eh ETH Introduction to Accounting (Meaning and Objectives of Accounting and Accounting Information) LEARNING OBJECTIVES This Chapter would enable you to understand: Meaning and Definition of Accounting Attributes (Characteristics) of Accounting ‘Accounting Process at ENP | i Book Keeping, Accounting and Accountancy Difference between Book Keey Objectives of Accounting Functions of Accounting Advantages of Accounting Role of Accounting in Business Limitations of Accounting Accounting Information and its Types Qualitative Characteristics of Accounting information Users of Accounting Information Systems of Accounting ping and Accounting oooo0000u00000 IBANING AND DEEINITION OF ACCOUNTING Accounting is a systematic process of identifying, measuring, recording, classifying, summarising, interpreting and communicating financial information. Accounting gives information on: (i the resources available; (ii) how the available resources have been employed; and (iii) the results achieved by their use. It shows the profit earned or loss incurred during the accounting period, value and nature of assets, liabilities and owners’ equity, i.e., capital. Since accounting is a medium of communication, itis called the language of business. “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 a financial character, and interpreting the results thereof. * i —American Institute of Certified Public Accountants “Accounting is the science of recording and classifying business transactions and events, primarily of @ financial character, and the art of making significant summaries, analysis and interpretations of those transactions and events and communicating the results to persons who must make decisions or form judgment. —Smith and Ashburne Scanned with CamScannerSS Double Entry Book Keeping~Cage x 1.2 “Accounting c is the process of identifying, mea information t suring and communicating COnom ic rMation » SOciatign ° Permit informed judgments and decisions by users of the info, —American Accounting As, The definitions of accounting bring to light the following characteristics 1. Identification of Fina only those transactions and events which can be meas involves identifying transactions that are considered a part of economic activity, § example, purchase of raw material or sale of finished goods by a firm. Suel jon are identified with the help of bills and receipts as evidence of the trai 2. Measuring the Identified Transactions: Accounting measures thi And events in terms of a common measurement unit (that is the curren In other words, financial transactions and events are measured in te Note: An event which cannot be measured in ‘terms of money is not recorded in. the books of account, the calibre or quality of management team or. @ppointment of @ manager are not recorded in the ‘books of accouny, 8. Recording: Accounting is an art of recording business transactions i account. Recording is the proc ess of entering business transactions of financial character in the book of original entry, ic. i i into subsidiary books such as Cash transactions), Purchases Journal or Purchases Bool © transactions icy of a Country), TMs of money, 'ul’s Account in the Ledger, all > business transactions related to Rahul are posted so that what is ultimately due to Rahul or due from Rahul can be ascertained §. Summarising: This involves presenting t y understandable and useful for internal as statements. This process leads to the prepar: @ Trial Balance, (i) Trading and Profit and Loss companies) and (iii) Balance Sheet, Trading Account, Profit and Loss Account or Statement of Profit and Loss (in case of Cc ompanies) and Balance Sheet are collectively known as Final Accounts or Financial Statements. he classified data in a manner which is well as external users of accounting ‘ation of the following statements: Account or Statement of Profit and Loss (in case of 6. Analysis and Interpretation: are carried out so that the users of of the profitability and financial pe the future in a better way, Scanned with CamScanner Analysis and interpretation of the financial data financial data can make a meaningful judgement osition of the business. This helps in planning forIntroduction to Accounting 1.3 7. Communicating: Finally, the accounting function involves communicating the financial data, i.e., financial statements, to its users. The accounting information must be provided in time and presented to the users so that appropriate decisions may be taken at the right time. Scanned with CamScannerBRANCHES OR ACCOUNTING With the changing times, following specialised branches of accounting have emerged to meet the changed requirements: Branches of Accounting PP Financial Accounting Cost Accounting Management Accounting Scanned with CamScanner| ey | 