MEANING AND SCOPE OF ACCOUNTING, GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, ACCOUNTING STANDARD, ACCOUNTING PROCESS Dibrugarh University FINANCIAL ACCOUNTING B.COM 1ST SEMESTER (CBCS) B.Com 1st Year NOTES UNIT -1



FINANCIAL ACCOUNTING
(CBCS)

UNIT -1

A
MEANING AND SCOPE OF ACCOUNTING



Q1. Define Accounting.
Ans: According to American Institute of Certified Public Accountants or AICPA, “Accounting is the art of recording, classifying and summersing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character and interpreting the results thereof.”

Q2. What are the objectives of accounting?
Ans: Following are the objectives of accounting:
a. To keep systematic record: Accounting is done to keep a systematic record of financial transactions.
b.To protect business properties: Accounting provides protection to business properties from unjustified and unwarranted use.
c. To ascertain the operational profit or loss: Accounting helps in ascertaining the net profit earned or loss suffered on account of carrying the business. This is done by keeping a proper record of the revenue and expenses of a particular period.
d. To ascertain the financial position of business: Accounting records helps to ascertain the financial position of the business at the end of the accounting period.
e. To facilitate rational decision making: Accounting these days has taken upon itself the task of collection, analysis and reporting of information at the required points of time to the required levels of authority in order to facilitate rational decision making.


Q3. What are the advantages of accounting?
Ans: Following are the advantages of accounting:
a. Replacement of memory: Human memory is a limited capacity to store every business transaction in mind. Therefore, the need arise to record every transaction in different books of account.
b. Prevents frauds: The maintenance of proper account books prevents irregularities, misappropriations, frauds, errors etc.
c. Helpful in planning: An efficient management always plans for the future targets, what will be the plan for production, purchase of goods, sales, marketing of goods, advertisement, acquisition of fixed assets, funds, etc, in the next accounting period.
d. Ascertainment of profit or loss of the business: The profit earned or loss suffered by the business can be calculated if systematic books of business are maintained.
e. Ascertainment of financial position of business: Financial position of the business is ascertained by preparing the balance sheet or positional statement.

Q4. What are the limitations of accounting?
Ans: Following are the limitations of accounting:
a. Permits alternative treatments: Accounting is based on concepts and it follows generally accepted accounting principles but there exist more than one principle for the treatment of any one item.
b. Ignores important non-monetary information: Accounting does not consider the transactions of non-monetary in nature.
c. Does not provide timely information: Accounting designed to supply information in the form of statement for a period normally one year. The business requires timely information at frequent intervals to enable the management to plan and take corrective action.
d. Does not provide detailed analysis: The information supplied by the accounting in reality aggregates of the financial transactions during the course of the year.
e. Does not disclose the present value of the business:  Accounting records are based on historical facts and it does not disclose the present value of business.


Q5. What are the difference between Book-keeping and accounting?
Ans: Following are the difference between Book-keeping and accounting:

Q6. What are the qualitative characteristics of accounting information?
Ans: Following are the qualitative characteristics of accounting information:
a. Reliability: Reliability is said to comprise representational faithfulness, verifiability and neutrality with an overlay of completeness, freedom from bias, precision and uncertainty.
b. Relevance: Relevance is a quality emphasized in every accounting framework. The relevance of information is affected by its nature and materiality.
c. Understandability: In addition to relevance the users of financial statements will be able to make informed and better decision if they can be able to interpret the contents of financial statements. Understandability is about communicating an intended meaning.
d. Comparability: Another important character of accounting information is comparability. Users should be able to compare financial statements of an enterprise though time in order to assess the trend in performance and financial position.


Q7. Write short notes on:

1. Accounting Mechanism [Systems of Accounting]

Single entry system: This system ignores the two fold aspect of each transaction as considered in double entry system. Under single entry system merely personal aspects of a transaction i.e. personal accounts are recorded.

Double entry system: It recognizes the two fold aspects of every business transaction. It is the only method fulfilling all the objectives of systematic accounting. The double entry system was first developed by Luca Pacioli, who was a Fransiscan Monk of Italy.

