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1. Define accounting?

Answer to the Question no. 1

Definition of Accounting:

“Accounting is an information system that identifies, records and communicates the


economic events of an organization to interested users.”
—Kieso, Weygandt, Kimmel-Accounting Principles.

“Accounting refers to the process of identifying, measuring, and communicating


economic information to permit informed judgments and decisions by users of the
information.” —The American Accounting Association.

“Accountancy may be defined as the collection, compilation and systematic recording


of business transactions of money, the preparation of financial reports, the analysis
and interpretation of these reports and the use of these reports for the information
and guidance of management.” —A. W. Johnson.

“Accounting is the art of recording, classifying and summarizing in significant


manner and in terms of money transactions and events which are, in part at least, of a
financial character and interpreting the result thereof.”
—American Institute of Certified Public Accounts (AICPA).

After discussing the above definitions we can say that Accounting is concerned with the
processes of recording, sorting and summarizing data resulting from the business operations
and events.
Or in other words accounting means-
1. Systematic classification of business transactions for recording them in books of
account.
2. Recording of events and transactions in books of account - called Bookkeeping.
3. Summarizing of the recorded events i.e., Preparation of a trial balance from a ledger
and subsequently preparation of balance sheet and profit and loss account from the
trial balance.
4. Interpreting the financial transactions from the recorded data and financial statement.
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2. What are the objectives of accounting?

Answer to the Question no. 2

Objective

The main objective of accounting is to provide information to the users to make relevant
decisions and form judgment.

Let us now elaborate a little on the Primary Objectives.

The main objectives of accounting are as follows:

Primary Objectives of Accounting

Maintaining Calculating Ascertaining Communicating


accounting the results of the financial the information
records operations position to the users

Figure: Objectives of accounting

Let us now discuss these objectives one by one:

1. To maintain accounting records:

Written records are always better than oral records. Different persons can use written
records for different decision-making purpose. It also serves as evidence of
transactions. Human memory cannot absorb each and every transaction.

2. To calculate the results of operations:

To measure the financial performance of an enterprise, i.e. preparing the Income


statement.

3. To ascertain the financial position:

To evaluate the financial strength and weaknesses of an enterprise, the financial


position is ascertained by preparing the position statement or the balance sheet.

4. To communicate the information to the users:

Accounting communicates information to internal users and the external users.


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3. Discuss the importance of accounting.

Answer to the Question no. 3

Importance of Accounting: In the competitive world, Accounting has become an integral


part of the business world. It guides and advises the business on a day-to-day basis. The
importance of Accounting are given below:

1. Facilitates to Replace Memory:

Accounting facilitates to replace human memory by maintaining a


complete record of financial transactions. Human memory is limited
by its very nature. Accounting helps to overcome this limitation.

2. Facilitates to Comply with Legal Requirements:

Accounting facilitates to comply with legal requirements of an


enterprise to maintain books of accounts.

3. Facilitates to Ascertain Net Result of Operations:

Accounting facilitates to ascertain net results of operations by


preparing income statement.

4. Facilitates to Ascertain Financial Position:

Accounting facilitates to ascertain financial position by preparing the


position statement.

5. Facilitates the Users to take Decisions:

Accounting facilitates the users to take decisions by communicating


accounting information to them. The users include the following:

 Short-term creditors
 Long-term creditors
 Present investors
 Potential investors
 Employees’ groups
 Management
 General public
 Tax authorities

6. Assist Management:

Accounting assists management in planning and controlling


business activities and in taking decisions. For example, projected
cash flow statement facilitates management to know future receipts
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and payments and to take decision regarding anticipated surplus or
shortage of funds.

7. Facilitates a Comparative Study:


1
Accounting facilitates a comparative study in the following four
ways:

(a) Comparison of actual figures with standard or budgeted


figures for the same period and for the same firm.
(b)Comparison of actual figures of a period with those of another
period for the same firm, i.e., intra-firm comparison.
(c) Comparison of actual figures of a firm with those of another
standard firm belonging to the same industry, i.e., inter-firm
comparison.
(d)Comparison of actual figures of a firm with those of industry to
which the firm belongs, i.e., pattern comparison.

8. Facilitates Control over Assets:

Accounting facilitates control over assets by providing information


regarding cash balance, bank balance, debtors, fixed assets, stock
etc.

