ACCOUNTANCY
Unit – 1
Introduction to Accounting
Q1. What is Book-Keeping?
Ans: Book-Keeping is the art and science of recording, classifying
and summarizing business transactions in money or money’s worth accurately and
systematically so that the businessman may be able to know his profit or loss
during a specified period and also his financial position on a particular date.
Book-Keeping is thus the recording of business transactions in a systematic
manner.
Q2. What are the features
of Book-keeping?
Ans: Following are the features of Book-keeping:
1. Book-keeping is a fundamental accounting activity for recording
business transactions in the prescribed books.
2. Every transaction is properly analysed before recording.
3. The transactions recorded relate to transfer of money or money’s
worth.
4. Book-keeping is a systematic method of recording.
5. It is both science as well as an art.
Q3. What are the
objectives of book-keeping?
Ans: Following are the objectives of book-keeping:
1. To have a permanent record of each transactions of the business.
2. To show the financial effect of each transactions recorded on the
entity.
3. To ascertain the combined effect of each transactions on the financial position of the business on
a particular date.
4. To disclose factors responsible for earning profit or suffering
loss in a given period.
5. To know the amount recoverable by the business from others and
payable to others.
Q4. What are the
importances of book-keeping?
Ans: Following are the importance of book-keeping:
1. Limitation of human memory: Capacity of human beings is limited
as to how much one can remember and that too how long.
2. Owners and managers being different persons: In case of company
form of organization ownership is with shareholders and management is in the hands
of board of directors.
3. Preparation of financial statements: Business wants to know the
profit earned or loss suffered during the year and its financial position at
the end of the year.
4. Need for financial information: Financial information and data
are needed for cost ascertainment, planning, budgeting and forecasting.
5. Information needs of various users: Different users of accounting
information like owners, investors, bankers, creditors, etc. are interested in
the affairs of the business.
Q5. 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.”
Q6. 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.
Q7. 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.
Q8. 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.
Q9. What are the
difference between Book-Keeping and Accounting?
Ans: Following are the difference between Book-keeping and
accounting:
Q10. 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.
Q11. 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
Personal account
Impersonal account
Real account
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.
4. Golden rules of Accounting:
a. Real Account: Dr
what comes in
Cr
what goes out
b. Personal Account - Dr
the receiver
Cr
the giver
c. Nominal Account- Dr
all expenses and losses
Cr
all incomes and gains
5. Branches of Accounting
a. Financial Accounting: It is that branch of accounting, which
involves the recording of the transactions, including towards the preparation
of trial balance and final accounts.
b. Cost Accounting: Cost account is the accounting discipline, which
deals with costs, i.e. the unit costs of the goods produced and services
provided. It helps the management of the organization in fixing the price,
controlling costs and providing relevant information for the purpose of
decision making.
c. Management Accounting: The accounting system which supplies the
necessary information to the management, for rational decision making. This
information is helpful in determining the effect of the decisions and analyzing
the performance of the entity.
d. Tax Accounting: The accounting system that deals with the tax
return and its payment, instead of preparation of final accounts of the
enterprise, is called tax accounting.
e. Social responsibility accounting: This branch of accounting is
commonly termed as social responsible accounting. It aims at unveiling the
facilities provided by the entity to the society, in terms of medical, housing,
education and so forth.
Q12. What are the
distinction between cash System and mercantile system?
Ans: Following are the distinction between cash System and
mercantile system:
Q13. Who are the users of Accounting Information?
Ans: Users of accounting information may be
categorised into two parts:
a. Internal users
b. External users
a. Internal users:
i. Owners: The primary objective of accounting
is to provide necessary information to the owners relating to their business.
