Page No: 19
Questions for Practice
1. Define Accounting.
Accounting is the art of recording, classifying, summarising and communicating financial information to users for correct decision making.
2. State what is end product of financial accounting?
The end product of financial accounting are Trading account, Profit and loss account and Balance sheet.
3. Enumerate main objectives of accounting.
The main objectives of accounting are:
→ To keep a systematic record of all business transactions
→ To determine the profit earned or loss incurred during an accounting period by preparing profit and loss account
→ To ascertain the financial position of the business at the end of each accounting period by preparing balance sheet
→ To assist management for decision making, effective control, forecasting, etc.
→ To assess the progress and growth of business from year to year
→ To detect and prevent errors and frauds
→ To communicate information to various users
4. List any five users who have indirect interest in accounting.
The five users who have indirect interest in accounting are:
• Trade associations
• Labour unions
• Lenders and Financial Institutions
• Tax authorities
5. State the nature of accounting information required by long-term lenders.
Long term lenders are interested in repaying capacity of the business, profitability, liquidity, operational efficiency, potential growth of business.
6. Who are the external users of information?
External users of information are the individual or the organisations that have direct or indirect interest in the business firm, however, are not a part of management. They do not have direct access to the internal data of the firm and uses published data or reports like profit and loss accounts, balance sheets, annual reports, press releases, etc. Some examples of external users are government, tax authorities, labour unions, etc.
Three examples of revenue are given below.
• Sales revenue
• Interest received
9. Distinguish between debtors and creditors.
|Basis of difference||
|Meaning||Persons or organisations that are liable to pay money to a firm are called debtors.||Persons or organisations to whom the firm is liable to pay money are called creditors.|
|Nature||They have debit balance to the firm.||They have credit balance to the firm.|
|Payment||Payments are received from them.||Payments are made to them.|
|Shown||They are shown as assets in the Balance sheet under Current Assets.||They are shown as liabilities in the Balance Sheet under Current Liabilities.|
10. ‘Accounting information should be comparable’. Do you agree with this statement? Give two reasons.
Yes, accounting information should be comparable because:
→ Comparability is needed to make inter-firm comparisons, i.e., to find out how a firm has performed as compared to the other firms.
→ Comparability is needed to make inter-period comparisons, i.e., to find out how it has performed as compared to the previous years.
11. If the accounting information is not clearly presented, which of the qualitative characteristic of the accounting information is violated?
If the accounting information is not clearly presented, then it will violate the ‘Reliability and Understandability’ qualitative characteristics of accounting because if accounting information is not clearly presented then it will not be reliable and also cannot be understood easily.
12. The role of accounting has changed over the period of time”- Do you agree? Explain.
The role of accounting has now shifted from that of a mere recording of business transactions to that of providing information to managers and other various interested parties in order to help them in making appropriate decisions. It now becomes an information system.
13. Giving examples, explain each of the following accounting terms:
• Fixed assets
• Short-term liability
• Fixed Assets: Fixed Assets refers to those assets which are held for continued use in the business for the purpose of producing goods and services and not meant for resale. Examples: Plant and Machinery, Land and Building etc.
• Revenue: Revenues refer to the amount received from day to day activities of the business, likesale proceeds of goods and rendering services to the customers. Example: Commission received, dividend, royalty etc.
• Expenses: Expense is the cost incurred in producing and selling the goods and services. Example: wages, depreciation, salaries etc.
• Short-term liability: Those liabilities which are to be paid in near future (normally within one year). Example: Bank Overdraft, Bills payable etc.
• Capital: It refers to the amount invested by the proprietor in a business enterprise. It is the amount with the help of which goods and assets are purchased in the business.
14. Define revenues and expenses?
Revenues is the income of a regular nature such as receipts from sale of goods, rent, commission etc.
Expense is the cost incurred in producing and selling the goods and services.
15. What is the primary reason for the business students and others to familiarise themselves with the accounting discipline?
Every monetary transaction must be recorded in such a manner that various accounting users must understand and interpret these results in the same manner without any ambiguity. The primary reason to study accounting discipline because it helps in the learning:
• the various aspects of accounting.
• how to maintain books of accounts.
• how to summarise accounting information.
• how to interpret the accounting information with relative accuracy.
1. What is accounting? Define its objectives.
Accounting is the art of recording, classifying , and summarising 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.
Objectives of Accounting are:
→ To keep systematic record of business transactions: The main objective of accounting is to keep complete record of business transaction according to specified rules. It helps to avoid the possibility of errors and fraud.
→ To calculate Profit and loss: Accounting helps in ascertaining the net profit or loss suffered on account of business transaction during a particular period. For this purpose trading and profit and loss account are prepared. It gives information regarding how much of goods have been purchased and sold, expenses incurred and amount earned during a year.
