MODEL ANSWERS TO ACCOUNTING
CLASS 11
UNIT TEST 1
1.1. Financial Transactions
2. Identification
3. External Users
4. Understandability
5. Generally Accepted Accounting Principles
2. Branches of Accounting -
Financial Accounting
Cost Accounting
Management Accounting
3. Accounting is defined as the process of identifying, measuring, recording and communicating the required information relating to the economic events of an organization to the interested users of such information.
4. The concept of business entity assumes that business has a distinct and separate entity from its owners. i.e., Business and businessman are two different entities.
It means that for the purpose of accounting the business and its owners are to be treated as two separate entities.So, when a person brings in some money as capital into his business in accounting records it is treated as liability of the business to the owner. Similarly drawings are treated as reduction in the owners capital and thus a reduction in the liabilities of the business.It is shown as capital on the liabilities side of the balance sheet.
5.a. Capital- The amount invested by the owner in the firm is known as capital.
It may be brought in the form of cash or assists by the owner for the business entity capital is an obligation and a claim on the assets of business.
It is shown as capital on the liabilities side of the balance sheet.
b. Assets-Assets are the economic resources of an enterprise that can be usefully expressed in monetary terms. Assets are valuable things owned by the business in its operations.
E.g. – Furniture and machinery owned by Business
c. Debtors –Persons/Entities who owe to an enterprise an amount for buying and services on credit. The total amount standing against such persons on the closing date, is shown in Balance Sheet as Sundry Debtors on the asset side.
d. Vouchers-The documentary evidence in support of a transaction is known as voucher .
e.g. If we buy goods on cash we get a cash memo
e. Drawings –Withdrawal of money and/or goods by the owner from the business for personal use is known as drawings. Drawings reduces the investment of the owners.
6.Stock And Debtor – CURRENT ASSETS, Furniture and Motor Car- FIXED ASSETS
7.Two types of liabilities –
i. Long term Liabilities- Those liabilities that are payable after a period of one year , for example , a term loan from a financial institution or debentures issued by a company
ii. Short term liabilities – Those obligations that are payable within a period of one year , for example, creditors, bills payable, bank overdraft.
8. Objective of accounting-
Maintenance of Records of business Transactions-
Accounting is used for the manufacture of a systematic record of all financial transactions in book of accounts.
Even the most brilliant executive or managers cannot accurately remember the numerous amount off varied transactions such as purchases, sales, receipts, payments, etc. that takes place in business every day. Hence, proper and complete records of all business transactions are kept regularly. Moreover, the recorded information enables verifiability and acts as evidence.
Calculation of profit and loss-
The owners of the business are keen to have an idea about the net results of their business operations periodically, i.e. whether business has profit or incurred losses. Thus, another objective of accounting is to ascertain the profit earned or loss sustained by a business during an accounting period which can be easily workout with the help f record of incomes and expenses relating to the business with the help of preparing profit and loss accounts.
Depiction of financial Position-
Accounting also aims at ascertaining the financial position of the business concern in the form of its assets and liabilities at the end of every accounting period.
A proper record of resources owned by the business organization (assets)and claims against such resources (Liabilities) facilitates the preparation of a statement known as balance sheet position statement.
Providing accounting information to its users-
The accounting information generated by the accounting process is communicated in the form of reports, statements, graphs and charts to the users who need it in different decision situations.
The information is needed by the internal users and external users .
Internal Users such as managers/directors use them to make comparisons, ascertain company’s strength and weakness and for strategy and planning operations.
The external users (owners/Shareholders) need them to assess whether they will get adequate returns on their investment and some users (Government and regulatory agencies such as registrar of company, custom Dept., IRDA, RBI, etc.)Need them for the payment of taxes (VAT, IT, Custom and excise duties) and to satisfy legal obligations.
9. Qualitative Characteristics of Accounting Information-
1. Reliability-
It means the users must be able to depend on the information.
The reliability is determined by the degree of correspondence between what the information conveys about the transactions or events that have occurred, measured and displayed.
It should be free from error and bias and faithfully represents what it is meant to represent.
It must be credible, verifiable by independent parties use the same method of ensuring, and must be neutral and faithful.
2. Relevance-
It should be available in time, must help in prediction and feedback, and must influence the decisions of users.
It must not be overburdened with unnecessary, irrelevant and unimportant information.
It must only contain those information that are relevant ,important and have dedicative value.
3. Understandability-
Decision Makers should interpret accounting information in the same sense as it is prepared and conveyed to them.
The information will be futile if it is not understandable ny its interested users.
The information must be clear , brief ,exact ,precise and easy to understand.
4. Comparability
It is not sufficient that the information generated is reliable and relevant in certain circumstance or for a particular entity .It must be comparable.
To be comparable, accounting reports must
-belong to common period
-use common unit of measurement
-use common format of reporting
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