Accounting

Question 1: What is account and accounting?

Account: An account is an accounting record of increases and decreases in a specific asset, liability or owner’s equity item.

Accounting: Accounting is an information system that identifies, records and communicates the economic activities of an organization to the interested users.

Question 2: State the accounting equation.

A= L+ O/E; that means, Assets = Liabilities + Owner’s Equity

Assets: Assets are those resources that give future economic benefits. Example---land, prepaid rent, cash.

Liabilities: Liabilities are creditors’ claims on total assets. Example --- accounts payable, notes payable etc.

Owner’s Equity: Owner’s equity is owner’s claims on total assets. It can be expanded as follows:

Capital: Any item brought by the owner for the business.

Drawing: Any item withdrawn by the owner for personal use.

Revenue: Revenue is the income that a company receives from its normal business activities, usually from the sale of goods and services to customers.

Expense: Amount spent or cost incurred in an organization's efforts to generate revenue, representing the cost of doing business.

Question 3: Explain the users of accounting.

a. Internal Users: Internal users are people inside of an organization who plan, organize, and run business operation and use financial information to make decisions.

• Managers: Managers are internal users of accounting information. Managers need accounting information to know the growth of organization, to compare the budget with actual result etc.
• Employee: Employees of the organization require accounting information for the evaluation of the outcome of the organization and for the appraisal of their performance during the year.
• Finance Director: Finance Director needs accounting information to know the financial condition, to collect funds, to utilize those funds effectively.

b. External Users: External users are individuals outside of an organization.

• Investors: They use accounting information to make decisions to buy, hold, or sell stock.
• Creditors: They use accounting information to evaluate the risks of granting credit or lending money.
• Taxing Authority: They use accounting information to compute tax liability.
• Regulatory Agencies: They want to know whether the company is operating within prescribed rules
• Labor Unions: They want to know whether the owners can pay increased wages and benefits.

Question 4: What are the generally accepted accounting principles (GAAP)?

The common set of accounting principles, standards and procedures that companies use to compile their financial statements. These include the standards, conventions, and rules that accountants follow in recording and summarizing and in the preparation of financial statements. Companies are expected to follow GAAP rules when reporting their financial data via financial statements.

Question 5: What are the Assumptions of Accounting? Explain them.

1. Economic entity assumption: The activities of an entity should be kept separate and distinct from the activities of its owner and all other entities.
2. Going concern assumption: Under going concern assumption, an entity is viewed as continuing in business for the foreseeable future.
3. Monetary unit assumption: Under monetary unit assumption, accounting records only the transaction data that can be expressed in monetary terms.
4. Time period assumption: This assumption allows for the division of businesses operational activities into artificial time periods for reporting purposes as determined by the business owners. The company can record information on a daily, weekly, monthly, quarterly and yearly basis during a time frame they deem relevant.

Question 6: Explain the Principles of Accounting.

1. Cost Principle: The cost principle requires that assets be recorded at the cash amount (or its equivalent) at the time that an asset is acquired. For example, if equipment is acquired for the cash amount of $50,000, the equipment will be recorded at $50,000.
2. Matching Principle: According to this principle, expenses are to be matched with revenue to determine net income.
3. Revenue Recognition Principle: Revenue should be recorded when the services are performed or the goods are sold. The revenue recognition principle requires that revenue should be recorded when it is realized or when it is earned.
4. Full disclosure Principle: For a business, the full disclosure principle requires a company to provide the necessary information so that people who are accustomed to reading financial information can make informed decisions concerning the company. The information can be disclosed either in the body of the statements or notes to the financial statements or through supplementary documents.

Question 7: Briefly explain the Debit and Credit terms of accounting.

• Debit: Debit is an entry on the left side of a double-entry bookkeeping system that represents the addition of an asset or expense or the reduction to a liability or revenue.
• Credit: Credit is an accounting entry that either increases a liability or equity account, or decreases an asset or expense account.

Question 8: What is double entry system?

In accounting, every transaction has two effects, debit and credit. The double entry system of accounting means that every business transaction will involve two accounts (or more). For example, when a company borrows money from its bank, the company's Cash account will increase and its liability account Loans Payable will increase. If a company pays $200 for an advertisement, its Cash account will decrease and its account Advertising Expense will increase.

Question 9: What is journal?

In accounting, a journal is a record of financial transactions in order by date. A journal is often defined as the book of original entry.

Question 10: What is bookkeeping?

Bookkeeping is the recording of financial transactions, and is part of the process of accounting in business. Transactions include purchases, sales, receipts, and payments by an individual person or an organization/corporation.

Question12: What is ledger?

Ledger is a principal book in which the monetary transactions of a business are posted in the form of debits and credits.

Question 13: What is Adjusting journal entry?

Adjusting entries are journal entries made at the end of the accounting period to allocate revenue and expenses to the period in which they are actually applicable.

Question 14: Define Accrual Basis of Accounting and Cash Basis of Accounting.

• Accrual Basis of Accounting: Under the accrual basis of accounting, revenues are reported on the income statement when they are earned and expenses are matched with the related revenues and/or are reported when the expense occurs, not when the cash is paid. The result of accrual accounting is an income statement that better measures the profitability of a company during a specific time period.
• Cash Basis of Accounting: Under the cash basis of accounting, revenues are recorded only when cash is received and expenses are recorded only when cash is paid.

Question 15: Define merchandising company.

A merchandising company is an enterprise that buys and sells goods to earn a profit.

Question 16: Discuss different types of merchandising inventory system.

1. Perpetual – where detailed records of each inventory purchase and sale are maintained. Cost of goods sold is calculated at the time of each sale.
2. Periodic – detailed records are not maintained. Cost of goods sold is calculated only at the end of the accounting period.

Question 17: Define FOB Shipping Point.

FOB shipping point means buyer has to pay the transportation cost.

Question 18: Define FOB Destination.

FOB destination means seller has to pay the transportation cost.

Question 19: What does 2/10, n/30 mean?

2/10, n/30 means 2 percent discount is available if the payment is made within 10 days of purchase.

Question 20: What does IFRS stand for?

IFRS stands for International Financial Reporting Standards.

Question 21: What does IASB stand for?

IASB stands for International Accounting Standards Board.

Question 22: What does IAS stand for?

IAS stands for International Accounting Standards.