Introduction To Accountings Flashcards
Definition of Accounting
What is Accounting?
What types of Accounting are there?
“Accounting is the process of recording, classifying, analyzing, interpreting, and summarizing financial information to aid in decision-making.”
Accounting is an information science that is used to collect and organize financial data for organizations and individuals
Financial Accounting
The main purpose of Financial Accounting is to ascertain the true result (profit or loss) of the business operations during a particular period of time and to state the financial position of the business on a particular period of time.
Cost Accounting
The main object of cost accounting is to determine the cost of goods manufactured or produced by the business. It helps in management of the business in controlling the cost indicating avoidable losses and wastes.
Managerial Accounting
The object of this accounting is to communicate the relevant information periodically to the management of the business to enable it to take suitable decisions.
Accounting Cycle
The sequence of steps followed in the accounting process to measure business transactions and transform the measurements into FINANCIAL STATEMENTS for a specific period.
Here are the 5 main steps in the accounting cycle.
1. — Identify business events, analyze these transactions, and record them as journal entries
2. — Post journal entries to applicable T-accounts or ledger accounts
3. — Prepare trial balance from the general ledger
4. — Use the adjusted trial balance to prepare financial statements
5. — Close all temporary income statement accounts with closing entries
Objectives and Functions of Accounting
•
Recording
The fundamental role of accounting is to maintain a systematic, complete, accurate and permanent record of all transactions of a business. which could be retrieved and reviewed whenever necessary.
• Retrievable
These transactions of a business could be retrieved and reviewed whenever necessary.
• Reliability
A reliable financial record is the backbone of any accounting system without which all other objectives of accounting will be compromised.
• Planning
Organizations need to plan how they intend to allocate their limited resources (e.g. cash, labor, materials, machinery and equipment) towards competing needs in the future. An effective way of doing so is by using various forms of budgets.
• Budgeting
Budgeting is a major component of managerial accounting. Budgets enable organizations to plan ahead by anticipating business needs and resources.
• Coordination
Budgeting helps in the coordination of different segments of an organization.
What are Accounting Principles?
Division of Accounting Principles
Accounting principles are the rules and guidelines that companies must follow when reporting financial data. The Financial Accounting Standards Board (FASB) issues a standardized set of accounting principles in the U.S. referred to as generally accepted accounting principles (GAAP).
The Accounting Principles can be defined into two groups.
● Accounting Concepts
● Accounting Conventions
Separate Entity Concept
• An accounting concept which treats a business separately from its owner. The separate entity assumption states that the transactions conducted by a business are separate to those conducted by its owners. For example, if a business owner bought an asset for their personal use, the asset is not the property of the business
Going Concern Concept
• The concept that assumes a business will continue to exist and operate in the foreseeable future, and not liquidate. This allows a business to defer some prepaid expenses (accrued) to future accounting periods, rather than recognize them all at once.
Cost Concept
• A business should record their assets, liabilities and equity at the original cost at which they were bought or sold. The real value may change over time (e.g. depreciation of assets/inflation) but this is not reflected for reporting purposes
Matching Concept
• The concept that each revenue recorded should be matched and recorded with all the related expenses, at the same time. Specifically in accrual accounting, the matching principle states that for every debit there should be a credit (and vice versa).
Money Measurement Concept
• Businesses should only record transactions that can be expressed in terms of a stable unit of currency.
Dual Aspect Concept
• The dual aspect concept states that every business transaction requires recordation in two different accounts. This concept is the basis of double entry accounting, which is required by all accounting frameworks in order to produce reliable financial statements.
Accounting Period Concept
• An accounting period is the span of time covered by a set of financial statements. This period defines the time range over which business transactions are accumulated into financial statements, and is needed by investors so that they can compare the results of successive time periods.
Realisation Concept
• The realization principle is the concept that revenue can only be recognized once the underlying goods or services associated with the revenue have been delivered or rendered, respectively. Thus, revenue can only be recognized after it has been earned
Accounting Conventions
Accounting conventions are a set of practices that are generally accepted and followed by accountants.
These conventions have been established over time, and are followed as a practice and can change depending on the changes in the financial landscape.
Conservatism Convention
• Playing it safe is both an Accounting Principle and convention. It tells accountants to err on the side of caution when providing estimates for assets and Liabilities. That means that when two values of a transaction are available, the lower one should be favored. The general concept is to factor in the worst-case scenario of a firm’s financial future. Anticipate no profit but provide for all possible losses.