→ To ascertain the financial position of the business: Ascertaining profit or loss is not sufficient for a businessman. The businessman must also know the financial health of the business. This purpose is served by preparing the balance sheet that facilitates in ascertaining the true financial position of the business.
→ To ascertain the progress of business from year to year: Accounting helps in assessing the progress of business from year to year, as accounting facilitates the comparison both inter-firm as well as intra-firm.
→ To prevent and detects errors and frauds.
→ To Provide informations to various parties: Another main objective accounting is to communicate financial and accounting information to various users including both internal and external users like owners, management, government, labour, tax authorities, etc. The information helps them in taking sound and judicious decisions about the business entity.
2. Explain the factors, which necessitated systematic accounting.
→ Recording of financial transactions only: Only those transactions and events are recorded in accounting which are of financial character. There are so many events which are important for business but cannot be expressed in terms of money will not be recorded in accounting such as strike by employees etc.
→ Recording in terms of money only: Each business transactions are recorded in terms of money only. For example, if a business possess 300 chairs and 100 tables, then their monetary values is recorded in the books, i.e. 300 chairs costing Rs 60,000, 100 tables costing Rs 50,000. Thus the total value of assets is Rs 1,10,000.
→ Recording: Accounting is the art of recording business transactions according to some specified rules. In a small business, all transaction are recorded in a book called ‘Journal’ but when the transactions becomes large the journal is further subdivided into various subsidiary books.
→ Classifying: After recording the transaction is Journal and subsidiary books, the transactions are classified and posted under their respective accounts. The books in which various accounts are opened is called ‘Ledger’.
→ Summarising: All business transactions are summarised in the form of Trial Balance, Trading Account, Profit and Loss Account and Balance Sheet that provides necessary information to various users.
→ Interpretation of the results: The results of the business are presented in form of graphs, statements, charts so that interested parties such as proprietors, managers, creditors etc. can have full information about the profitability and the financial position of the business.
The various external users and their needs are:
• Investors and potential investors: information on the risks and return on investment;
• Government and other regulators- information on the allocation of resources and the compliance to regulations;
• Social responsibility groups, such as environmental groups-information on the impact on environment and its protection;
• Competitors: information on the relative strengths and weaknesses of their competition and for comparative and benchmarking purposes.
4. What do you mean by an asset and what are different types of assets?
Any valuable thing that has monetary value, owned by a business is called an asset. Example: Building, stock, furniture etc.
Different types of asset are:
→ Fixed Assets- These are those assets that are held for the continued use in the business for the purpose of producing goods and services. These assets are not meant for sale, For example, land, building machinery, etc.
→ Current Assets- These are those assets which are meant for sale or which the management would want to convert into cash within one year. For example, cash, debtors, stock, etc.
5. Explain the meaning of gain and profit. Distinguish between these two terms.
Profit is the excess of total revenues over total expenses of a business enterprise for an accounting period whereas Gain is the monetary benefit, profit or advantage resulting from events or transactions which are incidental to business such as sale of fixed assets.
6. Explain the qualitative characteristics of accounting information.
The qualitative characteristics of accounting information are:
→ Reliability: Accounting information must be reliable, so that business owners can be reasonably assured that accounting information presents an accurate picture of the company. All accounting information is verifiable and can be verified from the source document (voucher), via cash memos, bills, etc. Hence, the available information should be free from any errors and unbiased.
→ Relevance: It means that essential and appropriate information should be easily and timely available and any irrelevant information should be avoided. The users of accounting information need relevant information for decision making, planning and predicting the future conditions.
→ Understandability: Accounting information should be presented in such a way that every user is able to interpret the information without any difficulty in a meaningful and appropriate manner.
→ Comparability: It allows business owners to compare accounting information of a current year with that of the previous years. Comparability enables intra-firm and inter-firm comparison. This assists in assessing the outcomes of various policies and programmes adopted in different time horizons by the same or different businesses. Further, it helps to ascertain the growth and progress of the business over time and in comparison to other businesses.
7. Describe the role of accounting in the modern world.
The role of accounting has been changing over the period of time. In the modern world, the role of accounting is not only limited to record financial transactions but also to provide a basic framework for various decision making, providing relevant information to various users and assists in both short run and long run planning. The role of accounting in the modern world are given below.
→ Assisting management- Management uses accounting information for short term and long term planning of business activities, to predict the future conditions, prepare budgets and various control measures.
→ Comparative study- In the modern world, accounting information helps us to know the performance of the business by comparing current year’s profit with that of the previous years and also with other firms in the same industry.
→ Substitute of memory- In the modern world, every business incurs large number of transactions and it is beyond human capability to memorise each and every transaction. Hence, it is very necessary to record transactions in the books of accounts.
→ Information to end user- Accounting plays an important role in recording, summarising and providing relevant and reliable information to its users, in form of financial data that helps in decision making.