Account 6 Marks Question

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

1. Financial Information about Business: Financial performance during the accounting period, i.e., profit earned or loss incurred and also the financial position at the end of the accounting period is known through accounting.
2. Assistance to Management: The management makes business plans, takes decisions and exercises control over the affairs on the basis of accounting information.
3. Replaces Memory: A systematic and timely recording of transactions obviates the necessity to remember transactions. The accounting record provides the necessary information.
4. Facilitates Comparative Study: A systematic record enables a businessman to compare one year's results with those of other years and locate significant factors leading to change, if any.

1. Recording: Accounting is the art of recording of transactions. Only business relative transactions are recorded in which money is mentioned. All transactions are recorded in detail. Both journal and subsidiary books are used for this.
2. Classifying: Accounting's main feature is also classifying all business transactions. Accounting makes group of all similar accounting entries in one place. For example all receipt and payment will be shown in cash book. So, all transactions are collected under one common head. This system is also called classification of transaction. This process is completed by opening accounts in books. These books are called ledger.
3. Summarizing: Summarizing is the art of showing business results in summarize form. After this, it can use for all the interested parties. This feature tells about to financial statement. One is Trading and profit and loss account and other is Balance Sheet.
4. Interpreting: By interpreting, we can know whether the position of profitability is good or bad. By knowing this, we can estimate business's performance.

1. Identification of Financial Transactions and Events: Accounting records only those transactions and events which can be measured in terms of money. This involves identifying transactions and events that are part of economic activity, for example purchase of raw material or sale of finished goods by a firm. Such transactions are identified with the help of bills and receipts as evidence of the transactions.
2. Measuring the Identified Transactions: Accounting measures the transactions and events in terms of a common measurement unit (that is the currency of a country. In other words, financial transactions and events are measured in terms of money.
3. Analysis and Interpretation: Analysis and interpretation of the financial data are carried out so that the users of financial data can make a meaningful judgement of the profitability and financial position of the business. This helps in planning for the future in a better way.
4. Communicating: Finally, the accounting function involves communicating the financial data, i.e., financial statements, to its users. The accounting information must be provided in time and presented to the users so that appropriate decisions may be taken at the right time.

The factors that necessitated systematic accounting are given below.

• Only financial transactions are recorded− Those events that are financial in nature are only recorded in the books of accounts. For example, salary of an employee is recorded in the books but his/ her educational qualification is not recorded.
• Transactions are recorded in monetary terms− Only those transactions which can be expressed in monetary terms are recorded in the books. For example, if a business has two buildings and four machines, then their monetary values is recorded in the books, i.e. two buildings costing ₹ 2,00,000, four machines costing ₹ 8,00,000. Thus the total value of assets is ₹ 10,00,000.
• Art of recording− Transactions are recorded in the order of their occurrence.
• Classification of 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.
• 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 necessary information to various users.
• Analysing and interpreting data− Systematic accounting records enable users to analyse and interpret the accounting data in a proper and appropriate manner. These accounting data and information are presented in form of graphs, statements, charts that leads to easy communication and understandability by various users. Moreover, these facilitates in decision making and future predictions.

Assets are economic resources of an enterprise that can be usefully expressed in monetary terms. Assets are items of value used by the business in its operations. For example, Super Bazar owns a fleet of trucks, which is used by it for delivering foodstuffs; the trucks, thus, provide economic benefit to the enterprise. This item will be shown on the asset side of the balance sheet of Super Bazaar.
Classification of Assets:

