Author Archives: Swati

Short Answer Type Questions

Q1. State the three fundamental steps in the accounting process.
Answer : The fundamental steps in the accounting process are diagrammatically presented below.

Q3. Should a transaction be first recorded in a journal or ledger? Why?
Answer : A transaction should be recorded first in a journal because journal provides complete details of a transaction in one entry. Further, a journal forms the basis for posting the transactions into their respective accounts into ledger. Transactions are recorded in journal in chronological order, i.e. in the order of occurrence with the help of source documents. Journal is also known as ‘book of original entry’, because with the help of source document, transactions are originally recorded in books. The process of recording the transactions in journal and then in ledger is presented in the below given flow chart.

Q4. Are debits or credits listed first in journal entries? Are debits or credits indented?
Answer : As per the rule of double entry system, there are two columns of ‘Amount’ in the journal format namely ‘Debit Amount’ and ‘Credit Amount’. The way of recording in a journal is quite different from normal recording. Journal entry is recorded in journal format in which the ‘Debit Amount’ column is listed before the ‘Credit Amount’ column.
Credits are indented. Indentation is leaving a space before writing any word. Journal entry has its own jargon. While journalising, in the ‘Particulars’ column of journal format, debited account is written first and credited account is in the next line leaving some space, which is indentation.

Q5. Why are some accounting systems called double accounting systems?
Answer : Some accounting systems are called double accounting systems because under this system there are two aspects of every transaction, i.e., every transaction has dual effect. Every transaction affects two accounts simultaneously, that is represented by debiting one account and crediting the other account. It is based on the fact that if there is receiver, there should be a giver.

Q6. Give a specimen of an account.

Q7. Why are the rules of debit and credit same for both liability and capital?
Answer :
Every business acquires funds from internal as well as from external sources. According to the business entity concept, the amount borrowed from the external sources together with the internal sources like, capital invested by the proprietor, is termed as liability to the business. Business entity concept treats business and business owner separately. Capital of the owner is treated as liability to the business because the business has to repay the amount of capital to the owner, in case of closure of the business. As liability incurred is credited, in the same way, fresh capital introduced and net profit increases the owner’s capital, and so, capital is credited. On the other hand, if liability is paid, it reduces liability, and so, it is debited. Similarly, drawings from capital and net loss reduce the capital, and so, capital is debited. Thus the rules of debit and credit are same for both liability and capital.
Q8. What is the purpose of posting J.F numbers that are entered in the journal at the time entries are posted to the accounts?
Answer : J.F. number is the number that is entered in the ledger at the time of posting entries into their respective accounts. It helps in determining whether all transactions are properly posted in their accounts. It is recorded at the time of posting and not at the time of recording the transactions.
The purpose of entering J.F. number in the ledger is because of the below given benefits.
1. J.F. number helps in locating the entries of accounts in the journal book. In other words, J.F number helps to locate the position of the related journal entry and subsidiary book in the journal book.
2. J.F. number in accounts ensures that recording in the books of original entry has been posted or not.

Q9. What entry (debit or credit) would you make to: (a) increase revenue (b) decrease in expense, (c) record drawings (d) record the fresh capital introduced by the owner.
Answer :
1. Increase in revenue
Increase in revenue is credited as it increases the capital. Capital has credit balance and if capital increases, then it is credited.
2. Decrease in expense
Decrease in expense is credited as all expenses have debit balance. If expense decreases, then it is credited.
3. Record drawings
Capital has credit balance; if the capital increases, then it is credited. If capital decreases, then it is debited. Drawings are debited as they decrease the capital.
4. Record of fresh capital introduced by the owner- credit
Capital has credit balance, if capital increases, then it is credited. The introduction of fresh capital increases the balance of capital, and so, it is credited.

Q10. If a transaction has the effect of decreasing an asset, is the decrease recorded as a debit or as a credit? If the transaction has the effect of decreasing a liability, is the decrease recorded as a debit or as a credit?
Answer :If a transaction has a decreasing effect on an asset, then this decrease is recorded as credit. This is because, as all assets have debit balance and if assets decrease, then it is credited. For example, sale of furniture results in decrease in furniture (asset); so, the sale of furniture will be credited.
If a transaction has a decreasing effect on a liability, then this decrease is recorded as debit. This is because all liabilities have credit balance. If the liability increases, then it is credited and if the liability decreases, then it is debited. For example, payment to the creditors results in a decrease in the creditors (liability); so, the creditors account will be debited.

Numerical Questions

Q1. Prepare accounting equation on the basis of the following:
(a) Harsha started business with cash Rs 2,00,000
(b) Purchased goods from Naman for cash Rs 40,000
(c) Sold goods to Bhanu costing Rs 10,000/- Rs 12,000
(d) Bought furniture on credit Rs 7,000

Q2. Prepare accounting equation from the following:

Answer:

Q3. Mohit has the following transactions, prepare accounting equation:

Answer:

Q4. Rohit has the following transactions:

Prepare the Accounting Equation to show the effect of the above transactions on the assets, liabilities and capital.
Answer:

Q5. Use accounting equation to show the effect of the following transactions of M/s Royal Traders:

Answer:

Q6. Show the accounting equation on the basis of the following transaction:

Answer:

Q7. Show the effect of the following transactions on Assets, Liabilities and Capital through accounting equation:

Answer :

Q8. Show the effect of the following transaction on the accounting equation:

Answer :

Q9. Transactions of M/s. Vipin Traders are given below.
Show the effects on Assets, Liabilities and Capital with the help of accounting Equation.

