what do u mean by accounting?

Discuss
the advantage and limitation of
accounting?
1. It is a systematic process of identifying, recording, measuring, classifying, verifying,
summarizing, interpreting and communicating financial information. It reveals profit or loss
for a given period, and the value and nature of a firm's assets, liabilities and owners' equity.
Accounting provides information on the
resources available to a firm,
the means employed to finance those resources, and
the results achieved through their use.

Advantages of accounting:
1. Ascertainment of profit and losses.
2. Ascertainment of financial position.
3. Ascertainment of amounts due to business.
4. Ascertainment of progress of the business.
5. Maintenance permanent records of business.
6. Helpful to the management.
Limitations of accounting:
1. Does not provide complete information.
2. Do not give exact information.
3. Accounting figures may be manipulated.
4. Does not show the real financial position of the business.
5. Accounting fails to supply the financial information.
6. The business as the assets and liabilities are shown in the balance.

Difference between journal and ledger?

Three golden rule of accounting?

1. Debit The Receiver, Credit The Giver
This principle is used in the case of personal accounts. When a person gives something to the
organization, it becomes an inflow and therefore the person must be credit in the books of
accounts. The converse of this is also true, which is why the receiver needs to be debited.
2. Debit What Comes in, Credit What Goes Out
This principle is applied in case of real accounts. Real accounts involve machinery, land and
building etc. They have a debit balance by default. Thus when you debit what comes in, you are
adding to the existing account balance. This is exactly what needs to be done. Similarly, when
you credit what goes out, you are reducing the account balance when a tangible asset goes out
of the organization.
3. Debit All Expenses and Losses, Credit All Incomes and Gains
This rule is applied when the account in question is a nominal account. The capital of the
company is a liability. Therefore, it has a default credit balance. When you credit all incomes and
gains, you increase the capital and by debiting expenses and losses, you decrease the capital.
This is exactly what needs to be done for the system to stay in balance.

The golden rules of accounting allow anyone to be a bookkeeper. They only need to understand the types
of accounts and then diligently apply the rules.

Name principal of accounting?

1. Business Entity
A business is considered a separate entity from the owner(s) and should be treated separately. Any
personal transactions of its owner should not be recorded in the business accounting book unless the
owners personal transaction involves adding and/or withdrawing resources from the business.

2. Going Concern
It assumes that an entity will continue to operate indefinitely. In this basis, generally, assets are
recorded based on their original cost and not on market value. Assets are assumed to be held and
used for an indefinite period of time or during its estimated useful life. And that assets are not
intended to be sold immediately or liquidated.

3. Monetary Unit
The business financial transactions recorded and reported should be in monetary unit, such as US
Dollar, Canadian Dollar, Euro, etc. Thus, any non-financial or non-monetary information that cannot be
measured in a monetary unit are not recorded in the accounting books, but instead, a memorandum
will be used.

4. Historical Cost
All business resources acquired should be valued and recorded based on the actual cash equivalent or
original cost of acquisition, not the prevailing market value or future value. Exception to the rule is
when the business is in the process of closure and liquidation.

5. Matching
This principle requires that revenue recorded, in a given accounting period, should have an equivalent
expense recorded, in order to show the true profit of the business.

6. Accounting Period
This principle entails a business to complete the whole accounting process over a specific operating
time period.

Accounting period may be monthly, quarterly or annually. For annual accounting period, it may follow
a Calendar or Fiscal Year.

7. Conservatism
This principle states that given two options in the amount of business transactions, the amount
recorded should be the lower rather than the higher value.

8. Consistency
This principle ensures similar and consistent accounting procedures is used by the business, year after
year, unless change is necessary.

Consistency allows reliable comparison of the financial information between two accounting periods.

9. Materiality
Business transactions that will affect the decision of a user are considered important or material, thus,
must be reported properly. This principle states that errors or mistakes in accounting procedures, that
which involves immaterial or small amount, may not need attention or correction.

10. Objectivity
This principle states that the recorded amount should have some form of impartial supporting
evidence or documentation. It also states that recording should be performed with independence,
thats free from bias and prejudice.

11. Accrual
This principle requires that revenue should be recorded in the period it is earned, regardless of the
time the cash is received. The same is true for expense. Expense should be recognized and recorded

at the time it is incurred, regardless of the time that cash is paid. This is to show the true picture of
the business financial performance.

Branches of accounting?
1. Financial Accounting
Financial accounting involves recording and classifying business transactions, and preparing
and presenting financial statements to be used by internal and external users.
In the preparation of financial statements, strict compliance with generally accepted accounting
principles or GAAP is observed. Financial accounting is primarily concerned in
processing historical data.

