Introduction to accounting

1.

Define Accounting.
Ans. Accounting records financial transactions and events, summarizes and
interprets them and communicates the results to the users

2.

What do you mean by Financial Accounting?

Ans. Financial accounting is that branch of accounting, which records financial
transactions and events, summarizes and interprets them and communicates the
results to the users.

3.

What do you mean by cost Accounting?

Ans. It ascertains the cost of products manufactured and helps the management in
decision making.

4.

What do you mean by management accounting?

Ans. It is concerned with the generating accounting information relating to f unds, cost,
profits, etc. as it enables the management in decision making.

5.

What do you mean by accountancy?

Ans. Accountancy refers to a systematic knowledge of accounting. It explains how to
deal with various aspects of accounting. It educates us why and how to maintain the
books of accounts.

6.

What are various objectives of Accounting?

Ans. Following are the objectives of accounting:
(i) Maintaining systematic records to transactions: The objective of accounting
is to record financial transactions and events of the organization in the books of
accounts in a systematic manner.
(ii) Ascertaining profit or loss: Another objective of accounting is to ascertain the
net result of day to day transactions for a period. For this purpose Trading A/c
and Profit & Loss a/c are prepared.
(iii) Ascertaining Financial Position: For a businessman, it is not adequate to only
ascertain the profit or loss; it is also necessary to know the financial position of
organization. For this purpose Balance Sheet is prepared.
(iv) Assisting Management: The management often requires financial information
for decision making, effective control, budgeting and forecasting. Accounting
provides financial information to assist the management.
(v) Communicating Accounting Information to Users: Another objective of
accounting is to provide accounting information to users who analyze them as
per their individual requirements.
(vi) Prevention of Frauds: Maintaining regular and systematic accounting records
helps in preventing possible frauds.

7.

What are various advantages of accounting?

Ans. Same as in T.S Grewal.

8.

What are the characteristics(attributes) of accounting?

Ans. Following are the attributes of accounting

(i) Identification of financial transactions and events: Accounting records only

those transactions and events which are of financial nature as the bring change
in the Income of the firm. Eg. Sale-purchase of goods.
(ii) Measuring the identified transactions: Accounting measures the transactions
and events in terms of a common measurement unit i.e. Rupees.
(iii) Recording: Accounting is an art of recording business transaction in the books of
accounts. In other words noting down the transactions in the books(ledgers).
(iv) Classifying: Classification is the process of collecting similar transactions in one
book(ledger). In other words transactions are divided on the basis of similarity
e.g. purchase book, sales book, cash book, B/R book, B/P book.
(v) Summarizing : This involves presenting the classified data in a manner which is
understandable. In which one can find total of the different items. For this
purpose Trial Balance, Trading A/c, P&L a/c and Balance sheets are prepared.
(vi) Analysis and Interpretation: Financial data is analyzed and interpreted so that
the users of financial data can make a meaningful judgment of the financial
performance.
(vii) Communicating: Accounting function involves communicating in the last.
Accounting information must be provided in time and presented to the users.
9.

What are the limitations of accounting?

Ans. Following are the limitations of accounting:
(i) Accounting is not fully exact: Although most of the transactions are recorded
on the basis of evidence yet some estimates are also made for calculating profit
or loss e.g. providing Depreciation on machine, Provision for tax, Provision for
bad debts etc.
(ii) Accounting does not indicate the realizable value: The Balance sheet does
not show the realizable amount of assets if sold. Because historical cost
concept is followed.
(iii) Accounting Ignores the qualitative elements: Since accounting is confined
to monetary matters only, qualitative elements like quality of staff, honesty,
industrial relations etc.
(iv) Accounting may lead to window dressing: The term window dressing means
manipulation of accounts so as to hide vital facts and present the financial
statements in such a way as to show better position than what it actually is .
(v) Accounting Ignores the effect of price level changes: Accounting
statements are prepared at historical cost. But prices of the product does not
remain same. Unless price level change are considered accounting information
will not show true financial position.