1.4 Double Entry Book Keeping—CBse x; Financial Accounting Financial Accounting is that branch of accounting which records financia) transactions and events, summarises and interprets them before communicating the results to the users, It determines profit earned or loss incurred during an accounting | Period (usually a year) and the financial position on the date when the accounting Period ends. The end-product of financial accounting is the Profit and Loss Account for the period ended (which shows the profit earned or loss incurred) and the Balance Sheet as on the last day of the accounting period (which shows the financial position), of financial statements, In short, financial accounting is confined to the preparation the users of accounting ie. the Profit and Loss Account and the Balance Sheet, for information. Cost Accounting ost of products, operations, hich deals with recording ‘ing costs. This branch of accounting is concerned with ascertaining ¢ Processes or activities. It is that branch of accounting W! i costs with the objective of ascertaining, reducing and contro} Management Accounting : ; Management Accounting is the most recently developed branch of accounting. It is concerned with generating accounting information relating to funds, costs, profits, etc., as it enables the management in decision-making. We may say that Management ‘Accounting addresses the needs of a single user group, i.e., the management. The terms Book Keeping’ and ‘Accounting’, often considered as same is not correct. The two terms are different from each other. Accounting is a wider concept and . includes Book Keeping. Meaning of Book Keeping Book Keeping is a part of accounting being a process of recording financial transactions and events in the books of account. Thus, Book Keeping involves: 1. Identifying financial transactions and events, 2. Measuring them in terms of money, 3. Recording the identified financial transactions and events in the books of account, and | 4, Classifying recorded transactions and events, i., posting them into Ledger accounts. | Definitions of Book Keeping | "Book Keeping is an art of recording in the books of account the monetary aspect of. commercial and financial transactions.” —Northcott “Book Keeping is an art of recording business dealings in a set of books." —J.R. Batliboi . Scanned with CamScannerbusts FUNCTION 1. Maintaining Systematic Accounting Records: The primary function of accounting is to maintain systematic accounting records of financial transactions and events. It means that the accounting records should be maintained following the accounting rules, principles and concepts. It is so because reliable financial statements can be drawn if proper accounting records are maintained. 2. Preparation of Financial Statements: Financial statements means final accounts prepared at the end of the accounting period. It includes Income Statement (Profit and Loss Account) and Position Statement (Balance Sheet). It is an important function of accounting because the financial statements show the financial performance, i.e., profit earned or loss incurred during the accounting year and the financial position, i.e,, Balance Sheet as at the end of the accounting year. Both the statements are important for all the users for taking decisions. 3. Meeting Legal Requirements: Accounting records are accepted as evidence by the court of law if they are maintained systematically following the accounting rules, principles and concepts, Besides, the law such as the Companies Act, Income Tax Act, GST Act, etc., require submissions of returns in the form and period as is prescribed in the law. The returns can be submitted if the accounting records are maintained systematically and timely. A systematic accounting record maintained following the accounting principles and concepts is accepted by the authorities to be correct. Thus, it is a function of accounting to meet the legal requirements. * Scanned with CamScannerIntroduction to Accounting 7 4, Communicating the Financial Information: It is yet another function of accounting to communicate the financial information to the users, which may be internal users or external users, such as management, hanks, employees, government authorities, etc. 5. Assistance to Management: Management often requires financial information which is given by the accounting records which in turn helps the management in decision-making, Accounting record should be maintained in such a manner that the assets owned are known, It will a also e: ‘ist the anagement in protecting the assets and ‘ing control, 1.Financial Information about Business: Financial performance during the accounting period, i.e., profit earned or loss incurred and also the financial position at the end of the accounting period is known through accounting. 