1.

Definition of Accounting

The word “Accounting” comes from the Latin word “Calculi” which means to count.
Accounting is an information system which identifies records, classifies, summarizes,
interprets financial events/ transactions of an organization and communicates with interested
users for their effective decision.

According to American Accounting Association (AAA), Accounting has been defined as “The
process of identifying, measuring, and communicating information to permit judgment and
decision by the users”.

Feature of Accounting-

i. 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.

ii. 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.

iii. 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.

iv. Interpreting:- By interpreting, we can know whether the position of profitability is good or
bad. By knowing this, we can estimate business’s performance.

2. Users of Accounting

There are many different users of accounting information and the users may be classified into
two groups-

a. Internal users or Primary users- inside the organizations

b. External users or Secondary users- outside the organizations

a. Internal users or Primary users- inside the organizations-

Internal users are those users within the organization who plan, organize and run the
business; think about the well-being of the business as well. These include marketing
managers, production supervisors, finance directors and company officers.

b. External users or Secondary users- outside the organizations-

External users are those individuals and organizations outside the company or business want
financial information about the company. The most common users are Investors and
creditors.

Investors (Owners) use accounting information to decide whether to buy, hold or sell
ownership shares of a company. Creditors (Such as suppliers and bankers) use accounting
information to evaluate the risk of granting credit or lending money. These also include Tax
authorities, Customers, Regulatory authorities and Labour union.

3. Assumptions of Accounting

i. The Consistency Assumption

One key accounting assumption is known as the consistency assumption. Under this
assumption, it is important that companies make sure that they use the same accounting
method across all accounting practices and accounting periods. The only exception to this
assumption is the case in which a different method would be more relevant and efficient.

ii. The Going Concern Assumption

Another key accounting assumption that persons working towards an accounting degree will
need to understand is the going concern assumption. This assumption assumes that the
business in question will likely continue operating in the foreseeable future. It assumes that
the company will not go bankrupt and will be able to meet its obligations and objectives. The
going concern assumption presumes that the business will be operating beyond its next fiscal
period, will complete its expected plans, and meet its projected goals.

iii. The Time Period Assumption

According to the Financial Accounting Standards Board, another extremely important

accounting assumption is the time period assumption. What this assumption means is that the
accounting practices and methods used by a company should be maintained and reported for
specific periods of time. These periods should also be consistent each year that the business is
in operation. Time periods can be monthly, quarterly, biannually, or annually but must be
consistent so that records can be compared over set time periods.
iv.. The Reliability Assumption

The reliability accounting assumption states that only transactions that can be proven should
be recorded in accounting practices. And what this means is that businesses must be able to
prove transactions through such things as receipts, billing statements, invoices, and bank
statements. There must be some form of objective evidence of a transaction before the
business can report it in its accounting records. This assumption is often known as the
objectivity assumption.

v. Economic Entity Assumption

A key accounting assumption that is especially important for small businesses is the economic
entity assumption. This assumption assumes that the accounting records of a business and
the personal accounting records of the business‟ owner will be kept separate. Business
transactions should never be mixed with the business owner’s personal transactions in
accounting practices. This issue is particularly problematic with small, family-owned
businesses.

4. Branches of Accounting

i. Cost accounting:- Cost accounting is defined as "a systematic set of procedures for recording
and reporting measurements of the cost of manufacturing goods and performing services in
the aggregate and in detail. It includes methods for recognizing, classifying, allocating,
aggregating and reporting such costs and comparing them with standard costs."

ii. Managerial Accounting:- Managerial accounting is the practice of identifying, measuring,

analysing, interpreting, and communicating financial information to managers for the pursuit
of an organization's goals. Managerial accounting differs from financial accounting because
the intended purpose of managerial accounting is to assist users internal to the company in
making well-informed business decisions.

iii. Financial Accounting:- Financial accounting is a specific branch of accounting involving a

process of recording, summarizing, and reporting the myriad of transactions resulting from
business operations over a period of time. These transactions are summarized in the
preparation of financial statements, including the balance sheet, income statement and cash
flow statement that record the company's operating performance over a specified period.
 5. Elements Accounting Equation / Component of Financial Statements

a. Assets- Assets are the resources controlled by the entity which help to operate a business
and to produces goods & services that provide future economic benefits. Like Cash,
Investment, Furniture, Land, Equipment, Machinery etc.

b. Revenues- Revenues are the inflows of the cash result from sale of goods or rendered of

services which increase assets. Such as Sales revenues, Service revenues, Interest, Discount
and commission received etc.

c. Expenses- Expired cost is called expense. Expense that occurs out flows of cash that may
increase liability or decrease asset. Such as salaries expense, Rent expenses, Interest
expenses, Discount or commission payment etc.

d. Liabilities- Liabilities are claim against assets that is existing debts and obligations.
Liabilities that must be paid within stipulated time. Like Loan, Credit purchase, Advance
received etc.

e. Owner’s equity- The ownership claim on total assets is owner’s equity. It can be calculated
by subtracting total liabilities from total assets.

6. Basis of Accounting

a. Cash basis accounting: The cash basis of accounting recognizes revenues when cash is
received, and expenses when they are paid. This method does not recognize accounts
receivable or accounts payable.

b. Accrual basis accounting: Accrual accounting is a method of accounting where revenues

and expenses are recorded when they are earned, regardless of when the money is actually
received or paid. For example, you would record revenue when a project is complete, rather
than when you get paid. This method is more commonly used than the cash method.

