Chapter 1-Introduction to Accounting

(c) identification

Explanation- It involves observing and selecting those events that are of considered financial character and relate to the organisation.

(a) Classifying

Explanation- Classifying is the process of grouping of transactions or entries of one nature at one place. Transactions recorded in the ‘Journal’ are classified and posted to the main book of accounts called the ‘Ledger’.

(b) Measurement

Explanation- If an event cannot be quantified in monetary terms, it is not considered for recording in financial accounts. That is why items like appointment of new managing director and signing of contracts are not shown in the books of accounts.

(a) Management Accounting

Explanation- The main purpose of management accounting is to provide necessary information about funds, costs, profit etc. It will enable management to discharge its functions properly.

(a) Cost accounting

Explanation- Cost accounting helps in analysing the expenditure so as to ascertain the cost of various products of the firm and fix the prices. It helps in controlling the costs and providing necessary costing information to management for decision making.

(d) Book-Keeping

Explanation- Book-Keeping is concerned with identifying financial transactions; measuring them in money terms; recording and classifying them.

(b) Sales

Explanation- Sales are total revenues from goods or services sold or provided to customers. Sales may be cash sales or credit sales.

(a) Current liability

Explanation- Lenders are the part of current liability which are to be paid off within a period of one year.

(b) Discount

Explanation- Discount is the deduction in the price of the goods sol

d. It is offered in two ways- Trade discount and Cash discount.

(b) Debtors.

Explanation- Debtors are the persons or parties who owe to an enterprise an amount for buying goods and services on credit. The total amount standing against such persons on the closing date is shown on the Asset side of the balance sheet as sundry debtors.

(a) Record systematically

Explanation- Accounting embraces proper recording to transactions classified under appropriate accounts and summarised into financial statements- Income Statement and the Position Statement.

(b) Invoice

Explanation- The documentary evidence in support of a transaction is known as voucher. For example, if we buy goods for cash, we get cash memo, if we buy on credit,

we get an invoice; when we make a payment we get a receipt and so on.

(b) Rs. 5,00,000

Explanation- Amount invested by the owner in the firm is known as capital.

(a) Net Profit

Explanation- Net Profit is the profit earned after allowing for all the expenses. It is shown on the Liabilities side of the Balance Sheet.

(d) Trading A/c

Explanation- The Excise Department and Sales Tax Department compute the taxes due to them on the basis of Trading Account.

(b) Discount

Explanation- Discount is allowed in the prices of goods.

(b) Cost of Goods sold

Explanation- Cost of goods sold is the direct costs of the goods sold to the customers.

(b) Cash discount

Explanation- After selling the goods on credit basis the debtors may be given certain deduction in amount due in case if they pay the amount within the stipulated period or earlier. This deduction is called cash discount.

(b) Capital expenditure

Explanation- Capital Expenditure is the amount that is incurred in purchasing assets which will give benefit extending over a number of accounting periods.

(d) Entity

Explanation- Business entity means a specifically identifiable business enterprise like Super Bazaar, Hire Jewellers, ITC Limited etc.

(b) Fixed assets

Explanation-Assets which are purchased for the purpose of operating the business and not for resale are called fixed assets. These assets are held on a long term basis, such as land, building, machinery, plant etc.

(b) revenue Expenditure

Explanation- Revenue expenditure is the amount that is incurred in current activities to purchase goods and services which are consumed during the accounting perio

d. Revenue expenditure is shown on the debit side of the Profit and Loss account.

(a) Income

Explanation- Income is the profit earned during a period of time. It is the difference between revenue and expense.

(d) Short term liability

Explanation- Bank overdraft is an example of short term liability as this obligation is payable within a period of one year.

(b) Cash Discount

Explanation- When debtors are allowed some discount in prices of the goods for quick payment, it is called cash discount.

(a) Cost accounting

Explanation- The main purpose of cost accounting has been to analyse the expenditure involved so as to ascertain the cost of various products manufactured and fix their prices.

(b) Owners

Explanation- Ownerscontribute the capital in the business. The capital may be brought in the form of cash or assets by the owner.

(b) Financial health

Explanation- The position statement provides the information about the assets owned by the firm, amounts, receivable and the cash and bank balance held by it.

(d) Owners

Explanation- The difference between the liabilities and the assets is represented by capital, i.e., amount due to owners.

(a) Owners

Explanation- Equity shareholders are the real owners of the firm. They have the voting right. .(Not part of this chapter)

(d) Conservatism

Explanation- Conservatism means that the accounting information is prepared by providing all prospective losses while leaving all prospective profits.(Not part of this chapter)

(b) Understandability

Explanation- Understandability means that the information provided through the financial statement is presented in the manner that it is understandable to the users. But if the information is considered relevant for the users’ decision making then it must be disclosed even of the information is complex and not easily understandable by the user.

(b) Nature of the enterprise

Explanation- Accounting measurement and treatment of any transaction depends to a large extent, on the nature of the enterprise, conditions of the occurrence of transactions and the legal framework.

(a) Expenses

Explanation- Generally, expenses are measured by the cost of assets consumed or services used during an accounting perio

d. The usual items of expenses are: depreciation, rent, wages, salaries, interest, cost of heater, light and water,telephone, etc.

(b) Expense

Explanation- Expense is the cost of the use of things or services which produce the revenue.

(d) Purchases

Explanation- Goods are those things which are purchased for resale or for producing the finished products which are also meant to be sol

d.

