What are the objectives, functions and limitations of

Accounting ?

Answer. Objectives of Accounting:

1. Recording Transactions: Accounting's primary goal is to systematically record
all financial transactions in an organized manner.
2. Determining Profit or Loss: Through accounting, businesses can ascertain
their financial performance over a specific period by preparing an income
statement (Profit and Loss Account).
3. Assessing Financial Position: It helps in determining the financial position of a
business by preparing a Balance Sheet, which lists assets, liabilities, and
owner's equity.
4. Providing Financial Information: Accounting provides essential financial
information to stakeholders (investors, creditors, management) for decision-
making.
5. Compliance with Legal Requirements: It ensures that businesses comply with
applicable laws and regulations such as taxation, auditing standards, and
company laws.
6. Budgeting and Forecasting: It aids in the preparation of budgets and forecasts,
helping in setting financial goals and evaluating business performance.

Functions of Accounting:

1. Systematic Record-Keeping: It ensures accurate and complete recording of

financial transactions in chronological order.
2. Preparation of Financial Statements: Accounting helps in preparing
essential financial statements like Income Statements, Balance Sheets, and
Cash Flow Statements.
3. Cost Control: Accounting helps in identifying areas where cost savings can
be made and ensures that expenses are kept under control.
4. Taxation: It aids in the calculation of taxes and the preparation of tax
returns for individuals and businesses.
5. Assisting in Decision Making: Accounting provides data that can be
analyzed to make informed decisions regarding investments, expenses, and
pricing.
6. Internal and External Reporting: Accounting reports are used both
internally (for management) and externally (for investors, creditors, and
regulatory bodies).
Limitations of Accounting:

1. Based on Historical Data: Accounting often relies on past data, which may
not reflect current or future business conditions.
2. Monetary Measurement: Accounting only records financial transactions
that can be measured in monetary terms, ignoring non-monetary aspects like
customer satisfaction or employee morale.
3. Subjectivity in Valuation: Certain items in accounting, like depreciation or
goodwill, involve estimation, which can lead to subjectivity and potential
inaccuracies.
4. Ignores Inflation: Conventional accounting does not account for changes in
the purchasing power of money due to inflation, leading to outdated
valuations.
5. Does Not Consider Qualitative Factors: Accounting primarily focuses on
quantitative data and often disregards qualitative factors that may affect a
business's performance.
6. Window Dressing: Companies can manipulate accounting data (window
dressing) to present a more favorable financial position than what may
actually exist.

Write the difference between cash discount and trade

discount.
Answer.
the difference between a cash discount and a trade discount:

Basis Cash Discount Trade Discount

A reduction in the invoice price offered A reduction in the listed price given to
Definition to customers for prompt payment customers on bulk purchases or as an
within a specified time. incentive to buy more.
To encourage prompt payment and To encourage bulk buying and increase
Purpose
improve cash flow. sales volume.
Time of
Given at the time of payment. Given at the time of sale or purchase.
Allowance
It is recorded in the books of accounts It is not recorded in the books of
Entry in
as it affects the actual payment accounts since it is deducted before
Accounts
received or made. invoicing.
Given if payment is made within the Given irrespective of the time of
Conditions
specified period. payment.
 Basis Cash Discount Trade Discount
Applies to the final amount payable
Applies to the list price or catalog price
Applicability after the trade discount has been
before invoicing.
deducted.
A 2% discount is offered if the
A 10% discount is offered on purchasing
Example payment is made within 10 days of the
100 units of a product.
invoice date.

