Principles of Financial Accounting - Sohail Afzal (Latest Edition)
Topic 1: Accounting for Incomplete
Records (Single Entry System) – I
🔹 Meaning:
Single Entry System is an incomplete accounting system where not all transactions are
recorded in double entry. Only personal accounts and cash book are maintained.
🔹 Features:
Incomplete records
No uniformity
Suitable for small businesses
🔹 Limitations:
No accuracy
Cannot prepare proper financial statements
No trial balance
🔹 Statement of Affairs:
Used to find opening and closing capital by comparing assets and liabilities.
📈 Statement of Affairs Format:
Assets | Liabilities
---------------------------|----------------------------
Cash | Creditors
Debtors | Bills Payable
Stock | Loan
Furniture |
| Capital (Balancing Figure)
📊 Capital = Assets – Liabilities
🔹 Profit Calculation:
Net Profit = Closing Capital – Opening Capital + Drawings – Additional Capital
Introduced
Topic 2: Accounting for Incomplete
Records (Single Entry System) – II
🔹 Conversion Method (From Single Entry to Double
Entry)
Sometimes, single entry records are converted into double entry to prepare accurate financial
statements.
🔹 Steps to Convert:
1. Prepare Total Debtors Account.
2. Prepare Total Creditors Account.
3. Prepare Cash Book.
4. Prepare Trading and Profit & Loss Account.
5. Prepare Balance Sheet.
🔹 Total Debtors Account Format:
Dr. | Cr.
----------------------------|------------------------------
To Opening Balance | By Cash
To Credit Sales | By Bills Receivable
| By Sales Returns
| By Bad Debts
| By Closing Balance
📊 Credit Sales = Balancing Figure
🔹 Total Creditors Account Format:
Dr. | Cr.
----------------------------|------------------------------
To Cash | By Opening Balance
To Bills Payable | By Credit Purchases
To Purchase Returns |
To Closing Balance |
📊 Credit Purchases = Balancing Figure
🔹 Numerical Illustration:
Given:
Opening Debtors: 15,000
Closing Debtors: 20,000
Cash received from Debtors: 60,000
Bad debts: 1,000
Sales Returns: 2,000
Bills Receivable: 5,000
Credit Sales = ?
Dr. Side = 15,000 + X
Cr. Side = 60,000 + 1,000 + 2,000 + 5,000 + 20,000 = 88,000
So, 15,000 + Credit Sales = 88,000 ➔ Credit Sales = 73,000
Topic 3: Accounting for Incomplete
Records (Single Entry System) – III
🔹 Preparation of Final Accounts
After obtaining all necessary figures:
1. Prepare Trading Account to find Gross Profit.
2. Prepare Profit & Loss Account for Net Profit.
3. Prepare Balance Sheet for Financial Position.
📈 Trading Account Format
Dr. | Cr.
----------------------------|------------------------------
To Opening Stock | By Sales
To Purchases | By Closing Stock
To Direct Expenses (e.g. wages)|
To Gross Profit c/d |
📈 Profit and Loss Account Format
Dr. | Cr.
----------------------------|------------------------------
To Salaries | By Gross Profit b/d
To Rent | By Commission Received
To Depreciation | By Interest Income
To Net Profit |
📈 Balance Sheet Format
Assets | Liabilities
---------------------------|----------------------------
Cash | Creditors
Debtors | Bills Payable
Bills Receivable | Capital
Stock | Add: Net Profit
Furniture | Less: Drawings
Topic 4: Accounting for Incomplete
Records (Single Entry System) – IV
🔹 Adjustments in Final Accounts
Outstanding Expenses
Prepaid Expenses
Accrued Income
Income Received in Advance
Depreciation
Bad Debts and Provision
These are treated in the same way as in complete double entry system.
Topic 5: Single Entry System & Non-Profit
Organization
🔹 Characteristics of Non-Profit Organizations
Not for profit, formed for social purposes
Main financial statements:
o Receipts and Payments Account
o Income and Expenditure Account
o Balance Sheet
📅 Receipts and Payments Account Format
Receipts | Payments
---------------------------|----------------------------
Opening Balance (Cash/Bank)| Rent
Subscriptions | Salaries
Donations | Utilities
Entrance Fees | Equipment Purchase
📈 Income and Expenditure Account Format
Dr. | Cr.