2. Bases of Accounting Systems
a. Accrual or mercantile basis: Accrual or mercantile basis is the method of recording transactions by which revenues, costs, assets and liabilities are reflected in accounts in the period in which they accrue. All incomes and expenses belonging to the accounting period are recorded in the books, even if these are not transacted in cash during the accounting period.

b. Cash or receipts basis: Cash or receipts basis is the method of recording transactions under which revenues, costs, assets and liabilities are reflected in the accounts in the period in which actual receipts or actual payments are made.

c. Hybrid basis: Hybrid basis is the combination of first two methods i.e. accrual on expenses and cash basis on incomes. This method is followed by advocates or others where only received income is sure but receivable income may not be guaranteed.

3. Account
Account is date wise summery of transactions relating to persons, property or expenses and incomes. It has two sides. Left hand side of an account is called debit side and right hand side of an account is called credit side. The transactions of similar nature are recorded at one place which is called an account.
Types of Account
a. Personal account
b. Impersonal account
i. Real account
ii.Nominal account
Personal accounts: The accounts of the persons with whom various transactions are entered into such as credit sale, credit purchase, sales return, purchase return, cash or cheques  received and issued are known as personal accounts.


Real accounts: The accounts relating to the property of the business are called real accounts.

Nominal accounts: The accounts of expenses, losses, incomes or gains are known as nominal accounts.

Q8. What are the distinction between cash System and mercantile system?
Ans: Following are the distinction between cash System and mercantile system:
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B

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES


Q1. What is Generally Accepted Accounting Principle (GAAP)?
Ans: Accounting is the language of business. To make the language convey, the same meaning to all people, accountants all over the world have developed certain rules, regulations, procedures and conventions which represent a consensus view by the profession of good accounting practices and procedures are generally referred to as Generally Accepted Accounting Principle.

Q2. What are the features of Accounting Principles?
Ans: Following are the features of Accounting Principles:
a. Man made: Accounting principles are manmade. They are not tested in a laboratory; therefore, they do not have authoritativeness, as universal principles like other natural sciences viz., Physics, chemistry, botany etc.
b. Objectivity: It means accounting principles must be based on facts and free from personal bias or judgement of the individual who prepares the statements.
c. Relevance: Accounting principles must be relevant and useful to the person who is using financial statements.
d. Feasibility: The accounting principles should be practicable or feasible. In case principle is sound theoretically but its application is difficult, then the principle does not have much value.

Q3. Write short notes on:
Accounting Principle
The term principle refers to fundamental believe or a general truth which once established does not change. The accounting principles are usually the concept of conventions which have been adopted as a general guide by the accounting profession. Some accountants prefer to use the term standard instead of using the word principle. Accounting principle can be classified into two categories:
a. Accounting concept.
b. Accounting convention.


Accounting concept: Accounting concept may be considered as postulates i.e., basic assumption or condition upon which the science of accounting is based. Any abstract ideas surviving a systematized function are regarded as concept.

Accounting convention: The term convention denotes circumstances or traditions which guide the accountants while preparing the accounting statement. It refers to a statements or a rule of practice which, by common consent, express or implied is employed in the solution of a given class of problem or guide behavior of a certain kind of situation.

Accounting concept
a. Business entity concept:  This concept implies that a business unit is separate and distinct from the person who supplies capital to it. Irrespective of the form of organization a business unit has got its own individuality as distinguished from the person who own or control it.

b. Money measurement concept: Money is the only practical unit of measurement that can be employed to achieve homogeneity of financial data, so accounting records only those transactions which can be expressed in terms of money.

c. Going concern: It is assumed that a business unit has a reasonable expectation of continuing business at a profit for an indefinite period of time. A business unit is deemed to be a going concern not a gone concern.

d. Cost concept: The cost principle provides a relatively objective foundation for accounting. Cost principle in accounting states that all accounting entries shall be made at cost as and when the transactions take place. Cost is the amount of money paid or payable for goods and assets acquired or services received.

e. Dual aspect concept: Dual aspect is another important concept applied in recording and presenting accounting information. According to this concept every business transaction has a double effect i.e., it has two sides debit and credit.

f. Accounting period concept: Accounting period refers to the period of time at the end of which books of accounts of business entity are to be closed and financial statements are to be prepared.

g. Matching concept: This concept is based on the accounting period concept. The determination of profit of a particular accounting period is essentially a process of matching the revenue recognized during the period and the cost to be allocated to that period to obtain the revenue.


h. Realization concept: According to this concept revenue is considered as being earned on the date at which it is realized i.e., on the date when the property in goods passes to the buyer and he becomes legally liable to pay.

i. Accrual concept: The essence of the accrual concept is that revenue is recognized when it is realized i.e., when sale is complete or services are given and it is immaterial whether cash is received or not. 

j. Objective evidence concept: The objectivity principle states that accounting should be definite, verifiable, reliable and free from manipulation and personal bias of the persons engaged in the process of recording and presenting accounting data.

