Introduction to accounting
Introduction to accounting
1
1.. DDeeffnne e AAccccoouunnttiinngg.. Ans.
Ans. Accounting recorAccounting records fnancial transactions ds fnancial transactions and events, summarizes andand events, summarizes and interpret
interprets them as them and communicates the results to nd communicates the results to the usersthe users 2
2.. WWhhaat dt do yo yoou mu meeaan bn by Fy Fiinnaanncciiaal Al Accccoouunnttiinngg?? Ans. Fin
Ans. Financial accounting is that ancial accounting is that branch o accounting, which records fnancialbranch o accounting, which records fnancial transactions and events, summarizes and interprets them and communicates the transactions and events, summarizes and interprets them and communicates the results to the users.
results to the users. 3
3.. WWhhaat dt do yo yoou mu meeaan bn by cy coosst At Accccoouunnttiinngg?? Ans. It ascertains the cost
Ans. It ascertains the cost o products manuactured and helps the management ino products manuactured and helps the management in decision making.
decision making. 4
4.. WhWhat at ddo o yoyou u mmeaean n bby y mmaananagegemmenent t acaccocouuntntiingng?? Ans.
Ans. It is concerned with the generating accounting inormation relating to It is concerned with the generating accounting inormation relating to unds, cost,unds, cost, profts, etc. as it enables the
profts, etc. as it enables the management in decision making.management in decision making. 5
5.. WWhhaat t ddo o yyoou u mmeeaan n bby y aaccccoouunnttaannccyy??
Ans. Accountancy reers to a systematic knowledge o accounting. It explains how Ans. Accountancy reers to a systematic knowledge o accounting. It explains how toto deal with various aspects o accounting. It educates us why and how to maintain the deal with various aspects o accounting. It educates us why and how to maintain the books o accounts.
books o accounts.
.. WhWhat at aare re !a!aririoous us oob"b"ecectti!i!es es o# o# AAccccouounnttiningg?? Ans. Following are the obectives o
Ans. Following are the obectives o accounting!accounting! "i#
"i# $aintaining systematic records to $aintaining systematic records to transactionstransactions! $he obective o accounting! $he obective o accounting is to record fnancial transactions and events o the
is to record fnancial transactions and events o the organization in the books o organization in the books o accounts in a systematic manner.
accounts in a systematic manner. "ii#
"ii# Ascertaining %roft or lossAscertaining %roft or loss! Another obective o accounting is to ! Another obective o accounting is to ascertain theascertain the net result o day
net result o day to day transactions to day transactions or a or a period. For this purpose $period. For this purpose $rading A%crading A%c and &roft ' (oss a%c are prepared.
and &roft ' (oss a%c are prepared. "iii#
"iii# Ascertaining Financial &ositionAscertaining Financial &osition! For a businessman, it is not ade)uate to only! For a businessman, it is not ade)uate to only ascertain the proft or loss* it is also necessary to know the fnancial position o ascertain the proft or loss* it is also necessary to know the fnancial position o organization. For this purpose +alance heet
organization. For this purpose +alance heet is prepared.is prepared. "iv#
"iv# Assisting $anagementAssisting $anagement! $he management o! $he management oten re)uirten re)uires fnancial inormationes fnancial inormation or decision making,
or decision making, e-ective control, budgeting and orecasting. Accountinge-ective control, budgeting and orecasting. Accounting provides fnancial inormation to assist the
provides fnancial inormation to assist the management.management. "v#
"v# 'ommunicati'ommunicating Accounting In#ormation to ng Accounting In#ormation to (sers)(sers) Another obective o Another obective o accounting is to provide accounting inormation to users who ana
accounting is to provide accounting inormation to users who analyze them aslyze them as per their
per their individual re)uirementindividual re)uirements.s. "vi#
"vi# &re!ention o# Frauds&re!ention o# Frauds! aintaining regular and ! aintaining regular and systematic accounting recordssystematic accounting records helps in preventing possible rauds.
helps in preventing possible rauds. /.
/. What are !arious What are !arious ad!antages o# accounting?ad!antages o# accounting? Ans. ame
Ans. ame as in as in $$. 0rewal.. 0rewal. *.
*. WhWhat at arare te the he chchararacacteteririststicics+s+atattrtribibututeses, o, o# a# accccouountntining?g? Ans.
