Q1(i). Define Accounting. Explain its objectives and branches. (10)
What is accounting?
Accounting is the recording of financial transactions plus storing, sorting, retrieving, summarizing, and presenting the information in various reports and analyses. Accounting is also a profession consisting of individuals having the formal education to carry out these tasks.
One part of accounting focuses on presenting the information in the form of general purpose financial statements (balance sheet, income statement, etc.) to people outside of the company.
Accounting also entails providing a company's management with the information it needs to keep the business financially healthy. These analyses and reports are not distributed outside of the company. Some of the information will originate from the recorded transactions but some of the information will be estimates and projections based on various assumptions. Three examples of internal analyses and reports are budgets, standards for controlling operations, and estimating selling prices for quoting new jobs. This area of accounting is known as management accounting.
Another part of accounting involves compliance with government regulations pertaining to income tax reporting.
Definition of Accounting
Accounting operates within a broad socio-economic environment, and so, the knowledge required of the accountant cannot be sharply compartmentalized. It is therefore, difficult to discuss one area without relating to other areas of knowledge. We place a great emphasis on the conceptual knowledge. The accountant should not only know but he should understand.
From the above it is clear that to define accounting as such, is rather difficult. Many accountants have defined Accounting in very many languages. However, we can consider the following definitions:
1.H.Chakravorty: “Accountancy is the science of recording, classifying and summarizing transactions so that relation with outsiders is exactly determined and result of operation during a particular period can be calculated, and the financial position as the end of the period may be shown.
2.A.I.C.P.A.: "Accountancy may be defined as the art of recording, classifying and summarizing 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".
3.Taylor and Shearing: "Accounting may be defined as the art and science of recording business transactions in a methodological manner so as to show: (a) the true state of affairs of a business of a particular period of time and, (b) the surplus or deficiency which has accrued during a specific period."
From the above definition, we can say that accounting helps us to have some information regarding the following:
1.The nature and amount of incomes.
2.The nature and amounts of expenses.
3.The nature and amounts of possible losses.
4.The nature and amounts of actual losses.
5.The size and volume of capital employed.
6.The increase or decrease in the volume of capital employed.
7.The nature and values of assets owned.
8.The nature and values of liabilities outstanding.
9.The specific amounts due to the business and their nature.
10.The specific amounts due to the business and their nature.
11.The specific amounts due to be paid to the government and their nature.
12.The reports regarding the interpretations of the financial results.
OBJECTIVES OF ACCOUNTING
1. Systematic Recording of Business Transactions:
A systematic and complete record helps the management to receive any retrieve information easily and in time. However, in every business there are numerous business transactions and it is not possible for the management to keep in their mind all business transactions. Accounting records all business transactions in books of accounts in such a manner that intended users can use the information for different decision making purposes.
2. Ascertainment of Results:
The main purpose of any business is to earn profit. For the ascertainment of profit earned or loss sustained by the business enterprise, all incomes and expenses are to be worked out and presented in a separate statement which is called Manufacturing, Trading and Profit & Loss Account.
When total expenses are less than the total income of the business concerned, it results in ‘profit’ and when total expenses exceed total income, it leads to ‘loss’. This information can be used for taking effective measures for cost control.
3. Ascertainment of Financial Position:
The aim of showing financial position can be achieved by preparing Balance Sheet of the business enterprise. Balance Sheet is a statement of assets and liabilities. The resources owned by an enterprise (Assets) and claims against such resources (Liabilities) are shown in the Balance Sheet.
4. Communicating Information to Various Users: In addition to the management, there are a number of other users who may be interested in knowing the information about the financial soundness and the profitability of the enterprise. For example, shareholders are interested to know the amount of dividend declared by the enterprise or earning per share, lenders are interested in the safety of their loan and interest paying capacity of the business etc. Accounting information is also required by different types of users (internal or external), who may need the same for decision making.
In this connection, accounting helps to provide relevant information to all the interested users. Annual Reports, Cash Flow Statements, Graphs and Charts are the various means which can be used to communicate the relevant information to intended users.
BRANCHES OF ACCOUNTING
Different Branches of Accounting:
It may be very aptly pronounced now-a-days that due to the spectacular development in the research and analytical aspects, Accounting, in the present day, has not confirmed itself to only record-keeping but has spread its branches to the farthest corners of commercial activities. As such, accounting to-day may be divided as follows:
1.Book-Keeping: Primary recording of the day-to-day transactions of any business unit and their subsequent posting into the Ledger Accounts are the functions of this part of accounting. As this part of the job of the Accountant is only keeping the proper records, it is therefore termed as Book-Keeping.