7. Types of Financial Statements

a. Income statement / Statement of Financial performance / Statement of Comprehensive

income- Reports revenue and expenses to evaluate profits or losses for a specific period.

b. Owner’s equity statement- Summarizes the changes in owner’s equity for a specific period
of time.
c. Statement of Cash flows- Signifies information about cash inflows (receipts) and outflows
(payment) for a specific period of time.

d. Balance sheet/ Statement of financial position- Reports the assets, liabilities, and owner’s
equity at a specific date.

e. Necessary notes- It includes the information which are material and influence the users of
accounting at decision making time and those are non-financial information.

8. Measurement Principle

a. Historical Cost Principle: According to historical cost an assets should be recorded as it’s
purchase acquisition cost or price. That means the change value should not be considered.

b. Fair value/ Market value principle: According to fair value an assets should be recorded as
it’s current value. And liabilities should be recorded at it’s settle amount or price.

9. Generally Accepted Accounting Principles (GAAP)

Generally Accepted Accounting Principles, or GAAP, is a set of principles, standards, and

procedures accountants use when compiling financial statements for publicly traded
companies. Although following GAAP procedure is not required by private companies, it is
nonetheless looked upon favourably by lenders and creditors.

GAAP follows ten principles, which are:

1. Regularity: Adherence to GAAP as a standard

2. Consistency: Application of the same standards throughout reporting

3. Sincerity: Recording an accurate and impartial report of a company’s financial situation

4. Permanence of methods: Using the same standards whenever financial reports are filed

5. Non-compensation: Reporting both positives and negatives, without the expectation of debt
compensation

6. Prudence: Using only fact based, empirical data, rather than speculation

7. Continuity: Assuming that the business will continue to operate when valuing assets

8. Periodicity: Entries are distributed across appropriate periods of time

9. Materiality: Delivering full disclosure in financial reports

10. Utmost good faith: Remaining honest when compiling financial reports

10. Definition of Debit Principl

Debit- Debit is the left side of an account which increases assets & expenses but decreases
liabilities, revenues and owner’s equity.

Credit- Credit is the right side of an account which increases liabilities, revenues & owner’s
equity but decrease assets & expenses.

11. Determining rules Debit & Credit

 12. FOB destination & FOB shipping point.

i. Free on Board (FOB) Destination

Once the goods are delivered to the buyer's specified location, the title of ownership of the
goods transfers from the seller to the buyer. Consequently, the seller legally owns the goods
and is responsible for the goods during the shipping process.

ii. Free on Board (FOB) Shipping Point

FOB shipping point, also known as FOB origin, indicates that the title and responsibility of
goods transfer from the seller to the buyer when the goods are placed on a delivery vehicle.
Since FOB shipping point transfers the title of the shipment of goods when the goods are
placed at the shipping point, the legal title of those goods is transferred to the buyer.

13. Trial balance & it’s limitations.

A trial balance is a bookkeeping worksheet in which the balances of all ledgers are compiled
into debit and credit account column totals that are equal. A company prepares a trial balance
periodically, usually at the end of every reporting period.

Limitations of a Trial Balance-

It may hide errors of omission. Some transactions are not journalized at all. Even a correctly
balanced Trial Balance cannot reveal this mistake.

If a journal entry with an incorrect amount gets recorded in both accounts, the Trial Balance
will not detect that error.

A journal entry may have the right amount, but the accountant may have entered it under
the wrong accounting heads. The Trial Balance cannot identify such mistakes.

If a journal entry is missing in the ledger, it will not reflect in the Trial Balance.
14. Operating cycle for Service & merchandising company.
 15. Different cost classification.

Cost classification for manufacturing company:

1. Manufacturing cost / Product cost:

i. Direct raw material- Is the physical substance of a product and converted into
finished goods with help of direct labour and manufacturing overhead.
ii. Direct labour- Is the physical and mental effort expended in production of an
item.
iii. Factory overhead / Manufacturing overhead- Is a cost pool that accumulate
indirect materials, indirect labour and other indirect manufacturing cost.

2. Non manufacturing cost/ Period cost

• Official and administrative cost
• Market and Distribution cost

3. Relation to production
• Prime cost = Direct material + Direct labour
• Conversion cost = Direct labour + Factory overhead

4. Predicting cost behaviour

• Variable cost- (Vary total amount, fixed per unit)
• Fixed cost- (Total amount fixed, vary per unit)
• Mixed cost- (Variable cost + Fixed cost/ Semi variable cost)

Relevant cost- Influence in decision making that differ among the alternative courses.

Differential Revenue- Revenue or benefit between two relevant cost

Sunk cost- Non recoverable, already invested cost.

 16. Managerial function.

i. Planning:- When you think of planning in a management role, think

about it as the process of choosing appropriate goals and actions to

pursue and then determining what strategies to use, what actions to

take, and deciding what resources are needed to achieve the goals.

ii. Organizing:- This process of establishing worker relationships

allows workers to work together to achieve their organizational goals.

iii. Leading:- This function involves articulating a vision, energizing

employees, inspiring and motivating people using vision, influence,

persuasion, and effective communication skills.

iv. Staffing:- Recruiting and selecting employees for positions within

the company (within teams and departments).

v. Controlling:- Evaluate how well you are achieving your goals,

improving performance, taking actions. Put processes in place to help

you establish standards, so you can measure, compare, and make

decisions.

17. CVP, Contribution Margin, Breakeven point.

i. Cost Value Profit (CVP)- A graphical representation of the relationship between an

organizations revenue, cost, profits on the one hand & it’s sales volume on the other
hand.
ii. Break even point: The level of sales at which the profit is zero.
iii. Margin of safety: the difference between current or forecasted sales and sales at the
break-even point.
iv. Contribution margin: the selling price per unit minus the variable cost per unit.

Solved by-

Md. Nafiul Islam

R-202012010

DWMTEC, 2nd Batch