Introduction to Accounting Overview

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Questions and Answers

What basis of accounting records transactions when cash is actually received or paid?

  • Matching basis of accounting
  • Cash basis of accounting (correct)
  • Historical cost accounting
  • Accrual basis of accounting

Which of the following is NOT a characteristic of an asset?

  • It may arise from liabilities (correct)
  • It is an economic resource
  • It leads to future benefits
  • It is owned by the organization due to past events

What principle involves recognizing income and expenses when they are earned or incurred?

  • Accrual principle (correct)
  • Periodicity principle
  • Dual aspect principle
  • Matching principle

Which type of liability arises from debts that are expected to be settled within one year?

<p>Current liability (B)</p> Signup and view all the answers

What distinguishes revenue from income in an accounting context?

<p>Revenue originates from ordinary business activities, while income includes all gains. (A)</p> Signup and view all the answers

Which of these transactions reflects an expense?

<p>Purchase of coal by Tata Steel (D)</p> Signup and view all the answers

Which accounting principle divides the business's life into shorter reporting periods?

<p>Periodicity principle (B)</p> Signup and view all the answers

Which of the following is a characteristic of both current and non-current liabilities?

<p>Must result in outflow of resources (A)</p> Signup and view all the answers

What is the purpose of accounting as described in the content?

<p>To provide information for decision making to various stakeholders (A)</p> Signup and view all the answers

Which statement accurately describes the 'Entity Concept' in accounting?

<p>A business entity is an economic unit distinct from its owners. (C)</p> Signup and view all the answers

Which convention ensures that all significant information is disclosed in financial statements?

<p>Convention of Disclosure (A)</p> Signup and view all the answers

What does the 'Going Concern' principle assume about a business?

<p>The business is a continuous enterprise unless evidence suggests otherwise. (C)</p> Signup and view all the answers

What is the first step in the accounting trail?

<p>Identify a transaction (A)</p> Signup and view all the answers

What does the concept of 'True and Fair view' in accounting signify?

<p>Financial statements must be factually correct and prepared under a reporting framework. (B)</p> Signup and view all the answers

According to the Convention of Conservatism, what should be the approach toward potential losses and profits?

<p>Provide for all possible losses and anticipate no profit (A)</p> Signup and view all the answers

What are the outputs of an accounting information system?

<p>Financial statements and reports (D)</p> Signup and view all the answers

What is the main purpose of a balance sheet?

<p>To provide a snapshot of a company's financial position (D)</p> Signup and view all the answers

Which of the following is NOT a section of a balance sheet?

<p>Expenses (C)</p> Signup and view all the answers

In which section of the balance sheet would you find equity share capital?

<p>Equity (A)</p> Signup and view all the answers

Which of these represents the accounting equation?

<p>Assets = Liabilities + Equity (A)</p> Signup and view all the answers

What does the income statement primarily summarize?

<p>Income, expenses, and profit over a period (C)</p> Signup and view all the answers

When recording a transaction, why is it important to identify both aspects involved?

<p>To balance the accounting equation at the end (A)</p> Signup and view all the answers

What happens to the balance sheet after purchasing machinery for cash?

<p>One asset increases while another asset decreases (B)</p> Signup and view all the answers

Which part of a transaction must align to maintain the balance sheet's integrity?

<p>Assets and liabilities (C)</p> Signup and view all the answers

Flashcards

Going Concern

The principle in accounting that states a business is assumed to be operating and will continue to operate in the future, unless there is evidence to suggest otherwise.

Entity Concept

A principle in accounting that states a business entity is separate from its owners. The business has its own assets and liabilities, and only transactions that affect the financial position of the business are recorded.

How is the Going Concern Principle Applied?

A business's financial records are only prepared on the assumption that it is going to continue operating.

What does 'True and Fair' mean in Accounting?

In accounting, this means that the financial statements truthfully and accurately present the financial position of the business.

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What are Accounting Conventions?

A set of rules and practices that guide how financial information is presented and communicated to stakeholders.

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Convention of Consistency

Ensures consistent accounting practices when reporting financial information over time.

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Convention of Conservatism

This convention encourages businesses to be cautious and avoid overstating profits. It means recognizing potential losses immediately but only recognizing profits when they are certain.

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Convention of Materiality

All information relevant for decision-making by investors should be disclosed in the financial statements.

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Going Concern Assumption

The assumption that a business will continue to operate in the foreseeable future and will not be liquidated.

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Historical Cost

A method of valuing assets at their original cost, regardless of their current market value. It's based on the idea that an asset's historical cost provides a reliable measure of its worth.

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Money Measurement Principle

Financial transactions should only be recorded if they can be expressed in terms of money.

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Matching Principle

Expenses are recorded in the same accounting period as the revenues they generate.

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Dual Aspect Concept

Every transaction has two sides, one debit and one credit. Both sides must be recorded in the accounting system to ensure the accounting equation (Assets = Liabilities + Equity) remains balanced.

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Periodicity Concept

Financial reporting is broken into shorter time periods, typically a month, quarter, or year, to provide timely information to users.

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Accrual Concept

Revenue and expenses are recognized when they are earned or incurred, regardless of when cash is received or paid. This is also know as accrual basis of accounting.

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Cash Basis of Accounting

Financial transactions are only recorded when cash is received or paid.

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What is a Balance Sheet?