Answer:

Q10. Bobby opened a consulting firm and completed these transactions during November, 2005:
(a) Invested Rs 4,00,000 cash and office equipment with Rs 1,50,000 in a business called Bobbie Consulting.
(b) Purchased land and a small office building. The land was worth Rs 1,50,000 and the building worth Rs 3,50,000. The purchase price was paid with Rs 2,00,000 cash and a long term note payable for Rs 8,00,000.
(c) Purchased office supplies on credit for Rs 12,000.
(d) Bobbie transferred title of motor car to the business. The motor car was worth Rs 90,000.
(e) Purchased for Rs 30,000 additional office equipment on credit.
(f) Paid Rs 75,00 salary to the office manager.
(g) Provided services to a client and collected Rs 30,000
(h) Paid Rs 4,000 for the month’s utilities.
(i) Paid supplier created in transaction (c).
(j) Purchase new office equipment by paying Rs 93,000 cash and trading in old equipment with a recorded cost of Rs 7,000.
(k) Completed services of a client for Rs 26,000. This amount is to be paid within 30 days.
(l) Received Rs 19,000 payment from the client created in transaction (k).
(m) Bobby withdrew Rs 20,000 from the business.
Analyse the above stated transactions and open the following T-accounts:
Cash, client, office supplies, motor car, building, land, long term payables, capital, withdrawals, salary, expense and utilities expense.
Answer :
(a) The transaction (a) increases assets by Rs 5,50,000 (cash Rs 4,00,000 and office equipment Rs 1,5,000) it will be debited and on the other hand it will increase the capital by Rs 5,50,000, so it will be credited in capital account.

(b)
Purchase of land and small office building are assets. On one hand, the purchase of these items will increase their individual accounts and this will increase the total amount of the assets in the business; so, both the accounts will be debited. On the other hand, payment in cash on the purchase of these assets will decrease the cash balance, so cash account will be credited to the extent of amount paid. After payment for building in cash, the balance of building account will be transferred to creditors for building account. This will increase the amount of the creditors, which in turn will increase the total liabilities of the business. Long term payables are regarded as loan to the business that will increase both cash balance (due to intake of loan) as well as liabilities of the business.

Q11. Journalise the following transactions in the books of Himanshu:

Answer:

Q12. Enter the following Transactions in the Journal of Mudit :

Answer :

Q13. Journalise the following transactions:

Answer :

Q14. Jouranlise the following transactions in the books of Harpreet Bros.:
(a) Rs 1,000 due from Rohit are now bad debts.
(b) Goods worth Rs 2,000 were used by the proprietor.
(c) Charge depreciation @ 10% p.a for two month on machine costing Rs 30,000.
(d) Provide interest on capital of Rs 1,50,000 at 6% p.a. for 9 months.
(e) Rahul become insolvent, who owed is Rs 2,000 a final dividend of 60 paise in a rupee is received from his estate.
Answer :

Q15. Prepare Journal from the transactions given below :

Answer :

Q16. Journalise the following transactions, post to the ledger:

Answer :

Q17. Journalise the following transactions is the journal of M/s. Goel Brothers and post them to the ledger.

Answer :

Q18. Give journal entries of M/s. Mohit traders; post them to the Ledger from the following transactions:

Answer :

Q19. Journalise the following transaction in the Books of the M/s. Bhanu Traders and Post them into the Ledger.

Answer :

Q20. Journalise the following transaction in the Book of M/s. Beauti tradeRs Also post them in the ledger.

Answer:

Q21. Journalise the following transaction in the books of Sanjana and post them into the ledger:

Answer :

Long Answer type Question:

Q.1Describe the events recorded in accounting systems and the importance of source documents in those systems.

Irrespective whether a business is small or big, there would be n-amount of financial transactions which would take place. A human mind cannot grasp this much amount of information. So in such instances, the source documents come in handy. A source document always enables verifiability and acts as evidence in court. They ensure that transactions recorded in the books are free from personal biases.

Source document in accounting is important because of the below given reasons.