2, Assistance to Management: ‘The management makes business plans, takes decisions and exercises control over the affairs on the basis of. accounting information. 3. Replaces Memory: A systematic and timely recording of transactions obviates the necessity to remember transactions. The accounting record provides the necessary information. 4. Facilitates Comparative Study: A systematic record enables a businessman to compare one year's results with those of other years and locate significant factors leading to change, if any. 5. Facilitates Settlement of Tax Liabilities: A systematic accounting record immensely helps in settlement of income tax and Goods and Services Tax (GST) liabilities, since it is a good evidence of the correctness of transactions. 6. Facilitates Loans: Loan is granted by the banks and financial institutions on the basis of growth potential which is supported by the performance. Accounting makes available the information with respect to performance, 7. Evidence in Court: Systematic record of transactions is often accepted by the Courts as good evidence, 8. Facilitates Sale of Business: If someone desires to sell his business, the accounts maintained by him will enable the ascertainment of the proper purchase price. 9, Assistance in the Event of Insolvency: Insolvency proceedings involve explaining many transactions that have taken place in the past. Systematic accounting records assist a great deal in such situation, 10. Helpful in Partnership Accounts: At the time of admission or retirement or death of a partner or in case of dissolution of the firm, the accounting record is of vital importance and use because it provides the basis to reach a settlement. 11. Helps in Decision-making: Accounting helps in taking a large number of decisions like the amount to be withdrawn by proprietor, the price at which goods should be sold, etc. Scanned with CamScanner| 1.8 Double Enty Book Keoping~CBSr recording, Classifying | financial transactioy Accounting r i a ting is a process of identifying, measurinte su pevieing, mMalysing, interpreting, and communicating: the a business ina useful manner, Following points highlight the role of ne 1, Maintenance of Systematic Records: stomatic records of financial transne for the accounting period and financial maintain s profit oF los particular date, 2, Assistance to Management: Accounting provide’ providing financial information for its effective func e to management hy nd taking rationa) des assistanct ning a | decisions. financial transacti 3. Facilitates Comparative Study: A systematit record or of other years a enables a businessman to compare one Year ae “ locate signil 7 ding to change, if any- . locate significant reasons leading sed by courts as good evidence, 4. Evidence in Court: Accounting records are often acceP’ 5. Others: / : (@) Proper accounting records obviates the necessity to remel (ii) Facilitiates Raising Loans. / | Gii) Facilitates sale of Business bY ascertaining the proper pi (iv) Facilitates settlement of tax liabilities. Diente elas ACCOUNTING Filly Exact: ‘Accounting is not fully ex: basis of evidence, yet some estimates are ded on the for examples, estimating the useful life of an salisable value of closing stock, etc. counting information may not be realistic since d following the accounting concepts and Concern Concept, it is taken that business i assets are recorded at cost and actually realisable at book value. ‘ber business transactions. yurchase price. act in spite of the fact 1. Accounting is not that most transactions are recor‘ also made for ascertaining profit or loss, asset, providing for doubtful debts, net re 2. Unrealistic Information: Act accounting statements are prepare conventions. For example, under the Going will continue for a foreseeable future. Accordingly, depreciated over their useful life. The assets may not be 3. Accounting Ignores the Qualitative Elements: Accounting is confined to monetary matters only, therefore, qualitative elements like quality of management and staff, industrial relations and public relations are ignored. 