Accounting conventions
a. Convention of consistency: The principle of consistency requires that the accounting policies which are followed from period to period should not be changed.
b. Convention of full disclosure: Accounting information are required for decision making purpose by various users. Therefore to be useful as the basis of decision making process, there should be full disclosure in the financial statements of all significant information.
c. Convention of conservatism (prudence): The term conservatism implies that all probable or anticipated losses should be provided for and all anticipated or unrealized gains should be ignored and the profit should not be overstated.
d. Convention of materiality: The term materiality refers to the relative importance of an item. What is material for one firm may be immaterial for another firm. Materiality depends on the amount involved in the transactions.

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C

ACCOUNTING STANDARD


Q1. What is Accounting Standard?
Ans: Accounting standards are authoritative standards for financial reporting and are the primary source of generally accepted accounting principles (GAAP). Accounting standards specify how transactions and other events are to be recognized, measured, presented, and disclosed in financial statements. The objective of such standards is to provide financial information to investors, lenders, creditors, contributors and others that is useful in making decisions about providing resources to the entity. Accounting standard is a selected set of accounting policies or broad guidelines issued by an accounting body, regarding the principles and methods to be chosen out of several alternatives that are followed for the preparation of financial statements.

Q2. What are the needs for Accounting Standard / objectives of Accounting Standard / Purposes of Accounting Standard?
Ans: Following are the needs for Accounting Standard / objectives of Accounting Standard / Purposes of Accounting Standard:

a. Uniform presentation of accounts: The users of financial statements require the accounting information which is comparable. The presence of wide variety of concepts, conventions and principles created confusion among them, rather than providing a solid and logical treatment of the transactions. The necessity to present uniform accounting information resulted in the emergence of accounting standards.


b. Avoidance of manipulation: Misusing the vagueness of accounting concepts, conventions and principles generates scandals resulting into failure of the business. Accounting Standards are needed to avoid such manipulation of accounting results.

c. Globalised business: Globalization of business has resulted in the emergence of multinational corporations in different countries with different principles, customs and currency. The global business needs standardization of accounting system for its smooth and fair flow.

d. Disclosure beyond law: There are certain areas of accounting where law does not require important information to be disclosed. Accounting standard may call for disclosure of such information beyond that required by law.

e. Simplify the accounting information: Accounting standards prevent the users from reaching any misleading conclusions and make the financial data simpler for everyone. For example, AS-3(Revised) clearly classifies the flows of cash in terms of ‘operating activities’, ‘investing activities’ and ‘financing activities’.

Q3. State the procedure adopted in formulation of Accounting Standards.
Ans: The Institute of Chartered Accountants of India (ICAI), recognizing the need to harmonies the diverse accounting policies and practices, constituted an Accounting Standards Board(ASB) on April 21, 1977. The main function of ASB is to formulate accounting standards so that such standards may be mandated by the council of ICAI. While formulating the standards in India, ASB will take into consideration the applicable laws, customs, usages and business environment.

Following are the standard-setting procedure Accounting Standards Board (ASB):
a. Identification of the broad areas by the ASB for formulating the Accounting Standards.
b. Constitution of the study groups by the ASB for preparing the preliminary drafts of the proposed Accounting Standards.
c. Consideration of the preliminary draft prepared by the study group by the ASB and revision, if any, of the draft on the basis of deliberations at the ASB.
d. Circulation of the draft, so revised, among the council members of the ICAI and specified outside bodies such as Department of Company Affairs (DCA), Securities and Exchange Board of India (SEBI), Comptroller and Auditor General of India (C&AG), Central Board of Direct Taxes (CBDT), Standing Conference of Public Enterprises (SCOPE), etc. for comments.
e. Meeting with the representatives of the specified outside bodies to ascertain their views on the draft of the proposed accounting standard.
f. Finalization of the exposure draft of the proposed accounting standard and its issuance inviting public comments.

g. Consideration of comments received on exposure draft and finalization of the draft accounting standard by the ASB for submission to the council of ICAI for its consideration and approval for issuance.
h. Consideration of the final draft of the proposed standard and by the council of ICAI, and it found necessary, medication of the draft in consultation with the ASB is done.
i. The accounting standard on the relevant subject is then issued by the ICAI.

