Solution

ACCOUNTANCY - INTRODUCTION

Class 11 - Accountancy
1. Accounting is regarded as the language of business. It is used as a means of communication between a business organization and
its shareholders. The accounting process is a source of information, it uses business data and processes it to generate relevant
information.
A proper record is maintained of all assets and liabilities to show the value of the firm's possessions and the amount the firm is
owing to others at the end of the particular period. With the help of systematic record, the accountant prepares the balance sheet of
the firm which provides necessary information about the financial position. The owners came to know about the earnings,
expenses, profit and loss, raw material, other goods etc.
Potential investors came to know about the past and present performance of the concern revealed by the accounting statements.
Creditors are interested in knowing whether an enterprise can settle its obligations on scheduled dates in time. The government
has to collect sales tax, income tax and other taxes from the business. For this, it is necessary to prepare proper accounts.
Accounting information systems typically include the general journal and four types of special journals. These are the sales, cash
receipts, cash disbursements, and purchases journals. Information systems also commonly include accounts receivable and

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accounts payable subsidiary ledgers.

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In this way, accounting works as a source of information for owners, management, creditors, employees and government.
2. Yes, this is true that protecting the assets of the business is amongst one of the key roles of Accounting. An Accountant has to

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design such system of accounting as protects its properties from unjustified and unwarranted [Link] performs this function by
recording all the assets or properties of the business properly in the books of accounts so that the property can be protected.
3. The main objective of maintaining a set of accounting books is to enable the person concerned to get information about the
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financial position and conduct of his business as and when he needs it.
Following are the advantages of accounting:
i. Helps in ascertaining the profit and financial position: Accounting facilitates the preparation of financial statements e.g.,
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Profit and Loss Account and Balance Sheet, which depicts the profit and financial position of the business.
ii. Assists in managing the business: Accounting helps the management in decision-making to run the business efficiently and
effectively.
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iii. Recording of transactions: A businessman cannot remember all the transactions, how-so ever sharp his memory may be.
Therefore, every transaction should be recorded in black and white so that transactions are not missed out and there may not
be any misappropriation.
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iv. Evidence in the court of law: If the accounts of the business are kept properly, according to the principles of accounting, they
can be presented in the court of law as necessary documentary evidence.
v. Correct payment of taxes: Accounting helps in ascertaining the tax liability of the business correctly. Taxation authorities
insist that accounts are to be maintained according to the principles of accounting.
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vi. Comparative study: Financial statements facilitate inter-period and inter-firm comparisons to detect the strong and weak
points of the business.
4. Qualitative characteristics of accounting information are as mention below:
Reliability, Relevance, Understandability, Comparability
i. Reliability- It means that the user can rely on accounting information. All accounting information is verifiable and can be
verified from the source document (voucher), viz. cash memos, bills, etc. Hence, the available information should be free from
any errors and unbiased.
ii. Relevance- It means that essential and appropriate information should be easily and timely available and any irrelevant
information should be avoided. The users of accounting information need relevant information for decision making, planning
and predicting future conditions.
5. Point of difference between Book-keeping and Accounting on the basis of stage, special skills and nature of the job are as
follows:-
Bookkeeping Accounting

Bookkeeping is mainly related to the process of Accounting is the process of summarizing, interpreting, and
identifying, measuring, recording, and classifying communicating financial transactions that were classified in the ledger
financial transactions. account as a part of bookkeeping.

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 The objective of bookkeeping is to keep proper and The objective of accounting is to ascertain the financial position and
systematic records of financial transactions. further communicate the information to the relevant parties.

Bookkeeping doesn’t require any special skills as it Accounting, on the other side, requires special skills due to its analytical
is mechanical in nature. and somewhat complex nature.
6. Following transactions are of a financial character and will be recorded in the books-
i. Credit purchase of goods.
ii. Goods worth ₹20,000 taken from the business and given by the proprietor to his friend as a gift.
iii. Withdrawing of money by the proprietor from the business for personal use.
iv. Loss of goods by fire.
7. i. This system fails to ascertain actual profits if there are errors of principle in the records;
ii. A mistake committed at the time of journalizing or omission of a transaction from Journalising cannot be disclosed under this
system;
iii. It ignores price level changes as a change in price level makes analysis of financial statements of different accounting years
invalid.
8. Following are the parties interested in the analysis of financial statements due to the reasons given below:

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i. Owners or Investors:
a. Profitability

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b. Financial position
c. Future prospects or growth potential

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ii. Management:
a. Short-term and long-term solvency
b. Profitability in relation to turnover and investment
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c. Liquidity of the business firm
iii. Employees:
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a. Profitability
b. Cash position
iv. Suppliers and other Creditors:
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a. Financial position
b. Profitability
v. Lenders:
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a. Financial Position
b. Profitability
vi. Researchers:
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a. Profitability
b. Growth
c. Financial Position
d. Future prospects
vii. Government and their agencies:
a. Profitability
b. Growth
c. Financial position
d. Estimating National Income
9. The double-entry system of accounting is a system under which both debit and credit aspects of accounting are recorded. A
transaction has 2 aspects-one debit and the other one is credit. At the time of recording one aspect is recorded on the debit side and
the other is recorded on the credit side. The sum of debit entries must be equal to the sum of credit entries.
10. Cost accounting is the branch of accounting that deals with recording costs with the objective of ascertaining, reducing, and
controlling cost. The purpose of cost accounting is to analyse the expenditure, so as to ascertain the cost of various products
manufactured by the firm and fix the prices. It includes the accounting procedures relating to the recording of all income and
expenditure and preparing the periodical statement of costs and reports. The information provided by cost accounting is helpful in

