Assignment 1-6

Question 1 - What are the meaning of the following

terms – 
Answer-1 Credit- A credit is an accounting entry that
either increases a liability or equity account, or
decreases an asset or expense account. It is positioned
to the right in an accounting entry.
Debit- A debit is an accounting entry that either
increases an asset or expense account, or decreases
a liability or equity account. It is positioned to the left
in an accounting entry.
Assets- An asset is a resource with economic
value that an individual, corporation, or country
owns or controls with the expectation that it will
provide a future benefit. Assets are reported on a
company's balance sheet and are bought or created
to increase a firm's value or benefit the firm's
operations. An asset can be thought of as something
that, in the future, can generate cash flow, reduce
expenses, or improve sales, regardless of whether it's
manufacturing equipment or a patent.
Liabilities- A liability is something a person or
company owes, usually a sum of money. Liabilities
are settled over time through the transfer of
economic benefits including money, goods, or
services. Recorded on the right side of the balance
sheet, liabilities include loans, mortgages, deferred
revenues, bonds, warranties, and accrued expenses.
Balance Sheet- The term balance sheet refers to a
financial statement that reports a company's assets,
liabilities, and shareholder equity at a specific point
in time. Balance sheets provide the basis for
computing rates of return for investors and
evaluating a company's capital structure. In short,
the balance sheet is a financial statement that
provides a snapshot of what a company owns and
owes, as well as the amount invested by
shareholders. Balance sheets can be used with other
important financial statements to conduct
fundamental analysis or calculating financial ratios.

Question 2 – What are accruals? Explain with

example.
Answer-2 Accrual accounting is one of two
accounting methods; the other is cash accounting.
Accrual accounting measures a company's
performance and position by recognizing
economic events regardless of when cash
transactions occur, whereas cash accounting only
records transactions when payment occurs.
Example- Consider a consulting company that
provides a $5,000 service to a client on Oct. 30.
The client receives the bill for services rendered
and makes a cash payment on Nov. 25. The entry
of this transaction will be recorded differently
under the cash and accrual methods. 
Question 3 – What are the principles of accounting?
Answer-3 The 5 principles of accounting are as
follows-
1. Revenue Recognition Principle- When you
are recording information about your business,
you need to consider the revenue recognition
principle. This is the period of time where
revenues are recognized through the income
statement of your company. In order for your
revenues to be recognized in the period that the
services were provided if you are on the accrual
basis, If you are on the cash basis then, the
revenues need to be recognized in the period the
cash was received.
2. Cost Principle- Recording your assets when
you purchase a product or service helps keep your
business’s expenses  orderly. It’s important to
record the acquisition price of anything you spend
money on and properly record depreciation for
those assets.
3. Matching Principle- Expenses should be
matched to the revenues recognized in the same
accounting period and be recorded in the period
the expense was incurred. If there is a period of
time where revenue was recognized on sold
products or services, then the cost of those things
should also be recognized.
4. Full Disclosure Principle- The information on
financial statements should be complete so that
nothing is misleading. With this intention,
important partners or clients will be aware of
relevant information concerning your company.
5. Objectivity Principle- The accounting data
should consistently stay accurate and be free of
personal opinions. Make sure the data is also
supported by evidence that can include vouchers,
receipts, and invoices. Having an objective
viewpoint, in this case, helps rely on financial
results. For example, your viewpoint may not be
objective if you once worked for the same
company that you are now an auditor for because
your relationship with this client might skew your
work.

Question 4 – List down the steps to recordkeeping

method.
Answer-4 The following steps to recordkeeping
method are-
1. Identifying the transactions
2. Recording in the journal
3. Classifying the nature of the transaction
4. Posting to ledger
5. Balancing of accounts
6. Preparing a financial statement. 
7. Interpreting the financial statements.
8. Communicating it to stakeholders.

Question-5 What is the realization concept of

accountancy?  Explain it with examples and
advantages.
Answer-5 This concept states that revenue from any
business transaction should be included in the
accounting records only when it is realised. The term
realisation means creation of legal right to receive
money. Selling goods is realisation, receiving order is
not.
Example- N.P. Jeweller received an order to supply
gold ornaments worth Rs.500000. They supplied
ornaments worth Rs.200000 up to the year ending
31st December 2005 and rest of the ornaments were
supplied in January 2006.
 Advantages-

 Realization concept gives more importance to

the recognition of revenue.
 It is commonly followed in a business
organization as per the accrual system of
accounting.
 It guides in the accounting process and
recognition of revenue.
 Through realization principles, the inflation of
revenue and profits can be controlled.
 The true and fair view is better reflected in the
realization concept.