Chapter-1 Introduction

Financial Accounting- I
Chapter-1 Introduction

Questions for 2 marks

1. Define Accounting.
Accounting can be defined as “the art of recording, classifying, summarizing and
presenting the financial aspect of business dealings and interpreting the results
thereof”.
2. What do you mean by Accountancy?
Accountancy is the application of art and science of both book-keeping and
accounting for designing information processing system, analyzing economic events,
analysis and interpretation of financial data, reporting and advising on financial
aspects of an activity.
It is a profession of consultancy and advice to the management on financial
matters. Accountancy includes both book-keeping and accounting.
3. What is Entity?
An Entity means an area of economic interest of a particular industry or group of
industries. It may be a business unit or a department of a business or a group of
related businesses.
4. What are Assets?
Assets are the properties or resources which are owned by the business entity. e.g.
land, building, machinery, cash, stock etc., owned by the business.
5. What are Tangible assets?
Tangible assets are those which can be seen and touch or which have physical
existence.
6. What are Intangible assets?
Intangible assets are those which cannot be seen and touched.
7. What are Liabilities?
Liabilities are the debts owed by the business entity to outsiders e.g. amount due to
suppliers, bills payable, loan from bank, unpaid expenses etc.
8. What is Capital?
Capital represents the owner’s claim or share in the assets of the business. In
common sense, capital is the amount invested by the proprietor in his business.
Capital = Assets - Liabilities
9. What do you mean by drawings?
Drawings means the amount of cash or any asset withdrawn or used by the owner of
the business for his personal or domestic use.
10. Who is a Debtor?
Debtor is a person who owes or who is liable to pay amount to the business.
11. Who is a Creditor?
Creditor is a person to whom any sum of money is owed or liable to pay by the
business
12. What do you mean by Solvent?
Solvent is a person whose assets are equal to or more than that of his liabilities.
13. Who is Insolvent?
Insolvent is a person whose assets are not sufficient to make payment of his
liabilities in full.
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14. What is Equity?

Equity is a claim against the assets of a business. It represents a share of interest in
the assets of the business of the owners and also of creditors.
15. What is Trading Account?
Trading account is a revenue account which contains sales and cost of goods sold. It
shows the gross profit or loss, as the case may be.
16. What do you mean by Profit and loss account?
This account is also a revenue account prepared to show the net profit or the loss as
the case may be, during the year. It contains all the incomes and gains and all the
expenses and losses of that year.

17. What is Balance sheet?

Balance sheet is the statement of the assets and liabilities prepared with a view to
ascertain the financial position of the business as on a specified date.
18. What is Accounting Cycle?
The term Accounting cycle refers to the process of flow of accounting data in the
course of accounting during the period of accounting.

Financial Transactions

Entry into Journals and Day books

Posting to ledger accounts

Taking out Trial balance

Preparing Final Accounts

(Trading, P & L account and
Balance sheet)
Diagram of Accounting cycle
19. What do you mean by Double-Entry system?
The term “Double-Entry system” means the method of recording of two-fold
aspects of a transaction. This system is based on the following assumptions:
(1) Every transaction affects the financial position in two ways. It brings changes in
two accounts of a transaction.
(2) The effect of change is in opposite directions.
(3) If one account receives the benefit, the other account gives the same.
(4) The benefit is measured in terms of money.
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(5) Therefore, the account which receives the benefit is debited and the account
which gives the benefit is credited. Thus,” for each debit there is a
corresponding credit and vice versa”.
20. What do you mean by Personal Accounts?
These are the accounts relating to persons, firms, companies, institutions, etc. with
whom a businessman deals e.g. debtors, creditors, bankers, capital, drawings etc.
21. What are Real accounts?
These are the accounts relating to properties, assets and possessions with which we
carry on business. e.g. Cash account, Stock account, Land account, Building account,
Goodwill account. The real account may be tangible or intangible or fictitious assets.
22. Give the meaning of Nominal Accounts.
These are the accounts of various expenses or losses and incomes and gains. They
are neither personal nor real.
23. Give the meaning of Journal.
A Journal is a book of daily record in which the transactions of day to day activities
are recorded chronologically in order of the dates and occurrence of the
transactions.
It is also called as Book of Original entry or Prime entry.
24. Write the meaning of Journal.
It is the process of entering the business transactions affecting both the aspects of
double-entry in a book called Journal.
25. What is Journal Entry?
When a transaction is duly entered in a journal it becomes a Journal entry.
26. What is Narration?
It is a short description of the nature of transaction explaining the reason for
debiting a particular account and crediting another account.
27. What is Posting?
The process of transferring the entries from journal to the respective accounts in the
ledger, is called Posting or Ledger Posting.