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 determining the prices of products and services, exercising control over the cost being incurred through estimating the standard
cost in advance and comparing with actual costs.
11. The nature of Accounting can be ascertained from the points mentioned below:
i. Accounting is a process that aims at communicating economic information to its users. It relies on a set of previously agreed
concepts, conventions and rules.
ii. Accounting is a process which involves gathering, compacting, interpreting and disseminating economic information in a
systematic way.
iii. Its basic goal is to report on the resources and obligation of the entity to the owners.
iv. Accounting is more of an art than a science; its logical foundation is not deeply embedded in scientific or natural law. It is
essentially and fundamentally utilitarian in nature.
v. Accounting is an important tool for Management as it helps them in decision making for the organisation.
12. Book-keeping is a part of accounting. It is mainly concerned with the record keeping or maintenance of books of accounts. This
function is of routine and clerical in nature.
Major Activities covered under book-keeping are as follows :
a. Identifying the transactions and events of financial nature.
b. Measuring the identified transactions and events in a common measuring unit i.e. money.

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c. Recording the identified and measured transactions and events in proper books of accounts i.e., the books of original entry.
d. Classifying the recorded transactions and events into ledger.

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13. Accounting or accountancy is the measurement, processing and communication of financial information of an entity.
The accounting field is evolving by adapting to the various needs of organizations at every level. However, there are 7 major types

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of accounting:
i. Financial Accounting
ii. Management Accounting
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iii. Governmental Accounting
iv. Tax Accounting
v. Forensic Accounting
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vi. Project Accounting
vii. Social Accounting
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14. Window dressing refers to actions taken or not taken prior to issuing financial statements in order to improve the appearance of
the financial statements of books of accounts of the company.
Example of Window Dressing: If a company operates throughout the year with a negative balance in its general ledger account
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Cash: Checking Account. (At the bank, the checking account has a positive balance due to the time it takes for the company's
checks to clear.) In order to avoid its December 31 balance sheet reporting a negative cash balance, the company decides to
postpone issuing checks for vendors' invoices that should have been paid. The postponement allows its general ledger Cash
account to temporarily have a positive amount. On January 2, the company will issue the postponed checks and will resume its
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normal practice of having a negative balance in its Cash account.

15. Three external users of accounting are:
i. Creditors: A creditor could be a bank, supplier or person that has provided money, goods, or services to a company and
expects to be paid at a later date. In other words, the company owes money to its creditors and the amounts should be reported
on the company's balance sheet as either a current liabilities or a non-current (or long-term) liability.
ii. Potential Investors: It is only after getting detailed information about the profitability of the concern that investors take
decisions regarding investment to be made in that particular business. Accounting information is of great use to them in this
connection.
iii. Government: Accounting information is required by the government for fixing GST, assessing the profitability of the
concern, computing national income and determining the growth rate of the industry.
16. The main functions of accounting are as follows :
i. Maintaining Systematic Records : The primary or the main function of accounting is to maintain the systematic and
complete records of business transactions, post them to the ledger and to prepare the final accounts.
ii. Communicating the Financial Results to various users : Accounting is used to communicate the financial information to its
various interested users for rational decision-making.
iii. Meeting Government Regulation : The accounting system should comply with legal requirements. The various governing
laws such as Companies Act, Income Tax and Sales Tax Act requires the submission of statements or returns i.e. annual

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 accounts, income tax return, sales tax returns, etc. So accounting performs this function by providing proper information to the
government agencies.
iv. Protecting the Business Assets : Accounting helps the management to exercise proper control over the assets of the business
by maintaining proper records of various assets such as Cash, bank balance, inventory etc.
v. Assistance to Management : Accounting assists the management in the task of planning, controlling and coordination of
business activities.
vi. Stewardship or Trusteeship : The management is entrusted with the resources of the enterprise, in case of companies. The
management is expected to act as the trustee of the company’s funds and accounting helps to achieve the same.
17.
Accounting is both an art as well as a science. It can be seen in the following points :
Accounting as an Art : As an art it is the technique of achieving some pre-determined objectives. Accounting is an art of
recording, classifying and summarising financial transactions of the business. It helps us in ascertaining the net profit and
financial position of the business enterprise.
Accounting as Science: Science is an organised body of knowledge based on certain basic principles. Therefore,
accounting is also a science as it is an organised body of knowledge based on certain accounting principles.
18. A creditor could be a bank, supplier or person that has provided money, goods, or services to a company and expects to be paid at

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a later date.
They are interested to know the ability of the enterprise to pay their dues. Sometimes, they also are also interested in the long-term

