ALLAMA IQBAL OPEN UNIVERSITY ISLAMABAD

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Semester

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Assignment No. 1st

Program

Course Code 5401

Q. 1
Define Accounting and explain its objectives and branches.
Definition of Accounting

Accounting is the process of identifying, recording, summarizing, and analyzing financial

transactions to provide useful information for decision-making. It involves the systematic and
detailed recording of all financial transactions of a business entity, ensuring accuracy and
compliance with established standards and principles. This financial information is then
presented in the form of financial statements such as the income statement, balance sheet, and
cash flow statement.

Accounting serves as the language of business, facilitating communication between stakeholders,

such as investors, creditors, managers, and regulators, by providing a clear and standardized
view of an entity’s financial performance and position.

Objectives of Accounting

The objectives of accounting can be broadly categorized as follows:

1. Recording Financial Transactions

The primary objective of accounting is to systematically record all financial transactions in a

chronological manner. This is done through journal entries, which form the foundation for
preparing financial statements.

2. Maintaining Financial Records

Accounting ensures that all financial data is maintained in an organized and accessible format,
enabling accurate tracking and referencing of historical transactions.

3. Determining Profit or Loss

One of the key purposes of accounting is to ascertain the profitability of a business by preparing
the income statement. This helps stakeholders understand whether the business is operating at a
profit or a loss.

4. Assessing Financial Position

Accounting provides insights into the financial health of an entity by preparing the balance sheet,
which lists assets, liabilities, and equity at a given point in time.

5. Providing Financial Information for Decision-Making

Accounting generates accurate and timely financial information that aids in making informed
decisions regarding investments, expansions, cost-cutting measures, and other strategic
initiatives.

6. Facilitating Regulatory Compliance

Accounting ensures adherence to legal and regulatory requirements, such as tax filings and
compliance with financial reporting standards like GAAP (Generally Accepted Accounting
Principles) or IFRS (International Financial Reporting Standards).

7. Ensuring Accountability

By providing a clear record of financial activities, accounting promotes accountability among

stakeholders, including management, employees, and investors.

8. Budgeting and Forecasting

Accounting helps in creating budgets and financial forecasts, which are essential for planning
and resource allocation.
9. Detecting and Preventing Fraud

Through accurate record-keeping and internal controls, accounting helps detect discrepancies
and irregularities, reducing the risk of fraud.

Branches of Accounting

Accounting is a vast field with several specialized branches, each serving unique purposes. The
major branches of accounting are discussed below:

1. Financial Accounting

This branch focuses on recording, summarizing, and presenting financial transactions to external
stakeholders such as investors, creditors, and regulators. The primary output of financial
accounting is the preparation of financial statements, including the income statement, balance
sheet, and cash flow statement. It adheres to standardized principles like GAAP or IFRS.

Key Features of Financial Accounting:

 Historical in nature, as it records past transactions.

 Primarily intended for external stakeholders.
 Governed by established accounting standards and principles.

2. Managerial Accounting

Managerial accounting provides financial and non-financial information to internal stakeholders,

such as management, to aid in decision-making, planning, and control. It focuses on future-
oriented activities like budgeting, cost analysis, and performance evaluation.

Key Features of Managerial Accounting:

 Forward-looking and strategic in nature.

 Emphasizes detailed reports tailored to managerial needs.
 Not governed by standardized principles.

3. Cost Accounting

Cost accounting is a subset of managerial accounting that deals specifically with determining,
analyzing, and controlling costs. It helps businesses understand the cost of production, identify
cost-saving opportunities, and improve profitability.

Key Features of Cost Accounting:

 Focuses on cost determination and control.

 Utilizes techniques like job costing, process costing, and activity-based costing.
 Aims to optimize resource utilization and reduce waste.
4. Tax Accounting

This branch deals with the preparation and filing of tax returns and ensuring compliance with tax
laws and regulations. It involves calculating taxable income, understanding tax liabilities, and
planning strategies to minimize tax burdens legally.

Key Features of Tax Accounting:

 Focuses on tax compliance and planning.

 Adheres to specific tax laws and regulations.
 Involves preparation of tax returns and tax audits.

5. Auditing

Auditing involves the examination and verification of financial records to ensure accuracy,
reliability, and compliance with accounting standards. It can be internal (conducted by the
company’s own auditors) or external (conducted by independent auditors).