Q4. Write short notes on: ACCOUNTING STANDARD BOARD (ASB):
Ans: It was constituted by the ICAI on April 21, 1977 to formulate accounting standards. While formulating accounting standards, the ASB takes into consideration the applicable laws, customs and business environment prevailing in the country. The ASB also gives due consideration to IASs/IFRSs is issued by the International Accounting Standard Board (IASB) and tries to integrate them, to the extent possible, in the light of conditions prevailing in India.

Q5. What are the distinction between  Accounting Principles and Accounting Standard?
Ans: Following are the distinction between  Accounting Principles and Accounting Standard:


Q6. What are the Advantages or Benefits of Accounting Standards?
Ans: Following are the Advantages or Benefits of Accounting Standards:
a. Accounting Standards sets the tone of accounting: Accounting as a language of business communicates the financial results and health of an enterprise to various interested parties by means of periodical financial statements.
b. Standardization of different accounting treatments: Standards reduce to a reasonable extent or eliminate altogether confusing variations in the accounting treatments used to prepare financial statements.

c. Improve the credibility and reliability of financial statements: Financial Statements of business enterprises are used by a diverse group of users for making sound economic decisions. It is necessary, therefore, that the financial statements present a fair picture of the position and progress of the enterprise.
d. Fulfill requirements for additional disclosures: There are certain areas where important information are not statutorily required to be disclosed. Standards may call for disclosure beyond that required by law.

Q7. What are the limitations of Accounting Standards?
Ans: Following are the limitations of Accounting Standards:
a. Difficulties in making choice between different treatments: Alternative solutions to certain accounting problems may each have arguments to recommend them. Therefore, the choice between different alternative accounting treatments may become difficult.
b. Lack of flexibility: There may be a trend towards rigidity and away from flexibility in applying the accounting standards.
c. Restricted scope: Accounting standards cannot override the statute. The standards are required to be framed within the ambit of prevailing statutes.
d. Involves Cost: The Company needs to comply with accounting standards which requires a financial investment that includes employee labor costs, system upgrades and employee training.

Q8. Write short notes on International Financial Reporting Standards (IFRS)
Ans: International Financial Reporting Standards constitute a globally recognized set of standards for the preparation of financial statements by business entities used in multiple countries. The IASB, or International Accounting Standards Board, work to develop these standards, creating a consistent approach to financial reporting globally. The IASB works with investors, auditors and regulators in different countries to determine the needs of each user and incorporate those needs in the standards.

Q9. What are the need and Importance of IFRS?
Ans: International Financial Reporting Standards (IFRS) convergence, in recent years, has gained momentum all over the world. As the capital markets become increasingly global in nature, more and more investors see the need for a common set of accounting standards. It will lower the cost of raising funds, reduce accountants’ fees and enable faster access to all major capital markets. It will facilitate companies to set targets and milestones based on global business environment rather than an inward perspective. This will eliminate the need for multiple reports and significant adjustment for preparing consolidated financial statements or filling financial statements in different stock exchanges.

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D

ACCOUNTING PROCESS


Q1. What is journal? What are its features?
Ans:  Journal is a book of original entry in which all business transaction are recorder  systematically. Journal means a book which records all monetary transactions on daily basis. The transactions are recorded is in chronological order i.e. in the order of their occurrence. The first recording of a transaction is done in journal. That is why it is called a book of original entry or prime entry.
                According to  Erlic. L. Kohler, ”The journal is a book of original entry in which are recorded transactions not provided for in specialized journals”

Following are the features of journal:
a. It is a book of original entry because transaction is recorded at first stage in this book.
b. It is also known as day book or diary because transactions are recorded in it on day to day basis as and when they take place.
c. The journal is only a subsidiary book, subordinate to the ledger which is principal book of accounts.
d. It keeps a chronological record of all transactions i.e., arranged according to the order of occurrence.
e. The journal gives a complete picture of each business transaction and thus maintains the identity of the transaction.

Q2. What is Ledger? What are its features?
Ans: Ledger is the principal or primary book of accounts. It is the most important book in accounting system. It contains all the accounts to which the transactions recorded in the books of original entry are transferred (posted). Ledger is the ultimate destination of all transactions. It is also called book of final entry.
According to L.C.Cropper, “The book which contains a classified and permanent record of all the transactions of a business is called ledger.”