9. Facilitates the Settlement of Tax Liability:

Accounting facilitates the settlement of tax liability with the


authorities by maintaining proper books of accounts in a systematic
manner.

10. Facilitates the Ascertainment of Value of Business:

Accounting facilitates the ascertainment of value of business in case of transfer of


business to another entity.

11. Facilitates Raising Loans:

Accounting facilitates raising loans from lenders by proving them historical and
projected financial statements.

1 12. Acts as Legal Evidence:

Proper books of accounts maintained in a systematic manner act as legal evidence in


case of disputes.
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4. What are the functions of accounting?

Answer to the Question no. 4

Functions of Accounting:

The functions of accounting are as follows:

1. Provides necessary information about the financial activities to the


interested parties

2. Provides necessary information about the efficiency or otherwise of


management with regard to the proper utilization of scarce
resources

3. Provides necessary information for making predictions (financial


forecasting)

4. Facilitates to evaluate the earning capacity of a firm by supplying


the statement of financial position, the statement of periodical
earning, together with the statement of financial activities to various
interested parties

5. Facilitates in decision-making with regard to the changes in the


manner of acquisition, utilization, preservation and distribution of
scarce resources

6. Facilitates in decision-making with regard to the replacement of


fixed assets and expansion of the firm
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7. Provides necessary data to the government to enable it to take


proper decisions concerning to duties, taxes, price control etc.

8. Devices remedial measures for the deviations of the actual from the
budgeted performance

9. Provides necessary data and information to managers for internal


reporting and formulation of overall policies

5. What are the principles of accounting?

Answer to the Question no. 5

The Principles of Accounting:

The basic principles of accounting are essentially the general decision rules, which govern the
development of accounting technique. On the basis of these assumptions of accounting, the
following basic principles of accounting have been developed:

Accounting Entity Principle:

Accountants treat a business as distinct from the persons who own it. Then, it
becomes possible to record the transactions of the business without the proprietor
also. The concept of separate business entity is applicable for all types of
organizations like sole proprietorship, partnership etc. where the business affairs are
free from the private affairs of the proprietor or partner.

1. Going Concern Principle:

It is assumed that the business will exist for a long time and transactions are recorded
from this point of view. Based on this concept, the accountants, while valuing assets,
will not consider the forced sale value of assets (market value), but the assets,
normally, will be reflected at the cost of acquisition minus depreciation. Similarly,
depreciation is provided based on the expected life of the assets. The concept,
however, does not imply the permanent continuance of the business. The underlying
presumption is that the business will continue in operations long enough to charge
against income the cost of fixed assets over their economic lives and to pay the
liabilities when they fall due. This concept is applicable to the business as a whole and
not for a particular division or branch. Merely closing of a branch or division may not
adversely affect the ability of the enterprise to continue other businesses normally.
Once the business goes in to liquidation or becomes insolvent, this concept does not
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apply. In other words, the going concern status of the concern will stand terminated
from the date of appointment of a receiver.

2. Accounting Period Principle:

According to this concept, the life of a business is divided into appropriate segments
of time, say 12 months, for studying the results. While the life of a business is
considered to be indefinite, according to the going concern concept, the measurement
of income and studying the financial position of the business after a very long time
would not be helpful in taking corrective steps at the appropriate time. Therefore, it is
necessary that after each segment of time interval the management should review the
performance. The segment of time interval is called accounting period, which is
usually a year. At the end of each accounting period, an income statement and a
balance sheet is prepared. The income statement discloses the profit or loss made by
the business during an accounting period. The balance sheet discloses the state of
affairs of the business as on the last date of the accounting period. The term
“conventions” includes those customs or traditions, which guide the accountants
while preparing the accounting statements.

3. Cost Principle:

Transactions are entered in the books of account at the amounts actually involved. An
asset is ordinarily recorded at a price at which it has been acquired. For example, a
plot of land purchased by a firm for Tk. 5,00,000 would be recorded at this value
irrespective of its current market price. Cost concept has the advantage of bringing
objectivity in the presentation of the financial statements. In the absence of this
concept, the figures shown in the accounting records would have to depend on the
subjective view of a person.