1. Systematic track of records
2. Detect and prevent frauds and errors
3. Alternative memory box
4. Verifying the transaction during the auditing process
5. Evidence in the count of law

Scenarios which are supported by source document are

1. Return of goods purchased on credit worth Rs. 500, supported by debit note
2. Deposits into bank worth Rs. 1000, supported by pay-in slips
3. Purchase of goods worth Rs. 1000 on credit, supported by purchase invoice/bill
4. Cash sales worth Rs. 2,000, supported by cash memo

The books of accounts only record events expressed in monetary terms and not the non-monetary events. For example, promotion of an employee is not recorded in the book but the salary increment is recorded at the time when salary is paid or due. Question LA 2

Describe how debits and credits are used to analyse transactions.Solution LA 2

An accounting system is of two types, single entry accounting system and double entry accounting system. Majority of the business use the double entry accounting system as it consists of dual aspect. Double entry system is a complete system of recording transaction in the books of accounts. Each transaction reveals two aspects, receiving aspect or incoming aspect or expenses/loss aspect known as debit aspect and giving aspect or outgoing aspect or income/gain aspect known as credit aspect. The dual aspect can be better understood by the help of an example; bought goods worth Rs.1000 on cash. This transaction affects two accounts with the same amount simultaneously. As goods are brought in exchange of cash, the cash balances in the business reduce by Rs.1000 i.e. the cash account is credited. Simultaneously, the amount of goods increases by Rs.1000, so purchase account will be debited.

Debit and credit depend on the nature of accounts involved; such as assets, expenses, income, liabilities and capital. There are five types of accounts.

1. Assets– This increases the profit earning capacity of the business over a long-term across various accounting periods. Examples of fixed assets are furniture, machinery, land, plant and buildings.For example, machinery purchased and payment is made by cheque. The journal entry isMachinery A/c  Dr.To Bank A/c Here, machinery and bank balance, both are assets to the firm. As machinery is purchased, so machinery account will increase, and will be debited. On the other hand, payment of machinery is being made by cheque that reduces the bank balance of the business, so bank account will be credited.
2. Expense– It is the costs incurred to maintain the profitability of business in the process of earning profits. This help in the generating revenues, business operations and production such as rent, wages, depreciation, interest, salaries. They are measured by the services rendered or the cost of assets during an accounting period. For example, rent paid. The journal entry is:Rent A/c Dr.To Cash A/cHere, rent is an expense. All expenses have debit balance. Hence, rent is debited. On the other hand, as rent is paid in cash that reduces the cash balances, so cash account is credited.
3. Liability– Liabilities refer to the financial obligations or debt which a business owes to others such as loans from banks, other persons or creditors for goods supplied. Long term liabilities are loans which are payable after a period of 1 year. Short term liabilities are obligations which are payable within a period of time.The journal entry is:Bank A/c  Dr.To Bank Loan A/cHere, loan from bank is a liability to the firm. As all liabilities have credit balance, so loan from bank has been credited because it increases the liabilities.
4. Income- It refers to the amount received from selling the products or providing services to customers, royalty and commission received; they are added to the capital.
   For example, rent received from tenant. The journal entry is:Cash A/c   Dr.To Rent A/cHere, rent is an income; hence, rent account has been credited and cash has been debited, as rent received increases the cash balances.
5. Capital- It refers to the amount invested in form of cash or asset by the owner in a firm’s business or organisation of his choice. It is a claim on the assets of the business and also it will be an obligation of the business towards the owner of the firm. On the balance sheet, the capital is shown on the liabilities side.For example, additional capital introduced by owner. The journal  entry is:Cash A/c  Dr.To Capital A/cThe amount of capital increases i.e. credited when additional capital is introduced. On the other hand, the cash account is debited when the cash balances decrease i.e. capital introduced in form of cash.

Q.2 Describe how accounts are used to record information about the effects of transactions.

In a business, recording each and every transaction is of utmost importance. Not doing so, can notably affect the financial status of the business.

A transaction is first recorded in the journal, the book of original entry. However, if the further details on expense, revenue, equity, liability or increase or decrease in assets are needed, an account is brought in use. A detailed record of the information relating to a financial transaction can be termed as an account. It helps in determining the financial position of the business.

There are some steps to record transactions in accounts; it can be easily understood with the help of an example.

Sold goods to Mr. X worth Rs. 40,000 on 12th April and received payment Rs. 40,000 on 25th April. The following journal entries will be recorded:

Date	Particulars	L.F	Debit Rs.	Credit Rs.
Apr. 12    Apr 25.	X’ A/c Dr To Sales(Goods sold on credit to Mr. X) Cash A/c Dr To X’s A/c(Cash received from Mr. X)	2218   1322	40,000    40,000	40,000    40,000

Step 1– Locate the account in ledger, i.e. Mr. X’s Account.

Step 2– Enter the date of transaction in the date column of the debit side of Mr. X’s Account.

Step 3– In the ‘Particulars’ column of the debit side of Mr. X’s Account, the name of corresponding account is to be written, i.e. ‘Sales’.

Step 4– Enter the page number of the ledger in the Journal Folio (J.F.) column of Mr. X’s Account.

Step 5- Enter the amount in the ‘Amount’ column.

Step 6- Same steps are to be followed to post entries in the credit side of Mr. X’s Account.

Step 7– After entering all the transactions for a particular period, balance the account by totaling both sides and write the difference in shorter side, as ‘Balance c/d’.