Key Features of Auditing:

 Enhances the credibility of financial statements.

 Detects errors, fraud, and non-compliance.
 Provides assurance to stakeholders about the accuracy of financial records.

6. Forensic Accounting

Forensic accounting combines accounting, auditing, and investigative skills to examine financial
records in cases of fraud, embezzlement, or legal disputes. It often plays a critical role in
litigation support and criminal investigations.

Key Features of Forensic Accounting:

 Focuses on detecting and investigating financial fraud.

 Utilized in legal proceedings and dispute resolution.
 Involves detailed examination of financial data and records.

7. Government Accounting

This branch focuses on accounting practices used by government entities to manage public funds
and ensure transparency and accountability in the use of taxpayer money. It adheres to specific
standards such as the Governmental Accounting Standards Board (GASB) guidelines.

Key Features of Government Accounting:

 Emphasizes accountability and stewardship of public resources.

 Adheres to unique accounting standards.
 Focuses on budgetary compliance and financial reporting.
8. Nonprofit Accounting

Nonprofit accounting is tailored to the needs of nonprofit organizations, focusing on fund

accounting and ensuring that resources are used in accordance with the organization’s mission
and donor restrictions.

Key Features of Nonprofit Accounting:

 Involves fund-based accounting.

 Tracks donations, grants, and expenditures.
 Ensures compliance with donor restrictions and reporting requirements.

9. International Accounting

International accounting deals with accounting practices and standards applicable to

multinational corporations and businesses operating in different countries. It addresses
challenges such as currency conversion, international taxation, and compliance with global
standards like IFRS.

Key Features of International Accounting:

 Focuses on cross-border financial transactions.

 Deals with currency translation and global reporting standards.
 Facilitates consistency in financial reporting across countries.

10. Environmental Accounting

Environmental accounting measures the environmental costs and benefits associated with
business activities. It helps organizations understand their ecological impact and integrate
sustainability into decision-making.

Key Features of Environmental Accounting:

 Tracks costs related to environmental conservation and compliance.

 Supports sustainability initiatives.
 Aims to balance economic and environmental goals.

11. Social Accounting

Social accounting focuses on the social and ethical impact of an organization’s activities. It
involves reporting on social responsibility initiatives, community engagement, and the overall
contribution to societal well-being.

Key Features of Social Accounting:

 Measures social and ethical performance.

 Enhances transparency and accountability.
  Communicates the organization’s social value to stakeholders.

Conclusion

Accounting is a vital function for any organization, enabling accurate financial reporting,
informed decision-making, and compliance with legal and regulatory requirements. Its diverse
branches cater to different aspects of financial management, from cost control and tax
compliance to sustainability and fraud detection. By understanding the objectives and branches
of accounting, businesses can effectively leverage this discipline to achieve financial stability,
transparency, and long-term success.

Q. 2
Mr. Anass started a sole proprietorship business. The business is
newly established, and Mr. Asfar hired an accountant for
keeping the journal updated. Suppose you are the accountant of
Mr. Anass’s business, prepare the journal book for the month of
December 2023. You are also required to post journal entries
into the ledger and prepare the trial balance. Detail of the
transactions during April 2023 are given as follows: (20)
April. 1. Mr. Anass commenced business with Cash of Rs.
990,000/- Building
Rs. 3, 700,000/-
2. Purchased Machinery with cash Rs. 300,000/-
5. Purchased goods from Miss Zara Rs. 250,000/-
8. Sold goods to Mr. M. Naeem Rs. 80,000/-
20. Goods returned from Miss Zara Rs. 5,000/-
21. Machinery Purchased Rs. 100,000/-
25. Returned goods to Mr. M. Naeem Rs. 3,000/-
28. Utility bills paid for the month Rs. 40,000/-
30. Rent paid for the month Rs. 40,000/
Journal Entries for April 2023

Below are the journal entries for the transactions that occurred during April 2023:

Date Particulars Debit (Rs.) Credit (Rs.)