• Current Assets: Current assets are assets that can be easily converted into cash and cash equivalents (typically within a year). Current assets are also termed liquid assets and examples of such are: Cash, Cash equivalents, Short-term deposits, Stock, Marketable securities, Office supplies.
• Fixed or Non-Current Assets: Non-current assets are assets that cannot be easily and readily converted into cash and cash equivalents. Non-current assets are also termed fixed assets, long-term assets, or hard assets. Examples of non-current or fixed assets include: Land, Building, Machinery, Equipment, Patents, Trademarks.
• Tangible Assets: Tangible assets are assets that have a physical existence (we can touch, feel, and see). Examples of tangible assets include: Land, Building, Machinery, Equipment, Cash, Office supplies, Stock, Marketable securities.
• Intangible Assets: Intangible assets are assets that do not have a physical existence. Examples of intangible assets include: Goodwill, Patents, Brand, Copyrights, Trademarks, Trade secrets, Permits, Corporate intellectual property.
• Operating Assets: Operating assets are assets that are required in the daily operation of a business. In other words, operating assets are used to generate revenue. Examples of operating assets include: Cash, Stock, Building, Machinery, Equipment, Patents, Copyrights, Goodwill.
• Non-Operating Assets: Non-operating assets are assets that are not required for daily business operations but can still generate revenue. Examples of non-operating assets include: Short-term investments, Marketable securities, Vacant land, Interest income from a fixed deposit.

The role of accounting has been changing over the period of time. In the modern world, the role of accounting is not only limited to record financial transactions but also to provide a basic framework for various decision making, providing relevant information to various users and assists in both short run and long run planning. The role of accounting in the modern world are given below.

• Assisting management: Management uses accounting information for short term and long term planning of business activities, to predict the future conditions, prepare budgets and various control measures.
• Comparative study: In the modern world, accounting information helps us to know the performance of the business by comparing current year's profit with that of the previous years and also with other firms in the same industry.
• Substitute of memory: In the modern world, every business incurs large number of transactions and it is beyond human capability to memorise each and every transaction. Hence, it is very necessary to record transactions in the books of accounts.
• Information to end user: Accounting plays an important role in recording, summarising and providing relevant and reliable information to its users, in form of financial data that helps in decision making.

Double Entry System of accounting is a system of accounting under which both, debit and credit, aspects of accounting are recorded. A transaction has two aspects Debit and Credit and at the time of recording a transaction, one aspect is recorded on the debit side and other aspect is recorded on the credit side. For example, at the tirr e of cash purchases, goods are received and in return cash is paid. In the transaction, two aspects are involved, i.e., receiving goods and paying cash and under the Double Entry System, both these aspects are recorded. One part, i.e., the receipt of goods, is debited and the second part, i.e., payment of cash, is credited. In other words, if only two accounts are affected (as in the purchase of building for cash), one account, Builcing, is debited and the other account, Cash, is credited for the same amount. If more than two accounts are affected by a transaction, the sum of the debit entries must be equal to the sum of the credit entries. Thus, on any day, total amount debited is equial to the total amount credited.
Thus, we can define Double Entry System as: "The system which recognises and records both aspects of a transaction. The Double Entry System has proved to be a scientific and complete system of accounting.”

1. Maintaining Records: Maintaining financial records is the main objective of accounting. Financial records must be kept systematically to find out the results of business. When records are not properly organized it would be of no use to management in decision making, Preserving records, support documents and helping management in tracking transactions and outcome of business is the main objective of accounting.
2. Estimating Profit or Loss: Profit is the aim of any business. The businessman should have clear information regarding the result of his business activity. If there is accurate measure of profit of loss, the businessman will take blind actions that will ultimately fail.
3. Presenting the Financial Position: Financial position of the business is presented in the form of Balance Sheet. This is an essential statement sought by banks, creditors and prospective investors to find out exactly what the business owns and what owes.

Financial accounting is the process of preparing financial statements that companies’ use to show their financial performance and position to people outside the company, Including investors, creditors, suppliers, and customers.

1. Dependence on historical costs: Transactions are initially recorded at their cost. This is a concern when reviewing the balance sheet, where the values of assets and liabilities may change over time. Some items, such as marketable securities, are altered to match changes in their market values, but other items, such as fixed assets, do not change. Thus, the balance sheet could be misleading if a large part of the amount presented is based on historical costs.
2. Inflationary effects: If the inflation rate is relatively high, the amounts associated with assets and liabilities in the balance sheet will appear inordinately low, since they are not being adjusted for inflation. This mostly applies to long-term assets.
3. Intangible assets not recorded: Many intangible assets are not recorded as assets. Instead, any expenditure made to create an intangible asset are immediately charged to expense. This policy can drastically underestimate the value of a business, especially one that has spent a large amount to build up a brand image or to develop new products. It is a particular problem for startup companies that have created intellectual property, but which have so far generated minimal sales.
4. Based on specific time period: A user of financial statements can gain an incorrect view of the financial results or cash flows of a business by only looking at one reporting period. Any one period may vary from the normal operating results of a business, perhaps due to a sudden spike in sales or seasonality effects. It is better to view a large number of consecutive financial statements to gain a better view of ongoing results.

