Accounting Functions

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Questions and Answers

What is the primary objective of preparing a trial balance?

To identify errors in journalizing

To prepare financial statements

To ensure arithmetical accuracy of account balances (correct)

To classify transactions into homogeneous groups

What is the purpose of adjusting entries in the accounting cycle?

To close temporary accounts

To classify transactions into homogeneous groups

To prepare financial statements

To allocate revenues and expenses to the appropriate time period (correct)

What is the final stage in the accounting cycle?

Journalizing transactions

Preparation of trial balance

Preparation of final accounts (correct)

Recording adjusting entries

What is the purpose of accounting in a business?

To communicate financial information to stakeholders Signup and view all the answers

What is the term for the remainder of offsetting positive and negative flows of benefits in an account?

Account balance Signup and view all the answers

What is the next step after preparing the trial balance?

Preparing adjusting entries Signup and view all the answers

What is the purpose of the income statement?

To present revenues and expenses for a period Signup and view all the answers

What is the foundation of accounting?

Conventions and assumptions Signup and view all the answers

What is the basic function of accounting according to A.C. Littleton?

To furnish dependable, relevant information about business enterprise Signup and view all the answers

What does the recording function of accounting involve?

Recording past, present, and future economic events of the business Signup and view all the answers

Who observed that accounting has three major functions?

D.R. Scott Signup and view all the answers

What is the fifth function of accounting according to Maurice Moonitz?

To express the foregoing in terms of money as a common denominator Signup and view all the answers

What is the primary focus of A.C. Littleton's six areas of accounting actions?

Homogenizing diverse events Signup and view all the answers

How many functions of accounting does Maurice Moonitz identify?

Five Signup and view all the answers

What is the primary goal of accounting according to the content?

To record and report economic events Signup and view all the answers

Who defines accounting in terms of measuring resources held by specific entities?

Maurice Moonitz Signup and view all the answers

What do investors and creditors want to predict, compare, and evaluate?

Potential cash flows in terms of amount, timing and related uncertainty Signup and view all the answers

What is an objective of financial statements according to the committee?

To report on the activities of the enterprise affecting the society Signup and view all the answers

Who are the external users of accounting information?

Individuals or organizations who have economic transactions with the enterprise Signup and view all the answers

Why are external users interested in the operations of a business enterprise?

To determine the credit worthiness of the enterprise Signup and view all the answers

What do external users want to know about the enterprise?

Both a and b Signup and view all the answers

What is the purpose of financial statements according to the committee?

To provide information for predicting, comparing, and evaluating potential cash flows Signup and view all the answers

What is not an example of an external user of accounting information?

Employees of the enterprise Signup and view all the answers

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 Signup and view all the answers

What is the broader scope of accounting used for?

For formulating macro economic policies Signup and view all the answers

What is the principal limitation of the monetary postulate?

It ignores everything that cannot be measured in terms of money Signup and view all the answers

What is the conventional accounting beset with?

A number of limitations Signup and view all the answers

What is the importance of accounting information?

It is useful for assessing the role of business in society Signup and view all the answers

What is the limitation of the monetary measure?

It ignores everything that cannot be measured in terms of money Signup and view all the answers

What is accounting used for apart from macro economic application?

For human resource accounting and environmental resource accounting Signup and view all the answers

What is the importance of accounting in national planning?

It is used for formulating macro economic policies Signup and view all the answers

What is the limitation of conventional accounting?

It ignores certain important matters like human resources and social costs Signup and view all the answers

Where did Giovanni Farolfi and Company, a firm of merchants, operate?

Florence Signup and view all the answers

What type of business did Datini conduct?

Large-scale international business Signup and view all the answers

What did the Medicis integrate into their accounting records for textile manufacturing?

Cost accounting records Signup and view all the answers

What was the title of Werner Sombart's major work?

Der Modern Kapitalismus Signup and view all the answers

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 Signup and view all the answers

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 Signup and view all the answers

What did Sombart predict about the future of capitalism?

It would reach its zenith in the 20th century Signup and view all the answers

Where did Werner Sombart study law, economics, history, and philosophy?

Universities of Berlin, Rome, and Pisa Signup and view all the answers

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.

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Description

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.