(c) Net Loss

Explanation- In case, expenses are more than the revenue, it is Net Loss.

(a) Long-term loans

Explanation- Debenture is a part of Long-term loans. Firm has to pay interest to the debenture holders.

(b) Computers

Explanation- The task of book-keeping is rather of a mechanical nature; in Western countries and also to a very large extent in India, computers are used for this purpose.

(b) Special

Explanation- Accounting requires special skills and ability to analyse and interpret.

(d) Book-Keeping

Explanation- Book-Keeping is the basis for accounting. Accounting begins where book-keeping ends.

(a) Gross profit

Explanation- Gross profit is the amount of difference between the sales revenue or the proceeds of goods sold and/or services rendered less the direct cost of goods sold and/or services rendere

d.

(b) Current assets

Explanation- Prepaid expenses is the part of current assets which can be converted into cash within a period of one year.

(b) Paid for salaries of employees Rs. 5,000.

Explanation- This entry is related to the business. If we talk about the remaining entries then these entries are related to the personal expense of an individual thus cannot be categorised under the business transaction.

(b) Advantage

Explanation- No businessman can remember everything about business since memory has limitations. It is necessary to record transactions in the books of account promptly. This will obviate the necessity of remembering the various transactions since on need, the record will furnish the necessary information.

(b) Value Added Tax

Explanation- It is a tax which is directly taken from the customer by charging his bill.

(a) Current assets

Explanation- Current assets are those assets of the business which are kept for short term for converting into cash or for resale. Unsold goods and bills receivables are the examples of the same.

(d) Assets - Capital

Explanation- Liabilities are debts, they are amounts owed to creditors. Thus, the claims who are not owners are called ‘‘Liabilities.’’

(b) Assets - Liabilities

Explanation- Capital is also known as Owner’s Equity, proprietorship and net worth. Owner’s Equity means owner’s claim against the assets of the business. It will always be equal to assets less liabilities.

(b) Current assets

Explanation- Unsold goods, debtors, bills receivables, bank balances etc are some of the examples of current assets. These assets are kept for the short term for converting into cash or for resale.

(d) Debtor

Explanation- A person who owes money to the firm generally on account of credit sale of goods is called a debtor.

(a) Current liabilities

Explanation- Outstanding salary is the salary amount which is due but not paid and it comes under the head ‘Current Liability.’

(b) Revenue

Explanation- Revenue is an inflow of assets which results in an increase in the owner’s equity. Examples of revenue are receipts from the sale of goods, rent, income etc.

(b) Economic Transactions

Explanation- Economics transactions are related to the financial aspect of the business.

(d) Proprietor

Explanation- The person who makes the investment and bears all the risks connected with the business is called the proprietor.

(a) Drawings

Explanation- It is the amount of money or the value of goods which the proprietor takes for his domestic or personal use.

(b) Opening stock

Explanation- The term ‘opening stock’ means goods lying unsold in the beginning of the accounting year.

(b) Liability

Explanation- Liabilities are debts, they are amounts owed to creditors. Thus, the claims of those who are not owners are called ‘Liabilities’.

(a) Current assets

Explanation- The term ‘stock’ is the part of current assets which can be converted into cash within a period of one year.

(d) Owners

Explanation- Drawings are made by owners in the form of cash.

(b) Long-term loans and public deposits

Explanation- Long-term loans and public deposits are the examples of fixed liabilities which cannot be paid off within a period of one year.

(d) Stock and prepaid expenses

Explanation- Current assets are those assets which can be converted into cash within a period of one year.

(b) Asset

Explanation- Assets are things of value owne

d. In the words of Finny and Miller, ‘‘Assets are future economic benefits, the rights which are owned or controlled by an organisation or individual.’’

(a) Credit purchases

Explanation- When goods are purchased on credit, it is referred to as credit purchases.

(b) Revenue – Expense

Explanation- For example, goods costing Rs. 15,000 are sold for Rs.21,000, the cost of goods sold i.e., Rs. 15,000 is expense, the sale of goods, i.e., Rs. 21,000 is revenue and the difference, i.e., Rs. 6,000 is income. It can therefore be expressed as:

(d) Goods, rent and income

Explanation- Revenue is an inflow of assets which results in an increase in the owner’s equity.

(b) External users

Explanation- External users are the groups outside the business identity who uses information to make decisions.

(d) Book keeping

Explanation- Accounting information thus refers to the financial statements generated through the process of Book-Keeping, use if which enables the users to arrive at the correct decision.

(a) Balance Sheet

Explanation- Capital is recorded in the balance sheet on the Liabilities side of the Balance Sheet.

(b) Current Assets

Explanation- Current Assets are assets held on a short-term basis such as debtors, bills receivable, stock, temporary marketable securities, cash and bank balances.

(d) Creditors and short-term loans.

Explanation- Current liability is the liability which is to be paid off within a period of one year.

(b) Recording the transactions

Explanation- Journal is that primary book of accounts in which transactions are originally recorded in a chronological order.

(a) Money

Explanation- Accounting records the transactions by expressing them in terms of money. This makes the transaction more meaningful.

(b) Cost Accounting

Explanation- The main purpose of cost accounting has been to analyse the expenditure involved so as to ascertain the cost of various products manufactured and fix their prices.

(d) Financial Accounting

Explanation- The accounting system that is concerned only with the financial state of affairs and financial results of operations is called Financial Accounting. It includes ascertainment of profit earned or loss incurred and position of the business at the end of the accounting period and providing financial information required by the management.