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continuation of the enterprises, if their existence becomes dependent on the survival of that business. Suppose, small ancillary
units supply their products to a big enterprise, if the big enterprise collapses, the future of the small units which depend upon big
enterprises may also become dark.
19. Accounting can be defined as the systematic recording, reporting of financial transactions of a business, and a person who
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manages the accounts of any company or financial institution is called an accountant.
The main purpose of accounting is to allow a company to analyze its statistical data and prepare its financial accounts.
i. To keep a systematic record of all business transactions.
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ii. To determine the profit earned or loss incurred during an accounting period by preparing a profit and loss account.
iii. To ascertain the financial position of the business at the end of each accounting period by preparing a balance sheet.
20. Following are the groups of people interested in accounting information:
i. Owners: Owners are those persons who invested capital in the business and share the risks. Owners need accounting
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information to know the profitability and financial strength of the business to make proper decisions for continuing the
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business.
ii. Management: Management is answerable to the owners. The responsibility of the management is to operate the business
efficiently. Management needs accounting information for decision-making.
iii. Employees: Employees need accounting information to claim an increase in wages, bonuses, and other benefits.
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21. Accounting records only financial transactions and events. It is an advantage as transactions of diverse nature are recorded using a
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common denominator, i.e., money. But there are other important transactions and events which may have far-reaching effects on
business. They are not recorded because they cannot be measured in money terms. For example, production loss due to labor
strike,after-sale service, etc. Thus, it is a limitation to that extent.
22. Only financial transactions are to be recorded because it is due to Money Measurement Concept, which states that only those
transactions are to be recorded in books of accounts which consist of cash. It means that events or transactions, which can be
expressed in terms of money, are recorded in the books of accounts. Consequently, those events or transactions which cannot be
expressed in terms of money, do not find a place in the books of accounts though they may be very useful for the business. For
example, the general health condition of the chairman of the company, working conditions, sales policy, quality of products,
labour-management relations, etc. cannot be expressed in monetary terms and, hence, are not recorded in the books. It makes
accounting information more meaningful as accounting entries are supported by facts. Accounting information is free from
personal bias and whims of the accountant.
23. Types of Accounting Information
Accounting information refers to the information provided in financial statements of the business, generated through the process
of book keeping and summarising. By using the accounting information, the users are in a position to take the correct decision.
The financial statements so generated are the income statement i.e., profit and loss account and the position statement i.e., balance
sheet and a Cash Flow Statement.
The information made available by these statements can be categorised into the following categories:

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 i. Information Related to Profit or Loss during the year: Information about the profit earned or loss incurred by the business
during an accounting period is made available through the income statement of the business i.e., the profit and loss account.
Trading account provides information about gross profit or gross loss whereas the profit and loss account provides information
about the net profit or net loss during the year. It also gives details of all the expenses and incomes during the year.
ii. Information Related to Financial Position of the business : Information about the financial position of the enterprise is
determined through its position statement i.e., the balance sheet.
It provides information about the assets and liabilities of a business on a particular date. The difference between the two is
represented by capital i.e., amount due to owners. In the case of not-for-profit organisation, difference between assets and
liabilities is termed as general fund.
iii. Information about Cash Flow during the year : Cash flow statement is a statement that shows inflow and outflow of cash
during a specific period. It helps in making various decisions such as payment of liabilities, payment of dividend and
expansion of business, etc., as all these are based on availability of cash. It gives a clear picture of the liquidity of the business.
24. Objectives of accounting are as follows:
i. Identifying and Recording Transactions - The primary objective of accounting is to identify money repeated transactions
and recording them in a systematic way.
ii. Assets and Liabilities - Businessmen need to buy assets like land, machinery, and also needs to face debts and liabilities like

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bank overdraft and loans, etc. He needs to keep track of these through proper accounting. A businessman can take the right
steps for controlling the quantity of assets decrease and liability increase.

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iii. Helping tax fixation - Accounts prepared on the basis of accepted accounting principles in considered reliable to the income
tax and VAT authorities for easy determination and settlement of tax and VAT.

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25. Financial accounting is a branch of accounting that involves the recording of revenues, expenses, assets, and liabilities of a
business. Financial Accounting is the measurement, processing, and communication of financial information about a business or
organization. It is basic accounting or initial level accounting in which we are recording, summarising, and analyzing day to day
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transactions of the particular business.
The main function of financial accounting is the preparation of financial reports which provide a summary of a firm's financial
condition. Income Statement or Profit & Loss Account and Balance Sheet are the end product of financial accounting. These
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financial statements provide vital information to various interested groups.
26. A good accountant is one who is honest and shrewd. He must ensure that all transactions are recorded in the books of accounts
and there should be no hiding of facts. Sometimes, pressure may be put on him to hide certain facts in accounts to evade tax or
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any other purpose.

27. Branches of Accounting
The economic development and technological improvements have resulted in an increase in the scale of operations and the advent
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of the company form of business organisation. This has made the management function more and more complex and increased the
importance of accounting information. This gave rise to the special branches of accounting.
These are briefly explained below :
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i. Financial Accounting : The process of identifying, measuring, recording, classifying, summarising, analysing, interpreting
and communicating the financial transactions and events is known as financial accounting. The main purpose of this branch is
to ascertain the profit or loss of the business by preparing final accounts.
ii. Cost Accounting : It is the process of ascertaining and controlling the cost of a product, operation or function. The purpose of
cost accounting is to analyse the expenditure, so as to ascertain the total cost and per unit cost of various products
manufactured by the firm and fix the prices. It also estimates the costs in advance,so it helps in controlling the costs and
providing necessary costing information to management for decision-making.
iii. Management Accounting : It is concerned with the use of accounting techniques to present the accounting information in
such a way as to assist all the levels of management in planning and controlling the activities of business and to enable
decision-making. The purpose of management accounting is to assist the management in taking rational policy and to evaluate
the impact of its decisions and actions by using various techniques and concepts to make the accounting data more meaningful
to them. Management accounting not only includes cost accounting but also covers other areas such as capital expenditure
decisions, capital structure decisions, dividend decisions.
iv. Social Responsibility Accounting : It is the process of identifying, measuring and communicating the social contributions of
business to the society. It helps its various users to enable judgements and decision-making by them. It is accounting for social
costs and social benefits.
28. i. Social Responsibility Groups ,
ii. Potential Investors and Long term Creditors.

