1.

Accounting is the process of recording, classify and summarizing financial data and analyzing and
communicating what has been learnt from the data.

Step 1 - Identifying the business transaction is the first step in the accounting process. The business
organization has to identify financial transactions. Therefore, only those transactions that are monetary are
recorded. The transactions that belong to the firm are to be recorded, and not the owner’s transactions are
included in the books of accounts of the business.

Step 2 - After identifying the transactions, the second step of the accounting process is to create the Journal
entry for every accounting transaction. The point of recording transactions is based on the policy followed
by the entity for accounting, i.e. accrual basis or cash basis of accounting. In the accrual basis of accounting,
the revenues and expenses are recorded in the entity’s books in the period when they are earned and
incurred, respectively, regardless of the actual cash receipt and payment. However, in the case of cash
accounting, the transactions are recorded only when the actual cash is received/paid. In a dual entry system,
every transaction affects at least two accounts, i.e., one account is debited, and another account is credited.
For example, if the purchases are made in cash, the purchases account will be debited (purchases increase),
and the cash account is credited (cash decreases).

Step 3 - After recording the transaction in the Journal, the individual accounts are then posted in the general
ledger. t helps the owner/accountant know each account’s balance individually. For example, all the debits
and credits of the bank account are transferred to the ledger account, which helps to know the increase and
decrease in bank balance during a period. Finally, we can determine the ending bank balance from it.

Step 4 - The company’s trial balance is prepared to check whether the debits are equal to the credits or not.
The trial balance’s main purpose is to identify any errors made during the above process. The trial balance
reflects all the accounts balances at the given time. After the preparation of the trial balance, it is checked
that the total of all credits is equal to the total of all debts, and if the total is not the same, then an error is
to be identified and corrected. There can be other reasons for the error, but firstly, an accountant tries to
locate the error by preparing the trial balance. Also, trial balance helps to know the balances of all accounts
in a summarized form.

Step 5 - After all the above steps are completed, the financial statements of the company are prepared to
know the actual financial position, the profitability position, and the cash flow position of the business. The
statements that are prepared for knowing the above positions are a statement of profit and loss for knowing
the profitability position, the balance sheet for getting the financial position, and the cash flow statement to
know the changes in cash flows from the three activities of the business (operating, investing and financing
activities).
Step 6 - Financial analysis is the process of evaluating businesses, projects, budgets, and other finance-
related transactions to determine their performance and suitability. Typically, financial analysis is used to
analyze whether an entity is stable, solvent, liquid, or profitable enough to warrant a monetary investment.

Reference - https://www.wallstreetmojo.com/steps-in-accounting-process/
2. Accounting concepts in the preparation of financial statements.

Accounting concepts are ideas, assumptions and conditions based on which a business entity records its
financial transactions and organizes its bookkeeping. It helps a business interpret and integrate a financial
transaction into the accounting process.

The importance of the accounting concept is visible in the fact that its application is involved in every step
of recording a financial transaction of the entity.
Following the generally accepted accounting concepts helps save the accountants’ time, effort, and energy,
as the framework is already set.
It improves the quality of financial statements and reports concerning the understandability, reliability,
relevance, and comparability of such financial statements and reports.

Below mentioned are the generally accepted accounting concepts:

Entity Concept
The entity concept is a concept that explains to you that your business is different from yours. It tells you
that the business owner and the owner are two separate entities. The statute recognizes the entity as an
artificial person. The entity must prepare its own set of financial statements and record its business
transactions accordingly.

Money Measurement Concept

It that only those transactions are recorded and measured in monetary terms. In simple words, only financial
transactions are recorded in books of accounts.

Periodicity Concept
The periodicity concept states that the entity or the business needs to carry out the accounting for a definite
period, usually the financial year. The period for drawing financial statements can vary from monthly to
quarterly to annually. It helps in identifying any changes occurring over different periods.

Accrual Concept
According to Accrual Accounting, the transaction is recorded on a mercantile basis. In other words,
transactions are to be recorded as and when they occur, not as and when the cash is received or paid, and
for the period the transaction pertains.

Matching Concept
The matching concept is linked to the Periodicity concept and Accrual concept. The matching concept states
that during the period for which revenue has been considered, the entity needs to account for expenses only
relating to that period. It means that the entity has to record revenue and expenses for the same period.

Going Concern Concept

Going concern concept assumes that the business will be carried out on an ongoing basis. Thus, the books
of accounts for the entity are prepared such that the business will be carried on for years to come.

Cost Concept
The cost concept states that any asset that the entity records shall be recorded at historical cost value, i.e.,
the asset’s acquisition cost.

Realization Concept
This concept is related to the cost concept. The realization concept states that the entity should record an
asset at cost until and unless the realizable value of the asset has been realized. Practically, it will be correct
to say that the entity will record the realized value of the asset once the asset has been sold or disposed of
off, as the case may be.
 Dual Aspect Concept
This concept is the backbone of the double-entry bookkeeping system. It states that every transaction has
two aspects, debit and credit. The entity has to record every transaction and give effect to both debit and
credit elements.

Conservatism
This conservatism concept states that the entity needs to prepare and maintain its book of accounts on a
prudent basis. Conservatism says that the entity has to provide for any expected losses or expenses;
however, it does not recognize future revenue expected.

Consistency
The accounting policies are followed consistently to achieve the intention of comparing the financial
statements of various periods or for that matter of multiple entities.

Materiality
The materiality concept explains that the financial statements should show all the items having a significant
economic effect on the business. It allows ignoring the other concepts if the item to be disclosed has an
insignificant impact on the entity’s business, and the efforts involved in recording the same are not
worthwhile.

Reference - https://www.wallstreetmojo.com/accounting-concept/

3. The role of double entry principle and accounting equation in the preparation of books of accounts.

Double entry system is a system of recording business transactions where each transaction affects at least
two accounts and requires an equal debit and credit. It is based on a dual aspect, i.e., Debit and Credit, and
this principle requires that for every debit, there must be an equal and opposite credit in any transaction.

Accounting equation is the relationship between the assets, liabilities and capital. It states that a firm's total
assets are equal to the sum of its liabilities and its owner's capital.

Example – A trader provided the following information on 1 January 2023.

Required:
A. Calculate the trader’s capital at 1 January 2023.
Capital = Assets – Liabilities
8500 = 14300 – 5800

B. Show the same information in the statement of financial position.

Trader’s Statement of Financial Position as at 1 January 2023
Assets ($) Liabilities ($)
Motor Vehicle 6500 Trade payables 1800
Trade receivables 1900 Loan 4000
Inventory 3400 Capital 8500
Cash at bank 2500
14300 14300
4.
The following details appeared in the books of a business ‘Friends Shop’.
May 1 Owner brought a cheque for $ 8 000 into the business.
May 3 Took $ 1 200 out of the bank and put it into the cash till.
May 9 Bought plant, on credit, from Ahmed $ 5 500.
May 12 Bought motor van paying by cash $ 1 000.
May 15 Bought motor van by cheque $ 2 000

Required:
Complete the ‘Effect’ and ‘Action’ column of the following table.
a)

b)
c)

d) Trial balances are used to prepare statement of financial position and other financial statements.
A trial balance is done to check that the debit and credit column totals of the general ledger accounts match
each other, which helps spot any accounting errors. It is used to prove the arithmetical accuracy of the
ledger accounts. Also, it is used as a basis for preparation of financial statements.