Chapter 1 Introduction to Accounting Solutions
Question - 1 : - Define accounting.
Answer - 1 : -
Accounting is a process of identifying the events of financial nature, recording them in Journal, classifying in their respective ledgers, summarising them in Profit and Loss Account and Balance Sheet and communicating the results to the users of such information, viz. owner/s, government, creditors, investors etc.
According to the American Institute of Certified Accountants, 1941, “Accounting is an art of recording, classifying and summarising in a significant manner and in terms of money transactions and events that are, in part at least, of a financial character and interpreting the results thereof.”
Question - 2 : - State what is end product of financial accounting?
Answer - 2 : -
Income statements (Trading and/or Profit and Loss Account)− An income statement that includes Trading and Profit and Loss Account, ascertains the financial results of a business in terms of gross (or net) profit or loss.
Balance Sheet− It depicts the true financial positions of a business that provides required information like assets and liabilities of a business firm, to the users of accounting information like owners, creditors, investors, government, etc.
Question - 3 : - Enumerate main objectives of accounting.
Answer - 3 : -
The main objectives of accounting are given below.
1. To keep a systematic record of all business transactions
2. To determine the profit earned or loss incurred during an accounting period by preparing profit and loss account
3. To ascertain the financial position of the business at the end of each accounting period by preparing balance sheet
4. To assist management for decision making, effective control, forecasting, etc.
5. To assess the progress and growth of business from year to year
6. To detect and prevent frauds and errors
7. To communicate information to various users
Question - 4 : - Who are the users of accounting information?
Answer - 4 : -
Users of accounting information are bifurcated in two categories as- Internal Users and External Users.
1. Internal Users
These are the users who are internal to an organisation. Such users have a direct access to the financial statements of a business. Some of the internal users are given below.
i. Owners
ii. Management
iii. Employees and Workers
2. External Users
External users are those who are outsiders to an organisation and are interested in the financial affairs of the business. These users do not have a direct access to the financial statements of the business. The following parties come under the head of external users.
i. Banks and Financial Institutions
ii. Investors and Potential Investors
iii. Creditors
iv. Tax Authorities
v. Government
vi. Consumers
vii. Researchers
viii. Public
Question - 5 : - State the nature of accounting information required by long-term lenders.
Answer - 5 : -
Accounting information required by the long term lenders are repaying capacity of the business, profitability, liquidity, operational efficiency, potential growth of business, etc.
Question - 6 : - Who are the external users of information?
Answer - 6 : -
External users of information are the individual or the organisations that have 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.
Question - 7 : - Enumerate informational needs of management.
Answer - 7 : -
The informational needs of management are concerned with the activities given below.
1. Assists in decision making and business planning
2. Preparing reports related to funds, costs and profits to ascertain the soundness of the business
3. Comparing current financial statements with its own historical financial statements and of other similar firms to assess the operational efficiency of the business.
Question - 8 : - Give any three examples of revenues.
Answer - 8 : -
Three examples of revenue are given below.
1. Sales revenue
2. Interest received
3. Dividends
Question - 9 : - Distinguish between debtors and creditors; Profit and Gain.
Answer - 9 : - Difference between Debtors and Creditors is given below.
| Basis of difference | Debtors | Creditors |
| Meaning | Persons or organisations that are liable to pay money to a firm are called debtors. | Persons or organisations to whom the firm is liable to pay money are called creditors. |
| Nature | They have debit balance to the firm. | They have credit balance to the firm. |
| Payment | Payments are received from them. | Payments are made to them. |
| Shown | They are shown as assets in the Balance sheet under Current Assets. | They are shown as liabilities in the Balance Sheet under Current Liabilities. |
Difference between Profit and Gain is given below.
• Gain− Gain is incidental to the business. They arise from irregular activities or non-recurring transactions; for example, profit on sale of fixed assets, appreciation in value of asset, profit on sale of investment, etc.
• Profit− This refers to the excess of revenue over the expense. It is normally categorised into gross profit or net profit. Net profit is added to the capital of the owner, which increases the owner’s capital. For example, goods sold above its cost
Question - 10 : - ‘Accounting information should be comparable’. Do you agree with this statement? Give two reasons.
Answer - 10 : -
Accounting information should be comparable because of the following reasons.
1. Comparable accounting information helps in inter-firm comparisons. This helps in assessing viability and advantages of various policies adopted by different firms.
2. It also helps in intra-firm comparisons that help in determining the changes and also to ascertain the results of various policies and plans adopted in different time periods. This also helps to figure out the errors, ascertain growth and assist in management planning.