Questions for 5 marks

28. What are the functions of Accounting?

Accounting involves the following functions or activities:
1) Recording
2) Classifying
3) Summarizing
4) Presentation
5) Interpretation
1) Recording: Recording means entering the financial transactions in journals and the
day books on sound principles and rules of double-entry.
2) Classifying: Classifying implies posting the transactions from the books of original
entries to the concerned accounts in the ledger.
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3) Summarizing: Summarizing is the process of preparing the trial balance and final
accounts of a year to ascertain the profit or loss and to present the financial position
of a business on a specified date.
4) Presentation: Presentation means setting out the financial data in a systematic
manner in the statements so as to facilitate their interpretation. It involves the
preparation of profit and loss account and the balance sheet.
5) Interpretation: Interpretation means arriving at the meaning of or understanding of
the financial statements for enabling the users to form their judgements for decision
making.
29. What are the needs of Accounting?
The necessity for accounting services arises because of the following reasons:
1) Creating records: Book keeping creates financial records in analytical and
appropriate manner. These books and records can be referred at any time in
future.
2) Creating evidence: The books of account can be produced in evidence in the
Court of Law and before any tax authorities.
3) Decision-making: Accounting provides the relevant information to the
managements, investors, lenders, banks etc., to enable them to take decisions.
4) Control: Accounting system develops reporting procedures which enable the
management to have control over the performance of the further.
5) Prevention of frauds and losses: Books of account disclose the errors and frauds.
They also prevent misappropriation of money or goods by pointing out the
responsibility on the employees.
30. Briefly explain the Importance of Accounting.
The information of accounting is that it aims at communicating information
about the financial results and financial position of a concern to various groups of
users of information for decision-making. The users of the information are grouped
as under:
1) Owners: Owners are the sole traders, partners, shareholders etc., as the case
may be. They are interested in the financial results and financial to know the
safety of the amount on their capital. The accounting system generates the
required information through the financial statements.
2) Investors: The investors are interest in knowing about the past performance as
regards the financial results and the financial position of the concern before
making investment in that concern.
3) Creditors, etc.: The creditors for goods supplied, bankers, financial institutions
etc., are interested to have the information as regards repaying capacity and
creditworthiness of the concern before extending credit or loan.
4) Employees: The employees are interested in their job security and the future
prospectus of the concern. The performance of the concern can be ascertained
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by analyzing the financial statements to decide their job security and the future
prospectus of the concern.
5) Government: Government is interested in the financial statements of the
concern to ascertain the profit earned by it year after year, for the purpose of
levying taxes thereon. Government also regulates the functioning of the
concerns for the good of the public.
6) Public: The public at large is also interested in knowing the functioning of the
concern in many ways is possible by analyzing the financial statements.
31. Explain objectives and advantages of Accounting.
The following are the objectives or the purposes of accounting:
(1) To maintain the record of the financial transactions of a business neatly and
accurately.
(2) To ascertain the profit or loss made by the business during an accounting period.
(3) To present the true and fair view of the financial position of a business.
(4) To know the amount due to each of the creditors.
(5) To know the amount receivable from each of the debtors.
(6) To compute the tax liability to the government.
(7) To supply the required financial information to the management for decision-
making and controlling the affairs of the business.
(8) To offer expert advice on the financial aspects of the business.
(9) To facilitate inter-period comparison of the financial trends of the business.
(10) To enable the comparison of performances of different firms.
32. What are the objectives and advantages of Journal?
1) Record of daily transactions: Journal is necessary to record daily transactions of
the business.
2) Complete record at one place: Complete record of all the transactions is found in
this book.
3) Complete picture of transactions: Both the debit and credit aspects of each
transaction are found in this book along with brief explanation at one place.
4) Easy for cross-checking: Journal helps cross-checking of the entries in the ledger.
5) Quick reference: As the entries are made in the journal date-wise future
reference in the ledger.
6) Basis for posting: Journal is a base for posting to ledger.
Chapter-1 Introduction