4. Accounting Ignores the Effect of Price Level Changes: Accounting statements ea rropared at historical cost. Money, as a measurement unit, changes in value add renin does et Jomain stable. Accounting, however, presumes that value | ‘ emains stable. Unless price level changes i i ictematian will not dow correct naical esiltat™ "4 centile ee | Scanned with CamScannercanned with CamScanner Introduction to Accounting i 5. Accounting May Lead to Window Dressing: The term window dressing means manipulation of accounts in a way so as to conceal vital facts and present the financial statements to show a better position than what it actually is. In this situation, income statement (i.e., Profit and Loss Account) fails to provide a true and fair _ of the result of operations and the Balance Sheet fails to provide a true and fair view of the financial position of the enterprise.ACCOUNTING INFORMATION “Account ng is a service activity. Its function is to provide qualitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions,” —Accounting Principles Board As an information system, accounting collects financial data, records it in the books of account, classifies and summarises it to produce ‘financial information that is communicated to its users, Accounting begins with the identification of transactions of financial nature and ends with the preparation of financial statements (i.e., Income Statement and Balance Sheet). Each step in the process of accounting generates information. Generation of information is not an end in itself, it is a way to facilitate the communication of information to users of accounting information. Types of Accounting Information Accounting information refers to the financial statements generated through the process of Book Keeping, use of which helps the users to arrive at decisions, The financial statements so generated are the Income’Statement, i.e., Profit and Loss Account and the Position Statement, ie., Balance Sheet. The information made available by these statements can be categorised into the following: 1. Information Relating to Profit or Surplus; 2, Information Relating to Financial Position; and 8. Information about Cash Flow. Let us now discuss these in detail. 1. Information Relating ‘to Profit or Surplus: The Income Statement makes available the accounting information about the profit earned or loss incurred as a result of business operations or otherwise during an accounting period. ‘A firm prepares Trading Account, a part of the Profit and Loss Account, which provides information about Gross Profit or Gross Loss and Profit and Loss Account provides information about the Net Profit or Net Loss. 2. Information Relating to ‘Financial Position: The Position Statement, i.e., the Balance Sheet makes available the information about the financial position of the entity. The Position Statement provides information, about the assets owned by the entity, amounts receivable and the cash and bank balance held by it. These are represented in the liabilities by the amounts owed by the entity towards loans, creditors and amounts payable, and capital. 8. Information about Cash Flow: Cash Flow Statement is a statement that shows flow, both inflow and outflow, of cash during a specific period, It is of immense use as many decisions such as payment ofiabilities, payment of dividend and expansion of business, etc., are based on availabilityof'cash. Scanned with CamScannerdj 1.40 Doublo Entry Book Kooping—Cese: Sioa eles lee Users of Accounting Information may be entogorised 10! External Us ty Internal Users ang «+ buninens and thus are exposed ¢ wing, the profit earned or Ios, jtal. The financial statements | position of the busin | Internal Users capital in th (i) Owners: Owners contribute ie kar maximum risk, Naturally, they are interestet ft incurred by the business besides the safety of a ancl give the information about profit or loss 2” ve use of accounti (ii) Management: The management. maker oxtensive rmination of selling E me ; of 5 informatics to arrive at informed decisions such a8 aaa a ing price, cost controls and reduction, investment into new PION” and itled to bonus at iii : fos and workers are entit the year-end, wl 5 «n financial statements. Besides terested in finan esides, the employees and sore it al prise has deposited its s al i t whether the enter] | statements P best snaeds Employees’ Provident Fund and Employees’ State Insurance, ete., authorities. or not with the appropriate External Users ( Banks and Financial Institutions: Banks and financial institutions are an aevintal part of any business as they provide loans to businesses. Naturally, they watch the performance of the business to know whether it is making to ensure the safety and recovery of the loan advanced. progress as projected : ‘ lysing the accounting information. ‘They assess it by anal (di Investors and Potential Investors: Investment involves risk and also the direct control over the business affairs. Therefore, they investors do not hav | rely on the accounting information available to them and seek answers to | questions such as—what is the earning capacity of the enterprise and how safe is their investment? (iii) Creditors: Creditors are those parties who supply Tt is a common business practice that a large num invested in credit sales. Before granting credit, creditors satisfy themselves about the credit-worthiness