Step 8– Total of account is to be written on either sides.Question LA 4

What is a journal? Give a specimen of journal showing at least five entries.Solution LA 4

Journal is known to be the book of original entry. Any financial transaction which takes place is recorded first in a journal so that they can be used for future references. The recording is done as and when a transaction occurs i.e. in a chronological order.

Performa of Journal

In the books of…..

Date	Particulars	L.F.	DebitRs.	CreditRs.

Date– Date of the transaction is entered in the first column. This date is entered only once unless and until there is a change in the date of transaction. It should be entered in proper sequence.

Particulars- Details of business transactions like, name of the parties involved and the name of related accounts, are recorded.

L.F. – Page number of ledger account when entry is posted.

Debit Amount– Amount of debit account is written.

Credit Amount- Amount of credit account is written.

 Example:

Date	Transactions by Mr. Ram
April 01	Started business with cash Rs.1,13,000
April 06	Open a bank account Rs.40,000
April 12	Purchase goods for cash Rs.5,000
April 19	Goods sold for cash Rs.4,500
April 25	Goods sold to Mr. X Rs.3,400

Journal in the books of Mr. Ram 

Date	Particulars		L.F.	Dr. (Rs.)	Cr.(Rs.)
2014
Apr. 01	Cash A/c	Dr.		1,13,000
	To Capital A/c				1,13,000
	(Being business started with cash)
Apr.02	Bank A/c	Dr.		40,000
	To Cash A/c				40,000
	(Being bank account opened with cash)
Apr.12	Purchases A/c	Dr.		5,000
	To Cash A/c				5,000
	(Being goods purchased for cash)
Apr.19	Cash A/c	Dr.		4,500
	To Sales A/c				4,500
	(Being goods sold for cash)
Apr.25	Mr. X’s A/c	Dr.		3,400
	To Sales A/c				3,400
	(Being goods sold to Mr. X on credit)
	Total		1,62,900	1,62,900

Q.3Differentiate between source documents and vouchers.Solution

Basis of Difference	Source Documents	Vouchers
Meaning	It refers to the documents in writing, containing the details of events or transactions	When source document is considered as evidence of an event or transaction, then it is called voucher
Purpose	It is used for preparing accounting vouchers	It is used for analysing the transactions
Recording	It acts as a basis for preparing accounting voucher which helps in recording	It acts as a basis for recording transactions
Legality/Validity	It can be used as evidence in the court of law	It can be used for authenticating transactions
Prepared By	It is prepared by the those directly involved in the transactions or who are authorised to prepare or approve these documents	It is prepared by the authorised persons or by the accountants
Examples	Cash memo, invoice, and pay-in-slip	Cash memo, invoice, pay-in-slip (if used as evidence), debit note, credit note, cash vouchers, transfer vouchers

Q.4Accounting equation remains intact under all circumstances. Justify the statement with the help of an example.

Majority of the business prefers the double entry accounting system i.e. the dual aspect concept over single entry system as it consists of dual effect i.e. two kinds of amount, debit and credit which affects each transaction. It is based on the fact that if there is receiver, there should be a giver. However, at any point of time, the assets of a business entity will always be equal to the total of its liabilities and capital i.e. total claims.

The equation between the assets and claims can be read as follows: 

or Liabilities = Asset – Capital

or Capital = Assets – Liabilities

The equation can also be represented as:

Assets – Liabilities = Capital

Assets – Capital = Liabilities

The above equation cannot be altered. For example, 

1. Business started with cash Rs.1,00,000

Cash A/c Dr 

 To Capital A/c

Assets	=	Liabilities	+	Capital
Cash(1,00,000)				1,00,000

Assets decrease, as cash is invested into the business and capital increases. Thus the equality between LHS and RHS remains intact.

2. Goods purchased on credit Rs.20, 000

Assets	=	Liabilities	+	Capital
Cash 1,00,000	Stock 20,000	=	Creditors 20,000	+	1,00,000

Assets increase as well as liability increases, without disturbing the equality.

3. Goods purchased with cash Rs.25,000

Assets	=	Liabilities	+	Capital
Cash1,00,000(25,000)	Stock20,00025,000	=	20,000	+	1,00,000

As goods are purchased for cash, so cash balance reduces by Rs.25,000, but on the other hand, stock balance increases by Rs.25,000. Thus the total balance of LHS remains equal to the total claims. Question LA 7

Explain the double entry mechanism with an illustrative example.Solution LA 7

Majority of the business prefers the double entry accounting system i.e. the dual aspect concept over single entry system as it consists of dual effect i.e. two kinds of amount, debit and credit which affects each transaction. It is based on the fact that if there is receiver, there should be a giver.

If a business firm acquires an asset for cash, it has to give some other asset say cash or the obligation to pay for it in future. Thus, giver necessarily implies a receiver and a receiver necessarily implies a giver.