4. Realization Principle:

Accounting is a historical record of transactions. It only records what has happened. It


does not anticipate events, though anticipated adverse effects of events that have
already occurred are usually recorded. For example, A places an order on B for supply
of certain goods. Upon receipt of the order, B procures raw material, employs labor,
and produces and delivers the goods to A. In this case, the sale transaction will be
recorded in the books of B only when the goods are delivered and not upon the receipt
of an enforceable purchase order from A.
There are certain exceptions to this concept, which are as follows:
1
i. In the case of hire-purchase transaction, the ownership of the goods passes on
to the buyer only when the last installment is paid, but sales presume to have
been made to the extent of installments received and installments outstanding
(installments due but not received).

ii. In the case of contract accounts, though the contractor is liable to pay only
when the whole of contract is completed as per terms of the contract, the profit
at the end of accounting year is calculated on the basis of the work completed
and certified by a competent authority.
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5. Expenses Recognition Principle:

Cost is the total outlay or expenditure on acquiring resources


required for the production of goods or rendering of services. Cost of
resources utilized and lost during a particular period is termed as
the expired cost or expense and is charged to the revenue of the
period to obtain information about income. Costs of the resources
remaining unutilized or un-expired at the end of the period are
carried forward to the next accounting period and are termed as
assets.

6. Dual Aspect Principle:

Each transaction has two aspects. With every increase in the money
owned to others, there should be an increase in assets or loss. Thus,
at any time the accounting equations is as follows:

Assets = Liabilities + Capital, or alternatively, Capital = Assets - Liabilities

For example, a proprietor brings in Tk. 1,00,000 in cash as capital to


start a small business. Tk. 1,00,000 is the capital and corresponding
amount of Tk. 1,00,000 will appear as cash in hand (assets).
7. The Matching Principle:

In determining the net income, it is necessary to match related costs and expenses to
revenue for the reporting period. The cost of a product sold and all expenses incurred
in generating the sale should be matched against the respective revenue.

This concept is basically an accrual concept since it disregards the timings and the
amount of actual cash inflow or cash outflow and concentrates on the occurrence of
revenue and expenses.

This concept calls for adjustments to be made in respect of prepaid expenses,


outstanding expenses, accrued revenue and un-accrued revenue. Thus, appropriate
costs have to be matched against the appropriate revenue for the accounting period.

8. Objectivity Principle:

According to this principle, the accounting data should be definite, verifiable and free
from personal bias of an accountant. In other words, this principle requires that each
recorded transaction/events in the books of accounts should have an adequate
evidence to support it.

In historical cost accounting, the accounting data are verifiable since the transactions
are recorded on the basis of source documents such as vouchers, receipts, cash
memos, invoices and the like. The supporting documents form the basis of their
verification by auditors afterwards.
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For items like depreciation and the provisions for doubtful debts where no
documentary evidence is available, the policy statement made by the management is
treated as the necessary evidence.

9. Materiality Principle:

According to this convention, the accountant should attach importance to material


details and ignore insignificant details. This is because otherwise accounting will be
unnecessarily overburdened with minute details. The question “what constitutes
material details” is left to the discretion of the accountant. Moreover, an item may be
material for one purpose while immaterial for another. The term materiality is a
subjective term. The accountant should regard an item as material if there is a reason
to believe that knowledge of it would influence decision of the informed investor.
According to Kohler, “Materiality means characteristic attaching to a statement, fact
or item whereby its disclosure or method of giving it expression would be likely to
influence the judgment of a reasonable person”.

10. Full Disclosure Principle:

According to this principle, the financial statements should act as a means of


conveying and not concealing. It means that the financial statements should disclose
all the relevant and reliable information, which they purport to represent, so that the
information may be useful for the users.

The practice of appending notes to the financial statements has developed as a result
of the principle of full disclosure. The disclosure should be full, fair and adequate so
that the users of the financial statements can make correct assessments about the
financial performance and position of the enterprise.

The changes, which have a significant impact on the accounts, should be disclosed.
For accurate interpretation, the accounting reports should include financial statements
and accompanying notes. Accompanying notes should be included to call attention
toward events and circumstances that may have significant effect on potential future
earnings and/or a company’s position, e.g., future take over or merger taking place.

11. Consistency Principle:

The accounting practices should remain the same from one year to another. For
example, consistency in valuation of stock, in trade or in method of charging
depreciation. If the stock has been valued by adopting the principle of cost or market
value, whichever is less, the same principle has to be consistently followed year after
year. Similarly, the method of charging depreciation, either straight line or written
down value method, has to be consistently followed. This is necessary for the
comparison of results. However, consistency does not mean inflexibility. In the case
of change in law or from the point of view of improved reporting, this convention is
broken and then adequate disclosure, as to the impact on the profit due to such
change, has to be mentioned in the notes appended to the accounts.