+i, Identifcation o# fnancial transactions and e!ents) Accounting records only those transactions and events which are o fnancial nature as the bring change in the Income o the frm. 1g. ale2purchase o goods.
+ii, $easuring the identifed transactions) Accounting measures the transactions and events in terms o a common measurement unit i.e. 3upees.
+iii,-ecording! Accounting is an art o recording business transaction in the books o accounts. In other words noting down the transactions in the books"ledgers#. +i!, 'lassi#ying) 4lassifcation is the process o collecting similar transactions in one
book"ledger#. In other words transactions are divided on the basis o similarity e.g. purchase book, sales book, cash book, +%3 book, +%& book.
+!, ummari/ing ) $his involves presenting the classifed data in a manner which is understandable. In which one can fnd total o the di-erent items. For this
purpose $rial +alance, $rading A%c, &'( a%c and +alance sheets are prepared. +!i, Analysis and Inter%retation) Financial data is analyzed and interpreted so that
the users o fnancial data can make a meaningul udgment o the fnancial perormance.
+!ii, 'ommunicating! Accounting unction involves communicating in the last. Accounting inormation must be provided in time and presented to the users.
0. What are the limitations o# accounting?
Ans. Following are the limitations o accounting!
+i, Accounting is not #ully eact) Although most o the transactions are recorded on the basis o evidence yet some estimates are also made or calculating proft or loss e.g. providing 5epreciation on machine, &rovision or tax, &rovision or bad debts etc.
+ii, Accounting does not indicate the reali/able !alue) $he +alance sheet does not show the realizable amount o assets i sold. +ecause historical cost
concept is ollowed.
+iii,Accounting Ignores the ualitati!e elements) ince accounting is confned to monetary matters only, )ualitative elements like )uality o sta-, honesty, industrial relations etc.
"iv# Accounting may lead to indo dressing) $he term window dressing means manipulation o accounts so as to hide vital acts and present the fnancial
statements in such a way as to show better position than what it actually is . "v# Accounting Ignores the eect o# %rice le!el changes) Accounting
statements are prepared at historical cost. +ut prices o the product does not remain same. 6nless price level change are considered accounting inormation will not show true fnancial position.
78. What are !arious #unctions o# accounting?
Ans. Following are the unctions o accounting!
+i, $aintaining systematic Accounting records) $he primary unction o accounting is to maintain systematic accounting records o fnancial transactions.
+ii, &re%aration o# fnancial statements) Financial statement shows the fnancial position and fnancial perormance o company. $hat is why it is important
unction o accounting to prepare fnancial statements o an organization these include &roft ' (oss a%c, $rial +alance and +alance sheet etc.
+iii,$eeting legal reuirements) Accounting records are accepted as evidence by the court o law i they are maintained systematically ollowing the accounting
principles and concepts. +esides at the time o fling income tax, service tax, vat etc. accounts provide important inormation.
+i!, 'ommunicating the fnancial data) It is yet another unction o accounting to communicate the fnancial data to the users, which may be internal users or external users.
+!, Assistance to the management) anagement oten re)uires inormation other then the inormation obtained rom fnancial data. Accounting records should be maintained in such a manner that the inormation sought by the management is available, which in turn helps in decision making.
77. Dierentiate beteen boo ee%ing and Accounting +most im%ortant,
Ans. ame as in $ 0rewal
12. 6o many ty%es o# accounting in#ormation are there?
Ans. Following are the types o accounting inormation!
+i, In#ormation relating to %roft or sur%lus) $he income statement makes
available the accounting inormation about the proft or loss incurred as a result o business operation.
+ii, In#ormation relating to Financial %osition) $he position statement i.e. balance sheet makes available the inormation about the fnancial position o the entity. In other words it provides inormation about the assets and liabilities o the assets.
+iii,In#ormation about cash 7o) 4ash 9ow statement is a statement that shows 9ow, both in9ow and out9ow o cash during the year.
7:. What do you mean by accountancy?
Ans. Accountancy reers to a systematic knowledge o accounting and its aspects "principles#.