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 iii. Public or Customers.
29. A company’s decision-makers must be able to trust the accounting information provided by the accounting department. A
company uses its financial data and other accounting information to make decisions that can affect its position within the market.
Following are the characteristics of the accounting:
i. Economic events: Accounting requires events to be expressed in terms of money. Transactions should involve transfer or
exchange of monetary value between the business entity and outsiders.
ii. Identification, measurement, recording and communication: Accounting is a process of identifying the transactions to be
recorded, quantifying the transactions into financial terms, recording the transactions in a systematic manner and
communicating the desired information to various interested groups.
iii. Users of the information: Accounting is complete when information is communicated to various groups interested in the
functioning of the business entity.
30. i. Investors: Persons who are interested in investing their funds in an organization should know about the financial condition of
a business unit while making their investment decisions. They are more concerned about the future earnings and risk-bearing
capacity of the organization which will affect the return to the investors. Investors do not have direct control over business
affairs.
ii. Government: The scarce resources of the country are used by business enterprises. Information about the performance of

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business units in different industries helps the government in policy formation for the development of trade and industry,
allocation of scarce resources, the grant of subsidy, etc.

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31. Basis Financial Accounting Cost Accounting Management Accounting

Financial accounting is a
Cost accounting is an accounting Management accounting, also called
specialized branch of
accounting that keeps track
of a company's financial
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method that aims to capture a company's
costs of production by assessing the
input costs of each step of production as
managerial accounting or cost accounting, is
the process of analyzing business costs and
operations to prepare internal financial
transactions. Using
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well as fixed costs, such as depreciation report, records, and account to aid
standardized guidelines, the
Meaning of capital equipment. Cost accounting managers’ decision making process in
transactions are recorded,
will first measure and record these costs achieving business goals. In other words, it
summarized, and presented
individually, then compare input results is the act of making sense of financial and
in a financial report or
to output or actual results to aid costing data and translating that data into
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financial statement such as

company management in measuring useful information for management and
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an income statement or a
financial performance. officers within an organization.
balance sheet.

Record transaction and

Ascertainment, allocation, accumulation To assist the management in decision
Objects determine financial position
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and accounting for the cost making & policy formulation

& profit or loss
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Concerned with historical concerned with both past and present Deals with a projection of data for the
Nature
data recorded( historical in nature) future( futuristic in nature)

Principle certain principles followed for recording

Governed by GAAP No set principles are followed in it
followed cost

Data Qualitative aspects are not Uses both qualitative and quantitative
Only quantitative aspects are recorded
Used recorded concepts

32. Basic Book-keeping Accounting

Book-keeping involves identifying financial transactions, Accounting involves summarizing the recorded
Scope measuring them in money terms, recording them in the transactions, interpreting them and communicating the
books of accounts and classifying them. results to the users of accounting.

Its objective is to ascertain net results of operations and

Its objective is to maintain systematic records of financial
Objective financial position so as to communicate such
transactions of the enterprises.
information to various interested parties.

Special Accounting requires special skills and ability to

Book-keeping does not require special skills.
Skills Analyse and interpret.

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33. The objectives of accounting are as follows:-
i. Identification and recording of the transactions of the business: Accounting enables business firms to maintain systematic
records of all financial transactions. Various properties and possessions as well as obligations are also recorded. As a result,
the true nature of each and every transaction is known without much exercise of memory. With this end in view the
transactions are primarily recorded in general and in a special journal and later on permanently various accounts are kept in
the ledger. So that there is no unauthorised use or disposal of property of business.
ii. Calculation of Profit or Loss: A businessman would be interested in knowing at periodical intervals the net result of business
operations, i.e. how much profit has been earned or how much loss has been incurred. The amount of profit or loss for a
particular period of a business concern can be ascertained by preparing income statement with the help of ledger account
balances of revenue nature. Surplus or deficit of revenue for a particular period of a non-trading concern can also be
ascertained by preparing income and expenditure account or statement.
iii. Depiction of position: A proper record is maintained of all assets and liabilities to show the value of the firm's possessions
and the amount the firm is owing to others at the end of the particular period. With the help of this systematic record, the
accountant prepares the balance sheet of the firm which provides information about the financial position.
iv. Comparison of results: Systematic maintenance of business records enables the accountant to compare profit of one year
with those of earlier years to know the significant facts about the changes. This helps the business to plan its future affairs

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accordingly.
34. The steps involved in the process of accounting are as follows:

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i. Identifying the financial transactions.
ii. Recording these transactions in the books of accounts.

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iii. Classifying the recorded entries in separate accounts.
iv. Summarising the classified records.
v. Analysis and interpretation of financial statements.
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vi. Communicating the accounting information to the users
35. Accounting is a process of identifying the financial transaction, measuring them in money terms, recording them in primary
books, classifying, summarising, interpreting them and communicating the result to the users.
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Limitation of Accounting:-
Accounting ignores the qualitative elements:
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1. Accounting only records that transaction which can convert into money it ignores the qualities elements. E.g. quality to staff,
public, industrial relations.
2. Accounting is not fully exact:- In accounting transactions are recorded in the basis of evidence (i.e., sale or purchase receipts)
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but some transactions are recorded on the basis of estimation. E.g. depreciation, provision for bad debts etc.
3. Accounting may lead to window dressing:- windows dressing means manipulation of accounts as to conceal vital facts and
present financial statements in such a way as to show a better position than what it actually is. Hence income statement
doesn’t show true financial position.
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4. Accounting doesn’t indicate the realisable value:- Balance sheet does not show actual realisable value become assets are
shown at net cost i.e.(Cost–Depreciation).
36. Accounting information qualitative characteristics are summarized below: In addition to the aforementioned characteristics (i.e.,
relevance, reliability, comparability, and consistency), the following qualities of accounting information affect its usefulness:
understandability, materiality, and conservatism. There are four 4 qualitative characteristics of accounting information that serve
as the basis for decision-making purposes in accounting:
Relevance: Information makes a difference in decision making.
Reliability: Information is verifiable, factual, and neutral.
Comparability: Information can be used to compare different entities. Also, comparability to entity for various years to report on
matters.
Consistency: Information is consistently presented from year to year.
These qualities make accounting information understandable and useful for decision and reporting purposes: the goal of financial
reporting is to provide useful information to current and potential investors, creditors, and other users of accounting information
(e.g., government, standard-setting bodies) to make an investment, credit, and other decisions.
37. The drawbacks or limitations of accounting are as follows
i. Accounting is Not Fully Exact: Although, most of the transactions are recorded on the basis of evidence such as sale or
purchases or receipt of cash, yet some transactions are purely based on estimates for ascertaining profit or loss.