12. Conservatism Principle:


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Financial statements are usually drawn up on a conservative basis, especially in the
initial stages when the anticipated profits, which were accounted, did not materialize.
This results in less acceptability of accounting figures by the end-users. Therefore,
accountants follow the rule “anticipate no profits but provide for all possible losses.”
Similarly, based on this convention, the inventory is valued at cost or market price
whichever is less. Necessary provision for bad and doubtful debts is made in the
books of account. Window-dressing, i.e. showing a position better than what it is, is
not permitted. It is also not proper to show a position substantially worse than what it
is. In other words, secret reserves are not permitted. Therefore, this convention has to
be applied with reasonable caution and care.

13. Stable Money Measurement Principle:

Accounting records normally those transactions, which are being expressed in


monetary terms. Measurement of business events in monetary terms helps in
understanding the state of affairs of the business in a much better way. For example, if
a business owns two factory buildings, five lathe machines and Tk. 1,00,000 as cash
at bank, we cannot add these numbers so as to produce a meaningful result. However,
if we say the value of two factory buildings is Tk. 10,00,000, the value of five lathe
machines is Tk. 5,00,000 and cash of Tk. 1,00,000, we can add these values and say
that the value of assets owned by the business is Tk. 16,00,000. This is definitely
informative and useful.

6. Describe the branches of accounting.

Answer to the Question no. 6

Branches of Accounting: The followings are the branches of accounting-

1. Financial Accounting:

“Financial accounting is the field of accounting that provides economic and financial
information for investors, creditors, and other external users.”
—Donald E. Kieso-Accounting Principles.

It is the process of identifying, measuring, recording, classifying, summarizing,


analyzing, interpreting and communicating the financial transactions and events. The
purpose of this branch of accounting is to keep systematic records to ascertain
financial performance and financial position and to communicate the accounting
information to the interested parties. It deals with the preparation of trial balance,
profit and loss account and balance sheet. It shows the amount of profit earned or loss
incurred during a period.

2. Management Accounting:

“Management accounting includes the methods and concepts necessary for effective
planning, for choosing among alternative business actions, and for control through
the evaluation and interpretation of performances”. -- The American Accounting
Association.
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It is the application of accounting techniques for providing information designed to


help all levels of management in planning and controlling the activities of business
enterprises and in decision making. The purpose of this branch of accounting is to
supply any and all information that management may need in taking decision and to
evaluate the impact of its decisions and actions.

Management accounting is not only confined to the area of cost accounting, but also
covers other areas such as

 Capital Expenditure Decisions


 Capital Structure decisions
 Dividend decisions.

In short, it deals with the processing of data generated in financial accounting and cost
accounting for managerial decision making. It also deals with application of
managerial economic concepts for decision-making.

3. Social Responsibility Accounting:

Social responsibility accounting involves accounting of social costs


incurred by an enterprise and reporting of social benefits created by
it.

4. Cost Accounting:

According to Charles T. Horngren, cost accounting is a quantitative method that


accumulates, classifies, summarizes and interprets information for the following three
major purposes:
1. Operational planning and control
2. Special decisions
3. Product decisions

According to the Chartered Institute of Management Accountants, London, “cost


accounting is the process of accounting for costs from the point at which its
expenditure is incurred or committed to the establishment of the ultimate relationship
with cost units”. The purpose of Cost accounting is to ascertain the cost, to control the
cost and to communicate information for decision-making. It shows classification and
analysis of costs on the basis of functions, processes, products, centers etc. It also
deals with cost computation, cost saving, cost reduction etc.

5. Tax Accounting:

Tax accounting is related to the tax liabilities of an organization. Based upon the
projected profit and loss statements, the tax consultants arrive at the likely tax
liabilities. This helps the management in tax planning (saving of tax liabilities by
appropriate investments/taking advantage of tax exemption provisions).
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6. Auditing:

Auditing is the examination of financial statements by a certified public accountant in


order to express an opinion as to the fairness of presentation.

7. Public Accounting or Government Accounting:

Public Accounting is an area of accounting in which the accountant offers expert


service to the general public.

