Deputy District Accounts Officers / Deputy Treasury Officers Punjab Treasuries Department - Finance Department

[imranrai]

Subject Related MatterialFinancial AccountingIntroductionThe purpose of accounting is to provide the information that is needed for sound economic decision making. The main purpose of financial accounting is to prepare financial reports that provide information about a firm's performance to external parties such as investors, creditors, and tax authorities. Managerial accounting contrasts with financial accounting in that managerial accounting is for internal decision making and does not have to follow any rules issued by standard-setting bodies. Financial accounting, on the other hand, is performed according to Generally Accepted Accounting Principles (GAAP) guidelines.CPA'sThe primary accounting professional association in the U.S. is the American Institute of Certified Public Accountants (AICPA). The AICPA prepares the Uniform CPA Examination, which must be completed in order to become a certified public accountant. To be eligible to become a CPA, one needs an undergraduate degree in any major with 150 credit hours of course work. Of these 150 credit hours, a minimum of 36 credit hours must be in accounting. Only about 10% of those taking the CPA exam pass it the first time.Accounting StandardsIn order that financial statements report financial performance fairly and consistently, they are prepared according to widely accepted accounting standards. These standards are referred to as Generally Accepted Accounting Principles, or simply GAAP. Generally Accepted Accounting Principles are those that have "substantial authoritative support".Accrual vs. Cash MethodMany small businesses utilize an accounting system that recognizes revenue and expenses on a cash basis, meaning that neither revenue nor expenses are recognized until the cash associated with them actually is received. Most larger businesses, however, use the accrual method.Under the accrual method, revenues and expenses are recorded according to when they are earned and incurred, not necessarily when the cash is received or paid. For example, under the accrual method revenue is recognized when customers are invoiced, regardless of when payment is received. Similarly, an expense is recognized when the bill is received, not when payment is made.Under accrual accounting, even though employees may be paid in the next accounting period for work performed near the end of the present accounting period, the expense still is recorded in the current period since the current period is when the expense was incurred.--------------------------------------------------------------------------------------------------------------------------------------------------Accounting ConceptsUnderlying Assumptions, Principles, and ConventionsFinancial accounting relies on several underlying concepts that have a significant impact on the practice of accounting.AssumptionsThe following are basic financial accounting assumptions: Separate entity assumption - the business is an entity that is separate and distinct from its owners, so that the finances of the firm are not co-mingled with the finances of the owners. Going concern assumption - the business is going to be operating for the foreseeable future. Stable monetary unit assumption - e.g. the U.S. dollar Fixed time period assumption - info prepared and reported periodically (quarterly, annually, etc.)PrinciplesThe basic assumptions of accounting result in the following accounting principles: Historical cost principle - assets are reported and presented at their original cost and no adjustment is made for changes in market value. One never writes up the cost of an asset. Accountants are very conservative in this sense. Sometimes costs are written down, for example, for some short-term investments and marketable securities, but costs never are written up. Matching principle - matching of revenues and expenses in the period earned and incurred. Revenue recognition principle - revenue is realized (reported on the books as earned) when everything that is necessary to earn the revenue has been completed. Full disclosure principle - all of the information about the business entity that is needed by users is disclosed in understandable form.Modifying ConventionsDue to practical constraints and industry practice, GAAP principles are not always applied strictly but are modified as necessary. The following are some commonly observed modifying conventions: Materiality convention - a modifying convention that relaxes certain GAAP requirements if the impact is not large enough to influence decisions. Users of the information should not be overburdened with information overload. Cost-benefit convention - a modifying convention that relaxes GAAP requirements if the expected cost of reporting something exceeds the benefits of reporting it. Conservatism convention - when there is a choice of equally acceptable accounting methods, the firm should use the one that is least likely to overstate income or assets. Industry practices convention - accepted industry practices should be followed even if they differ from GAAP.