Summary

This document provides a detailed explanation of accounting, including its various types such as financial accounting, cost accounting, management accounting and their respective advantages and disadvantages. It also touches upon tax accounting, government accounting, social accounting, human resource accounting, and auditing.

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## 8. What is Accounting? Accounting refers to collecting, summarizing, analyzing and reporting the information of business in monetary terms. In order to satisfy information needs of different people, different types of accounting have developed each and every type of accounting is generally confi...

## 8. What is Accounting? Accounting refers to collecting, summarizing, analyzing and reporting the information of business in monetary terms. In order to satisfy information needs of different people, different types of accounting have developed each and every type of accounting is generally confined to its own area of operation. The various types of accounting are: ### Financial Accounting - It is the original form of accounting - It is mainly concerned with recording, classification, summarizing, financial transaction accounting statements. - The main task of financial accounting is to prepare income statement ie. profit & loss amount and the statement of financial position that is balance sheets. - These financial statement not only provide overall operational results of the business but also furnished valuable information to the outsider. Such as shareholder, Creditors, text outhorities etc. - The main objective of Financial accounting is to ascertain protit earned during a year and financial position at the end of year. ### Cost Accounting - It is a specialized branch of accounting which involves classification, accumulation, assignment and control of cost. - The main purpose of cost accounting is to ascertain the cost of production, to enable the management fix the price of the product and to ensure cost reduction. - Cost accounting is generally adopted in the business engaged in manufacturing activities. ### Management Accounting - That part of accounting system which facilitates the management process of decision making is called management accounting. - It is concerned with accounting information which is useful to the management in formulating policies and controlling the business operations. - The main purpose management accounting is to provide all relevant information that may be required by the management to take decision. ### Tax Accounting - If tax accounting is covered with computation of taxable income, it is concerned with computation wealth tax, gift tax, sales tax etc. ### Government Accounting - The accounting system followed by the central government, state government and legal bodies is called government accounting. ### Social Accounting - It is concerned with the application of double entry system of book-keeping and account to socio-economic analysis. - It deals with measurement of social benefit created and the cost incurred by the enterprise, social benefit include facilities like housing, medical etc. ### Human Resource Accounting - It means accounting for the organizational sources. - It is measurement of the cost and value of people to the organization. ### Auditing - While accounting involves the tracking and reporting of all financial activity for a business, auditing is designed to provide and independent analysis that financial activities to ensure that a business is recording transactions. ## The advantages of accounting as follows: 1. **Accounting helps to ascertain the profit and financial position.** - Accounting facilitates the preparation of financial statements. Ex: profit and Loss account and Balance sheet. Profit and loss account give information about the protit (or loss) made by a business if recording at the end of a year. 2. **Accounting assist in managing the business.** - Accounting helps the management in managing the business. To manage an enterprise means planning, controlling and decision making. 3. **Accounting provide systematic record of business transactions.** - A business con't remember all the transactions of the business. Accounting is a systematic approach to present business transactions in books of accounts. 4. **Accounting ensure proof in the court of law.** - It facilitates inter-firm and intra-firm comparison of the business. For ex: current year profit may be compared with previous years. 5. **Accounting facilitates comparative studier.** - If accounting of business are kept properly according to the principles of accounting they con be presented in the court of law for giving necessary documentory evidence. 6. **Accounting facilitates correct payment of taxes.** - Accounting helps us in ascertaining the tax lioblity of the business correctly. Taxation authorities insist that accounts are to be maintained according to principles of accounting. 7. **Cost Control.** - It helps in identifying and reducing business expenses to increase profits that helps in budgeting process. 8. **Helps in Audit.** - Audit certificate is issued by the auditor on the accounts which proves that there are no irregularitier in the organization. 