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 ii. Ignores the Qualitative Elements: Qualitative elements like quality of employees, better public relations are ignored as
accounting is confined to monetary transactions only.
iii. Ignores Price Level Changes: Price level changes are ignored while preparing financial statements as accounting statements
are prepared at historical cost. Unless price level changes are considered, accounting information will not show true financial
results.
iv. Window Dressing: The term window dressing means manipulation of accounts so as to present the financial statements in a
way to show better position than the actual. In this situation, income statement {i.e., profit and loss account) fails to provide a
true and fair view of the results of operations and the balance sheet fails to provide a true and fair view of the financial
position of the business.
38. Advantages of accounting are as follows:
Maintenance of business records: All financial transactions are recorded in a systematic manner in books of accounts so
that there is no need to rely on memory. It is not possible for any human being to remember all what happened in daily
operations of a business.
Taxation Problems: In settlement of taxation matters, systematic maintenance of records is a big help.
Goods evidence in courts: Accounting information can be produced as evidence in the legal matter. Records of business
transactions are treated as satisfactory evidence in a court of law.

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Comparison of results: Systematic maintenance of business records enables the accountant to compare profit of one year
with those of the earlier year to know the significant facts about the changes.

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Valuation of business: Accounting records kept in a proper way to enable a business unit to determine the purchase or
sale price in a simple manner.

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Provides information An accounting information system is generally a computer-based method for tracking accounting
activity in conjunction with information technology resources. The resulting financial reports can be used internally by
management or externally by other interested parties including investors, owners, creditors, management, employees are
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interested in various aspects.
39. Yes, I do agree with the statement because:-
i. With accounting information, we are able to compare the result of the previous year with the current year.
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ii. if this information is not comparable we will not be able to compare ourselves with our competitors.
40. The limitations of financial statements are those factors that a user should be aware of before relying on them to an excessive
extent. Knowledge of these factors could result in a reduction of invested funds in a business, or actions taken to investigate
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further.
Following are the limitations of financial accounting:
i. Incomplete information: The accountant measures only those events that are financial in nature, i.e., that is capable of being
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expressed in money. Nonmonetary items or events, however, significant they may be, are not measured or recorded in
accounting. For example, competency of management, competition in the market, industrial relations, etc.
ii. Inexactness: Accounting data is some-times based on estimations and it may be inaccurate. Therefore, profits and financial
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position disclosed by such accounts may not be true and exact. For example, stocks are also valued on some assumptions. The
actual useful life of an asset cannot be accurately calculated for the purpose of depreciation.
iii. The personal influence of accountant: Accounting may be influenced by the personal judgment of the accountant. He
applies a choice between different methods of inventory valuation, depreciation methods, provision for doubtful debts,
treatment of capital and revenue items, and so on. Thus, due to the lack of objectivity, income measured may not be true in
certain cases.
iv. Assets may not be shown at their real value: Fixed assets are shown at written down value, i.e., cost less depreciation. There
may be a great difference between book value at which assets are shown and the current replacement cost. Certain valueless
assets are also sometimes shown in the Balance sheet, such as goodwill, patents, and trademark, preliminary expenses, etc.
41. External users are the persons outside the organisation, who are interested in knowing the accounting information of the business
due to present or future interest in the business enterprise. They access such information through published reports such as Profit
& Loss account, Balance Sheet, Cash Flow Statement etc.
The various external users and their informational needs are as follows:
i. Investors and Potential Investors : They require information on the risks, profitability, and return on investment.
ii. Unions and Employee Groups : They require information on the stability, profitability and distribution of wealth within the
business.
iii. Lenders and Financial Institutions : They require information on the creditworthiness of the company and its liquidity i.e.,
its ability to repay loans and to pay interest.

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 iv. Suppliers and Creditors : They require information on whether amount owed to them will be repaid when due, and on the
continued existence of the business.
v. Customers : They require information on the continued existence of the business and thus, the probability of a continued
supply of products, parts and after sales service etc.
vi. Government and Other Regulators : They require information on the allocation of resources and the compliance to
regulations.
vii. Social Responsibility Groups : Social responsibility groups such as environmental groups require information on the impact
of business activities on environment and its protection.
viii. Competitors : They require information on the relative strengths and weaknesses of their competitors and for comparative
and benchmarking purposes. The competitors require the accounting information mainly for strategic purposes.
42. i. Researchers: Researchers are interested in interpreting the financial statements of the concern for a given objective.
Accounting information helps research scholars who wants to make a study into the financial operation of a particular firm.
ii. Government:- Government has to collect sales tax, income tax, excise duty, and other taxes from the business. For this, it is
necessary that proper accounts are made available to the [Link] wants to know earnings or sales for a
particular period for the purpose of taxation. Income tax returns are examples of financial reports which are prepared with
information taken from [Link] ensures that a company's disclosure of accounting information is in

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accordance with the regulations that are in place to protect the interest of various stakeholders who rely on such information in
forming their decisions

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iii. Creditors:- Creditors are those parties that provide a firm with raw material, goods, services and financial resources by either
extending credit or making loans. They are interested in knowing whether an enterprise can settle its obligations on a