Discuss any four Accounting concepts and four Accounting

conventions

Answer. Four Accounting Concepts:

1. Business Entity Concept:
o Definition: This concept treats the business as a separate entity from its owner(s).
The personal transactions of the owner are kept distinct from the business
transactions.
o Example: If the owner of a business buys a personal car, it should not be recorded
in the books of the business. Only transactions related to the business should be
recorded.
o Purpose: To ensure clarity and accuracy in accounting records by separating
personal and business activities.
2. Dual Aspect Concept:
o Definition: This concept states that every transaction has two aspects: a debit and
a credit, both of which must be recorded. The accounting equation (Assets =
Liabilities + Owner’s Equity) is based on this concept.
o Example: When a business buys equipment for cash, equipment (an asset)
increases while cash (another asset) decreases. This keeps the accounting equation
balanced.
o Purpose: To maintain accurate records and ensure the balance sheet remains in
equilibrium after every transaction.
3. Cost Concept:
o Definition: Assets are recorded at their original purchase price, not their current
market value. This cost remains on the books unless there is a depreciation or
impairment.
o Example: If land was purchased for $100,000, it is recorded at that cost even if its
current market value has increased to $150,000.
o Purpose: To provide consistency and reliability in financial reporting, as
historical cost is objective and verifiable.
4. Realization Concept:
 o Definition: This concept holds that revenue should only be recognized when it is
earned, regardless of when cash is received.
o Example: If a business delivers goods to a customer in September but receives
payment in October, the revenue is recorded in September, when the goods were
delivered.
o Purpose: To ensure that income is recognized in the period it is earned, providing
an accurate depiction of a company’s financial performance.

Four Accounting Conventions:

1. Convention of Objectivity:
o Definition: This convention emphasizes that accounting data should be verifiable
and free from personal bias. Financial information should be based on objective
evidence.
o Example: Recording purchases based on actual invoices rather than estimates or
assumptions ensures that transactions are recorded objectively.
o Purpose: To enhance the credibility and reliability of financial statements by
ensuring that they are based on verifiable facts.
2. Convention of Materiality:
o Definition: This convention dictates that financial statements should report all
material information, meaning that insignificant items can be disregarded but
significant information should be disclosed.
o Example: Small expenses, such as the purchase of office supplies, may be
expensed immediately rather than capitalized because they are immaterial in the
context of the overall financial statements.
o Purpose: To avoid overburdening financial reports with unnecessary details,
while ensuring that important information is not omitted.
3. Convention of Consistency:
o Definition: Accounting methods and policies should be applied consistently from
one period to another. Any changes should be justified and disclosed in the
financial statements.
o Example: If a company uses the straight-line method of depreciation, it should
continue using that method in future periods unless there is a compelling reason to
change.
o Purpose: To facilitate comparability of financial statements over time, allowing
stakeholders to evaluate trends in a company’s performance.
4. Convention of Conservatism (Prudence):
o Definition: This convention suggests that accountants should err on the side of
caution when reporting financial transactions. Anticipate and record potential
losses, but do not record potential gains until they are realized.
o Example: If a company expects to incur a loss on a lawsuit, it should record the
loss as soon as it is anticipated, even if the outcome is uncertain. However,
expected gains from a favorable outcome should not be recorded until they are
certain.
o Purpose: To avoid overstating the financial position of a company and ensure that
financial reports reflect a conservative view of the company’s financial health.
Write the difference between Book keeping and Accounting.
Answer.
Basis Bookkeeping Accounting
Bookkeeping is the process of Accounting is the process of summarizing,
recording daily financial transactions analyzing, interpreting, and reporting financial
Definition
in a systematic and chronological information based on the records kept during
order. bookkeeping.
It involves recording and organizing It involves preparing financial statements,
Scope financial transactions such as sales, analyzing them, and making business
purchases, receipts, and payments. decisions based on the data.
To provide insights into the financial health and
To maintain a detailed and accurate
Objective performance of a business and assist in decision-
record of all financial transactions.
making.
Nature of Clerical and routine work related to Analytical and complex work involving
Work transaction recording. interpretation of financial data.
Skills Basic knowledge of financial Requires expertise in financial reporting,
Required transactions and recording. analysis, and interpretation of data.
Bookkeeping does not involve Accounting involves the preparation of financial
Financial
the preparation of financial statements like the income statement, balance
Statements
statements. sheet, and cash flow statement.
Decision- Does not aid in decision-making; its Provides data that aids in decision-making
Making purpose is to provide records. by management and stakeholders.
Tools Journals, ledgers, and subsidiary Financial statements, ratio analysis, budgets, and
Used books. forecasts.