Owners are interested in the accounting information with a view to ascertaining
the profitability and financial strength of the company.
ii. Management: Management is interested in
knowing the existing profits, earning per share, chances of survival,
possibility of growth and diversification, cost information etc., from the accounting
information so that it can chalk out suitable strategy for its entity.
iii. Employees: Employees are interested in job
satisfaction, job security, bonus declarations, employee’s welfare scheme etc.
of their unit. So they want information on profitability and future prospects
of the company.
b. External users
i. Creditors: Creditors are interested in
knowing entity’s capability to repay the amount and interest as and when
repayment becomes due. So, they are interested in finding out profitability,
cash flows etc., of the entity.
ii. Potential investors: The potential
investors are keen to know the earning potential of the business and ensure the
safety of their investment.
iii. Research scholars: The financial
statements being a mirror of the financial position of a firm are of immense
value to the research scholar who wants to make a study into financial
operations of a particular firm.
iv. Government: Governments all over the world
are using financial statements for compiling statistics concerning business
units, which, in turn help compiling national accounts.
v. Taxation authorities: Income tax authorities
are interested in knowing the profits of the business so that tax can be
imposed thereon.
Q14. What is double entry
system?
Ans: Every business transaction has two aspects, i.e., when we
receive something, we give something else in return. For example, when we
purchase goods for cash, we receive goods and give cash in return; similarly in
accredit sale of goods, goods are given to the customer and the customer
becomes debtor for the amount of goods sold to him. This method of writing
every transaction in two accounts is known as Double entry system of
Accounting. Of the two accounts one account is given debit while the other
account is given credit with an equal amount.
Q15. What are the features
of double entry system?
Ans: Following are the features of double entry system:
1. Transactions take place only if there are two parties one party
receiving the benefit and other party giving or parting with the benefits.
2. Each party is affected in opposite direction but with the same
amount.
3. Each transaction affects at least two items in an accounting
equation.
4. For each transaction debit amount is equal to the credit amount.
5. Account receiving the benefits is debited and the account
rendering the benefits is credited.
Q16. What are the
advantages and disadvantages of double entry system?
Ans: Following are the advantages of double entry system:
1. It enables to keep a complete record of business transactions.
2. It provides a check on the arithmetical accuracy of books of
accounts based on equality of debits credits.
3. It gives the results of business activities either profit or loss
during the accounting period.
4. It helps to ascertain the details regarding any account easily
and accurately.
5. It reduces the chances of errors creeping in the accounting
records because of its equality principle.
Following are disadvantages of double entry system:
1. Requirement of expert knowledge: Now days, accounting is a
profession and is being practiced by qualified chartered accountants.
2. Lengthy cumbersome process: The process of recording,
classifying, analyzing and interpreting is cumbersome and tedious.
3. Expensive: Accounting department is to be staffed by qualified
and trained personnel requiring high salaries. So it is expensive for small
business units.
Accounting Terminology
Business Transaction: Any exchange of goods or services for cash or on credit by the
business with any other person is a business transaction.
Events: An event is a happening indicating a business transaction
requiring a journal entry has occurred.
Capital: It is the amount invested by the proprietor into business. It may
be in cash or in kind.
Drawings: It is the amount or benefit withdrawn by the owner from the
business for personal or domestic use.
Liability: It refers to an amount owing by one person to another payable in
money, goods or services. Liability is the amount which arises as a result of
purchase of goods or services from others on credit and through cash borrowings
to finance the business.
Assets: An asset is any owned physical object or right having a money
value. In other words assets are economic resources which are owned by a
business and from which future economic benefits are expected to flow to the
enterprise.
Goods: Goods are the things in which the business man deals in. It implies
all those articles which have been purchased by the enterprise for sale in the
usual course of business.
Voucher: The document prepared for
the purpose of recording business transactions in the books of accounts are
known as voucher.
Debit: The left hand side of an account is known as debit side.
Credit: The right hand side of an account is known as credit side.
Debtor: The person from whom amounts are due for goods sold or services
rendered or in respect of contractual obligations is called debtor.
Creditor: The person to whom amount is owed by the enterprise on account of
goods purchased or services rendered or in respect of contractual obligations
is called creditor.
Bad debts: The amount that has become irrecoverable from a debtor either due
to his insolvency or other reasons is called as bad debts. It is the loss of
business.
Proprietor: The proprietor who takes the initiative to start the business
invests his money or money’s worth and bears the risk of the business is called
proprietor.
Consumable stores: The materials held by a business enterprise for consumption and not
for resale are called consumable stores.
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