10.
What are various functions of accounting?
Ans. Following are the functions of accounting:
(i) Maintaining systematic Accounting records: The primary function of
accounting is to maintain systematic accounting records of financial
transactions.
(ii) Preparation of financial statements: Financial statement shows the financial
position and financial performance of company. That is why it is important
function of accounting to prepare financial statements of an organization these
include Profit & Loss a/c, Trial Balance and Balance sheet etc.
(iii) Meeting legal requirements: Accounting records are accepted as evidence by
the court of law if they are maintained systematically following the accounting

principles and concepts. Besides at the time of filing income tax, service tax,
vat etc. accounts provide important information.
(iv) Communicating the financial data: It is yet another function of accounting to
communicate the financial data to the users, which may be internal users or
external users.
(v) Assistance to the management: Management often requires information other
then the information obtained from financial data. Accounting records should be
maintained in such a manner that the information sought by the management
is available, which in turn helps in decision making.
11.
Differentiate between book keeping and Accounting (most important)
Ans. Same as in TS Grewal
12.
How many types of accounting information are there?
Ans. Following are the types of accounting information:
(i) Information relating to profit or surplus: The income statement makes
available the accounting information about the profit or loss incurred as a result
of business operation.
(ii) Information relating to Financial position: The position statement i.e.
balance sheet makes available the information about the financial position of
the entity. In other words it provides information about the assets and liabilities
of the assets.
(iii) Information about cash flow: Cash flow statement is a statement that shows
flow, both inflow and outflow of cash during the year.
13.
What do you mean by accountancy?
Ans. Accountancy refers to a systematic knowledge of accounting and its aspects
(principles).
14. Users of accounting Information:
Internal Users:
(i)
Owners
(ii)
Management
(iii)
Employees and workers
External Users:
Areas of interest
(i)
Banks
Performance, Financial position
(ii)
Investors Earning Capacity, Safety
(iii)
Creditors Financial position, Profitability
(iv)
Govt.
Profitability, Tax liability
(v)
Consumers Pricing
(vi)
Public
Protecting environment
14.
What do you mean by double entry system?
Ans. Under double entry system, every transaction has two aspects- Debit and Credit
and at the time of recording a transaction, it is recorded once on a debit side and
again on the credit side. For eg. A furniture is purchased for Rs 10,000 then it will be
recorded as:
FurnitureDebit
Cash.Credit
15.
What do you mean by Single entry system?

Ans. Under Single entry system all transactions are recorded only once. In other
words it is incomplete double entry system.

2. Accounting Terms:
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, Bank, Building, Machinery, Furniture, Car etc.

# Debtors :- Debtors are those persons or customers whom goods have been sold on credit and

payment has
not been received from them.
2.

Liability :- It refers to the amount which the firm owes to outsiders

Eg. Loan, Baknk Overdraft, Bills payable, Creditors etc.
# Creditors:- Creditors represents those persons or suppliers from whom goods have been purchased on credit and
payment has not been made to them
# Capital :- It refers to the amount (money value) invested 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 external liabilities are deducted from total assets.
# Bank Overdraft: When money is overdrawn from bank , bank balance becomes negative. It is a type of short term
loan give by bank. When accountholder deposits the money into bank this amount is adjusted against the deposit
along with interest automatically. This facility is not provided to all accountholders.

3.

Drawings :- Any cash or value of goods withdrawn by the owner for personal use.

4.

Accrued Income:- Income earned but not received.

5.

Prepaid Expenses:- Expenses paid in advance.

6.

Outstanding Expenses:- Expenses due but not paid. (or arrears)e.g. rent due but not paid.

7.

Tangible Assets: Tangible assets are those assets which have physical existence i.e. they can be seen and
touched. Ex. Cash, furniture, machinery, sock, computer etc.

8.

Intangible Assets :Intangible assets are those assets which do not have physical existence ie they can not be
seen and touched. Ex. Goodwill, Patents, Trademark etc.

9.

Fixed Assets: Fixed assets are those assets which are acquired not with a purpose for resell but for the use of
long term. Ex Furniture, Machinery, Building, Vehicles etc.

10.

Current assets: Current Assets are those assets which are retained in the business with the purpose to convert
them into cash within a short period. Eg. Cash, Stock, Debtors, Bank etc.

11.

Expenditure: is the amount spent or liability for acquiring Goods or other assets.
Eg. Purchase goods on Credit. Purchased furniture for cash.

12.

Expense: Expense is a value which has expired during the accounting period.
Eg. Payment of salaries. Payment of rent.