8. Human Resource Accounting:

Human beings are considered central to achievement of productivity, well above


equipment, technology and money. Human Resource Accounting (HRA) is an attempt
to identify, quantify and report investment made in human resources of an
organization that are not presently accounted for under conventional accounting
practice. The committee of HRA of the American Accounting Association defined
HRA as the process of identifying and measuring data about human resources and
communicating this information to interested parties. However resources are not yet
recognized as ‘assets’ in the Balance Sheet. The measures of the net income, which
are provided in the conventional financial statement, do not accurately reflect the
level of business performance. Expenses relating to the human organization are
charged to current revenue instead of being treated as investments to be amortized
over the economic service life, with the result that the magnitude of net income is
significantly distorted.

7. Distinguish between Financial Accounting and Cost Accounting.

Answer to the Question no. 7

The main differences between financial and cost accounting are given as follows:

Point of Financial Accounting Cost Accounting


Distinction
1.Purpose It provides information about the It provides information to the
business in a general way. It tells management for proper planning,
about the profit and financial operation, control and decision-
position of the business to owners making.
and other outside parties.
2.Form of These accounts are kept in such a These accounts are generally kept
accounts way as to meet the requirements of voluntarily to meet the requirements
Companies Act and Income Tax Act. of the management. But now
Companies Act has made it
obligatory to keep cost records in
some manufacturing industries.
3.Recording It classifies, records and analyses the It records the expenditure in an
transactions in a subjective manner objective manner i.e. according to
i.e. according to the nature of the purposes for which the costs are
expenses. incurred.
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4.Control It lays emphasis on the recording It provides a detailed system of
aspect without attaching any control for materials, labor and
importance to control. overhead costs with the help of
standard costing and budgetary
control.
5.Periodicity It reports operating results and It gives information through cost
of reporting financial position usually at the end reports to management as and when
of the year. desired.
6.Analysis of Financial accounts are the accounts Cost Accounting is only a part of the
profit of the whole business. They are financial accounts and discloses
independent in nature and disclose profit or loss of each product, job or
the net profit or loss of the business service.
as a whole.
7.Reporting The costs are reported in aggregate The costs are broken down on a unit
of costs in financial accounts. basis in cost accounts.

8.Nature of Financial accounts relate to Cost Accounts relate to transactions


transactions commercial transactions of the connected with the manufacture of
business and include all expenses goods and services and include only
viz., manufacturing, office, selling those expenses, which enter into the
and distribution etc. Financial production. Cost Accounts are
accounts are concerned with external concerned with internal transactions,
transactions i.e. transactions between which do not form the basis of
the business concern on one side and payment or receipt of cash.
third parties on the other. These
transactions form the basis for
payment or receipt of cash.
Point of Financial Accounting Cost Accounting
Distinction
9.Informatio Monetary information is only used Non-monetary information like units
n (i.e. only monetary transactions are is also used (i.e. it deals with
recorded). monetary as well as non-monetary
information).
10.Fixation Financial accounts are not Cost accounting provides sufficient
of selling maintained with the object of fixing data for fixation of selling prices.
Price selling prices.

11.Figures Financial accounts deal mainly with Cost Accounts deal partly with facts
actual facts and figures. and figures and partly with estimates.
12.Reference In devising or operating a system of No such reference is possible.
financial accounting reference can be Guidance can be had only from a
made in case of difficulty to the body of conventions followed by
company law, case decisions and to cost accountants.
the canons of sound professional
practice.
13.Relative Financial accounts do not provide Cost accounts provide valuable
efficiency information on the relative information on the relative
efficiencies of various workers, efficiencies of various plants and
plants and machinery. machinery.
14.Stock Stocks are valued at cost or market Stocks are valued at cost.
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valuation price whichever is less.

15.Type of Financial accounting is a positive Cost accounting is not only a


science science because it is subject to legal positive science but also a normative
rigidity with regard to the science because it includes
preparation of the financial techniques of budgetary control and
statements. standard costing. Costing is an
empirical science, that is to science,
the rules which govern it are largely
conditioned by the operations,
personnel and policy of the
undertaking with respect to which is
its techniques are to be applied.