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scheduled date in time. As a result, the existing cash position, outstanding debts, present and future earnings of an enterprise
are of utmost concern.
iv. Potential Investors: The prospective investors are in need of detailed information about the progress of the concern because
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on the basis of the information revealed by the accounting statements they make decisions regarding the investment to be
made in that particular business. They would like to know the data relating to the past and present performance of the business
and details of the decisions taken for future programmes.
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43. Users of accounting information are as follows:
i. The owners/shareholders use them to see if they are getting satisfactory returns on their investment and also to assess the
financial health of their enterprise.
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ii. The managers/directors use them to ascertain the strengths and weaknesses of the enterprise.
iii. The creditors use them to know whether the firm will be able to pay the interest regularly and will be able to pay their debts as
they become due.
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iv. The prospective investors use them to assess whether or not to invest their money in this firm.
v. Employees: They need accounting information to claim an increase in wages, bonus and other benefits.
vi. The government agencies use them for the payment of various taxes such as Goods and Service Tax (GST), Income Tax etc.
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44. The modern business environment has changed drastically in a short time. Business technology has advanced business functions
and operations to levels not previously believed possible. The role of accounting and business is perhaps one of the most reliable
functions in business. While a few basic procedures or methods have changed, the purpose of accounting remains the same.
Business owners often use accounting to measure their company’s financial performance and make business decision:
Facts
The goal of most businesses is to make a profit. Accounting allows business owners to record, report and analyze their company's
financial information. Accounting provides information relating to income, cost of goods sold, expenses, assets, liabilities and
owner’s equity. Business owners often rely on this information to provide them with information on how money was spent in the
business. Financial statements are usually the final output of accounting. These statements include a company’s aggregate
financial information for accounting period.
Features
Accounting provides business owners with potential benchmarks for comparing their company with the industry standard.
Business owners and managers often use financial ratio analysis to break down their company’s financial performance. These
ratios provide indicators or percentages to compare against a competing company in the business industry. Companies with
financial indicators or percentages worse than the industry standard usually need to improve business operations. Ratios provide
focal points so business owners know where to start when making improvements.
Function
Small business owners often use accounting information to secure bank loans or investor financing for their business. Many small

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 businesses require startup capital when beginning business operations. Entrepreneurs and business owners will often prepare pro
forma financial statements to provide banks and investors with information relating to the business’ expected financial return.
Business owners needing additional financing during business operations often provide banks and investors with a track record of
their company’s financial accounting information.
Significance
Accounting is often called the language of business. This statement refers to the analysis methods used to measure different
companies using the same measuring stick. Comparing one company with another is often difficult because each company has
different operations. Accounting boils down a company’s operational performance to a basic financial analysis. Accounting may
also provide individuals with an analytical comparison of international companies.
Expert Insight
The accounting industry has seen significant growth over the past several years. Public accounting firms and individual certified
public accountants offer professional accounting services to small and large businesses. The growth in accounting is often
attributed to increasing government regulations, the number of new businesses in the economic environment and increasingly
complex financial situations. Small business owners typically use professional accountants to prepare business tax returns
45. Accounting can be defined, as the process of identifying, measuring, recording and communicating the required information
relating to the economic events or an organisation to the interested users or such information.
The objectives of accounting are as follows :

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i. To keep the Systematic Records of Business Transactions: The main objective of accounting is to keep the proper and

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systematic record of all business transactions. In other words, Accounting systematically records all financial transactions and
events of the enterprise in the books of accounts. It classifies the recorded data under relevant accounts and summarises them

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into financial statements. Accounting is done to keep a systematic record of all financial transactions, assets and liabilities.
The recorded information enables verifiability and acts as evidence.
ii. To Calculate Profit or Loss: Another main objective of accounting is to ascertain the profit earned or loss sustained by a
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business during an accounting period. For this purpose, a statement called the income statement or the trading and profit and
loss account is prepared at the end of each financial year. In this account, the revenue and the expenses incurred in the
accounting period are recorded, and the comparison of the two shows whether the business has earned profit or incurred loss.
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iii. To Ascertain the Financial Position of business: Accounting also aims at ascertaining the financial position of the business
by preparing a position statement called as balance sheet. Balance sheet is a systematic record of various assets and liabilities
of the business on a particular date. It is like a screen picture of the financial position of the business showing its all the assets
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and liabilities.
iv. To Provide Accounting Information to Its Users for Decision-making: Another important objective of accounting is to
provide accounting information to its user. Users are generally of two types internal and external. Internal users include
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management, owners etc. and external users include creditors, investors, government etc. The accounting information is
communicated in the form of reports, statements, graphs, charts, etc. to these users. This information helps them for financial
planning and controlling.
46. Development of Accounting: In ancient times, around 4000 B.C., accounting was used for recording wages and salaries, deposits
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and withdrawals of valuable goods (such as gold and silver) from the treasures of the king. Afterwards, it was used to record the
receipts and payments and balancing of government financial transactions. During 1500 A.D., accounting was used by business
firms for recording transactions related to business. In 1800 A.D., accounting was used to record transactions and also to provide
information to various users of financial data.
Role of Accounting: Accounting is often called “the language of business.” Why? Because it communicates so much of the
information that owners, managers, and investors need to evaluate a company’s financial performance. These people are all
stakeholders in the business—they’re interested in its activities because they’re affected by them. In fact, the purpose of
accounting is to help stakeholders make better business decisions by providing them with financial information. Obviously, you
wouldn’t try to run an organization or make investment decisions without accurate and timely financial information, and it’s the
accountant who prepares this information.
i. Substitute of memory: As it is beyond human capabilities to remember each and every business transaction, accounting plays
an important role in recording these transactions in the books of accounts.
ii. Assistance to management: Management uses accounting information for short-term and longterm planning of business
activities and to control various costs and budgets.
iii. Comparative study: In order to ascertain the performance of the business, accounting enables comparison of current year's
profit with that of previous years (intra-firm comparison)and also with other firms in the same business (inter-firm
comparison).