--------------------------------------------------------------------------------------------------------------------------------------------------Single Entry BookkeepingMost of financial accounting is based on double-entry bookkeeping. To understand and appreciate the advantages of double entry, it is worthwhile to examine the simpler single-entry bookkeeping system. In its most basic form, a single-entry system is similar to a checkbook register and is characterized by the fact that there is only a single line entered in the journal for each transaction. In a simple checkbook, each transaction is recorded in one column of an account as either a positive or a negative amount in order to represent the receipt or disbursement of cash. This system is demonstrated in the following example for a repair shop business:Single Column SystemDate Description AmountJan 1 Beginning Balance 1,000.00 Jan 2 Purchased shop supplies (150.00)Jan 4 Performed repair service 275.00 Jan 7 Performed repair service 125.00 Jan 15 Paid phone bill (50.00)Jan 30 Ending balance 1,200.00 While extremely simple, because the above system uses a single column, only the difference between revenues and expenses is totaled - not the individual values of each. Knowing the individual total amounts of revenues and expenses is important to a business, for example, when formulating a budget. The revenues and expenses also are reported in the income statement. In the above example, the individual revenue and expense amounts can be determined only by sorting through the transactions and tabulating the revenue and expense totals. This process can be designed into the system by using a separate column for revenues and expenses:Separating Revenues and ExpensesDate Description Revenues ExpensesJan 2 Purchased shop supplies 150.00 Jan 4 Performed repair service 275.00 Jan 7 Performed repair service 125.00 Jan 15 Paid phone bill 50.00 January Totals 400.00 200.00 While the above example now uses two columns, it still is considered to be a single-entry system since only one line is used to record each transaction in the cash account. This single-entry system often is expanded to provide more useful information. For example, additional columns can be added to classify the revenues as sales and sales tax collected, and the expenses as rent, utilities, supplies, etc. Some single-entry systems may add dozens of columns for different types of revenues and expenses. Many small businesses utilize such a system. However, even with columns to classify the revenues and expenses, single-entry bookkeeping is limited in its ability to provide detailed financial information. Some disadvantages of a single-entry system include: Does not track asset and liability accounts such as inventory, accounts receivable and accounts payable. These must be tracked separately. Facilitates the calculation of income but not of financial position. There is no direct linkage between income and the balance sheet. Errors may go undetected and often are identified only through bank statement reconciliation.Because of these drawbacks, a single-entry system is not practical for many organizations such as those having many thousands of transactions in a reporting period, significant assets, and external suppliers of capital. The more sophisticated double-entry bookkeeping system addresses the more demanding needs of such businesses.------------------------------------------------------------------------------------------------------------------------------------------------Single Entry BookkeepingMost of financial accounting is based on double-entry bookkeeping. To understand and appreciate the advantages of double entry, it is worthwhile to examine the simpler single-entry bookkeeping system. In its most basic form, a single-entry system is similar to a checkbook register and is characterized by the fact that there is only a single line entered in the journal for each transaction. In a simple checkbook, each transaction is recorded in one column of an account as either a positive or a negative amount in order to represent the receipt or disbursement of cash. This system is demonstrated in the following example for a repair shop business:Single Column SystemDate Description AmountJan 1 Beginning Balance 1,000.00 Jan 2 Purchased shop supplies (150.00)Jan 4 Performed repair service 275.00 Jan 7 Performed repair service 125.00 Jan 15 Paid phone bill (50.00)Jan 30 Ending balance 1,200.00 While extremely simple, because the above system uses a single column, only the difference between revenues and expenses is totaled - not the individual values of each. Knowing the individual total amounts of revenues and expenses is important to a business, for example, when formulating a budget. The revenues and expenses also are reported in the income statement. In the above example, the individual revenue and expense amounts can be determined only by sorting through the transactions and tabulating the revenue and expense totals. This process can be designed into the system by using a separate column for revenues and expenses:Separating Revenues and ExpensesDate Description Revenues ExpensesJan 2 Purchased shop supplies 150.00 Jan 4 Performed repair service 275.00 Jan 7 Performed repair service 125.00 Jan 15 Paid phone bill 50.00 January Totals 400.00 200.00 While the above example now uses two columns, it still is considered to be a single-entry system since only one line is used to record each transaction in the cash account. This single-entry system often is expanded to provide more useful information. For example, additional columns can be added to classify the revenues as sales and sales tax collected, and the expenses as rent, utilities, supplies, etc. Some single-entry systems may add dozens of columns for different types of revenues and expenses. Many small businesses utilize such a system. However, even with columns to classify the revenues and expenses, single-entry bookkeeping is limited in its ability to provide detailed financial information. Some disadvantages of a single-entry system include: Does not track asset and liability accounts such as inventory, accounts receivable and accounts payable. These must be tracked separately. Facilitates the calculation of income but not of financial position. There is no direct linkage between income and the balance sheet. Errors may go undetected and often are identified only through bank statement reconciliation.Because of these drawbacks, a single-entry system is not practical for many organizations such as those having many thousands of transactions in a reporting period, significant assets, and external suppliers of capital. The more sophisticated double-entry bookkeeping system addresses the more demanding needs of such businesses.