April 1 Cash 990,000

Building 3,700,000

To Capital 4,690,000

(Commenced business with cash and building)

April 2 Machinery 300,000

To Cash 300,000

(Purchased machinery with cash)

April 5 Purchases 250,000

To Miss Zara (Creditors) 250,000

(Purchased goods from Miss Zara on credit)

April 8 Mr. M. Naeem (Debtors) 80,000

To Sales 80,000

(Sold goods to Mr. M. Naeem on credit)

April 20 Miss Zara (Creditors) 5,000

To Purchases Return 5,000

(Returned goods to Miss Zara)

April 21 Machinery 100,000

To Cash 100,000

(Purchased machinery with cash)

April 25 Sales Return 3,000

To Mr. M. Naeem (Debtors) 3,000

(Returned goods by Mr. M. Naeem)

April 28 Utility Expense 40,000

 Date Particulars Debit (Rs.) Credit (Rs.)

To Cash 40,000

(Utility bills paid for the month)

April 30 Rent Expense 40,000

To Cash 40,000

(Rent paid for the month)

Ledger Posting

Cash Account

Date Particulars Debit (Rs.) Credit (Rs.) Balance (Rs.)

April 1 Capital 990,000 990,000

April 2 Machinery 300,000 690,000

April 21 Machinery 100,000 590,000

April 28 Utility Expense 40,000 550,000

April 30 Rent Expense 40,000 510,000

Capital Account

Date Particulars Debit (Rs.) Credit (Rs.) Balance (Rs.)

April 1 Cash and Building 4,690,000 4,690,000

Purchases Account

Date Particulars Debit (Rs.) Credit (Rs.) Balance (Rs.)

April 5 Miss Zara 250,000 250,000

April 20 Purchases Return 5,000 245,000

Sales Account
 Date Particulars Debit (Rs.) Credit (Rs.) Balance (Rs.)

April 8 Mr. M. Naeem 80,000 80,000

April 25 Sales Return 3,000 77,000

Machinery Account

Date Particulars Debit (Rs.) Credit (Rs.) Balance (Rs.)

April 2 Cash 300,000 300,000

April 21 Cash 100,000 400,000

Miss Zara Account (Creditors)

Date Particulars Debit (Rs.) Credit (Rs.) Balance (Rs.)

April 5 Purchases 250,000 250,000

April 20 Purchases Return 5,000 245,000

Mr. M. Naeem Account (Debtors)

Date Particulars Debit (Rs.) Credit (Rs.) Balance (Rs.)

April 8 Sales 80,000 80,000

April 25 Sales Return 3,000 77,000

Trial Balance (As of April 30, 2023)

Account Name Debit (Rs.) Credit (Rs.)

Cash 510,000

Building 3,700,000

Machinery 400,000

Purchases 245,000

Sales Return 3,000

Utility Expense 40,000

 Account Name Debit (Rs.) Credit (Rs.)

Rent Expense 40,000

Capital 4,690,000

Miss Zara (Creditors) 245,000

Sales 77,000

Mr. M. Naeem (Debtors) 77,000

Purchases Return 5,000

Total 5,015,000 5,015,000

This completes the journal, ledger, and trial balance for April 2023.

Q. 3
A firm whose accounting year is the calendar year, purchased
on 1st April 2020
Machinery costing Rs. 150,000. It purchased further machinery
on 1st Oct 2013 costing Rs. 1000,000 and on 1 st July 2021, costing
Rs. 50,000. On 1st January 2022,
machinery installed on 1st April 2020 became obsolete and was
sold for Rs. 45,000.

Show how machinery Account would appear in the books of

company, if Machinery was depreciated by fixed installment method
@ 10% p.a. What Would be the balance of machinery Account on
1st January 2023?

To prepare the Machinery Account, we will first compute depreciation on the machinery using
the Fixed Installment Method (straight-line method) at the rate of 10% per annum and record
all the necessary transactions.
Step 1: Depreciation Calculation

 Machinery purchased on 1st April 2020: Rs. 150,000

o Annual depreciation: 150,000×10%=15,000150,000 \times 10\% = 15,000
o Depreciation from 1st April 2020 to 31st December 2021 (1 year 9 months):
15,000×2112=26,25015,000 \times \frac{21}{12} = 26,250
o Net book value as of 31st December 2021: 150,000−26,250=123,750150,000 -
26,250 = 123,750
o Sold on 1st January 2022 for Rs. 45,000.
 Machinery purchased on 1st October 2013: Rs. 1,000,000
o Annual depreciation: 1,000,000×10%=100,0001,000,000 \times 10\% = 100,000
o Depreciation for 2021 (3 months): 100,000×312=25,000100,000 \times \frac{3}
{12} = 25,000
o Depreciation for 2022: 100,000×1=100,000100,000 \times 1 = 100,000
 Machinery purchased on 1st July 2021: Rs. 50,000
o Annual depreciation: 50,000×10%=5,00050,000 \times 10\% = 5,000
o Depreciation for 2021 (6 months): 5,000×612=2,5005,000 \times \frac{6}{12} =
2,500
o Depreciation for 2022: 5,000×1=5,0005,000 \times 1 = 5,000

Step 2: Machinery Account

Date Particulars Debit (Rs.) Credit (Rs.) Balance (Rs.)