Followings are the features of Ledger:
a. It is the principal or primary books of accounts.
b. The transactions are classified under appropriate heads, called accounts.
c. The accounts contain the condensed and summarized record of all the related transactions.
d. The information contained in the ledger account can be used to draw the conclusion regarding the status of any account.
e. It is the basis of preparing the final accounts. Hence, it cannot be avoided.

Q3. What are the difference between journal and ledger?
Ans.  Following are the difference between journal and ledger

Q4. What is cash book? What are its features?
Ans: Cash book consists of cash and bank accounts taken out of ledger and maintained separately; thus it is a substitute of ledger for cash and bank accounts. It is also a book of original entry because cash and bank transactions are not recorded in other subsidiary book. This book enables us to know the balance of cash in hand and at bank at any point of time.
Following are the features of cash book:
a. Only cash / bank transactions are recorded in cash book.
b. It performs the role of both journal and the ledger.
c. Receipts are recorded on the debit side and payments on the credit side.
d. Transactions are recorded in chronological order.

Q5. What are the distinctions between cash account and cash book?
Ans:  Following are the distinctions between cash account and cash book:

Q6. What are the difference between Trade discount and Cash discount?
Ans: Following are the difference between Trade discount and Cash discount:
Q7. What is trial balance? What are its features?
Ans: Trial balance is an abstract or list of the ledger accounts at a specified date, showing debit and credit balances for all the accounts and the cash book. It has two amounts columns – one for debit amount and the other for credit amount. It is prepared periodically, usually, at the end of each month/year. It is a statement prepared to test the arithmetical accuracy of the ledger accounts.
According to Carter, “Trial balance is the list of debit and credit balances, taken out from ledger, it also includes the balances of cash and bank taken from cash book.”
 Following are the features of trial balance:


a. It is just a statement, and not an account.
b. It is neither a part of double entry system, nor does it appear in the actual books of accounts. It is usually, prepared on a loose sheet of paper.
c. It is list of balances of all ledger accounts and the cash book.
d. It can be prepared at any time during the accounting period, say, at the end of every month, every quarter or every year.
e. The total of debit and credit amount columns of the trial balance must tally.

Q8.  What are the objectives and needs of trial balance?
Ans: Following  are the objectives and needs of trial balance:
a. To ascertain the arithmetical accuracy of ledger accounts: A trial balance is prepared to check the arithmetical accuracy of the ledger accounts. If the sum of the debit and credit columns of trial balance is equal, it is assumed that the posting to the ledger accounts, its totaling and balancing is accurate.
b. Completion of double entry: It proves that both the aspects of each transaction are recorded. If the totals of both sides are equal, it is believed that the records are complete and reasonably trustworthy.
c. Ledger account balances: It is a consolidated summarized statement of balances of accounts on a certain date. It enables one to know the details of assets, liabilities, expenses, losses, incomes etc.
d. To help in the preparation of final accounts: A trial balance is used as a connecting link between the ledger and the final accounts, Trading and profit & loss account, and balance sheet are prepared on its basis.

Q9. What are the advantages and disadvantages of trial balance?
Ans: Following are the advantages of trial balance:
a. Check upon the ledger postings: The trial balance provides an internal check upon the ledger postings. It ensures that both the aspects of each transaction have been duly posted into ledger i.e., the dual aspect of each transaction has been completed.
b. Arithmetical accuracy: The trial balance proves the arithmetical accuracy to a great extent. It ensures that the posting in the ledger account has been made with correct amount, the totaling and balancing of ledger accounts is correct.
c. Facilitates the preparation of financial statements: It is very convenient to prepare the financial statements from the balance method of trial balance.
d. Connecting link: Trial balance is a connecting link between the ledger accounts and the financial statements.
e. Useful data for management: The various balances of real, nominal and personal accounts provide useful information in a convenient form to the management for comparing the balances and arriving at conclusions.


Following are the Disadvantages/ limitations of trial balance:
a. The trial balance can be prepared only in those concerns where double entry system of book keeping is adopted. This system is too costly.
b. A trial balance is not a conclusive proof of the arithmetical accuracy of the books of account.
c. It the trial balance is wrong, the subsequent preparation of Trading, Profit & loss account and Balance Sheet will not reflect the true picture of the concern.

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