Full Disclosure Convention
• Information considered potentially important and relevant must be revealed, regardless of whether it is detrimental to the company.
Consistency Convention
• A company should apply the same accounting principles across different accounting cycles. Once it chooses a method it is urged to stick with it in the future, unless it has a good reason to do otherwise. Without this convention, investors ability to compare and assess how the company performs from one period to the next is made much more challenging.
Materiality Convention
• Like full disclosure, this convention urges companies to lay all their cards on the table. If an item or event is material, in other words important, it should be disclosed. The idea here is that any information that could influence the decision of a person looking at the financial statement must be included.
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IMPORTANT ACCOUNTINT TERMINOLOGIES
Stock
These are those goods which are left unsold in the business at the end of the year.
The goods unsold at the end of the accounting year are called closing stock.
The same stock is called opening stock at the beginning of a new accounting year
Vouchers
The written document through which financial transactions are recorded in the books is called voucher.
Entry
Recording of the transaction in account books is called making an entry or the record of a transaction in books is called an entry.
Account
A list of all transactions relating to a person, property, income expenses is called into account. It is a tabular statement containing all the transaction of same nature at one place under a common heading in a systematic manner.
Debit
Every account has two sides. Left side is called the debit side. In short, it is Dr.
Credit
Every account has two sides. And the right side is called the credit side. In short, it is Cr.
Purchases
Goods bought for resale are called purchases. This may be in form of raw material or finished goods. Purchase of assets is not called purchases because assets are not purchased for resale.
If the goods are purchased from the supplier and payment is made at the same time, such purchases is called Cash Purchases.
If the goods are purchased from the supplier and payment is not made at the same time, but arranged to be paid at some future date, such purchases is called Credit Purchases or Purchases on Account.
Sales
When purchase goods are sold in order to earn a profit are called sales. When goods are sold for cash it is called cash sales and goods sold on credit are called credit sales.
If goods are sold to the customer and price is received at the same time it is called Cash Sales.
If goods are sold to the customer and the price of goods sold is not received at the time of sales rather arranged to be received in some future date is called Credit Sales.
Discount
Concession a rebate allowed by a businessman to its customer is called a discount. it may be of two types: –
a. Trade discount
b. Cash discount
Trade discount
When a trader allows a concession to its customers on the list price, it is known as trade discount. It is not recorded in the books. It is stated in the invoice.
Cash discount
When a trader allows a concession to the customer to make payment in cash or by cheque, it is known as cash discount. It is recorded in the books. When cash discount is allowed customer is required to pay the less due amount, so it encourages the customer to pay as early as possible
Debtor/Account Receivables
The person, firm or an organization who takes goods or services on credit from the business are called debtors of the business. In other words, the person, firm or an organization who owes money or Money’s worth to the business is called debtor.
Creditors/Accounts Payable
The person, firm or an organization from whom goods or services are purchased on credit by the business are called creditors of the business. The business owes money to them. The amount payable to creditors is a liability of the business.
Drawings
The amount of cash or goods which is withdrawn by proprietor from business for its private uses is called drawings. It reduces the capital of the business.
Assets
All the resources of business having economic value are called assets. These resources help the business to earn a profit and have future value. These are important for running a business and are in the possession of businessman. These are of two types: –
a. Fixed assets
The assets which are used by business for a long time are called fixed assets or non-current assets. These are continued to be used by the business for a period of more than one year. For example:- land ,building ,plant, machinery ,furniture ,vehicle etc.
b. Current assets
The assets which are used up in one year or easily get converted into cash in one year are called current assets. For example:- raw material, finished goods, debtors, cash balance and bank balance etc.
Liabilities
The amount which business owes to others is called its liabilities. There is a certain amount which business is under obligation to pay. There are two types of liabilities:
a. Long-term liabilities Those liabilities which are usually payable after a period of 1 year. Long-term loans from Financial Institutions, debentures issued by companies etc.
b. Short-term liabilities These are those which are payable within one year. For example creditors, bank overdrafts etc.
Capital / Owner’s Equity
The amount of cash, goods or assets which is initially invested by proprietor while commencing business is called capital. It is invested to earn profits. In other words, the excess of assets over liability is capital.
Revenue
These are the amount received by a business for selling goods or services. This amount is received from day to day business activity in the form of rent, interest, commission, discount, dividend etc.
Expenses
The cost which business incurs for producing goods and services or for using services is called expenses. These include payments made for wages, salaries, freight, advertisement, rent, insurance etc. In other words, we can say that the cost of earning revenue is an expense.