In double entry system, accounts are classified as shown below:

1. Personal Accounts: Accounting transactions relating to persons such as individuals, firms, bank and companies are known as personal accounts, such as Mr. A, M/s ABC and Co. etc.
   Rule of double entry system for personal accounts: Debit the receiver and credit the giver.For example: Cash paid to Mr. A.Mr. A’s A/cDr.To Cash A/c (Being cash paid to Mr. A)  
2. Impersonal Accounts: It relates to non living things. Impersonal accounts are further classified as real accounts and nominal accounts.
   1. Real Account– Accounting transactions relating to tangible assets such as properties, goods and cash and intangible assets such as patents and trademark are known as real accounts.Rule of double entry system for real accounts: Debit what comes in and credit what goes out.For example: Furniture purchased for cash.Furniture  A/cDr.To Cash A/c (Being furniture purchased for cash)  
   2. Nominal Account: Accounting transactions relating to incomes and expenses and gains and losses of the firm are known as nominal accounts.Rule of double entry system for nominal accounts:Debit all expenses and losses and credit all incomes and gains.
      For example : Rent paidRent A/cDr.To Cash A/c (Being rent paid)  
   
    

Q.5 What is a journal? Give a specimen of journal showing at least five entries.

Journal is known to be the book of original entry. Any financial transaction which takes place is recorded first in a journal so that they can be used for future references. The recording is done as and when a transaction occurs i.e. in a chronological order.

Performa of Journal

In the books of…..

Date	Particulars	L.F.	DebitRs.	CreditRs.

Date– Date of the transaction is entered in the first column. This date is entered only once unless and until there is a change in the date of transaction. It should be entered in proper sequence.

Particulars- Details of business transactions like, name of the parties involved and the name of related accounts, are recorded.

L.F. – Page number of ledger account when entry is posted.

Debit Amount– Amount of debit account is written.

Credit Amount- Amount of credit account is written.

 Example:

Date	Transactions by Mr. Ram
April 01	Started business with cash Rs.1,13,000
April 06	Open a bank account Rs.40,000
April 12	Purchase goods for cash Rs.5,000
April 19	Goods sold for cash Rs.4,500
April 25	Goods sold to Mr. X Rs.3,400

Journal in the books of Mr. Ram 

Date	Particulars		L.F.	Dr. (Rs.)	Cr.(Rs.)
2014
Apr. 01	Cash A/c	Dr.		1,13,000
	To Capital A/c				1,13,000
	(Being business started with cash)
Apr.02	Bank A/c	Dr.		40,000
	To Cash A/c				40,000
	(Being bank account opened with cash)
Apr.12	Purchases A/c	Dr.		5,000
	To Cash A/c				5,000
	(Being goods purchased for cash)
Apr.19	Cash A/c	Dr.		4,500
	To Sales A/c				4,500
	(Being goods sold for cash)
Apr.25	Mr. X’s A/c	Dr.		3,400
	To Sales A/c				3,400
	(Being goods sold to Mr. X on credit)
	Total		1,62,900	1,62,900

Distance Formula
The distance between two points A(x₁, y₁) and B (x₂, y₂) is given by

The distance of a point A(x, y) from the origin 0 (0, 0) is given by …….

Section Formula
The coordinates of the point which divides the joint of (x₁, y₁) and (x₂, y₂) in the ratio m : n internally, is

Mid-point of the joint of (x₁, y₁) and (x₂, y₂) is

X-axis divides the line segment joining (x₁, y₁) and (x₂, y₂) in the ratio -y₁ : y₂.

Y-axis divides the line segment joining (x₁, y₁) and (x₂, y₂) in the ratio -x₁ : x₂.

The coordinates of the centroid of the triangle whose vertices are (x₁, y₁), (x₂, y₂) and (x₃, y₃) is

Area of Triangle
The area of the triangle, the coordinates of whose vertices are (x₁, y₁), (x₂, y₂)and (x₃, y₃) is the absolute value of

If the points (x₁, y₁), (x₂, y₂) and (x₃, y₃) are collinear, then x₁ (y₂ – y₃) + x₂ (y₃ – y₁) + x₃ (y₁ – y₂) = 0.

Shifting of Origin
Let the origin is shifted to a point O'(h, k). If P(x, y) are coordinates of a point referred to old axes and P'(X, Y) are the coordinates of the same points referred to new axes, then x = X + h, y = Y + k.

Straight Line
Any curve is said to be a straight line if two points are taken on the curve such that every point on the line segment joining any two points on it lies on the curve. General equation of a line is ax + by + c = 0.

Slope or Gradient of Line
The inclination of angle θ to a line with a positive direction of X-axis in the anti-clockwise direction, the tangent of angle θ is said to be slope or gradient of the line and is denoted by m.
i.e. m = tan θ
The slope of a line passing through points P(x₁, y₁) and Q(x₂, y₂) is given by

Note: Slope of a line parallel to X-axis is zero and slope of a line parallel to Y-axis is not defined.

Angle between Two Lines
The angle θ between two lines having slope m₁ and m₂ is

• If two lines are parallel, their slopes are equal i.e. m₁ = m₂.
• If two lines are perpendicular to each other, then their product of slopes is -1 i.e. m₁m₂ = -1.