7;. (sers o# accounting In#ormation) Internal (sers)
"i# <wners
"ii# anagement
"iii# 1mployees and workers
8ternal (sers) Areas o interest
"i# +anks &erormance, Financial position "ii# Investors 1arning 4apacity, aety
"iii# 4reditors Financial position, &roftability "iv# 0ovt. &roftability, $ax liability
"v# 4onsumers &ricing
"vi# &ublic &rotecting environment
7;. What do you mean by double entry system?
Ans. 6nder double entry system, every transaction has two aspects2 5ebit and 4redit and at the time o recording a transaction, it is recorded once on a debit side and again on the credit side. For eg. A urniture is purchased or 3s 78,888 then it will be recorded as!
Furniture==5ebit 4ash==.4redit
Ans. 6nder ingle entry system all transactions are recorded only once. In other words it is incomplete double entry system.
2. Accounting 9erms)
1. Assets :- Anything which is in the possession or is the property of businessman including the amounts due to it from others, is called an asset. In other words, anything which will enable a businessman to get cash or get a benefit in future is an assets. Eg. Cash, Ban, Building, !achinery, "urniture, Car etc.
# Debtors !2 5ebtors are those persons or customers whom goods have been sold on credit and payment has
not been recei$ed from them.
%. Liability :- It refers to the amount which the firm owes to outsiders Eg. &oan, Ban '$erdraft, Bills payable, Creditors etc.
# Creditors:- Creditors represents those persons or suppliers from whom goods ha$e been purchased on credit and payment has not been made to them
# Capital :- It refers to the amount (money $alue) in$ested by the proprietor in a business. It is the amount with the help of which goods and assets are purchased in the business. As such, in order to calculate the amount of capital all e*ternal liabilities are deducted from total assets .
# Bank Overdraft: +hen money is o$erdrawn from ban , ban balance becomes negati$e. It is a type of short term loan gi$e by ban. +hen accountholder deposits the money into ban this amount is adusted against the deposit along with interest automatically. his facility is not pro$ided to all accountholders.
. Drawings :- Any cash or $alue of goods withdrawn by the owner for personal use. /. Accrued nco!e:- Income earned but not recei$ed.
0. "repaid $penses:- E*penses paid in ad$ance.
. Outstanding $penses:- E*penses due but not paid. (or arrears)e.g. rent due but not paid.
2. %angible Assets: angible assets are those assets which ha$e physical e*istence i.e. they can be seen and touched. E*. Cash, furniture, machinery, soc, computer etc.
3. ntangible Assets :Intangible assets are those assets which do not ha$e physical e*istence ie they can not be seen and touched. E*. 4oodwill, 5atents, rademar etc.
6. &i$ed Assets: "i*ed assets are those assets which are ac7uired not with a purpose for resell but for the use of long term. E* "urniture, !achinery, Building, 8ehicles etc.
19. Current assets: Current Assets are those assets which are retained in the business with the purpose to con $ert them into cash within a short period. Eg. Cash, toc, ;ebtors, Ban etc.
11. $penditure: is the amount spent or liability for ac7uiring 4oods or other assets. Eg. 5urchase goods on Credit. 5urchased furniture for cash.
1%. $pense: E*pense is a $alue which has e*pired during the accounting period. Eg. 5ayment of salaries. 5ayment of rent.
1. "rofit : 5rofit is the e*cess of re$enue of a business o$er its costs.
1/. 'ain: 4ain is a profit of irregular or non-recurring nature. E*ample: 4ain on sale of car assets
10. &ictitious Assets : "ictitious Assets are those assets which are neither tangible assets nor intangible assets but represent loss yet to be written off e.g. 5<&(loss), 5reliminary E*penses etc.
1. Bills (eceivable : A bill of acceptance gi$en by debtor at the time of credit sale.
12. Bills "ayable: A bill of acceptance gi$en by us to our creditors at the time of credit purchase. 13. Bad debts: Bad debt is the amount that has become irreco$erable.
)*. nsolvent + Bankrupt: Insol$ent is a person or enterprise which is not in a position to pay its ;ebts. ,. Depreciation: ;epreciation is the decrease in the $alue of an Asset.