of the business. The financial statements help them immensely in making such an assessment. (iv) Government and its Authorities: The government makes use of financial statements to compile national income accounts and other information, The information available to it enables it to take policy decisions. Government levi i is i Thos grernment uthren anno ces tax der sar an analy ofthe hs 3@8S COI ax due i Frat fovemumedt es after an analysis of the goods and/or services on credit. ber of suppliers remain a Scanned with CamScanner; Introduction to Accounting i (v) Researchers: Researchers use accounting information in their research work. (vi) Consumers: Consumers require accounting information for establishing good accounting control so that cost of production may be reduced with the resultant reduction in the prices of products they buy. Sometimes, prices of some products are fixed by the government, so it needs accounting information to fix fair prices so that consumers and producers are not exploited. (vii) Public: ic: They want to see the business running since it makes substantial contribution to the economy in many ways, e.g., employment of people, patronage to suppliers, etc. Thus, financial accounting provides useful financial information to various user groups for decision-making, QUALITATIVE CHARACTERISTICS OF ACCOUNTINGINFORMATION Qualitative characteristics are attributes that make the accounting information useful to users. The qualitative characterstics are: 1. Reliability: Accounting information must be reliable. Reliability of information means it is verifiable, free from bias and material error. 2, Relevance: Accounting information must be relevant to the user. Information is relevant if it meets the needs of the users in decision-making. 8. Understandability: Understandability means that the information provided through the financial statements must be presented in a manner that the users are able to understand it. 4. Comparability: Comparability means that the users should be able to compare the accounting information of an enterprise of the period either with that of other periods, known as intra-firm comparison or with the accounting information of other enterprises, known as inter-firm comparison. Scanned with CamScannerVV aa _ Bases of Accounting LEARNING OBJECTIVES This Chapter would enable you to understand: OF Bases of Accounting > Cash Basis > Accrual Basis 2 Difference between Accrual Basis of Accounting and Cash Basis of Accounting The most significant function of accounting incurred ‘0 determine profit earned or lo: y a business during an accounting period, Profit earned or | incurred by the business can be determined either by 1. Cash Basis of Accounting or 2. Accrual or Mercantile Basis of Accounting. 1. Cash Basis of Accounting: Cash basis of accounting is a system in which transactions are recorded when cash is received or paid. It means, revenue is recognised on receipt of cash. Likewise, expenses are recorded as incurred when they have been paid. The difference between the total incomes and total expenses represents Profit or Loss of a business for the accounting period. Thus, when Cash Basis of Accounting is followed, outstanding and prepaid expenses and income received in advance or accrued incomes are not considered. Receipts and Payments Account prepared in case of Not-For-Profit Organisations, such as charitable institutions, clubs and schools, is an example of accounting on cash basis. Outstanding Expenses are those expenses which have become due during the accounting period but which have not yet been paid. Prepaid Expenses are those expenses which have been paid in advance. Accrued Income is an income which has been eamed during the accounting period but has not yet become due and, therefore, has not been received. Income Received in Advance is an income which has been received before it has been gamed, /.e., goods to be sold or services to be rendered in future. Advantages: Advantages of Cash Basis of Accounting are: () It is a simple basis of accounting as adjustments for outstanding expenses, prepaid expenses, accrued income and income received in advance is not made. (i) This approach is more objective as very few estimates and judgments are required. (iii) This basis of accounting is suitable for those enterprises where most of the transactions are on cash basis. Scanned with CamScanner; 42 Double Entry 800k Keeping — CBS Disadu y antages: + . jag are: iges: Disadvantages of Cash Basis of Acco d the financial posit, anirepaid expenses ang ( Te does not give a true and fair view of the profit oF of an enterprise because it ignores outstanding 2 _. accrued income and income received in advance. (i) Tt does not follow the Matching Principle of acco (iii) This system does not distinguish between cape two yea ing untiDe enue items and, as, ars. result, there is no consistency in the profits © cash sales of € 3,90 04, ‘Ashok ba 5,70,000, out of whig, Illustration 1. Durin i 2017-18, . During the financial year wer ; and credit eales of 1,60,000. His expenses JF the yee "017-18 following the Cay, | % 80,000 is still to be paid. ind out Ashok’s inco™ | Basis of Accounting. e Solutio: = fe | Revenues (inflow of casb, #2 cash sales) & 59,000) 220,009 | wy of cash) & 270,000 2,00,004 Less: Expenses (outflo Net Income snot o conssred une cash Basis of Accounting will ‘Accounting, unlike ‘under 5 mit is earned or accrue recorded a8 ince me when wether aout h a Je irrespet”™ irred but payment has not been for the month of ‘March, 2018 because it had become due, ‘ation and expiration and Principle and Matching red ul 2, Acerual Basis of 4 | Cash Basis of ‘Accounting, 1 | For example, credit sale i$ rrecognis | Gen received or not. Similar rade, it wil be recorded 25 27 Fas not been paid. It will stil! 9° a “Accrual Basis of “Accounting is based on the concept of real se accounting principles, he. Revenue Recognition r ») follows two baste “der the Accrual Basis of Accounting, outstanding and prepaid cae vdjusted. * similarly, accrued income and mcon received in advance are ens 7 4 E : resognised for ascertaining correct profit or loss for the accounting period. Thus, under Trem oorual Basis of Accounting, net incom for the period is the result of matching revenue realised in the period and cost ‘neurred, whether paid or not. The difference between total income and total expense incurred is the profit or loss for the period. It may be noted that the Companies Act, 2018 requires companies to follow accrual basis of accounting in maintaining the books of account. ‘Advantages: The advantages of Accrual Basis of Accounting are: (@ Itis more scientific compared to Cash Basis of Accounting and he by accountants. (i This basis of accounting shows a comp! business as iB takes into account the effec as well as adjustments like i ae and income received ence = epee (ii) This basis discloses co1 7 rect profi i . . true nancial position ofthe busine Joss for a particular period and also exhibits (iv) It reflects true profit or lose duri ess oo a particular day. aI uri * ide acentbiy. ing the accounting period and, therefore, has ects true financial positi ncial position at the end of the accounting peri at ing period by adjusting outstanding ex; ‘penses, i aieeYae , prepaid expenses, accrued income and i ; income received nce is preferred ete picture of financial transactions of the .ct of all transactions relating to a period prepaid expenses, accrued Scanned with CamScannerBases of Accounting 4.3 Disadvantages: The disadvantages of Accrual Basis of Accounting are: ( This system is not as simple as Cash Basis of Accounting. (ii) The accounting process is too elaborate. (iii) A quick appre isal of the profit/loss is not possible because many adjustments are required to ascertain the true financial position of the business. Illustration 2, Taking the figures in Illustration 1, find out the net income according to Accrual Basis of Accounting. Solution: Total Sales = Cash Sales & 3,90,000) + Credit Sales (% 1,60,000) Les: Net Income Note: is done. Total Expenses for the Year credit sales of € 1,60,000 are taken in = 5,50,000 2,70,000 2,80,000 ¥ 80,000 expenses still to be paid belong to this year and hence are to be charged to the revenue of this year. Similarly, the year in which sales transaction Difference between Accrual Basis of Accounting and Cash Basis of Accounting Basis Abcerual Basis of Accounting Cash Basis of Accounting 1. Recording of Transactions| Both cash and credit transactions are recorded. [Cash transactions are recorded. 2, Prepald/Outstanding Expenses Accrued Incomefincome Received in Advance Prepaid and outstanding expenses are accounted in the Profit and Loss Account, /Accrued income and income received in advance| [ate also accounted and showin in the Balance Sheet, Prepeld and outstanding expenses are not adjusted. Similarly, accrued Income and income received in advance are not juste, 3. Profit or Loss Jconect profit or loss is ascertained because i [records both cash and credit transactions. Correct profit orloss isnot ascertained because itecords only cash transactions. 