----------------------------|------------------------------
To Salaries | By Subscriptions (adjusted)
To Depreciation | By Donations (revenue)
To Surplus (Excess of Income)|
Topic 6: Accounting for Non-Trading
Concern – I
🔹 Capital Fund
It is the accumulated surplus of a non-profit organization. Appears in the balance sheet.
📈 Balance Sheet Format (Opening)
Assets | Liabilities
---------------------------|----------------------------
Cash | Outstanding Expenses
Bank | Capital Fund
Furniture |
Capital Fund = Total Assets – Total Liabilities
Topic 7: Accounting for Non-Trading
Concern – II
🔹 Adjustments:
Subscriptions (Outstanding, Prepaid)
Depreciation
Accrued Income
Income Received in Advance
Entrance Fees (capital/revenue)
📅 Subscriptions Account Format
Dr. | Cr.
----------------------------|------------------------------
To Balance b/d | By Income & Expenditure A/c
To Income & Expenditure A/c | By Balance c/d
Topic 8: Accounting for Non-Trading
Concern – III
🔹 Preparation of Final Accounts
1. Receipts and Payments A/c
2. Income and Expenditure A/c
3. Balance Sheet (Closing)
📈 Closing Balance Sheet Format
Assets | Liabilities
---------------------------|----------------------------
Cash | Creditors
Bank | Outstanding Expenses
Investments | Capital Fund
Furniture | Add: Surplus
Topic 9: Departmental Accounting I
🔹 Meaning:
Departmental accounting is maintaining separate accounts for each department of a business
to assess performance.
🔹 Objectives:
To know profitability of each department
To control cost
For better planning
🔹 Types:
Dependent Departments
Independent Departments
🔹 Allocation of Expenses:
Direct expenses: Charged directly to departments
Indirect expenses: Apportioned on suitable basis
📊 Basis of Apportionment:
Rent: Floor area
Salary: Time spent
Depreciation: Asset value
Topic 10: Departmental Accounting II &
Branch Accounting
🔹 Inter-Departmental Transfers:
Transfers at cost or selling price
Unrealized profit adjustments needed
🔹 Branch Accounting – Meaning:
Branch accounting is keeping records of business units located at different places.
🔹 Types of Branches:
Dependent Branches
Independent Branches
Topic 11: Branch Accounting System I
🔹 Dependent Branch:
Does not maintain complete records
Head Office maintains accounts
🔹 Systems:
1. Debtors System
2. Stock and Debtors System
3. Final Accounts System
4. Wholesale Branch System
🔹 Debtors System:
Suitable for small branches
Topic 12: Branch Accounting System II
🔹 Accounts Maintained under Debtors System:
Branch Account
📈 Branch Account Format:
Dr. | Cr.
----------------------------|------------------------------
To Opening Stock | By Cash Sales
To Goods Sent to Branch | By Credit Sales
To Expenses | By Closing Stock
To Net Profit |
Topic 13: Branch Accounting System III
🔹 Goods Sent at Invoice Price:
Includes a profit margin. Adjustments needed to find actual profit.
🔹 Adjustment Accounts:
1. Branch Stock Account
2. Branch Adjustment Account
3. Branch Profit & Loss Account
Topic 14: Branch Accounting System IV
🔹 Branch Stock Account Format:
Dr. | Cr.
----------------------------|------------------------------
To Opening Stock (Invoice) | By Cash Sales
To Goods Sent to Branch | By Credit Sales
| By Closing Stock
Topic 15: Branch Accounting System V
🔹 Branch Adjustment Account:
Used to eliminate loading (unrealized profit).
🔹 Branch P&L Account:
Used to compute actual branch profit.
Topic 16: Branch Accounting System VI
🔹 Independent Branches:
Maintain their own books
HO maintains control account
🔹 HO and Branch Reconciliation:
Necessary to ensure books match
Topic 17: Partnership I
🔹 Partnership Features:
Agreement between 2+ persons
Share profits and losses
Governed by Partnership Act
🔹 Partnership Deed Contents:
Capital, Profit-sharing ratio
Interest on capital/drawings
Salaries/commission
Topic 18: Partnership II
🔹 Capital Accounts:
Fixed Capital Method – Two accounts (Capital & Current)
Fluctuating Capital Method – One account
📊 Profit Distribution:
Interest on capital
Salaries to partners
Remaining profit in ratio
End of Notes for Topics 1 to 18
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