40 Questions
What is the primary objective of preparing a trial balance?
To ensure arithmetical accuracy of account balances
What is the purpose of adjusting entries in the accounting cycle?
To allocate revenues and expenses to the appropriate time period
What is the final stage in the accounting cycle?
Preparation of final accounts
What is the purpose of accounting in a business?
To communicate financial information to stakeholders
What is the term for the remainder of offsetting positive and negative flows of benefits in an account?
Account balance
What is the next step after preparing the trial balance?
Preparing adjusting entries
What is the purpose of the income statement?
To present revenues and expenses for a period
What is the foundation of accounting?
Conventions and assumptions
What is the basic function of accounting according to A.C. Littleton?
To furnish dependable, relevant information about business enterprise
What does the recording function of accounting involve?
Recording past, present, and future economic events of the business
Who observed that accounting has three major functions?
D.R. Scott
What is the fifth function of accounting according to Maurice Moonitz?
To express the foregoing in terms of money as a common denominator
What is the primary focus of A.C. Littleton's six areas of accounting actions?
Homogenizing diverse events
How many functions of accounting does Maurice Moonitz identify?
Five
What is the primary goal of accounting according to the content?
To record and report economic events
Who defines accounting in terms of measuring resources held by specific entities?
Maurice Moonitz
What do investors and creditors want to predict, compare, and evaluate?
Potential cash flows in terms of amount, timing and related uncertainty
What is an objective of financial statements according to the committee?
To report on the activities of the enterprise affecting the society
Who are the external users of accounting information?
Individuals or organizations who have economic transactions with the enterprise
Why are external users interested in the operations of a business enterprise?
To determine the credit worthiness of the enterprise
What do external users want to know about the enterprise?
Both a and b
What is the purpose of financial statements according to the committee?
To provide information for predicting, comparing, and evaluating potential cash flows
What is not an example of an external user of accounting information?
Employees of the enterprise
What do external users use accounting information for?
To determine whether the enterprise is credit worthy and the terms under which credit can be extended
What is the broader scope of accounting used for?
For formulating macro economic policies
What is the principal limitation of the monetary postulate?
It ignores everything that cannot be measured in terms of money
What is the conventional accounting beset with?
A number of limitations
What is the importance of accounting information?
It is useful for assessing the role of business in society
What is the limitation of the monetary measure?
It ignores everything that cannot be measured in terms of money
What is accounting used for apart from macro economic application?
For human resource accounting and environmental resource accounting
What is the importance of accounting in national planning?
It is used for formulating macro economic policies
What is the limitation of conventional accounting?
It ignores certain important matters like human resources and social costs
Where did Giovanni Farolfi and Company, a firm of merchants, operate?
Florence
What type of business did Datini conduct?
Large-scale international business
What did the Medicis integrate into their accounting records for textile manufacturing?
Cost accounting records
What was the title of Werner Sombart's major work?
Der Modern Kapitalismus
What did Werner Sombart identify as the three causal factors that contributed to the growth of the capitalistic enterprise?
The market, business management techniques, and the law
What did Sombart believe was the primary role of accounting in the growth of the capitalistic enterprise?
To represent the flow of capital through a business
What did Sombart predict about the future of capitalism?
It would reach its zenith in the 20th century
Where did Werner Sombart study law, economics, history, and philosophy?
Universities of Berlin, Rome, and Pisa
Study Notes
Functions of Accounting
- Accounting has multiple functions, but there is no unanimous agreement among accountants on what those functions are.
- D.R. Scott identified three major functions: record-keeping, control, and protection of equities.
- Maurice Moonitz defined five basic functions: measuring resources, reflecting claims and interests, measuring changes, assigning changes to specific periods, and expressing results in monetary terms.
- A.C. Littleton identified six areas of "accounting actions": homogenizing events, converting events into entries, classifying entries, reclassifying data into fiscal periods, summarizing and reporting, and reviewing data and processes.
- Littleton also stated that accounting's primary function is to furnish dependable, relevant information about business enterprises.
Users of Accounting Information
- External users include suppliers, banks, financial institutions, buyers, contractors, and other entities that have economic transactions with the business.
- These users are interested in the business's creditworthiness, financial position, and ability to repay debts.
- Social organizations may also use accounting information to assess a business's role in society and its impact on welfare.
Accounting Cycle
- The accounting cycle involves several stages, including:
- Recording transactions
- Preparing a trial balance
- Adjusting entries for proper allocation of revenues and expenses
- Preparing final accounts, including the income statement and balance sheet
Accounting Bases and Policies
- Accounting is based on assumptions, concepts, postulates, and conventions.
- It can be viewed as a practical art or a theory of financial communication.
- Accounting information has broad utility, including:
- Maximizing social well-being
- National planning and income determination
- Human resource accounting
- Environmental resource accounting
- Macroeconomic policy formulation
Limitations of Accounting
- Conventional accounting has several limitations, including:
- Monetary postulate: accounting is limited by its focus on monetary measurements, which ignore non-monetary aspects like human resources and social costs.
- Ignoring qualitative aspects like managerial efficiency and employee relations.
Historical Development of Accounting
- Double-entry bookkeeping developed in Florence and Venice during the same period.
- Giovanni Farolfi and Company used a sophisticated double-entry system in the 14th century.
- The Medicis used cost accounting records for textile manufacturing, including accounting for depreciation, interest on capital, and cost of production.
Werner Sombart's Propositions
- Sombart identified three causal factors contributing to the growth of capitalistic enterprises: law, business management techniques, and market.
- Accounting played a crucial role in business management techniques, providing four explanations:
- Representing the flow of capital through a business.
- Providing a framework for the firm as a legal entity.
- Facilitating the firm's financial entity through the market.
- Enabling business management techniques through accounting.
Learn about the different functions of accounting, as defined by various experts in the field, including D.R. Scott, Maurice Moonitz, and A.C. Littleton.
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