2. Managerial Accounting
Managerial or management accounting focuses on providing information for use by internal
users, the management. This branch deals with the needs of the management rather than
strict compliance with generally accepted accounting principles.
Managerial accounting involves financial analysis, budgeting and forecasting, cost analysis,
evaluation of business decisions, and similar areas.

3. Cost Accounting
Sometimes considered as a subset of management accounting, cost accounting refers to the
recording, presentation, and analysis of manufacturing costs. Cost accounting is very useful in
manufacturing businesses since they have the most complicated costing process.
Cost accountants also analyze actual and standard costs to help managers determine future
courses of action regarding the company's operations.

4. Auditing
External auditing refers to the examination of financial statements by an independent party
with the purpose of expressing an opinion as to fairness of presentation and compliance with
GAAP. Internal auditing focuses on evaluating the adequacy of a company's internal control
structure by testing segregation of duties, policies and procedures, degrees of authorization,
and other controls implemented by management.

5. Tax Accounting
Tax accounting helps clients follow rules set by tax authorities. It includes tax planning and
preparation of tax returns. It also involves determination of income tax and other taxes, tax
advisory services such as ways to minimize taxes legally, evaluation of the consequences of
tax decisions, and other tax-related matters.

6. Accounting Systems
Accounting systems involves the development, installation, implementation, and monitoring
of accounting procedures and systems used in the accounting process. It includes the
employment of business forms, accounting personnel direction, and software management.

7. Fiduciary Accounting
Fiduciary accounting involves handling of accounts managed by a person entrusted with the
custody and management of property of or for the benefit of another person. Examples of
fiduciary accounting include trust accounting, receivership, and estate accounting.

8. Forensic Accounting
Forensic accounting involves court and litigation cases, fraud investigation, claims and
dispute resolution, and other areas that involve legal matters. This is one of the popular
trends in accounting today.

Focusing on a Specialization
If you want to focus on a specialization, you may want to consider obtaining an accounting
certification in your chosen field. It will give you an edge over those who are uncertified. Due
to the increasing population and demand for competitive professionals, you need to step it
up a little to get recognized.

User of financial statement?

The following are the different users of accounting information and their specific information
needs.

1. Owners and investors

Stockholders of corporations need financial information to help them make decisions on
what to do with their investments (shares of stock), i.e. hold, sell, or buy more.
Prospective investors need information to assess the company's potential for success and
profitability. In the same way, small business owners need financial information to determine
if the business is profitable and whether to continue, improve or drop it.

2. Management
In small businesses, management may include the owners. In huge organizations, however,
management is usually made up of hired professionals who are entrusted with the
responsibility of operating the business or a part of the business. They act as agents of the
owners.
The managers, whether owners or hired, regularly face economic decisions How much
supplies will we purchase? Do we have enough cash? How much did we make last year? Did

we meet our targets? All those, and many other questions and business decisions, require
analysis of accounting information.

3. Lenders
Lenders of funds such as banks and other financial institutions are interested in the
companys ability to pay liabilities upon maturity (solvency).

4. Trade creditors or suppliers

Like lenders, trade creditors or suppliers are interested in the companys ability to pay
obligations when they become due. They are nonetheless especially interested in the
company's liquidity its ability to pay short-term obligations.

5. Government
Governing bodies of the state, especially the tax authorities, are interested in an entity's
financial information for taxation and regulatory purposes. Taxes are computed based on the
results of operations and other tax bases. In general, the state would like to know how much
the taxpayer makes to determine the tax due thereon.

6. Employees
Employees are interested in the companys profitability and stability. They are after the
ability of the company to pay salaries and provide employee benefits. They may also be
interested in its financial position and performance to assess company expansion
possibilities and career development opportunities.

7. Customers
When there is a long-term involvement or contract between the company and its customers,
the customers become interested in the companys ability to continue its existence and
maintain stability of operations. This need is also heightened in cases where the customers
depend upon the entity.
For example, a distributor (reseller), the customer in this case, is dependent upon the
manufacturing company from which it purchases the items it resells.

8. General Public
Anyone outside the company such as researchers, students, analysts and others are
interested in the financial statements of a company for some valid reason.

Internal and External Users

The users may be classified into internal and external users.
Internal users refer to managers who use accounting information in making decisions related
to the company's operations.
External users, on the other hand, are not involved in the operations of the company but
hold some financial interest. The external users may be classified further into users with
direct financial interest owners, investors, creditors; and users with indirect financial interest
government, employees, customers and the others.

