Account 4 Marks Question

Accounting is the art of recording, classifying, summarising and communicating financial information to users for correct decision making.

1. Maintaining Systematic Accounting Records: The primary function of accounting is to maintain systematic accounting records of financial transactions and events. It means that the accounting records should be maintained following the accounting rules, principles and concepts. It is so because reliable financial statements can be drawn if proper accounting records are maintained.
2. Preparation of Financial Statements: Financial statements means final accounts prepared at the end of the accounting period. It includes Income Statement (Profit and Loss Account) and Position Statement (Balance Sheet). It is an important function of accounting because the financial statements show the financial performance, i.e., provit earned or loss incurred during the accounting year and the financial position, 1.2., Balance Sheet as at the end of the accounting year. Both the statements are important for all the users for taking decisions.
3. Meeting Legal Requirements: Accounting records are accepted as evidence by the court of law if they are maintained systematically following the accounting rules, principles and concepts. Besides, the law such as the Companies Act, Income Tax Act, GST Act, etc., require submissions of returns in the form and period as is prescribed in the law. The returns can be submitted if the accounting records are maintained systematically and timely. A systematic accounting record maintained following the accounting principles and concepts is accepted by the authorities to be correct. Thus, it is a function of accounting to meet the legal requirements.
4. Communicating the Financial Information: It is yet another function of accounting to communicate the financial information to the users, which may be interrial users cr external users, such as management, banks, employees, government authorities, etc.

Classification of receipts into capital receipts and revenue receipts is essential for the preparation of financial statements since revenue receipts are shown on the credit side of Trading and Profit and Loss Account whereas capital receipts are shown in the Balance Sheet.

Only those transactions and events are recorded in accounting which are of a financial character. There are so many transactions in the business which are very important for business but which cannot be measured and expressed in terms of money and hence such transactions will not be recorded. For example, the quarrel between the Production Manager and the Sales Manager, resignation by an able and experienced manager, strike by employees and starting of a new business by the other competitor etc. Though these events affect the earnings of the business adversely but as no one can measure the effect of such events in terms of money, these will not be recorded in the books of the business.

Classification of assets into current and non-current helps in ascertaining the liquidity position of the business entity. Non-Current Assets are held for continued use in the business whereas current assets are expected to be converted into cash within one year.

	Basis	Book Keeping	Accounting
1.	Scope	Book Keeping is concerned with identifying financial transcations and events measuring them in money terms recording them un the books of account and classifying them.	According is concerned with summarising the recorded transactions and events, interpreting them and communicating the results there of.
2.	Stage	It is a primary stage. it is the basis for accounting.	It is a secondary stage. It begins where Booking Keeping ends.
3.	Objective	The objective of Book Keeping is to maintain systematic records of financial transactions.	The objective of According is to ascertain net results of operations and financial position and to communicate information to the interested parties.
4.	Nature of Job	This job is routine in nature.	This job is analytical and dynamic in nature.
5.	Performance	It being a routine work is performed by junior staff.	It being a specialised function is performed by senior staff.
6.	Special skills	Book Keeping is mechanical in nature and thus, does not require special skills.	According requires special skills and ability to analyse and interpret.

1. Revenue: Revenue in accounting ineans the income of a recurring (regular) nature from any source. It consists of the amount received from sale of goods and from service provided to customers. It also includes receipt of rent, commission, dividend, interest etc. Revenue is related with the day-to-day affairs of the business and should also be regular in nature. As such, the amount of capital introduced by the proprietor or borrowing loan is not revenue
2. Trade Payables: Trade payables is the amount payable on account of goods purchased or services taken in the normal course of business.

Trade Payables include both 'Creditors' and 'Bills Payables'.

3. Fictitious Assets: These are the Assets which cannot be realised in Cash or no further benefit can be derived from these assets. Such assets include Debit balance of P & L A/c and the expenditure not yet written off such as Advertisement Expenses etc. These assets are not really assets but are shown on the Assets side only for the purpose of transferring them to the Profit & Loss Account gradually over a period of time.
4. Working Capital: The capital of a business which is used in its day-to-day trading operations, calculated as the current assets minus the current liabilities.

Working Capital = Current Assets - Current Liabilities.

• Fixed Assets: Fixed Assets refers to those assets which are held for continued use in the business for the purpose of producing goods and services and not meant for resale. Examples: Plant and Machinery, Land and Building etc.
• Revenues: These are the amounts of the business earned by selling its products or providing services to customers, called sales revenue. Other items of revenue common to many businesses are: commission, interest, dividends, royalities, rent received, etc. Revenue is also called income.
• Expenses: Costs incurred by a business in the process of earning revenue are known as expenses. Generally, expenses are measured by the cost of assets consumed or services used during an accounting period. The usual items of expenses are: depreciation, rent, wages, salaries, interest, cost of heater, light and water, telephone, etc.
• Short-term liability: A debts or current liability arising from normal business opretions and recurring expenses that is expected to be satisfied within one year. Examples of short term liabilities are accounts payable, taxes payable, unearned revenues, current purcheses, vendor invoices, accuerd exspenses payable and current portions of long-term debts.
• Capital: Amount invested by the owner in the firm is known as capital. It may be brought in the form of cash or assets by the owner for the business entity capital is an obligation and a claim on the assets of business. It is, therefore, shown as capital on the liabilities side of the balance sheet.