8. Distinguish between Financial Accounting and Management Accounting.

Answer to the Question no. 8

Distinction Between Financial Accounting and Management Accounting:

Serial Factor Financial Accounting Management Accounting


No.
1. Objective External reporting Internal reporting

2. Nature of data Historical, quantitative, Descriptive, statistical,


used monetary and objective subjective and future

3. Subject matter Business as a whole Departments, divisions and


units

4. Flexibility Principles and rules-rigid Flexible in approach

5. Legal compulsion Statutory Voluntary

6. Periodicity of Longer with lapse of time Shorter, prompt and


reports immediate
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7. Precision Accurate and precise Approximate

8. Unit of account Whole business concern Whole or departments.

9. Coverage • Entire range of business • Parts of activities


• Only money transactions • Non-monetary events also
• Static in nature • Dynamic in nature

10. Publication and Compulsory Not compulsory


audit

11. Accounting Generally Accepted Accounting No standard principles


principles Principles (GAAP)

12. Methodology Records of income, expenses, Costs and revenue are


personal and assets accounts reported by cost/profit
centers

9. What is Accounting Information System?

Answer to the Question no. 9

Accounting Information System:

“The system that collects and processes transaction data and disseminates financial
information to interested parties is known as the accounting information system”.
—Donald E. Kieso-Accounting Principles.

Principles of Accounting Information Systems:

Efficient and effective accounting information systems are based on certain basic
principles. These principles are:

Cost Effectiveness:

The accounting system must be cost effective. Benefits of information must


outweigh the cost of providing it.

 Useful Output:
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To be useful, information must be understandable, relevant, reliable, timely,
and accurate. Designers of accounting systems must consider the needs and
knowledge of various users.

 Flexibility:

The accounting system should accommodate a variety of users and changing


information needs. The system should be sufficiently flexible to meet the
resulting changes in the demands made upon it.

If the accounting system is cost effective, provides useful output, and has the
flexibility to meet future needs, it can contribute to both individual and organizational
goals.

10. Who are the users of Accounting Information?

Answer to the Question no. 10

Users of Accounting Information: Accounting provides information to a variety of users.


The major user groups for a business organization are shown below:

1. Owners

Owners are referred to as a person or a group of persons who has


provided capital for running the business. It refers to an individual in
case of proprietor, partners in case of partnership firm and
shareholders in case of a joint stock company. The information
needs of shareholders have assumed a greater significance in the
corporate business world because of the separation of ownership
and management in the case of joint stock companies. Usually, an
owner is interested in the financial information to know about the
safety of amount invested and the return on investment.

2. Managers
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For managing business profitably, management requires adequate
information about financial results and financial position. By
providing this information, accounting helps managers in efficient
and smooth running of the business.

3. Investors

Prospective investors would be keen to know about the past


performance of business before making investment in that concern.
By analyzing historical information provided by accounting records,
they can arrive at a decision about the expected return and the risk
involved in investing in a particular business. There are two types of
investors involved in using accounting information-

 Present Investor: Present investors need information to judge prospects for


their investments and to determine whether they should buy, hold or sell the
shares.

 Potential Investor: Potential Investor needs information to judge prospects of


an enterprise and to determine whether they should buy the shares.

4. Employees

Employees are concerned about job security and future prospects.


Both of these are intimately related with the performance of
business. Thus, by analyzing the financial statements, they can
draw conclusions about their job security and future prospects.

5. Government

Government policies relating to taxation, providing subsidies etc.


are guided by the relevance of industries in the economic
development of the country. The policies also consider the past
performance of industries. Information about past performance is
provided by the accounting system. Collection of taxes is also based
on accounting records.
6. Researchers

Researchers need financial information for testing hypothesis and


development of theories and models. The required information is
provided by accounting system.

7. Creditors and Financial Institutions:

Whosoever is extending credit or loan to a business enterprise


would like to have information about its repaying capacity, credit
worthiness etc. Analyzing and interpreting the financial statements
of an enterprise can help in obtaining the required information.
There are two types of creditors involved in using accounting
information-
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 Short-term creditors: Short-term creditors need information to determine


whether the amount owing to them will be paid when due and whether they
should extend, maintain or restrict the flow of credit to an individual
enterprise.

 Long-term creditors: Long-term creditors need information to determine


whether their principals and the interest thereof will be paid when due and
whether they should extend, maintain or restrict the flow of credit to an
enterprise.

8. Customers

The customers who have developed loyalties toward a business are


those who are certainly interested in the continuance of the
business. They certainly want to know about the future directions of
the enterprise with which they are associating themselves. The way
to information about the enterprise is through their financial
statements.