Discuss any five important adjustments

and its impact on financial statement?
An adjusting entry can use for any type of accounting transaction; here are some of the more common
ones:

To record depreciation and amortization for the period

To record an allowance for doubtful accounts

To record a reserve for obsolete inventory

To record a reserve for sales returns

To record the impairment of an asset

To record an asset retirement obligation

To record a warranty reserve

To record any accrued revenue

To record previously billed but unearned revenue as a liability

To record any accrued expenses

To record any previously paid but unused expenditures as prepaid expenses

To adjust cash balances for any reconciling items noted in the bank reconciliation
As shown in the preceding list, adjusting entries are most commonly of three types, which are:

Accruals. To record a revenue or expense that has not yet been recorded through a standard
accounting transaction.

Deferrals. To defer a revenue or expense that has been recorded, but which has not yet been
earned or used.

Estimates. To estimate the amount of a reserve, such as the allowance for doubtful accounts
or the inventory obsolescence reserve.
When you record an accrual, deferral, or estimate journal entry, it usually impacts an asset or liability
account. For example, if you accrue an expense, this also increases a liability account. Or, if you defer

revenue recognition to a later period, this also increases a liability account. Thus, adjusting entries
impact the balance sheet, not just the income statement.
Since adjusting entries so frequently involve accruals and deferrals, it is customary to set up these
entries as reversing entries. This means that the computer system automatically creates an exactly
opposite journal entry at the beginning of the next accounting period. By doing so, the effect of an
adjusting entry is eliminated when viewed over two accounting periods.
A company usually has a standard set of potential adjusting entries, for which it should evaluate the
need at the end of every accounting period. You should have a list of these entries in the standard
closing checklist. Also, consider constructing a journal entry template for each adjusting entry in the
accounting software, so there is no need to reconstruct them every month.

Explain the accounting process in detail?

The accounting process is a series of activities that begins with a transaction and ends with
the closing of the books. Because this process is repeated each reporting period, it is
referred to as the accounting cycle and includes these major steps:
1. Identify the transaction or other recognizable event.
2. Prepare the transaction's source document such as a purchase order or invoice.
3. Analyze and classify the transaction. This step involves quantifying the transaction in
monetary terms (e.g. dollars and cents), identifying the accounts that are affected
and whether those accounts are to be debited or credited.
4. Record the transaction by making entries in the appropriate journal, such as the
sales journal, purchase journal, cash receipt or disbursement journal, or the general
journal. Such entries are made in chronological order.
5. Post general journal entries to the ledger accounts.
The above steps are performed throughout the accounting period as transactions
occur or in periodic batch processes. The following steps are performed at the end of
the accounting period:
6. Prepare the trial balance to make sure that debits equal credits. The trial balance is a
listing of all of the ledger accounts, with debits in the left column and credits in the
right column. At this point no adjusting entries have been made. The actual sum of
each column is not meaningful; what is important is that the sums be equal. Note

that while out-of-balance columns indicate a recording error, balanced columns do

not guarantee that there are no errors. For example, not recording a transaction or
recording it in the wrong account would not cause an imbalance.
7. Correct any discrepancies in the trial balance. If the columns are not in balance, look
for math errors, posting errors, and recording errors. Posting errors include:
o

posting of the wrong amount,

omitting a posting,

posting in the wrong column, or

posting more than once.

8. Prepare adjusting entries to record accrued, deferred, and estimated amounts.

9. Post adjusting entries to the ledger accounts.
10. Prepare the adjusted trial balance. This step is similar to the preparation of the
unadjusted trial balance, but this time the adjusting entries are included. Correct any
errors that may be found.
11. Prepare the financial statements.
o

Income statement: prepared from the revenue, expenses, gains, and losses.

Balance sheet: prepared from the assets, liabilities, and equity accounts.

Statement of retained earnings: prepared from net income and dividend

information.

Cash flow statement: derived from the other financial statements using either
the direct or indirect method.

12. Prepare closing journal entries that close temporary accounts such as revenues,
expenses, gains, and losses. These accounts are closed to a temporary income
summary account, from which the balance is transferred to the retained earnings
account (capital). Any dividend or withdrawal accounts also are closed to capital.
13. Post-closing entries to the ledger accounts.
14. Prepare the after-closing trial balance to make sure that debits equal credits. At this
point, only the permanent accounts appear since the temporary ones have been
closed. Correct any errors.

15. Prepare reversing journal entries (optional). Reversing journal entries often are used
when there has been an accrual or deferral that was recorded as an adjusting entry
on the last day of the accounting period. By reversing the adjusting entry, one avoids
double counting the amount when the transaction occurs in the next period. A
reversing journal entry is recorded on the first day of the new period.
Instead of preparing the financial statements before the closing journal entries, it is possible
to prepare them afterwards, using a temporary income summary account to collect the
balances of the temporary ledger accounts (revenues, expenses, gains, losses, etc.) when
they are closed. The temporary income summary account then would be closed when
preparing the financial statements.