A financial statement that shows a company's assets, liabilities, and owner's equity at a specific point in time. It's like a snapshot of the company's financial health at a particular moment.

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What is the order of items on the Balance Sheet?

The Balance Sheet follows the order of permanency, starting with assets, followed by equity and then liabilities.

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What is an Income Statement?

A financial statement that shows a company's revenues, expenses, and profit or loss over a period of time.

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What is the double-entry accounting principle?

Every transaction involves two aspects that need to be recorded. This means that for every increase in an asset, there must be a corresponding decrease in another asset or an increase in liability or equity.

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What is the accounting equation?

This equation highlights the relationship between assets, liabilities, and equity: Assets = Liabilities + Equity.

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How to record a purchase of machinery for cash?

When a company purchases machinery for cash, the value of machinery increases, while the value of cash decreases. This is recorded as an increase in an asset (machinery) and a decrease in another asset (cash).

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How to record the purchase of supplies on credit?

When a company buys supplies on credit, it increases its liabilities (accounts payable) because it owes money to the supplier. At the same time, the company's assets (supplies) increase.

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How to record unpaid expenses, e.g., outstanding salary?

Unpaid expenses like salaries or utilities are recorded as liabilities because the company owes money for services already received. These liabilities usually decrease as the company pays its bills.

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Study Notes

Accounting Overview

  • Accounting is as old as human civilization
  • It's the language of business
  • It provides information for decision-making by various stakeholders
  • It's an information system

Accounting Information System

  • Inputs: Events and Transactions
  • Processes: Accounting Principles and Procedures
  • Output: Financial Statements and Reports
  • Users: Investors, Lenders, etc.

Accounting Trail

  • Recording: Identify a transaction, Record in Accounting Books
  • Reporting: Prepare a Trial balance, Prepare Financial Statements

True and Fair View in Accounting

  • True: Financial statements are factually correct, Prepared according to a reporting framework
  • Fair: Financial statements present information faithfully, Substance over form

Accounting Conventions

  • Convention of Disclosure: All significant information is disclosed
  • Convention of Consistency: Accounting rules and practices are consistently applied
  • Convention of Conservatism: "Provide for all possible losses and anticipate no profit"
  • Convention of Materiality: All information required for investor decision-making is disclosed

Accounting Principles: Entity Concept

  • A business entity is a separate economic unit from its owners
  • It owns its assets and has its own obligations
  • Only transactions affecting the entity's financial position are recorded

Accounting Principles: Going Concern

  • Accounting assumes the business is ongoing (unless evidence suggests otherwise)
  • Disclose if statements are not prepared using the going concern basis
  • Persistent losses, loan defaults, etc., may signal a concern

Accounting Principles: Historical Cost

  • Assets not for sale should be recorded at cost
  • An extension of the going concern concept

Accounting Principles: Money Measurement

  • Only measurable transactions in monetary terms are recorded

Accounting Principles: Matching

  • Expenses are matched with the revenues they relate to

Accounting Principles: Dual Aspect

  • Every transaction has two aspects
  • Both sides of the transaction need to be recorded

Accounting Principles: Periodicity

  • Infinite life is broken into shorter periods for reporting
  • Reporting usually happens annually

Accounting Principles: Accrual Concept

  • Income and expenses are recognized when they are earned or incurred, rather than when cash changes hands
  • This is different from cash basis accounting

Assets

  • What is an Asset?
    • Economic resource
    • Future benefits
    • Owned by the organization due to past events
  • Types of Assets: Tangible and intangible, Current and non-current

Liabilities

  • What is Liability?
  • Present obligation of the entity
  • Arises from past events
  • Settlement results in an outflow of resources
  • Types of Liabilities: Outsider and insider, Current and non-current

Income

  • What is Income?
  • Increase in economic benefit
  • Inflow or enhancement of assets or decrease in liabilities
  • What is Revenue?
  • Gross inflow of economic benefits
  • From ordinary course of business activity

Expenses

  • What is an Expense?
  • Decrease in economic benefits
  • Outflow or depletion of assets or increase in liability
  • Decrease in equity, excluding distributions to owners

A Small Quiz - Examples of Transactions

  • Furnitures owned by the company
  • Machinery owned by the company
  • Bank loan
  • Creditors
  • Steel rods sales
  • Coal purchases
  • Furnace sales
  • Apartment sales (by different companies)

Balance Sheet

  • A snapshot of a company's financial position at a specific point in time
  • Three sections: Assets, Liabilities, Equity
  • Order of presentation matters (usually follows permanency)
  • Assets are classified as current or non-current
  • Equity includes capital and other equity
  • Liabilities are current or non-current

Income Statement

  • A flow of activity over a period of time for a company.
  • Reports income, expenses, and profit (or loss)
  • Income less expenses = profit
  • Looks at revenue and expenditures across a period

How to Record a Transaction

  • Every transaction has two aspects
  • Both aspects must be recorded
  • Transactions cause changes in the balance sheet (assets=liabilities+equity)

Transaction Analysis

  • Step 1: Identify the two aspects of the transaction.

  • Step 2: Determine how each aspect is affected by the transaction.

  • Step 3: Update the relevant accounts to reflect the transaction. Assets, liabilities, and equity should balance after each transaction.

Example : Machinery Purchase

  • Purchased machinery worth 50,000 for cash
  • Machinery (asset) increases by 50,000 while cash (asset) decreases by 50,000.
  • The effects are reflected on the balance sheet

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