9. Public

An enterprise affects the public at large in many ways as it acts as a


provider of employment to a number of persons, a customer to
many suppliers, a provider of amenities in the locality or a cause of
concern to the public due to pollution. Hence, public at large is
always interested in knowing the future directions of an enterprise
and the only window to peep inside an enterprise is through their
financial statements. The above-mentioned list of group of users of
accounting information is not exhaustive. Anyone having interest in
an enterprise can use the information for decision-making.

10. Tax Authorities:

Tax Authorities need information to assess the tax liabilities of an enterprise.

11. What is the ‘Accounting Equation’?

Answer to the Question no. 11

The Accounting Equation:


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The accounting equation indicates a company’s financial position at any point in time.
On its framework rests the entire accounting process. According to the accounting equation, a
company’s assets equal its liabilities plus owner’s equity, thus:

Assets = Liabilities + Owners’ Equity

Any recorded business transaction can be analyzed in terms of its effect on the
accounting equation. Also, business transactions must be recorded to maintain the equality of
this equation. This equality is reflected in the balance sheet, one of the financial statements a
firm is required to prepare.

Assets:

Anything of value owned by the business and used in conducting its operations are
called assets. Examples include cash, investments, inventory, accounts receivable, and
furniture and fixtures.

Liabilities:

The amounts owed by the business to its creditors, including obligations to perform
services in the future are called liabilities. Liabilities include accounts payable and
notes payable (for example, when a firm uses credit to purchase machinery or
inventory), wages payable to employees, and taxes payable.

Owners’ Equity:

Owners’ equity represents the claims of the owners, partners, and shareholders against
the firm’s assets. It is the owners’ claim on the firm’s assets, or the excess of assets
over all liabilities.

12. Describe the ‘Accounting Cycle’.

Answer to the Question no. 12

The Accounting Cycle: An accounting cycle is a complete sequence. It begins with the
recording of the transactions and ending with the preparation of the final accounts.
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Various Steps in an Accounting Cycle

Step 1: Identification of the transaction:

In this step we identify the events of organization, which are included with
money.

Step 2: Journalizing:

Record the transactions and events in the Journal.

Step 3: Posting:

Transfer the transactions (recorded in the Journal), in the respective accounts


opened in the Ledger.

Step 4: Balancing:

Ascertain the difference between the total of debit amount column and the
total of credit amount column of the ledger account.

Step 5: Trial Balance:

Prepare a list showing the balances of each and every account to verify
whether the sum of the debit balances is equal to the sum of the credit
balances.

Step 6: Income Statement:

Prepare Trading and Profit & Loss Account to ascertain the profit or loss for
the accounting period.

Step 7: Position Statement (i.e. Balance Sheet):

Prepare a Balance Sheet to ascertain the financial position as at the end of the
accounting period.

Step 8: Rectification:

If there occur any error we correct this error by this step.

Step 9: Analysis:

In this step we analyze the financial statement of organizations.


The illustration below shows the steps in the accounting cycle:
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1.
Identification of
9. the transaction
Analysis
8. 2.
Rectification Journalizing

7. Accounting 3.
Position Cycle Posting
Statement

4.
6. Balancing
Income
Statement 5.
Trial Balance

Figure: Accounting Cycle

PROBLEMS: SET A

P1-1A On April 1, Holly Palmer established Matrix Travel Agency. The following
transactions were completed during the month.
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1. Invested $10,000 cash to start the agency.
2. Paid $400 cash for April office rent.
3. Purchased office equipment for $2,500 cash.
4. Incurred $300 of advertising costs in the Chicago Tribune, on account.
5. Paid $600 cash for office supplies.
6. Earned $7,500 for services rendered: $1,000 cash is received from customers, and the
balance of $6,500 is billed to customers on account.
7. Withdrew $200 cash for personal use.
8. Paid Chicago Tribune amount due in transaction (4).
9. Paid employees’ salaries $2,200.
10. Received $5,000 in cash from customers who have previously been in transaction (6).

Instructions:
(a) Prepare a tabular analysis of the transactions using the following column
headings: Cash, Accounts Receivable, Supplies, Office Equipment, Accounts Payable,
and Holly Palmer’s Capital.
(b) From an analysis of the column Holly Palmer’s Capital, compute the net
income or net loss for April.