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 iv. Evidence in court: It acts as evidence that can be used or presented in the court if any discrepancy arises in the future.
47. Bookkeeping is the activity of recording the financial transactions of the company in a systematic manner while Accounting is an
orderly recording and reporting of the financial affairs of an organization for a particular period while accountancy is to
summarize, classify and accordance of every financial activity into a system.
Book-keeping is a primary and basic function in the process of accounting and concerned with recording and maintenance of
books of accounts only.
Accounting is the secondary function and it starts where function of book-keeping ends.
Accountancy is a study of systematic knowledge and contains those rules, regulations, procedures, principles, concepts,
conventions and techniques, which are to be applied in the process of accounting. In this sense, we can say that accountancy is a
broader term that acts as a guide for the preparation of books of accounts, summarisation of information and communicating the
results to all the concerned parties.
48. Classifying : After recording the transactions in Journal or subsidiary books, the transactions are classified. It means the
process of grouping transactions or entries of one nature at one place. Say for example, The transactions recorded in the
journal or the subsidiary books are classified or posted to the main book of account known as the ledger. This book
contains individual account heads under which all financial transactions of a similar nature are collected.
Summarising : It is the art of presenting the classified data in such a manner which is understandable and useful to

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various users of accounting statements. This involves balancing of ledger accounts and preparation of Trial Balance. Then
final accounts are prepared from Trial Balance.

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Analysis and Interpretation : Analysing and interpreting the financial data (presented in the books of accounts) enables
its users to make a meaningful judgement about the profitability and financial position of the business. It also helps in

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planning for the future in a better manner.
49. The qualitative characteristics of accounting information are as follows:
i. Reliability : It means the accounting information must be reliable i.e., the users must be able to depend on the information. It
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must be factual and verifiable. A reliable information should be free from errors and bias.
To ensure reliability, the information disclosed must be credible, verifiable by independent parties, must use the same method
of measuring and be neutral and faithful.
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ii. Relevance : Accounting information presented by financial statements must be relevant to the decision making needs of the
users. It means Unnecessary and irrelevant information should not be included. To be relevant, the information must be
available on time, must help in prediction and feedback, and must influence the decisions of users.
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iii. Understandability : It implies that the information provided in the financial statements must be prepared in such a manner
that it is understandable by the its users. Understandability implies that the accounting information provided to the decision-
makers must be interpreted by them in the same sense as it was prepared and conveyed to them. This can be done by giving
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proper explanatory and working notes to explain the information.

iv. Comparability : It means that the users should be able to compare the accounting information. To be comparable, accounting
reports must belong to a common period and use common unit of measurement and format of reporting.
50. Limitations of accounting are as follows:
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i. Accounting information is not fully correct: Transactions are recorded in the books of account on the basis of source of
documents such as sale or purchase or receipt of cash. But still, some are also made available for ascertaining profit or loss.
ii. Accounting information ignores the qualitative elements: As accounting statements are confined to monetary values only,
qualitative elements are ignored. Qualitative aspects are also important in analysis of accounting
iii. Accounting information ignores the effect of price level changes: Accounting statements are prepared at historical cost.
The changes in the value of money are not considered while preparing financial statements. Unless price level changes are
considered, accounting information will not present the original financial results.
51. Accounting is the art of recording, classifying and summarising in terms of money transactions and events of a financial character
and interpreting the results thereof. The attributes of accounting are as follows:-
i. Relevance:- Relevance is closely and directly related to the concept of useful information. Relevance implies that all those
items of information should be reported that may aid the users in making decisions and/or predictions. In general, information
that is given greater weight in decision-making is more relevant.
ii. Reliability:- Reliability is described as one, of the two primary qualities (relevance and reliability) that make accounting
information useful for decision-making. Reliable information is required to form judgements about the earning potential and
financial position of a business firm. Reliability differs from item to item. Some items of information presented in an annual
report may be more reliable than others. For example, information regarding plant and machinery may be less reliable than

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 certain information about current assets because of differences in uncertainty of realisation. Reliability is that quality which
permits users of data to depend upon it with confidence as representative of what it purports to represent.
iii. Understandability:- Understandability is the quality of information that enables users to perceive its significance. The
benefits of information may be increased by making it more understandable and hence useful to a wider circle of users.
Presenting information which can be understood only by sophisticated users and not by others, creates a bias which is
inconsistent with the standard of adequate disclosure. Presentation of information should not only facilitate understanding but
also avoid wrong interpretation of financial statements. Thus, understandable financial accounting information presents data
that can be understood by users of the information and is expressed in a, form and with terminology adopted to the user’s
range of understanding.
52. External users of information are the individual or the organisations that have a direct or indirect interest in the business firm;
however, are not a part of management. They do not have direct access to the internal data of the firm and uses published data or
reports like profit and loss accounts, balance sheets, annual reports, press releases, etc. Some examples of external users are
government, tax authorities, labour unions, etc.
53. i. Complete and Systematic Record: Accounting is based on generally accepted principles and a scientific way of presentation
of business transactions in books of accounts. As such, accounting is a complete and systematic recording of all business
transactions. The limitations of humans, that they can not keep all transactions in mind, is overcome by accounting because

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each and every business transaction can be recorded and analyzed through the same.
ii. Determination of Selling Price: The main function of the management is decision making. Accounting helps and guides the

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management to take decisions in respect of determining selling price, deduction of cost, increase in sales, etc.
iii. Evidence in Court of Law: The business transactions are recorded in the books of accounts supported by authenticated