Various Forms of the Equation of a Line
If a line is at a distance k and parallel to X-axis, then the equation of the line is y = ± k.

If a line is parallel to Y-axis at a distance c from Y-axis, then its equation is x = ± c.

Slope-intercept form: The equation of line with slope m and making an intercept c on the y-axis, is y = mx + c.

One point-slope form: The equation of a line which passes through the point (x₁, y₁) and has the slope of m is given by y – y₁ = m (x – x₁).

Two points form: The equation of a line passing through the points (x₁, y₁) and (x₂, y₂) is given by

The Intercept form: The equation of a line which cuts off intercepts a and b respectively on the x and y-axes is given by xa+yb=1

The normal form: The equation of a straight line upon which the length of the perpendicular from the origin is p and angle made by this perpendicular to the x-axis is α, is given by x cos α + y sin α = p.

General Equation of a Line
Any equation of the form Ax + By + C = 0, where A and B are simultaneously not zero is called the general equation of a line.

Different Forms of Ax + By + C = 0
Slope intercept form: If B ≠ 0, then Ax + By + C = 0 can be written as

If B = 0, then x = – C / A which is a vertical line, whose slope is not defined and x-intercept is – C/A.

Intercept form If C ≠ 0, then Ax + By + C = 0 can be written as

where a = – C / A and b = – C/B
If C = 0, then Ax + By + C = 0 can be written as Ax + By = 0 which is a line passing through origin and therefore has zero intercept on the axes.

Normal form: The normal form of equation Ax + By + C = 0 is x cos α + y sin α = p where

Note: Proper choice of signs to be made so that p should be always positive.

Position of Points is Relative to a Given Line
Let the equation of the given line be ax + by + c = 0 and let the coordinates of the two given points be P(x₁, y₁) and Q(x₂, y₂).
The two points are on the same side of the straight line ax + by + c = 0, If ax₁ + by₁ + c and ax₂ + by₂ + c have the same sign.

The two points are on the opposite sides of the straight line ax + by + c = 0, If ax₁ + by₁ + c and ax₂ + by₂ + c have opposite sign.

Condition of concurrency for three given lines
a₁x + b₁y + c₁ = 0, a₂x + b₂y + c₂ = 0 and a₃x + b₃y+ c₃ = 0 is a₃(b₁c₂ – b₂c₁) + b₃(a₂c₁ – a₁c₂) + c₃(a₁b₂ – a₂b₁) = 0

Point of intersection of two lines
Let equation of lines be ax₁ + by₁ + c₁ = 0 and a₂x + b₂y + c₂ = 0, then their point of intersection is

Distance of a Point from a Line
The perpendicular distanced of a point P(x₁, y₁)from the line Ax + By + C = 0 is given by

Distance Between Two Parallel Lines
The distance d between two parallel lines y = mx + c₁ and y = mx + c₂ is given by

Sequence
A succession of numbers arranged in a definite order according to a given certain rule is called sequence. A sequence is either finite or infinite depending upon the number of terms in a sequence.

Series
If a₁, a₂, a₃,…… a_n is a sequence, then the expression a₁ + a₂ + a₃ + a₄ + … + a_n is called series.

Progression
A sequence whose terms follow certain patterns are more often called progression.

Arithmetic Progression (AP)
A sequence in which the difference of two consecutive terms is constant, is called Arithmetic progression (AP).

• An arithmetic progression (A.P .) is a sequence in which terms increase or decrease regularly by the same constant. This constant is called  common difference of the A.P. Usually, we denote the first term of A.P . by   a, the common difference by d and the last term by . The general term or the  n^th  term of the A.P. is given by 
• Single Arithmetic mean between any two given numbers a and b: A.M. = 
•  Arithmetic mean between two given numbers a and b:  form an A.P.
• If a constant is added to each term of an A.P., then the resulting sequence is also an A.P.
• If a constant is subtracted to each term of an A.P., then the resulting sequence is also an A.P.
• If each term of an A.P. is multiplied by a constant, then the resuting sequence is also an A.P.
• If each term of an A.P. is divided by a constant, then the resuting sequence is also an A.P.
• Sum of first  terms of an A.P.:  and , where  is the last term, i.e., .

GEOMETRIC PROGRESSION

• A sequence of non-zero numbers is said to be a geometric progression, if the ratio of each term, except the first one, by its preceding term is always the same. , where  is the first term and  is the common ratio.
•  term of a G.P.: 
• Sum of  terms of a G.P.:  if .
• Sum to infinity of a G.P.: 
• Geometric mean between a and b: 
•  Geometric means between a and b: 
• If all the terms of a G.P. be multiplied or divided by the same quantity the resulting sequence is also a G.P.
• The reciprocal of the terms of a given G.P. form a G.P.
• If each term of a G.P. be raised to the same power, the resulting sequence is also a G.P.