2.Accounting: To prepare the Trial Balance and thereby to check the arithmetical accuracy of the books and records, to prepare the Revenue statements of Profit or Loss Accounts, to prepare the statement of Affairs or Balance Sheets, or , in other words, to prepare the Final Accounts and also to make plans and programmes for smooth running of this part of Accounting procedures and to act accordingly are, in short, the functions of the Accountant. This of his work is generally termed as accounting.
3.Cost Accounting: In any manufacturing concern, it is necessary to keep the records of daily stocks in hand, their issues and receipts, payment of wages, calculated regarding overhead charges, fixing the sale-price of the products, to prepare the budget and thereby to help in cost control etc. These functions are the functions of the Cost Accountant.
4. Management Accounting: The present-day Management is very much dependent on the Accountant in all the levels of managerial activities. By furnishing regular reports regarding various necessary information required daily by the management, the Accountant very ably helps in their work. Cost Control, Quality Control, Budgetary Control, Planning etc. are therefore, the functions of the Management Accountant.
5. Decision Accounting: This means that part of the functions of the Accountant by which he prepares and presents necessary information to the Management for making decisions. This function is one which has developed a great during the recent years. As and when there arises a particular problem in any business unit, the accounting personnel are thereupon called to present the necessary information in all possible details and in a most appropriate manner. Decision Accounting is thus, a part of the Managerial Accounting.
6.Household Accounting: With the development of the Socialistic Pattern of economy and the emergence of the Welfare States, the present-days Governments in all the countries in the World are becoming more and more interested in collecting taxes not only form the corporate bodies of form the employed persons but also from the self-employed men and professional personalities. These types of persons are now required to maintain their professional accounts Household Income and Expenditure Accounts separately.
7. Government Accounting: Government Accounting is quite different from Commercial Accounting. This is because in Welfare States is present day World, any Government has to collect taxes, compute National Income, fix the Gross National Product Target, ascertain the Balance of Payments position etc. governments, therefore have their own system of Accounting which is called Government Accounting.
8. Auditing: Whether the Books of Accounting have been maintained correctly or not has to be proved. For this purpose, the Accounts are to be checked by some qualified persons from the Book of Prime entry up to the Final Accounts every year. This is also necessary for the benefit of the share-holders as well as for the Government which will collect taxes on the basis of the Published Accounts.
Q1(ii) What do you mean by double entry system of accounting?
What is the double entry system?
The double entry system of accounting or bookkeeping means that every business transaction will involve two accounts (or more). For example, when a company borrows money from its bank, the company's Cash account will increase and its liability account Loans Payable will increase. If a company pays $200 for an advertisement, its Cash account will decrease and its account Advertising Expense will increase.
Double entry also allows for the accounting equation (assets = liabilities + owner's equity) to always be in balance. In our example involving Advertising Expense, the accounting equation remained in balance because expenses cause owner's equity to decrease. In that example, the asset Cash decreased and the owner's capital account within owner's equity also decreased.
A third aspect of double entry is that the amounts entered into the general ledger accounts as debits must be equal to the amounts entered as credits
Every transaction has two effects. For example, if someone transacts a purchase of a drink from a local store, he pays cash to the shopkeeper and in return, he gets a bottle of dink. This simple transaction has two effects from the perspective of both, the buyer as well as the seller. The buyer's cash balance would decrease by the amount of the cost of purchase while on the other hand he will acquire a bottle of drink. Conversely, the seller will be one drink short though his cash balance would increase by the price of the drink.
Accounting attempts to record both effects of a transaction or event on the entity's financial statements. This is the application of double entry concept. Without applying double entry concept, accounting records would only reflect a partial view of the company's affairs. Imagine if an entity purchased a machine during a year, but the accounting records do not show whether the machine was purchased for cash or on credit. Perhaps the machine was bought in exchange of another machine. Such information can only be gained from accounting records if both effects of a transaction are accounted for.
Traditionally, the two effects of an accounting entry are known as Debit (Dr) and Credit (Cr). Accounting system is based on the principal that for every Debit entry, there will always be an equal Credit entry. This is known as the Duality Principal.
Debit entries are ones that account for the following effects:
Increase in assets
Increase in expense
Decrease in liability
Decrease in equity
Decrease in income
Credit entries are ones that account for the following effects:
Decrease in assets
Decrease in expense
Increase in liability Increase in equity
Increase in income
Double Entry is recorded in a manner that the Accounting Equation is always in balance.
Assets - Liabilities = Capital
Any increase in expense (Dr) will be offset by a decrease in assets (Cr) or increase in liability or equity (Cr) and vice-versa. Hence, the accounting equation will still be in equilibrium.
QUESTION #2
Solution
Page1
Page2
Page3
Question No.3
Question No.4
Page1
Page2
No comments:
Post a Comment