chapter 1
Accounting theory and philosophy
Important questions and answers
Q1. What is accounting concept? Explain the six accounting concepts?
Ans- Accounting concept provide a foundation for accounting process. No enterprise can prepare its financial statement without considering these basic concept. These guide how trancation should be recorded and reported.
Six accounting concepts are:
1. Business Entity Concept:- As per this concept, the business is considered to have a separate identity apart from its owner. Only the business transaction are recorded in the books of accounts. As per this concept the business is liable to pay to the owner the capital brought by him.
2. Going concern concept:- Accounting standard or statement are prepared on the basis that the business will continue its activities in the near future. it is also assumed that business has idefinitely long life
3. Full Disclosure principle:- The convention of disclosure means that the information of material nature must be fully or properly disclosed in the financial statement.
4. Matching Concept:- As per this concept, the revenue of an accounting period such expenses are deducted which are incurred to earn that income. This helps to determine the correct profit or loss of that period.
5. Principle of Conservatism:- This implies that the accountant should not anticipate income but provide for all possible losses. This puts a guard against all possible losses.
6. Consistency Concept:- In order to compare the financial statement of different years it is necessary to maintain consistency in the accounting policies followed by the business.
Q2. What is GAAP?
Ans- GAAP(General Accepted Accounting Principles) are basic or fundamental proposition accepted by the accountant based on which transaction are recorded in the books of account and financial statements are prepared. GAAP refers to the common set of accepted accounting principles, standards and procedure that company and their accounting must follow when they compile their financial statement.
Q3. Difference between Book Keeping and Accounting.
Ans- Book-Keeping differ from Accounting in the following respect:-
Q4. Write a short note on
(a) Internal user of accounting information.
(b) External user of accounting information.
Ans- Internal user of accounting information:
Internal user are the primary user of accounting. Following are the 3 types of internal user and their information needs:
3. Full Disclosure principle:- The convention of disclosure means that the information of material nature must be fully or properly disclosed in the financial statement.
4. Matching Concept:- As per this concept, the revenue of an accounting period such expenses are deducted which are incurred to earn that income. This helps to determine the correct profit or loss of that period.
5. Principle of Conservatism:- This implies that the accountant should not anticipate income but provide for all possible losses. This puts a guard against all possible losses.
6. Consistency Concept:- In order to compare the financial statement of different years it is necessary to maintain consistency in the accounting policies followed by the business.
Q2. What is GAAP?
Ans- GAAP(General Accepted Accounting Principles) are basic or fundamental proposition accepted by the accountant based on which transaction are recorded in the books of account and financial statements are prepared. GAAP refers to the common set of accepted accounting principles, standards and procedure that company and their accounting must follow when they compile their financial statement.
Q3. Difference between Book Keeping and Accounting.
Ans- Book-Keeping differ from Accounting in the following respect:-
(a) Internal user of accounting information.
(b) External user of accounting information.
Ans- Internal user of accounting information:
Internal user are the primary user of accounting. Following are the 3 types of internal user and their information needs:
- OWNER:- Owner is the main user of accounting. Owner need to assess how well their organisation or business is performing.He uses accounting information to know amounts due to others and due from others.
- MANAGER:- Manager need accounting information to plan, control, and execute. Manager need to allocate the capital, human and financial resources towards need of the business through the budgeting process.
- EMPLOYEE:- employee using accounting information for various purposes. Many employees review accounting information in the annual report just to get a better understanding of the business.
External user are the secondary user of accounting. following are the types of external user:
- INVESTORS:- Person who are interested to make investment in some company, may study annual report. Investor use accounting information to determine whether an investment is a good fit for their portfolio.
- SUPPLIERS:- Person who supply goods and services to business on credit are interested to watch liquidity position of the business. Suppliers use accounting information to ensure repayment capacity of the business.
- CUSTOMERS:- Customer who place order and are dependent on specific business organisation for their supplies have to ensure the capability of the firm to execute the order.
- GOVERNMENT:- Government uses accounting information for levying various taxes like sales tax, export duty, etc.
- PUBLIC:- they also interested in accounting information of a company. These could include joirnalists, academics, acticists and individuals with an interest in economic developments.
- RESEARCHER:- Research scholar who have undertaken research on any aspects of business activity, may use accounting information for the purpose of analysis.
Ans- Advantages of accounting:
- It helps in management of business.
- Helpful in decision making.
- Helpful in raising loan.
- Helpful in prevention and detection of error and fraud.
- Proviide complete and systematic record.
- Information regrading profit and loss and financial position.
- Facilitates sale of business.
- Maintain complete and systematic records of business transaction, post them to ledger and to prepare the financial statement i.e., statement of profit and loss and the balance sheet.
- It maintain proper records of various assets such as cash in hand, bank balance, inventory, debtors etc.
- Accounting perform this function by supplying the information to the government agencies.
- Accounting provide assestance to management in the task of planning, controlling, and decision making.
- Accounting is to communicate the information regarding net profit(or loss), assets, liabilities etc. to the interest parties.
- Recording only monetary itens.
- Transaction are recorded on the basis of evidence such as sale or purchase or reciept of cash.
- Allocation process is an important problem in accounting system. The value of fixed assets is exhausted charging depreciation for allocated period.
Ans- Need of Accounting:
Accounting helps you track who owes you what, what you owe to who, manage payroll records, track loan and interest repayments, sets you up with the financial data you need when it comes time to file and pay your company's taxes. The goal of mangerial accounting is to help company manager and supervisor make financial decisions, whereas the goal of accounting is to provide finacial information about your company to those outsider of the business.
Evolution of accounting:
In the earliest ages man's commercial activities were based upon direct barter and, therefore, the keeping of records was not a neccessary part of business, but as soon as the principle of transaction upon credit term beecame a part of commercial practice, records became a necessary that might know what amounts were owing to him by his customers and what was owing by him to his creditors.
As soon as, men commenced to keep book-keeping recoeds the need for accuracy became apparent. With the end in view and in order that the recorder might be complete, the double entry system of book keeping was evolved.
Accounting helps you track who owes you what, what you owe to who, manage payroll records, track loan and interest repayments, sets you up with the financial data you need when it comes time to file and pay your company's taxes. The goal of mangerial accounting is to help company manager and supervisor make financial decisions, whereas the goal of accounting is to provide finacial information about your company to those outsider of the business.
Evolution of accounting:
In the earliest ages man's commercial activities were based upon direct barter and, therefore, the keeping of records was not a neccessary part of business, but as soon as the principle of transaction upon credit term beecame a part of commercial practice, records became a necessary that might know what amounts were owing to him by his customers and what was owing by him to his creditors.
As soon as, men commenced to keep book-keeping recoeds the need for accuracy became apparent. With the end in view and in order that the recorder might be complete, the double entry system of book keeping was evolved.
Q7. Give two example of transactions which are not recorded in accounting.
Ans- Business events that are not recorded in the financial books, Example are hiringof employees, death of the owner, entering into a contract etc.
Q8. What is accounting process?
Ans-
Ans- Accounting terminologies are :-
- Trade debtors
- Trade creditors
- Assets- tangible assets, intangible assets, current assets, ficticious assets.
- Liabilities
- Capital
- Drawings
- Baddebts
- Goods/raw material
- Inventory/ stock
- Revenue/Income
- Expenditure
- Profit/ Loss
- Reserves and Provisions
- Contingent Liabilities
- Depreciation/ Appreciation
Ans- The main characteristics of accounting are:-
- Recording of financial transactions only.
- Recording in terms of money.
- Classifying.
- Summarising.
- Interpretation of the results.
- Communication.
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