-------------------------------------------------------------------------------------------------Double Entry BookkeepingA business transaction involves an exchange between two accounts. For example, for every asset there exists a claim on that asset, either by those who own the business or those who loan money to the business. Similarly, the sale of a product affects both the amount of cash (or cash receivable) held by the business and the inventory held.Recognizing this fundamental dual nature of transactions, merchants in medieval Venice began using a double-entry bookkeeping system that records each transaction in the two accounts affected by the exchange. In the late 1400's, Franciscan monk and mathematician Luca Pacioli documented the procedure for double-entry bookkeeping as part of his famous Summa work, which described a significant portion of the accounting cycle. Double-entry bookkeeping spread throughout Europe and became the foundation of modern accounting.Two notable characteristics of double-entry systems are that 1) each transaction is recorded in two accounts, and 2) each account has two columns.In a double-entry system, two entries are made for each transaction - one entry as a debit in one account and the other entry as a credit in another account. The two entries keep the accounting equation in balance so that:Assets = Liabilities + Owners' EquityTo illustrate, consider a repair shop with a transaction involving repair service performed on Jan 4 for a cash payment of $275.00. In a single-entry bookkeeping system, the transaction would be recorded as follows:Single Entry ExampleDate Description Revenues ExpensesJan 4 Performed repair service 275.00 In a double-entry system, the transaction would be recorded as follows:Double Entry ExampleDate Accounts Debit CreditJan 4 Cash 275.00 Revenue 275.00A notation may be added to this journal entry to indicate that the revenue was from repair services.Note that two accounts (revenue and cash) are affected by the transaction. If the customer did not pay cash but instead was extended credit, then "accounts receivable" would have been used instead of "cash."In this system, the double entries take the form of debits and credits, with debits in the left column and credits in the right. For each debit there is an equal and opposite credit and the sum of all debits therefore must equal the sum of all credits. This principle is useful for identifying errors in the transaction recording process.Double-entry accounting has the following advantages over single-entry: Accurate calculation of profit and loss in complex organizations Inclusion of assets and liabilities in the bookkeeping accounts. Preparation of financial statements directly from the accounts Easier detection of errors and fraudTo appreciate the importance of double-entry bookkeeping, it is interesting to note that the industrial revolution might not have been possible without it. At that time, businesses increased in size and complexity. Accurate bookkeeping was required for managers to understand the financial status of their businesses in order to keep them solvent and offer a degree of transparency to investors. While a single-entry system can be adapted by a skilled bookkeeper to meet some of these needs, only a double-entry system provides the required detail systematically and by design.-------------------------------------------------------------------------------------------------------The Accounting CycleThe sequence of activities beginning with the occurrence of a transaction is known as the accounting cycle. This process is shown in the following diagram:Steps in The Accounting CycleIdentify the TransactionIdentify the event as a transactionand generate the source document.Analyze the TransactionDetermine the transaction amount,which accounts are affected,and in which direction.Journal EntriesThe transaction is recorded inthe journal as a debit and a credit.Post to LedgerThe journal entries are transferredto the appropriate T-accountsin the ledger.Trial BalanceA trial balance is calculatedto verify that the sum of the debitsis equal to the sum of the credits.Adjusting EntriesAdjusting entries are made foraccrued and deferred items.The entries are journalized andposted to the T-accountsin the ledger.AdjustedTrial BalanceA new trial balance is calculatedafter making the adjusting entries.Financial StatementsThe financial statementsare prepared.Closing EntriesTransfer the balances of thetemporary accounts(e.g. revenues and expenses)to owner's equity.After-ClosingTrial BalanceA final trial balance iscalculated after the closingentries are made.The above diagram shows the financial statements as being prepared after the adjusting entries and adjusted trial balance. The financial statements also can be prepared before the adjusting entries with the help of a worksheet that calculates the impact of the adjusting entries before they actually are posted.Best wishes

[punjabi]

Number of posts?

[waqasmanzoor]

Seniors please tell its eligibility criteria along with the paper pattern

[sparkofighter]

there are 96 posts and qualification still not fianlized

[MedievalMan]

there are 96 posts and qualification still not fianlized

qualification will be B.com,M.com and MBA (finance) maybe with some experience for any post of grade 17.

[punjabi]

there are 96 posts and qualification still not fianlized

are you sure that posts are 96 in numbers?

[sparkofighter]

yes brother it will be above 90

[Abaid]

salam plzz tell me k kia PPSC man 100% merit hota hy?

[QAYYUM]

90%

[adnan4u]

salam plzz tell me k kia PPSC man 100% merit hota hy?

bhai jan 100% nai BUt 110% bhai jaan. Beleive me....ap aankhien band ker k ppsc main apply karain and have faith in Allah and strong believe in ur abilities............