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documents viz. vouchers etc. Thus, the accounts can be used as evidence in the court of law.
iv. In Compliance of Law: Every business has to deal with various government departments like income tax, sales tax, custom
and excise, etc. Various periodic returns are to be filed with these departments. Accounting helps in the preparation and filing
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of such returns.
v. Facilitates Audit: Depending upon the size, nature and type of business, certification of books of accounts, known as audit, is
mandatory. An audit certificate issued by the auditor on the accounts is a clean chit to the organization which proves that there
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are no irregularities in the organization.
vi. Replace Memory:- When Organisation needs any information from the financial year, It provides information Regarding
Data. We can use these data for our need hence we can say accounting replaces memory.
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54. The accounting cycle is the holistic process of recording and processing all financial transactions of a company, from when the
transaction occurs, to its representation on the financial statements, to closing the accounts. One of the main duties of a book
keeper is to keep track of the full accounting cycle from start to finish. The cycle repeats itself every fiscal year as long as a
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company remains in business.

The accounting cycle incorporates all the accounts, journal entries, T accounts, debits and credits, adjusting entries over a full
cycle.
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Steps in accounting cycle are as follows :

i. Transaction: Financial transaction starts the process.

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 ii. Journal Entries: With the transaction set in place, the next step is to record these entries in the company's journal
iii. Posting: After that the journal entries are posted to the general ledger.
iv. Trial Balance: After the end of the accounting period, a total balance is calculated for the accounts.
v. Worksheet: When the debits and credits on the trial balance don't match the book keeper must look for errors and make
corrective adjustments that are tracked on a worksheet.
vi. Adjusting Entries: At the end of the accounting period, adjusted entries must be posted to accounts for accruals and deferrals.
vii. Financial Statements: The Balance sheet, Trading and P/L A/c and cash flow statement can be prepared using the correct
balance.
viii. Closing the Books: The revenue and expense accounts are closed and zeroed out for the next accounting cycle. Balance Sheet
accounts are not closed because they show the company's financial position at a certain point of time.
55. Any valuable thing that has monetary value, which is owned by a business, is its asset. In other words, assets are the monetary
values of the properties or the legal rights that are owned by business organizations.
Types of Assets:
Fixed Assets - These are those assets that are held for the long term and increase the profit earning capacity and productive
capacity of the business. These assets are not for resale, these assets use to increase the earning capacity of the business, for
example, land & building, plant & machinery, etc.

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Current Assets - Assets that can be easily converted into cash or cash equivalents are termed as current assets. These are required
to run the day to day business activities; for example, cash, debtors, stock, bills receivable, etc.

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Tangible Assets - Assets that have a physical existence which we can touch and see are tangible assets; for example, cars,
furniture, building, plant, and machinery, etc.

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Intangible Assets - Assets that cannot be seen or touched, i.e. those assets that do not have a physical existence, are intangible
assets; for example, goodwill, patents, trademark, copyright, computer software, etc.
Liquid Assets - Assets that are kept either in cash or cash equivalents are regarded as liquid assets. These can be converted into
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cash in a very short period of time; for example, cash, bank, bills receivable, debtors, etc.
Fictitious Assets - These are the heavy revenue expenditures, the benefit of which can be derived in more than one year. They
represent loss or expense that is written off over a period of time, for example, if advertisement expenditure is Rs 10,00,000 for 5
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years, then each year Rs 2,00,000 will be written off.
56. Financial accounting is the field of accounting concerned with the summary, analysis and reporting of financial transactions
pertaining to a business. This involves the preparation of financial statements available for public consumption.
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Limitation of Financial Accounting:

i. Accounting ignores the qualitative elements:- Accounting only records that transaction which can convert into money it
ignores the qualities elements. E.g. quality to staff, public, industrial relations.
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ii. Accounting is not fully exact:- In accounting transactions are recorded in the basis of evidence (i.e., sale or purchase receipts)
but some transactions are recorded on the basis of estimation. E.g. depreciation, provision for bad debts etc.
iii. Accounting may lead to window dressing:- windows dressing means manipulation of accounts as to conceal vital facts and
present financial statements in such a way as to show a better position than what it actually is. Hence income statement
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doesn’t show true financial position.

iv. Accounting doesn’t indicate the realisable value:- Balance sheet does not show actual realisable value become assets are
shown at net cost i.e.(Cost – Depreciation).
57. The factors that necessitated systematic accounting are given below.
i. Only financial transactions are recorded - Those events that are financial in nature are only recorded in the books of
accounts. For example, the salary and wages of an employee are recorded in the books but his/her educational qualification is
not recorded.
ii. Transactions are recorded in monetary terms - Only those transactions which can be expressed in term of money are
recorded in the books of accounts. For example, if a business has two buildings and four machines, then their monetary values
are recorded in the books, i.e. two buildings costing Rs 2,00,000, four machines costing Rs 8,00,000. Thus the total value of
assets is Rs 10,00,000, we don't record quantity recorded only monetary value.
iii. Art of recording - Transaction is recorded in the systematic order of their occurrence.
iv. Classification of the transaction - Business transactions of similar nature are classified and posted under their respective
accounts. For example, all the transactions relating to machinery will be posted in the Machinery Account and other different
nature transaction should be recorded in their account.
v. Summarising of data - All business transactions are summarised in the form of Trial Balance, Trading Account, Profit and
Loss Account and Balance Sheet that provides the necessary information to various users according to their need.

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vi. Analyzing and interpreting data - Systematic accounting records enable users to analyze and interpret the accounting data in
a proper and appropriate manner. These accounting data and information are presented in the form of graphs, statements,
charts that leads to easy communication and understandability by various users. Moreover, these facilitate decision making
and future predictions.

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