Main purpose of accounting is to provide information to a variety of users for taking various decisions. Hence the information should have the quality of reliability, understandability and comparability which is possible only if the accounting is carried out systematically i.e. based on principles and rules of accounting. Further, the role of accounting has been changing with the changes in economic development and increasing social demands, which requires analyses of accounting data and preparation of reports. Systematic recording is also needed for assessment of various taxes such as Goods and Service Tax (GST), Income Tax etc.

Qualitative characteristics are the attributes of accounting information which tend to enhance its understandability and usefulness. In order to assess whether accounting information is decision useful, it must possess the characteristics of reliability, relevance, understandability and comparability.

• Reliability: Reliability means the users must be able to depend on the information. The reliability of accounting information is determined by the degree of correspondence between what the information conveys about the transactions or events that have occurred, measured and displayed. A reliable information should be free from error and bias and faithfully represents what it is meant to represent. To ensure reliability, the information disclosed must be credible, verifiable by independent parties use the same method of measuring, and be neutral and faithful.
• Relevance: To be relevant, information must be available in time, must help in prediction and feedback, and must influence the decisions of users by:

1. helping them form prediction about the outcomes of past, present or future events; and/ or
2. confirming or correcting their past evaluations.

• Understandability: Understandability means decision-makers must interpret accounting information in the same sense as it is prepared and conveyed to them. The qualities that distinguish between good and bad communication in a message are fundamental to the understandability of the message. A message is said to be effectively communicated when it is interpreted by the receiver of the message in the same sense in which the sender has sent. Accountants should present the comparable information in the most intenlligible manner without sacrificing relevance and reliability.
• Comparability: It is not sufficient that the financial information is relevant and reliable at a particular time, in a particular circumstance or for a particular reporting entity. But it is equally important that the users of the general purpose financial reports are able to compare various aspects of an entity over different time period and with other entities. To be comparable, accounting reports must belong to a common period and use common unit of measurement and format of reporting.

Accounting is the art of recording, classifying , and summarising in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results there of.
Objectives of Accounting are:

• To keep systematic record of business transactions: The main objective of accounting is to keep complete record of business transaction according to specified rules. It helps to avoid the possibility of errors and fraud.
• To calculate Profit and loss: Accounting helps in ascertaining the net profit or loss suffered on account of business transaction during a particular period. For this purpose trading and profit and loss account are prepared. It gives information regarding how much of goods have been purchased and sold, expenses incurred and amount earned during a year.
• To ascertain the financial position of the business: Ascertaining profit or loss is not sufficient for a businessman. The businessman must also know the financial health of the business. This purpose is served by preparing the balance sheet that facilitates in ascertaining the true financial position of the business.
• To ascertain the progress of business from year to year: Accounting helps in assessing the progress of business from year to year, as accounting facilitates the comparison both inter-firm as well as intra-firm.
• To prevent and detects errors and frauds.
• To Provide informations to various parties: Another main objective accounting is to communicate financial and accounting information to various users including both internal and external users like owners, management, government, labour, tax authorities, etc. The information helps them in taking sound and judicious decisions about the business entity.

There are various external users of accounting who need accounting information for decision making, investment planning and to assess the financial position of the business. The various external users are given below.