- The prime function of Accounting is
a. Record economic data
b. Classifying and recording business data
c. Classifying and summarizing business transactions
d. Provide the informational basis for transactions.
2. Any legal activity which is done for the purpose of earning profit is called
a. Trust
b. Society
b. Business
d. a and b
- All those things which are purchased for the purpose of resale are called
a. Goods
b. Assets
c. Liabilities
d. Sale
- Book keeping provides the
a. Primary Function
b. Final Information
c. Secondary Function
d. All the above
- Book keeping is mainly concerned with
a. Recording of business transactions
b. Classifying of business transactions
c. Interpreting of business transactions
d. None of the above
- How many branches of accounting are
a. Two
b. Three
c. Four
d. One
- Accounting is the language of
a. Business
b. School
c. Proprietor
d. America
8. The rate of allowance given by a creditor to the debtor, if he pays his debts before the due date of payment is normally
a. 2%
b. 5%
c.10%
d. 15%
- All those goods which are lying unsold in the business are termed as
a. Revenue
b. Expense
c. Stock
d. Sale
- The term expenses and expenditure are
a. Same
b. Different
c. Opposite
d. Singular or plural
- A person who owes money to the business is called
a. Debtor
b. Creditor
c. Shareholder
d. Owner
- Stages for proceeding a transactions are
a. Recording
b. Classifying
c. Summarizing
d. All of these
- If damaged or below standard goods returned to the seller are called
a. Return outwards
b. Purchases Return
c. Return to suppliers
d. All of these
- The system of providing quantified information about an organization to people who need such information is called
a. Economics
b. Accounting
c. Book Keeping
d. All of these
- The amount of cash or goods invested by the proprietor in the business is called
a. Revenue
b. Assets
c. Capital
d. Expense
- A person from whom the credit purchases is made is called
a. debtor
b. creditor
c. banker
d. Owner
- The price of goods sold and services provided by a business to its customers is called
a. Expense
b. Loss
c. Liability
d. Revenue
- A form of remuneration for services are called
a. Revenue
b. Expenses
c. Commission
d. Expenditure
- It takes place when assets or services are acquired
a. Revenue
b. Expenses
c. Assets
d. Expenditure
- The discount allowed by the wholesale to the retailer at the list price of the goods is called
a. Trade Discount
b. Cash Discount
c. Discount Allowed
d. Discount received
21. A person to whom goods or services are sold on credit basis is known as
a. Creditor
b. Proprietor
c. Debtor
d. Investor
- Net income is equal to
a. Assets – Liabilities
b. Revenues + Expenses
c. Revenue – Income
d. Revenue - Income
- The system of recording transactions having two fundamental aspects is known as
a. single entry system
b. Modern system
c. Double entry system
d. None of these
- According to this concept it is assumed that business will exist for an indefinite period of time
a. Realisation concept
b. Going concern Concept
c. Business entity concept
d. None of these
- According to this concept, business and owner have separate identity
a. Realisation concept
b. Going concern Concept
c. Business entity concept
d. None of these
- According to this concept, a record is made of only those information that can be expressed in terms of money
a. Realisation concept
b. Going concern Concept
c. Business entity concept
d. Money Measurement Concept
- According to this concept, an asset is recorded at a price at which it is acquired
a. Realisation concept
b. Going concern Concept
c. Business entity concept
d. Cost concept
- Modern Accounting is based on
a. Realisation concept
b. Going concern Concept
c. Business entity concept
d. Dual Aspect Concept
- According to this concept , expenses are matched with the revenues to study the business results
a. Realisation concept
b. Going concern Concept
c. Business entity concept
d. Matching Concept
- According to this concept, revenue should be recognized at the time when goods are sold or servicers are rendered
a. Realisation concept
b. Going concern Concept
c. Business entity concept
d. None of these
- According to this convention, Anticipate no profits but provide for all possible loses.
a. Full Disclosure
b. Conservatism
c. Consistency
d. Materiality
- According to this convention, the users of financial statements are informed of any facts necessary for the proper interpretation of statements
a. Full Disclosure
b. Conservatism
c. Consistency
d. Materiality
- According to this convention, Accounting practices should remain unchanged from one period to another.
a. Full Disclosure
b. Conservatism
c. Consistency
d. Materiality
- A type of business in which a merchant purchases goods and sells it in the same position is called
a. Trading Concern
b. Services Concern
c. Manufacturing concern
d. None of these
