Chapter 1 Introduction to Accounting Solutions
Question - 21 : - Explain the meaning of gain and profit. Distinguish between these two terms.
Answer - 21 : -
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 Rs 1, 00,000 is sold at Rs 1,20,000, then the sale proceeds of Rs 1,20,000 is the revenue and 1,00,000 is the expense to generate this revenue. Hence, accounting profit of Rs 20,000 (i.e. Rs 1,20,000 − Rs 1,00,000) is the difference between the revenue and expense that is earned by the business.
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 Rs 20,000 is sold at Rs 25,000. Hence, the gain is Rs 5,000 (i.e. Rs 25,000 − Rs 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.
Question - 22 : - Explain the qualitative characteristics of accounting information.
Answer - 22 : -
The following are the qualitative characteristics of accounting information:
1. Reliability− It means that the user can rely on the 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.
2. 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 the future conditions.
3. Understandability− Accounting information should be presented in such a way that every user is able to interpret the information without any difficulty in a meaningful and appropriate manner.
4. Comparability− It is the most important quality of accounting information. Comparability means accounting information of a current year can be comparable with that of the previous years. Comparability enables intra-firm and inter-firm comparison. This assists in assessing the outcomes of various policies and programmes adopted in different time horizons by the same or different businesses. Further, it helps to ascertain the growth and progress of the business over time and in comparison to other businesses.
Question - 23 : - Describe the role of accounting in the modern world.
Answer - 23 : -
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.
1. 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.
2. 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.
3. 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.
4. 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.