4, Technical Knowledge The Accrual Bas's of Accounting requires technical knowledge as many adjustments like prepaid, outstanding capital and revenue are required to be| made. tdoes not require much of echnical knawledge as required for Accrual Basis of Accounting, 5, Legal Position ‘Accrual Basis of Accounting is recognised by the Companies Act, 2013, Cash Basis of Accounting is natrecogrised by the Companies Act, 2013, 6. Acceptability Acerual Basis of Accounting is more acceptable in business as it reveals correct income and expense besides assets and liabites. \Cash Basis of Accounting isnot acceptable in business as it does not reveal the required information, 7. Reliability Accrual Basis of Accounting is more reliable as it ecords both cash and credit transactions and thus, reveals correct profit or loss besides assets and| lables, ‘Cash Basis of Accounting is lss roliable as it records only cash transactions and asa result does not reveal correct profit or loss and also assets and lables, 8. Sultability ‘Accrual Basis of Accounting is suitable for businesses ast requires information thats complex. Itcan be made availabe by Accrual Bass ct Accounting, (Cash Basis of Accounting is sultable for Not- For-Proft Organisations and Professionals such as chartered accountans, anyers, etc, since they require comparatively ess information, Scanned with CamScannerEntry Book Koop 44 Double _ Higher Order Thinking Skills (HOTS) ‘Questions ) nr in practice _ instead Q.1. Dr. Arvind Kishore, a homeopath docto to maintain his accounts on Accrual I with the ad junting is ™ is fee i is Fo0 gs roveiwed an order for of Accounting. Do you agree I do not agree. Cash Basis of Acco a medical practitioner rece! ve its accounts on Accrua|y ” erbardwares jntal re ir MANE gg be credited to the Sal for your answer. transfers; be Ms. Kalra Bros.,2 dealer in comput along with an advance of € 50,000- q Accounting. Should the amount received: i-€ or to the Advance Received Accoun*= “Account and late ‘Ans. It should be credited to the Advan account of purchaser on affecting sale. Very Short Answer Type ‘Questions (KVS 3 Q. 1. What are the two bases of accounting? ‘Ans, There are two bases of accounting: ( Cash Basis and (i) ‘Accrual Basis. : Q.2. What do you understand by Cash Basis 0! Ans. Cash Basis of Accounting means that the entry ise cash. The system does not distinguish between capital ant not recognise prepaid expenses and outstanding expenses: , oo Q.3. What do you understand by Accrual Basis of Accounting: ‘Ans, Accrual Basis of Accounting mean’ the transaction is recorde entered into and not when the settlement takes place. In other words, under Aor, Basis of Accounting, accounting entries are recor’ expenses are incurred irrespective of cash received or paid. and Accrual Basis of ‘Accounting. e recorded under the Accrual System ting only cash transactions x f Accounting? corded on receipt or paymer. d revenue items. It alo, d at the time whe ac ded when incomes are earned x: Q. 4. Distinguish between Cash Basis (Two Points) ‘Ans. (i Both cash and credit transactions art ‘Accounting. Under the Cash System of Accow recorded. (i) Capital and ‘Accounting. Under the Cash System of Accounting no such disti1 revenue items are distinguished under the Accrual System d inction is made. Q.5. What are the advantages of Cash Basis of ‘Accounting? (Two Points) Ans, Advantages of Cash Basis of Accounting are: i It ies simple system as adjustments are not required, ii) It is more objective as very few estimates and judgments are made. } Scanned with CamScannerBases of Accounting 45 Q.6. What are the disadvantages of Cash Basia of Accounting? (Two Points) Ans, Disndvantages of Cash Basis of Accounting are: () It does not give a (rue and fair view of profit or lows and the financial position. (i 1¢ docs not follow the Matching Principe Q. 7, What are the advantages of Accrual Busis of Accounting? (Two Points) ‘Ans, Advantages of Accrual Basis of Accounting are: (i It gives a true and fair view of profit or loss and the financial position. Gi It a Picture of financial transactions as it accounts prepaid and outstanding expenses, earned and unearned incomes, assets and liabilities, Q.8, What are the disadvantages of Accrual Basis of Accounting? (' ‘Ans. Disadvantages of Accrual Basis of Accounting are: ‘Two Points) () The accounting process is more elaborate. (i) Itis more complicated than Cash Basis of Accounting and requires adequate skills, Objective Type Questions Select the correct alternative: () Under the Cash Basis of Accounting, expenses are recorded (@) on payment. () on being incurred, (© either (a) or (. @ None of the above. (i) Under the Accrual Basis of Accounting, expenses are recorded (a) on payment. (8) on being incurred. (©) either (a) or (). (@) None of the above. W@:@O)] Short Answer Type Questions 1. Discuss Cash and Accrual Basis of Accounting. 2. Write down any three differences between Cash Basis and Accrual Basis of Accounting. (Delhi 2007; MSE Chandigarh 2008) 3, What is meant by Accrual Basis of Accounting? Give three advantages of Accrual Basis of Accounting. Scanned with CamScanner