• Banks and other financial institutions: Banks provide finance in form of loans and advances to various businesses. Thus, they need information regarding liquidity, creditworthiness, solvency and profitability to advance loans.
• Creditors: These are those individuals and organisations to whom a business owes money on account of credit purchases of goods and receiving services; hence, the creditors require information about credit worthiness of the business.
• Investors and potential investors: They invest or plan to invest in the business. Hence, in order to assess the viability and prospectus of their investment, creditors need information about profitability and solvency of the business.
• Tax authorities: They need information about sales, revenues, profit and taxable income in order to determine the levy various types of tax on the business.
• Government: It needs information to determine national income, GDP, industrial growth, etc. The accounting information assist the government in the formulation of various policies measures and to address various economic problems like employment, poverty etc.
• Researcher: Various research institutes like NGOs and other independent research institutions like CRISIL, stock exchanges, etc. undertake various research projects and the accounting information facilitates their research work.
• Consumer: Every business tries to build up reputation in the eyes of consumers, which can be created by the supply of better quality products and post-sale services at reasonable and affordable prices. Business that has transparent financial records, assists the customers to know the correct cost of production and accordingly assess the degree of reasonability of the price charged by the business for its products and thus helps in repo building of the business.

• Public: Public is keenly interested to know the proportion of the profit that the business spends on various public welfare schemes; for example, charitable hospitals, funding schools, etc. This information is also revealed by the profit and loss account and balance sheet of the business.

1. 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.
2. The managers/directors: use them to ascertain the strengths and weaknesses of the enterprise.
3. 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.
4. The prospective investors: use them to assess whether or not to invest their money in this firm.
5. Employees: They need accounting information to claim increase in wages, bonus and other benefits.
6. The government agencies: use them for the payment of various taxes such as Goods and Service Tax (GST), Income Tax etc.

Types of Accounting:

1. Financial Accounting: The main purpose of this branch of account ng is to record the business transactions in a systematic manner, to ascertain the profit or loss of the account ng period by preparing a Profit & Loss Account and to present the financial posit on of the business by preparing a Balance Sheet. This branch of accounting provides informations required by the management and various other interested parties.
2. Cost Accounting: The main purpose of cost accounting is to ascertain the total cost and per unit cost of goods produced and services rendered by a bus ness. It also estimates the cost in advance and helps the management in exercising strict control over cost.
3. Management Accounting: The main purpose of management accounting is to present the accounting information in such a way as to assist the management in planning and controlling the operations of a business. The management accountant uses various techniques and concepts to make the accounting data more useful for managerial decision making. These techniques include ratio analysis, budgetary control, fund flow statement, cash flow statement etc.
4. Tax Accounting: The branch of accounting which is used for tax purposes is called Tax Accounting. Income tax and GST are computed on the basis of this accounting.
5. Social responsibility Accounting: The society provides the infrastructure and the facilities without which business cannot operate at all. Hence the business also has a responsibility to the society. There is a growing demand for reports on activities which reflect the contribution of an enterprise to the society. Social responsibility accounting is the process of identifying, measuring and communicating the contribution of a business to the society. The contribution of a business to the society consist of providing employment to under-privileged, providing financial and manpower support for public programs, environmental contribution, product safety, product durability, customer satisfaction etc. In social responsibility accounting techniques have been developed for measuring the cost of these contributions and the benefit to the society.

1. Financial Information about Business: Financial performance during the accounting period, i.e., profit earned or loss incurred and also the financial position at the end of the accounting period is known through accounting.
2. Assistance to Management: The management makes business plans, takes decisions and exercises control over the affairs on the basis of accounting information.
3. Replaces Memory: A systematic and timely recording of transactions obviates the necessity to remember transactions. The accounting record provides the necessary information.
4. Facilitates Comparative Study: A systematic record enables a businessman to compare one year's results with those of other years and locate significant fac leading to change, if any.
5. Facilitates Settlement of Tax Liabilities: A systematic accounting record immensely helps in settlement of income tax and Goods and Services Tax (GST) liabilities, since it is a good evidence of the correctness of transactions.
6. Facilitates Loans: Loan is granted by the banks and financial institutions on the basis of growth potential which is supported by the performance. Accounting makes available the information with respect to performance.
7. Evidence in Court: Systematic record of transactions is often accepted by the Courts as good evidence.
8. Facilitates Sale of Business: If someone desires to sell his business, the accounts maintained by him will enable the ascertainment of the proper purchase price.
9. Assistance in the Event of Insolvency: Insolvency proceedings involve explaining many transactions that have taken place in the past. Systematic accounting records assist a great deal in such situation.