13.

Profit : Profit is the excess of revenue of a business over its costs.

14.

Gain: Gain is a profit of irregular or non-recurring nature. Example: Gain on sale of car assets

15.

Fictitious Assets : Fictitious Assets are those assets which are neither tangible assets nor intangible assets but
represent loss yet to be written off e.g. P&L(loss), Preliminary Expenses etc.

16.

Bills Receivable : A bill of acceptance given by debtor at the time of credit sale.

17.

Bills Payable: A bill of acceptance given by us to our creditors at the time of credit purchase.

18.

Bad debts: Bad debt is the amount that has become irrecoverable.

19.

Insolvent / Bankrupt: Insolvent is a person or enterprise which is not in a position to pay its Debts.

20.

Depreciation: Depreciation is the decrease in the value of an Asset.

CHAPTER : 3
1.

Business Entity Concept: According to this assumption, business is treated as a separate unit from its
owners. Business unit should have a completely separate set of books and we have to record business transactions
from firms point of view and not from the point of view of the proprietor. The proprietor is treated as a creditor of the
business to the extent of capital invested by him in the business. The 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

2.

Money Measurement Assumption:- Only those transactions and events are recorded in accounting which are
capable of being expressed in terms of money. An event even though it may be very important for the business, will
not be recorded in the books of the business unless its effect can be measured in terms of money with a fair degree
of accuracy.

3.

Going concern concept :- As per assumption it is assumed that the business will continue to exist for a long
period in the future. It is on this assumption that we record fixed assets at their original cost and depreciation is
charged on these assets without reference to their market value. Because of the assumption of going concern the full
cost of the machine would not be treated as an expense 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, give loans and purchase the shares of the enterprise

4.

Principle of consistency:- This principle states that accounting principles and methods should remain
consistent from one year to another. But the principle of consistency should not be taken 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. The changed method may be adopted

5.

Principle of matching:- This principle is very 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 revenue of the
period should be charged against that revenue

6.

Principle of prudence or conservatism:- According to this principle, all anticipated losses should be recorded
in the books of accounts, but expected profit can not be shown in advance. Provision is made for all known liabilities
and losses even though the amount cannot be determined with certainty

7.

Duality Principle: According to this principle every business transaction is recorded as having a dual aspect. In
other words every transactions affects at least two accounts. For e.g. in above case Cash account and Bat account
is affected. If one account is debited other account must be credited. The system of recording transaction based on
this principle is called as Double Entry System

8.

Principle of full disclosure :This principle requires 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, investors and others.

9.

Accrual Assumption: According to the accrual assumption, a transaction is recorded at the time when it takes
place and not when the settlement takes place. Eg. If a clerk is Employed for a salary of Rs 10,000 p.m. then Salary
of Rs ,20,000 should be shown in the The Accounts whether half salary is paid due to financial problems.

10.

Historical cost concept: According to the cost concept, an asset is recorded

in the books of accounts at the price paid to acquire it and the cost Is the basis for all subsequent accounting of the
asset but depreciation or appreciation must be considered every year.

11.

The verifiable objective concept: holds that accounting should be free from personal bias. It means all
accounting transactions should be evidenced and supported by business documents. Eg. Bills, cash memo,
vouchers etc.

12.

Revenue recognition concept: According to this concept revenue is considered to have been realized when
a transaction has been entered into and the obligation to receive the amount has been established. Eg. An
enterprise sells goods in Feb. and receives the amount in April . Revenue of this sales should be recognized in Feb.
Suppose an enterprise has received an advance in Feb for the sale to be made in May, revenue shall be recognized
in May

13.

Materiality concept: The materiality principle refers to the relative importance of an item. An item should be
regarded as material if there is a reason to believe. If an enterprise has turnover of Rs 10,00,000 and salary paid by
it is Rs 9,00,000. It is not material information.

14.

What are fundamental accounting assumption?

Ans. (i) Accrual assumption
(ii) Going concern assumption and (iii) Consistency assumption

15.

What do you mean by accounting standard?

Ans. The accounting standards are a set of guidelines i.e. GAAP, issued by the accounting body of the country such
as the ICAI

16.

What do you mean by IFRS?

Ans. IFRS are a set of accounting standards developed by the International Accounting Standards Board (IASB)

17.