9. **Helps in raising loan.** - Business owners take loan when they want to expand business. Financial institution provide loans on the basis of profitablity of business. This con be measured by hoving a look at the accounti of compony. 10. **Prevention of fraud, errors, and forgery.** - It helps in taking the timely steps for prevention and detection of fraud. Accounting help in the overall growth of the business and helps in keeping track of the financial transaction of the business. ## The limitations of accounting as follows: 1. **Accounting records only in monetary terms.** - It records only those transactions which can be measured in terms of money. For ex: policies of government have direct effect on the business but accounting records will not show it's impact because cannot be measured in terms of money. 2. **Based on historic cost.** - Assets are recorded of their cost bond not of their market price. Accounting ignore the changes in the value of the assets which change time to time. 3. **Based on historical personal judgement.** - Adaption of various accounting policies depends on the personal judgement of the accountant or a result, financial statements may not be objective and comparable for ex: an accountant user hir personal judgement with regard to depreciation policies. 4. **Accounting ir not fully exact.** - Accounting information is sometime based on estimate, Hence, the financial statements do not reflect the true picture of the business. 5. **Not a good tool for management.** - Sometimes, records are part facts which do not help the management in decision making accounts do not provide for evaluation of business plans or policies. 6. **Accounting may lead to window dressing.** - The term "window dressing" refers to the practice of manipulation of accounts so as to conceal with facts, vital facts and present a more favorable position of the business than the actual position. 7. **The tendency for secret reserves.** - Often management create secret reserves internationally by increasing or decreasing assets and liability for which the total financial picture of org. is not reflected. 8. **Maintaining Secrecy.** - Secrecy cannot be ensured for the environment of many employees in accounting work, although maintaining is important. 9. **Verifiability.** - An audit of financial statements does not guarantee the correctness of such statements. The auditor can only ensure that the statements are free from error to the best of his of judgement. 10. **Conflicts between accounting principles.** - There is a conflict between different accounting principles. For ex: principles of prudence (conservatism) require that either cost or market price basis should be consistently followed. ## 9.2 Write Golden rules of accounting and journalize the following transactions: On 1st Jon 2020, S.K. Jain commenced business with capital of ₹60,000 and his transaction for month are given below: **2020** - Jon 1: Purchase goods for cash ₹ 5,000 - Jon 2: Purchased furniture for cash ₹ 1000, Purchased typewriter for cash ₹ 2000 - Jon 5: Cash Sales ₹ 5000 - Jon 6: Sold goods to Monohor ₹ 8000 - Jan 10: Purchased goods from Ram ₹ 10,000 - Jon 12: Goods return to Rom ₹ 2,000 - Jon 15: Goods returned by Monohar ₹ 5,000 - Jan 25: Withdraw for personal use ₹ 500 ### Ans: The golden rules of accounting are: 1. **Personal Accounts** - Debit the receiver - Credit the giver 2. **Real Account** - Debit what comes in - Credit what goes out. 3. **Nominal Account** - Debit all the expenses and losses. - Credit all income and gain. | Date | Particulars | L.F. | Amount Dr. | Amount Cr. | |:---|:---|:---|:---|:---| | Jon 1 | Cash A/C Dr. | | 60,000 | | | | To Capital A/C | | | 60,000 | | | (being business started with cash) | | | | | Jan 1: | Purchase A/C Dr. | | | | | | To Cash A/C | | | | | | (being goods purchased for cash) | | | | | Jan 2 | Furniture A/C Dr | | 1,000 | | | | Typewriter A/C Dr | | 2,000 | | | | To Cash A/C | | | 3,000 | | | (being furniture and typewriter purchased for cash) | | | | | Jan 5 | Cash A/C Dr | | 5,000 | | | | To Sales A/C | | | 5,000 | | | (being goods sold on cash) | | | | | Jan 6 | Manohar A/C Dr | | 8,000 | | | | To Sales A/C | | | 8,000 | | | (being goods sold to Monohor) | | | | | Jan 10 | Purchase A/C Dr | | 10,000 | | | | To Ram A/C | | | 10,000 | | | (being goods purchased from Ram) | | | | | Jan 12 | Ram A/c Dr | | 2,000 | | | | To Purchase A/C | | | 2,000 | | | (being goods retum to Ram) | | | | | Jon 15 | Sales A/C Dr | | 1,000 | | | | To Monohor A/C | | | 1,000 | | | (being returned by Monohor) | | | | | Jon 20 | Cash A/C Dr | | 5,000 | | | | To Sales A/C | | | 5,000 | | | (being goods sold for cash) | | | | | Jan 25 | Drowing A/C Dr | | 500 | | | | To Cash A/C | | | 500 | | | (being withdrawn for personal use) | | | | | | **GRAND TOTAL** | | **1,05,500** | **1,05,500** | ## 4. What is trial balance? Discuss the different features and objective of trial balance. A trial balance is a statement that keeps record of the final ledger balance of accounts in a business. - It has two columns – Debit and Credit. - It is prepared at the end of a year and is used to prepare financial statements like profit & Loss Account or Balance sheet. - The main objective of a Trial Balance is to ensure the accuracy. ### Objectives of Trial Balance: 1. **It helps in ascertaining arithmatic errors that occur while preparing accounts.