01-Apr-2020 To Cash (Purchase of Machinery) 150,000 150,000
01-Oct-2021 To Cash (Purchase of Machinery) 1,000,000 1,150,000
01-Jul-2021 To Cash (Purchase of Machinery) 50,000 1,200,000
31-Dec-2021 By Depreciation 26,250 1,173,750
01-Jan-2022 By Bank (Sale of Machinery) 45,000 1,128,750
01-Jan-2022 By Profit/Loss on Sale 78,750 1,050,000
 Date Particulars Debit (Rs.) Credit (Rs.) Balance (Rs.)
31-Dec-2022 By Depreciation 105,000 945,000

Step 3: Closing Balance as of 1st January 2023

The closing balance of the Machinery Account as of 1st January 2023 is Rs. 945,000.

This includes:

 Machinery purchased on 1st October 2021 and 1st July 2021, net of depreciation.

Q.4
The following Trial Balance was extracted from the books of Jaffar
Brothers on 31st
January 2019. From the given information you are required to
prepare a work sheet for the year ending on 31 st December 2023.

Trial Balance on 31st December 2023 as follows.

Sr. Title of Accounts Dr. (Rs.) Cr. (Rs.)

No.

1 Cash 170,000

2 Account Receivable 90,000

3 Merchandise inventory on 1st January, 2023 60,000

4 Plant and machinery 170,000

5 Furniture and Fixtures 820,000

6 Capital 1,360,000

7 Account payable 38,000

8 Purchases return and allowances 22,000

 9 Purchases 600,000

10 Discount on Purchases 6,000

11 Sales 700,000

12 Sales Return and Allowances 30,000

13 Sales Discount 16,000

14 Insurance Prepaid 10,000

15 Advertisement Expenses 40,000

16 Salaries Expenses 120,000

2,126,000 2,126,000

Additional Information
1) Prepaid insurance on 31 December 2023 is Rs. 14,000/-
2) Outstanding salaries Rs. 10,000/-
3) Depreciation on plant and machinery @ 10% p.a.
4) Merchandise inventory on 31 December 2023 was valued at Rs.60,000/-

Solution

Solution to Q4: Preparing the Worksheet for the Year Ending 31st December
2023

Below is the detailed adjustment and worksheet for the provided trial balance and additional
information.

Step 1: Adjustments

1. Prepaid Insurance
o Insurance expense during the year: Rs. 10,000
o Prepaid insurance on 31st December 2023: Rs. 14,000
o Adjustment: Rs. 10,000 will be reduced from the prepaid insurance account as an
expense.
2. Outstanding Salaries
o Salaries Expense: Rs. 120,000
o Outstanding salaries on 31st December 2023: Rs. 10,000
o Adjustment: Add Rs. 10,000 to Salaries Expense as an accrual.
3. Depreciation on Plant and Machinery
o Depreciation rate: 10%
o Cost of Plant and Machinery: Rs. 170,000
 oAdjustment: Depreciation = 170,000×10%=17,000170,000 \times 10\% = 17,000
oRecord depreciation as an expense and reduce the value of Plant and Machinery.
4. Merchandise Inventory
o Opening Inventory: Rs. 60,000
o Closing Inventory: Rs. 60,000
o Adjustment: The inventory value remains unchanged, but the cost of goods sold
needs to be calculated.