Question
: Explain the following terms:-
a) Capital b) Drawings c) Trade Payables
(Creditors) d) Trade Receivables (Debtors)
Answer.

Explanation of Terms:
a) Capital:

 Definition: Capital refers to the amount of money or assets invested by the

owner(s) in the business to start and run its operations. It can be in the
form of cash, goods, or other assets contributed by the proprietor(s).
 Example: If the owner of a business invests ₹500,000 to start a business,
that amount is considered the capital of the business.
 Nature: Capital is recorded on the liabilities side of the balance sheet
because it represents the owner's claim on the business's assets.

b) Drawings:

 Definition: Drawings refer to the withdrawal of cash or assets by the

owner(s) for personal use from the business. These withdrawals reduce the
owner's equity in the business.
 Example: If the owner withdraws ₹10,000 from the business account for
personal expenses, this is considered drawings.
 Nature: Drawings reduce the capital of the business and are recorded in
the books by deducting the amount from the owner’s capital account.

c) Trade Payables (Creditors):

 Definition: Trade payables refer to the amount a business owes to its

suppliers for goods or services purchased on credit. These suppliers are
known as creditors.
 Example: If a business buys inventory worth ₹50,000 from a supplier on
credit, the amount payable to the supplier is categorized as trade payables.
 Nature: Trade payables are liabilities and are recorded on the liabilities side
of the balance sheet under current liabilities.

d) Trade Receivables (Debtors):

 Definition: Trade receivables refer to the amount that customers owe to a

business for goods or services provided to them on credit. These customers
are known as debtors.
 Example: If a business sells goods worth ₹30,000 on credit to a customer,
the amount receivable from the customer is categorized as trade
receivables.
  Nature: Trade receivables are assets and are recorded on the assets side of
the balance sheet under current assets.

Question
Q7: Journalize the following:- Feb 1 : Ram started business with cash
Rs.10,00,000 Feb 3 : Deposited Rs.20,000 in bank Feb.4: Purchased
Machinery of Rs.1,20,000 Feb 7: Took a loan from bank of
Rs.10,00,000 Feb 10: Purchased goods for cash Rs.4,000 and goods on
credit from Shyam Rs.5,000 Feb 20 : Cash sales Rs.6,000, credit sales
to Atul Rs.7,200 Feb 28: Atul paid Rs.7,000 in full settlement of his
account

Answer.

Journal Entries:

Date Particulars Debit (₹) Credit (₹) Explanation

Feb 1 Cash A/c Dr. 10,00,000 Business started with cash
To Capital A/c 10,00,000
Feb 3 Bank A/c Dr. 20,000 Deposited cash into the bank
To Cash A/c 20,000
Feb 4 Machinery A/c Dr. 1,20,000 Purchased machinery
To Cash A/c 1,20,000
Feb 7 Cash A/c Dr. 10,00,000 Loan taken from the bank
To Bank Loan A/c 10,00,000
Feb 10 Purchases A/c Dr. 9,000 Purchased goods for cash and credit
To Cash A/c 4,000 For cash purchase
To Shyam A/c 5,000 For credit purchase from Shyam
Feb 20 Cash A/c Dr. 6,000 Cash sales
Atul A/c Dr. 7,200 Credit sales to Atul
To Sales A/c 13,200
Feb 28 Cash A/c Dr. 7,000 Received cash from Atul
To Atul A/c 7,200 Settlement of Atul's account (discount
 Date Particulars Debit (₹) Credit (₹) Explanation
allowed)
Discount Allowed A/c
200
Dr.

Explanation:

1. Feb 1: Ram started the business with cash, credited to Capital A/c.
2. Feb 3: Deposited some cash into the bank.
3. Feb 4: Purchased machinery with cash.
4. Feb 7: Loan taken from the bank and credited to Bank Loan A/c.
5. Feb 10: Purchased goods partly for cash and partly on credit from Shyam.
6. Feb 20: Recorded both cash and credit sales to Atul.
7. Feb 28: Atul settled his account with a payment of ₹7,000, resulting in a ₹200 discount
allowed.