** - Accountants can make mistates while recording financial transactions under the double-entry bookkeeping system. When the debit & Credit side of Trial Balance do not match, it means one of two things. One, there was an error in either recording the account balance. Or two, there is an accounting mistake made while recording the transactions in ledger. 2. **It helps in preparing the financial statements of a company at the end of a financial year.** - The final balance of expenses and revenue accounts is taken from the Trial Balance and used in the protit and Loss Account. Similary, the accounts related to assets, Liabilities and Copital gets recorded in Balance sheet. 3. **A trial Balance helps in summoring the financial transactions done while running a business.** - It is a consolidated summary of the financial transactions that have taken place within a financial year. It can help the management in making business decisions as well. ### Features of a Trial Balance: 1. It is a list of the various ledgers account balances whethe debit or credit. 2. It is prepared in the form of a statement. 3. A firm prepares a trial balance in order to check the arithmetical accuracy of ledger accounts. 4. A trial balance is usually prepared at the end of the accounting year. However a firm may prepare it weekly, monthly, quarterly or half-yearly also. 5. The arithmatical accuracy established by a trial Balance is not proof that there are no mistakes in the books of accounts. 6. It does not form a part of final accounts. 7. It provides a summary of the ledger accounts. Thus, it serves as a link between the books of accounts and Trading & Profit and loss Account and Balance sheet. ## 5. Define the followings: 1. **Journal** - A Journal is a book of prime entry. Any transaction is first recorded in a journal and then posted from there to the ledger accounts. We record transactions here in a chronological order. An organization has an option to either maintain a single Journal Book or to maintain separate journals for each king of transactions. - **Columns in Journal:** - **Date:** Every transaction is recorded at the transaction date. - **Particulars:** It is area where Journal entry is passed in 3 parts namely debit, credit & narration. - **Ledgerfolio:** It is the page no. of the ledger to which the journal entry is posted. - **Debit Amount:** The amount whic is debited in the entry should be mentioned in this column. - **Credit Amount:** The amount which is cited in the entry should be mentioned in the column. 2. **Ledger** - Ledger account is journal in which a compony mointains all the data of all the transactions and financial statements. - It is a book which contains permanent record of all transactions in a summarised and classified form. - It provides complete information of a particular account during a particular period, also provides information of incomes and expenses during a particular accounting period. - It provider information for the preporation of trial Balance. - It is helpful in preporing final accounts for a particular accounting period. 3. **Trial Balance** - A trial balance is a bookeeping worksheet in which the balances of all ledgers are compiled into debit and credit account column totals that are equal. A company prepares a trial balance periodically, usually at the end of every reporting period. The general purpose of producing a trial balance is to ensure that the entries in a company's bookkeeping system are mathematically correct. It has two columns Debit & Credit. 4. **Trading Account** - It is used to determine the gross profit & Loss of a business which results from trading Activities. Trading activities are mostly related to the buying and selling activities involved in a business. Trading Account is useful for businesses that are dealing in the trading business. This account helps them to easily determine the overall gross profit or gross loss of the business. The formulae used for this is: Gross profit = Net sales – Cost of goods sold 5. **Profit and Loss Account** - It shows the net protit and net loss of the business for the accounting period. This account is prepared in order to determine the net protit or net loss that occurs during an accounting period for a business concern. It's get initiated by entering the gross loss on the debit side or gross protit on the credit side. The value obtained from the balance which is comed down from the Trading Account. Net protit = Gross protit – Expenser + Other Income 6. **Balance sheet** - The term balance sheet refers to a financial statement that reports a compony's assets, liabilities, and stockholder equity at a specific point in time. In short, It is a financial statement that provides a snapshot of what a compony owns and owes. Fundamental analysts use balance sheets to calculate financial ratios.

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