Capital = Assets − Liabilities.

Qualitative characteristics are attributes that make the accounting information use ul to users. The qualitative characteristics are:

1. Reliability: Accounting information must be reliable. Reliability of information means it is verifiable, free from bias and material error.
2. Relevance: Accounting information must be relevant to the user. Information is relevant il it meets the needs of the users in decision-making.
3. Understandability: Understandability means that the information provided through the financial statements must be presented in a manner that the users are able to understand it.
4. Comparability: Comparability means that the users should be able to compare the accounting information of an enterprise of the period either with that of other periods, known as intra-firm comparison or with the accounting information of other enterprises, known as inter-firm comparison.

1. Capital Expenditure: Any expenditure which is incurred in acquiring or increasing the value of a fixed asset is termed as capital expenditure. As such, the amount spent on the purchase or erection of Building, Plant, Furniture etc. is capital expenditure. Such expenditure yields benefit over a long period and hence written in Assets.
2. Non-Current Assets: Non-Current Assets refer to those assets which are held for continued use in the business for the purpose of producing goods or services and are not meant for sale. Examples of non-current assets are long-term investments and fixed assets such as Land and Building, Plant and Machinery, Computer, Motor Vehicles, Furniture etc.

• Gain: It arises from irregular activities or non-recurring transactions. In other words, a gain is a result of transactions that are incidental to the business, other than operating transactions. For example, an old machinery of book value ₹ 20,000 is sold at ₹ 25,000. Hence, the gain is ₹ 5,000 (i.e. ₹ 25,000 - ₹ 20,000). Here, the sale of the old machinery is an irregular activity; so, the difference is termed as gain Thus, in other words the only difference between profit and gain is that profit is the excess of revenue over expense and gain arises from other than operating transactions.
• Profit: Excess of revenue over expense is known as profit. It is normally categorised into gross profit or net profit. It increases the owner’s capital as it is added to the capital at the end of each accounting period. For example, goods costing ₹ 1,00,000 is sold at ₹ 1,20,000, then the sale proceeds of ₹ 1,20,000 is the revenue and 1,00,000 is the expense to generate this revenue. Hence, accounting profit of ₹ 20,000 (i.e. ₹ 1,20,000 - ₹ 1,00,000) is the difference between the revenue and expense that is earned by the business.

1. Accounting is not Fully Exact: Accounting is not fully exact in spite of the fact that most transactions are recorded on the basis of evidence, yet some estimates are also made for ascertaining profit or loss, for examples, estimating the useful life of an asset, providing for doubtful debts, net realisable value of closing stock, etc.
2. Unrealistic Information: Accounting information may not be realistic since accounting statements are prepared following the accounting concepts and conventions. For example, under the Going Concern Concept, it is taken that business will continue for a foreseeable future. Accordingly, assets are recorded at cost and depreciated over their useful life. The assets may not be actually realisable at book value.
3. Accounting Ignores the Qualitative Elements: Accounting is confined to monetary matters only, therefore, qualitative elements like quality or skills of management and staff, industrial relations and public relations are ignored.
4. Accounting Ignores the Effect of Price Level Changes: Accounting statemerts are prepared at historical cost. Money, as a measurement unit, changes in value frequently, i.e., it does not remain stable. Accounting, however, presumes that value of money remains stable. Unless price level changes are considered, accounting information will not show correct financial results.
5. Accounting May Lead to Window Dressing: The term window dressing means manipulation of accounts in a way so as to conceal vital facts and present the financ al statements to show a better position than what it actually is. In this situation, inccine statement (i.e., Profit and Loss Account) fails to provide a true and fair view of the result of operations and the Balance Sheet fails to provide a true and fair view of the financial position of the enterprise.

In order to appreciate the exact nature of accounting, we must understand the following aspects of accounting :

1. Economic Events: Accounting records only economic events. An economic event is a transaction which can be measured and expressed in terms of money.
2. Identification, Measurment, Recording and Communication:

1. Identification: It means determining what transactions are to be recorded. It involves observing activities and selecting those events that are of financial character and relate to the organisation.
2. Measurment: It means quantification of business transactions into financial terms by using monetary units.
3. Recording: Accounting is the art of recording business transactions according to some specified rules and in chronological order.
4. Communication: The recorded events are communicated to management and other internal and external users regularly through accounting reports.

3. Organisation: It refers to a business enterprise which can be a sole-proprietory concern, partnership firm, company or any other association of persons.
4. Interested users of information: They may be internal users and external users. Internal users include Chief Executive, Financial Officer, Vice President, Plant Managers, Stores Managers etc. External users include owners, potential investors, creditors, lenders, labour unions, Tax Authorities, Customers etc.

