i. 35. Increase in Asset is Debit 36. o Reversing the above situation if the asset is sold, which is termed as disposing off, forsay 37. cash, the asset account provides benefit to the cash account. Therefore, the assetaccount is 38. Credited 39. ii. 40. Decrease in Asset is Credit 41. 16 42. Virtual University of Pakistan

43.

44. FinancialAccounting (Mgt-101) 45. VU 46. Rules of Debit and Credit forLiabilities 47. 48. Anythingthat transfers value to the business, and in turncreates a responsibility on part of the 49. business to return a benefit, is a Liability. Therefore, liabilities are the exact opposite of the assets. 50. o When a liability is created the benefit is provided to business by thataccount so it is 51. Credited 52. iii. 53. Increase in Liability is Credit 54. o When the business returns the benefit or repays the liability, the liabilityaccount benefits 55. from the business. So it is Debited 56. iv. 57. Decrease in Liability is Debit 58. Rules of Debit and Credit forExpenses 59. 60. Justlike assets, we have to payfor expenses. From assets, we draw benefit for a long time whereas 61. the benefit from expenses is for a short run. 62. 63. Therefore, Expenditure is just likeAsset but for a short run. 64. 65. Using our rule for Debit and Credit, when we pay cash forany expense that expenseaccount 66. benefits from cash, therefore, it is Debited. 67. o Now we can lay down ourrule for Expenditure: 68. v. 69. Increase in Expenditure is Debit 70. o Reversing the above situation, if we return any item that we had purchased, we will receive 71. cash in return. Cash account willreceive benefit from thatExpenditure account. Therefore, 72. Expenditureaccount will be credited 73. vi. 74. Decrease in Expenditure is Credit 75. Rules of Debit and Credit forIncome 76. 77. Incomeaccounts are exactly opposite to expense accounts just as liabilities are opposite to that of 78. assets. 79. 80. Therefore, using the same principle we can draw our rules of Debit and Credit forIncome 81. vii. 82. Increase in Income is Credit

83. viii. 84. Decrease in Income is Debit 85. THE ACCOUNTING EQUATION 86. Resources in the business = Resourcessupplied by theowner 87. In accounting, terms are used to describe things. The amount of resources supplied by the owner is called 88. capital. Theactual resources which are in the business are calledassets. This means that the accounting 89. equation above, when the owner has supplied all the resources, can be shownas: 90. Assets=Capital 91. Usually, people, other than the owner has supplied some of the assets.Liabilitiesare the name given to the 92. amountsowing to these people forthese assets. The equation has now changedto: 93. Assets=Capital + Liabilities 94. It can be seen that two sides of the equation will have the sametotals. This is because we aredealing with 95. the same thing with twodifferent points of view. It is: 96. Resources in the business = Resources:who supplied them 97. Assets = Capital + Liabilities 98. It is a fact that total of eachside will always equalone another, and this willalways be true no matterhow 99. manytransactions there may be.The actual assets, capitaland liabilities may change,but the total of the 100. assetswill always equal to the total of capital andliabilities. 101. Assetsconsist of property of all kinds, such as buildings, machinery, stocks of goods and motorvehicles. 102. Also benefits such as debts owned by customersand the amount of money in the bank accounts are 103. included. 104. Liabilitiesconsist of money owing forgoods supplied to the business andfor expenses. Also loansmade to 105. the firm are included. 106. Capital is often called the owner's net worth. 107. Workingcapital 108. Workingcapital of the business is the net value of current assets & current liabilities. 109. Currentassets are the resources of the business thatare expected to be receivedwithin 12 months in an 110. accountingperiod. 111. Current liabilities are the amount owing to the business that is expected to be paid within oneyear in a 112. financial year. 113. So,working capital is the net of what is receivable in an accounting year & what is payable in that yearor: 114. WorkingCapital = Current Assets Current Liabilities 115. Forinstance, current assets of the businessworth Rs.100,000 & current liabilities of the business has the 116. value of Rs. 75,000. Then workingcapital is Rs.25,000. 117. i.e.,(100,000-75,000).