Step 2: Worksheet

Adjusted Adjusted
Trial Trial
Adjustments Adjustments Trial Trial
Account Title Balance Balance
(Dr.) (Cr.) Balance Balance
(Dr.) (Cr.)
(Dr.) (Cr.)
Cash 170,000 170,000
Account
90,000 90,000
Receivable
Merchandise
Inventory 60,000 60,000
(Opening)
Plant and
170,000 17,000 153,000
Machinery
Furniture and
820,000 820,000
Fixtures
Capital 1,360,000 1,360,000
Account Payable 38,000 38,000
Purchases Return
22,000 22,000
and Allowances
Purchases 600,000 600,000
Discount on
6,000 6,000
Purchases
Sales 700,000 700,000
Sales Return and
30,000 30,000
Allowances
Sales Discount 16,000 16,000
Insurance
10,000 14,000 4,000
Prepaid
Advertisement
40,000 40,000
Expenses
Salaries
120,000 10,000 130,000
Expenses
Totals 2,126,000 2,126,000 27,000 31,000 2,122,000 2,122,000
Step 3: Adjusted Balance of Accounts

 Cash: Rs. 170,000 (no change)

 Plant and Machinery: Rs. 153,000 (after depreciation)
 Prepaid Insurance: Rs. 4,000 (adjusted for prepaid amount)
 Salaries Expense: Rs. 130,000 (after adding outstanding salaries)

Q.5

What do you mean by double entry system of accounting? Explain

it with examples.
Double Entry System of Accounting

The Double Entry System of Accounting is a bookkeeping method where every financial
transaction affects at least two accounts and has two corresponding entries: a debit (Dr.) and a
credit (Cr.). The total of debits always equals the total of credits, maintaining the accounting
equation:

Assets = Liabilities + Capital

This system ensures accuracy and provides a complete record of all transactions, as every
transaction is recorded from two perspectives.

Key Features of the Double Entry System:

1. Two-Fold Effect: Every transaction involves at least two accounts—one account is

debited, and another is credited.
2. Accounting Equation: It ensures the accounting equation is always balanced.
3. Accuracy: It helps in minimizing errors and ensures the financial statements are accurate.
4. Universal Application: This system is used globally and is the foundation for modern
accounting.
5. Complete Record: It provides a comprehensive and systematic record of all financial
transactions.
Explanation with Examples

Example 1: Capital Introduced into the Business

 Transaction: Mr. Ahmed started a business with Rs. 500,000 in cash.

 Accounts Affected:
o Cash Account (Asset) is increased → Debit
o Capital Account (Owner’s Equity) is increased → Credit
 Journal Entry:
 Date Account Title Dr. (Rs.) Cr. (Rs.)
 ---------------------------------------------------------------
 01-Jan-2023 Cash Account 500,000
 Capital Account 500,000

Example 2: Purchase of Machinery with Cash

 Transaction: Machinery worth Rs. 200,000 is purchased in cash.

 Accounts Affected:
o Machinery Account (Asset) is increased → Debit
o Cash Account (Asset) is decreased → Credit
 Journal Entry:
 Date Account Title Dr. (Rs.) Cr. (Rs.)
 ---------------------------------------------------------------
 05-Jan-2023 Machinery Account 200,000
 Cash Account 200,000

Example 3: Credit Sale of Goods

 Transaction: Goods worth Rs. 50,000 are sold to Mr. Ali on credit.
 Accounts Affected:
o Accounts Receivable (Asset) is increased → Debit
o Sales Account (Revenue) is increased → Credit
 Journal Entry:
 Date Account Title Dr. (Rs.) Cr. (Rs.)
  ---------------------------------------------------------------
 10-Jan-2023 Accounts Receivable 50,000
 Sales Account 50,000

Example 4: Payment of Rent

 Transaction: Rs. 10,000 rent is paid in cash.

 Accounts Affected:
o Rent Expense Account (Expense) is increased → Debit
o Cash Account (Asset) is decreased → Credit
 Journal Entry:
 Date Account Title Dr. (Rs.) Cr. (Rs.)
 ---------------------------------------------------------------
 15-Jan-2023 Rent Expense Account 10,000
 Cash Account 10,000

Benefits of the Double Entry System

1. Accuracy and Consistency: Errors are reduced as debits equal credits.

2. Financial Control: It provides a complete record of all transactions for effective
decision-making.
3. Preparation of Financial Statements: Essential for creating the trial balance, income
statement, and balance sheet.
4. Fraud Prevention: It makes it easier to detect and prevent fraud.
Conclusion

The Double Entry System of Accounting is the backbone of modern financial accounting. By
recording every transaction with a corresponding debit and credit, it ensures accuracy,
transparency, and reliability in financial reporting.