1. Liability: It refers to the amount which the firm owes to outsiders (excepting the amount owed to proprietors). In the words of Finney and Miller, “Liabilities are debts, they are amounts owed to Creditors”. This can be expressed as:

Liabilities = Assets - Capital
Thus, when a firm purchases goods on credit from A, the amount owing to A is a liability. Likewise when a bank account is overdrawn, the amount owing to the bank (i.e., bank overdraft) is known as a liability. Likewise the Bills Payable, Creditors, Unpaid Wages are also the examples of liabilities.

2. Stock: The term stock’ includes the value of those gocds which are purchased for reselling and which are lying unsold at the end of accounting period. The Stock may be of two types:

• ​​​​​Opening Stock.
• Closing Stock.

The term 'Opening Stock' means the value of goods lying unsold at the beginning of the accounting period whereas the term "Closing Stock' means the value of goods lying unsold at the end of the accounting period.

3. Business Transaction: A business transaction is an economic activity of the business that changes its financial position. Whenever any business transaction takes place, it results in a change in the values of some of the assets, liabilities or capital.
4. Drawings: Any cash or value of goods withdrawn by the owner for personal use or any private payments made out of business funds are called drawings.

1. Assets: Anything which is in the possession or is the property of a business enterprise including the amounts due to it from others, is called an asset. In other words, anything which will enable a business enterprise to get cash or a benefit in future is an asset. Thus, Cash and Bank balances, Stock, Furniture, Machinery, Land and Building, Bills Receivable, Money owing by Debtors etc. are all assets.
2. Capital: It refers to the amount invested by the proprietor in a business enterprise. Amount may be in the form of cash, goods or assets. It is the amount with the help of which goods and assets are purchased in the business. As such, in order to calculate the amount of capital all current assets and fixed assets are added up and external liabilities are deducted out of it.

Capital = Assets - Liabilities

3. Goods: Goods include all those things which are purchased for resale or which are used for producing the finished products which are also meant to be sold. Thus, for a furniture dealer purchase of chairs and tables is termed as goods, while for others it is furniture and is termed as an asset. Similarly, for a stationery trader, stationery is goods, whereas for others it is expense.
4. Drawings: Any cash or value of goods withdrawn by the owner for personal use or any private payments made out of business funds are called drawings.
5. Trade Receivables: Trade receivables refer to the amount receivable on account of sale of goods or services rendered by the company in the normal course of business.

Trade receivables include both Debtors and Bills Receivables.

The main objective of accounting of Primary objectives accounting are as under:

1. To maintain accounting records: Now a days the volume of transaction is to large that human memory cannot remember them. Hence the object of accounting is to keep a systematic record of all financial transaction, all assets and all liabilities. Written records are always better than oral records, since written records can be used by different person for taking rational decisions and serve as evidence of transactions.
2. To calculate the results of operation: At the end of the accounting period, the income statement e.g, profit and loss account is prepared to calculate net profit or loss. This done record of income and expenses facilities the preparation of the income statement.
3. To ascertain the financial position: A position statement is prepared as at last date of the accounting period to know the financial position of an organization. The balance sheet rows various resources owned by organization and claims against these resources or assets. The claim of outsiders against the assets is called liability and claim of owns against the assets is called capital. A systematic record of various and liabilities facilities the preparation of position statement.

Some of the most important information required for managing a business are the following:

1. Financial information such as income generated, expenses incurred, assets and liabilities of the business.
2. Administrative information such as list of employees, their service records, list and location of assets.
3. General information such as governing laws, regulations, obligations of the company etc.

1. Amount received from sale of goods.
2. Amount received from providing service to customers.
3. Receipts of commission, interest, rent etc.

Difference between Debtors and Creditors is given below.

	Debtors	Creditors
1	Debtors avail credit facility as they borrow.	Creditors extend credit as they act as lenders.
2	It is a current asset for the business.	It is a current libility for the business.
3	Debtors are a result of credit sales by the business.	Creditors are a result of credit purchases by the business.
4	Discount is allowed to debtors.	Discount is received from creditors.
5	Total amount to be received (total debtors) is also known as Sales Ledger Control.	Total amount to be paid (total creditors) are also known as purchase ledger control.
6	Collectively they form company’s accounts receivables.	Collectively they form company’s accounts payables.
7	Also known as Trade Debtors or Trade Receivables.	Also known as Trade Creditors or Trade Payables.
8	A provision for doubtful debtful debts is created for debtors.	No such provision or reserve is created.

Difference between Profit and Gain is given below.
Profit: The excess of revenues of a period over its related expenses during an accounting year is profit. Profit increases the investment of the owners.
Gain: A profit that arises from events or transactions which are incidental to business such as sale of fixed assets, winning a court case, appreciation in the value of an asset.