ARITHMETIC – GEOMETRIC SERIES

• A sequence of non-zero numbers is said to be a arithmetic-geometric series, if its terms are obtained on multiplying the terms of an A.P. by the corresponding terms of a G.P. For example:   
• The general form of an arithmetic-geometric series:
  
• n^th term of an arithmetic-geometric series:  of A.P. x  of G.P.
• Sum of n terms of some special series : 
• Sum of squares of first n natural numbers =
• Sum of cubes of fist n natural numebrs = 

Binomial Expression
An expression consisting of two terms, connected by + or – sign is called binomial expression.

Binomial Theorem
If a and b are real numbers and n is a positive integer, then

The general term of (r + 1)^th term in the expression is given by
T_r+1 = ⁿC_r a^n-r b^r

Some Important

General and Middle Terms

• Binomial Theorem: The expansion of a binomial for any positive integral n is given by Binomial Theorem, which is
  
• The coefficients of the expansions are arranged in an array. This array is called Pascal’s triangle.
• The general term of an expansion 
• The general term of an expansion 
• The general term of 
• The general term of 
• In the expansion , if n is even, then the middle term is the  term. If n is odd, then the middle terms are and  terms.
•  term from the end in  term fromt he beginning.
• Method to prove Binomial Theorem:

(a) Principle of Mathematical Induction.

(b) Combinatorial Method.

• Factorial notation:
  (i)  
  (ii) 
  (iii) 
  (iv) 

1. Fundamental Principle of Counting
2. Permutations
3. Combinations

Fundamental Principle of Counting

• Addition Law: If there are two operations such that such that they can be performed independently in  and  ways respectively, then either of the two operations can be performed in  ways.
• Multiplication: If one operation can be performed in  ways and if corresponding to each of the  ways of performing this operation, there are  ways of performing a second operation, then the number of ways of performing two operations together in .
• Factorial Notation: The continued product of first  natural numbers is called the ‘ factorial’ and is denoted by .
• 

Addition Principle: If an operation A can be performed in m ways and another operation S, which is independent of A, can be performed in n ways, then A and B can performed in (m + n) ways. This can be extended to any finite number of exclusive events

Factorial
The continued product of first n natural number is called factorial ‘n’.
It is denoted by n! or n! = n(n – 1)(n – 2)… 3 × 2 × 1 and 0! = 1! = 1

Permutation
Each of the different arrangement which can be made by taking some or all of a number of objects is called permutation.

Permutation of n different objects
The number of arranging of n objects taking all at a time, denoted by ⁿP_n, is given by ⁿP_n = n!
The number of an arrangement of n objects taken r at a time, where 0 < r ≤ n, denoted by nP_r is given by
ⁿP_r = n!(n−r)!

Properties of Permutation

Important Results on Permutation
The number of permutation of n things taken r at a time, when repetition of object is allowed is nr.

The number of permutation of n objects of which p1 are of one kind, p2 are of second kind,… pk are of kth kind such that p₁ + p₂ + p₃ + … + p_k = n is n!p1!p2!p3!…..pk!

Number of permutation of n different objects taken r at a time,
When a particular object is to be included in each arrangement is r. ^n-1P_r-1

When a particular object is always excluded, then number of arrangements = ^n-1P_r.

Number of permutations of n different objects taken all at a time when m specified objects always come together is m! (n – m + 1)!.

Number of permutation of n different objects taken all at a time when m specified objects never come together is n! – m! (n – m + 1)!.

Combinations
Each of the different selections made by taking some or all of a number of objects irrespective of their arrangements is called combinations. The number of selection of r objects from; the given n objects is denoted by ⁿC_r, and is given by
ⁿC_r = n!r!(n−r)!

Inequation
A statement involving variables and the sign of inequality viz. >, <, ≥ or ≤ is called an inequation or an inequality.

Numerical Inequalities
Inequalities which do not contain any variable is called numerical inequalities, e.g. 3 < 7, 2 ≥ -1, etc. Literal Inequalities Inequalities which contains variables are called literal inequalities e.g. x – y > 0, x > 5, etc.

Linear Inequation of One Variable
Let a be non-zero real number and x be a variable. Then, inequalities of the form ax + b > 0, ax + b < 0, ax + b ≥ 0 and ax + b ≤ 0 are known as linear inequalities in one variable.

Linear Inequation of Two Variables
Let a, b be non-zero real numbers and x, y be variables. Then, inequation of the form ax + by < c, ax + by > c, ax + by ≤ c and ax + by ≥ c are known as linear inequalities in two variables x and y.

Solution of an Inequality
The value(s) of the variable(s) which makes the inequality a true statement is called its solutions. The set of all solutions of an inequality is called the solution set of the inequality.

• The values of x, which make an inequality a true statement, are called solutions of the inequality.
• To represent x <  a (or x >  a) on a number line, put a circle on the number and dark line to the left (or right) of the number a.
• To represent x ≤ a (or  x ≥ a) on a number line, put a dark circle on the number and dark the line to the left (or right) of the number x.
• If an inequality is having ≤ or ≥ symbol, then the points on the line are also included in the solutions of the inequality and the graph of the inequality lies left (below) or right (above) of the graph of the equality represented by dark line that satisfies an arbitrary point in that part.
• If an inequality is having < or > symbol, then the points on the line are not included in the solutions of the inequality and the graph of the inequality lies tothe left (below) or right (above) of the graph of the corresponding equality represented by dotted line that satisfies an arbitrary point in that part.