CA"%( : /
). Business ntity Concept: According to this assumption, business is treated as a separate unit from its
owners. Business unit should ha$e a completely separate set of boos and we ha$e to record business transactions from firm=s point of $iew and not f rom the point of $iew of the proprietor. he proprietor is treated as a creditor of the business to the e*tent of capital in$ested by him in the business. he capital is treated as a liability of the firm because it is assumed that the firm has borrowed funds from its own proprietors instead of borrowing it from outside parties
,. 0oney 0easure!ent Assu!ption:- 'nly those transactions and e$ents are recorded in accounting which are capable of being e*pressed in terms of money. An e$ent e$en though it may be $ery important for the business, will not be recorded in the boos of the business unless its effect can be measured in terms of money with a fair degree of accuracy.
/. 'oing concern concept :- As per assumption it is assumed that the business will continue to e*ist for a long period in the future. It is on this assumption that we record fi*ed assets at their original cost and depreciation is charged on these assets without reference to their maret $alue. Because of the assumption of going concern the full cost of the machine would not be treated as an e*pense in the year of its purchase itself.
It is also because of the going concern assumption that outside parties enter into long-term contracts with the enterprise, gi$e loans and purchase the shares of the enterprise
1. "rinciple of consistency:- his principle states that accounting principles and methods should remain consistent from one year to another. But the principle of consistency should not be taen to mean that it does not allow a firm to change the accounting methods according to the changed circumstances of the business. If the accountant feels that change in a particular method will lead to the better disclosure of the profits and the financial position of the business. he changed method may be adopted
2. "rinciple of !atc3ing:- his principle is $ery important for correct determination of net profit. According to this principle, in determining the net profit from business operations, all costs which are applicable to re$enue of the period should be charged against that re$enue
4. "rinciple of prudence or conservatis!:- According to this principle, all anticipated losses should be recorded in the boos of accounts, but e*pected profit can not be shown in ad$ance. 5ro$ision is made for all nown liabilities and losses e$en though the amount cannot be determined with certainty
5. Duality "rinciple: According to this principle e$ery business transaction is recorded as ha$ing a dual aspect. In other words e$ery transactions affects at least two accounts. "or e.g. in abo$e case Cash account and Bat account is affected. If one account is debited other account must be credited. he system of recording transaction based on this principle is called as >;ouble Entry ystem
6. "rinciple of full disclosure :his principle re7uires that all significant information relating to the economic affairs of the enterprise should be completely disclosed. In other words, there should be a sufficient disclosure of information which is of material interest to the users of the financial statements such as proprietors, present and potential creditors, in$estors and others.
*. Accrual Assu!ption: According to the accrual assumption, a transaction is recorded at the time when it taes place and not when the settlement taes place. Eg. If a cler is Employed for a salary of ?s 19,999 p.m. then alary of ?s ,%9,999 should be shown in the he Accounts whether half salary is paid due to financial problems.
). istorical cost concept: According to the cost concept, an asset is recorded
in the boos of accounts at the price paid to ac7uire it and the cost Is the basis for all subse7uent accounting of the asset but depreciation or appreciation must be considered e$ery year.
)). %3e verifiable ob7ective concept: holds that accounting should be free from personal bias. It means all accounting transactions should be e$idenced and supported by business documents. Eg. Bills, cash memo, $ouchers etc.
),. (evenue recognition concept: According to this concept re$enue is considered to ha$e been reali@ed when a transaction has been entered into and the obligation to recei$e the amount has been established. Eg. An
enterprise sells goods in "eb. and recei$es the amount in April . ?e$enue of this sales should be recogni@ed in "eb. uppose an enterprise has recei$ed an ad$ance in "eb for the sale to be made in !ay, re$enue shall be recogni@ed in !ay
)/. 0ateriality concept: he materiality principle refers to the relati$e importance of an item. An item should be regarded as material if there is a reason to belie$e. If an enterprise has turno$er of ?s 19,99,999 and salary paid by it is ?s 6,99,999. It is not material information.
)1. 83at are funda!ental accounting assu!ption9 Ans. (i) Accrual assumption
(ii) 4oing concern assumption and (iii) Consistency assumption )2. 83at do you !ean by accounting standard9
Ans. he accounting standards are a set of guidelines i.e. 4AA5, issued by the accounting body of the country such as the ICAI
)4. 83at do you !ean by &(9
Ans. I"? are a set of accounting standards de$eloped by the International Accounting tandards Board (IAB) )5.