• To remove the denominator when the sign of the value of the denominator is unknown, may be +ve or -ve: We multiply by the square of the denominator. Square of the denominator is always positive. On multiplication of an inequation by a positive number the sign of inequality does not change.
• Solution of a system of Linear Inequality: The solution set of a system of linear inequality in one variable is defined as the intersection of the solution sets of the linear inequality of the system. For example: If we have two solution sets  and  then solution of the system is the intersection of  and  i.e., 
• Properties of absolute values:
  (i)  i.e., 
  (ii)  i.e., 
  (iii)  or  i.e., 
  (iv)  or  i.e., 
• Triangle Inequality: , 

Solving Linear Inequations in One Variable
Same number may be added (or subtracted) to both sides of an inequation without changing the sign of inequality.

Both sides of an inequation can be multiplied (or divided) by the same positive real number without changing the sign of inequality. However, the sign of inequality is reversed when both sides of an inequation are multiplied or divided by a negative number.

Representation of Solution of Linear Inequality in One Variable on a Number Line
To represent the solution of a linear inequality in one variable on a number line. We use the following algorithm.

If the inequality involves ‘>’ or ‘<‘ we draw an open circle (O) on the number line, which indicates that the number corresponding to the open circle is not included in the solution set.

If the inequality involves ‘≥’ or ‘≤’ we draw a dark circle (•) on the number line, which indicates the number corresponding to the dark circle is included in the solution set.

Graphical Representation of the Solution of Linear Inequality in One or Two Variables
To represent the solution of linear inequality in one or two variables graphically in a plane, we use the following algorithm.

If the inequality involves ‘<’ or ‘>’, we draw the graph of the line as dotted line to indicate that the points on the line are not included from the solution sets.

If the inequality involves ‘≥’ or ‘≤’, we draw the graph of the line as a dark line to indicate the points on the line is included from the solution sets.

Solution of a linear inequality in one variable can be represented on number line as well as in the plane but the solution of a linear inequality in two variables of the type ax + by > c, ax + by ≥ c,ax + by < c or ax + by ≤ c (a ≠ 0, b ≠ 0) can be represented in the plane only.

Two or more inequalities taken together comprise a system of inequalities and the solution of the system of inequalities are the solution common to all the inequalities comprising the system.

Page No: 38

Questions for Practice

Short Questions

1. Why is it necessary for accountants to assume that business entity will remain a going concern?

Answer

It is necessary for accountants to assume that business entity will remain a going concern because

→ It helps in recording fixed assets at their original cost and depreciation is charged on these assets without reference to their market value. For example: if a machinery is purchased which would last for next 5 years, the cost of this machinery will be spread over the next 5 years for calculating the net profit or loss of each year. The full cost machinery would not be treated as an expense in the year of its purchase itself.

→ It is also because of this concept that outside parties enter into long-term contracts with the enterprise, give loans and purchase the debentures and shares of enterprise.

2. When should revenue be recognised? Are there exceptions to the general rule?

Answer

Revenue is recognised only when it is realised i.e., when a legal right to receive it arises. Thus credit sales are treated as revenue on the day sales are made and not when cash is received from the buyers. Similarly, rent for the month of March even if received in April month will be treated as revenue of the financial year ending 31st March.
There are two exceptions to this rule:
→ In case of sales on installment basis, only the amount collected in installments is treated as revenue.
→ In case of long-term construction contracts, proportionate amount of revenue, based on part of the contracted completed by the end of the financial year is treated as realised.

3. What is the basic accounting equation?

Answer

Assets = Liabilities + Capital

4. The realisation concept determines when goods sent on credit to customers are to be included in the sales figure for the purpose of computing the profit or loss for the accounting period. Which of the following tends to be used in practice to determine when to include a transaction in the sales figure for the period. When the goods have been:
(a) dispatched
(b) invoiced
(c) delivered
(d) paid for

Answer

According to the realisation concept, revenue is recognised when a legal right to receive it arises. Therefore, when the goods are invoiced, it is treated as the transfer of ownership of goods from the seller to the buyer and hence the revenue is recognised.

5. Complete the following work sheet:

(i) If a firm believes that some of its debtors may ‘default’, it should act on this by making sure that all possible losses are recorded in the books. This is an example of the ___________ concept.
► conservatism

(ii) The fact that a business is separate and distinguishable from its owner is best exemplified by the ___________ concept.
► business entity concept

(iii) Everything a firm owns, it also owns out to somebody. This co-incidence is explained by the ___________ concept.
► dual aspect

(iv) The ___________ concept states that if straight line method of depreciation is used in one year, then it should also be used in the next year.
► consistency

(v) A firm may hold stock which is heavily in demand. Consequently, the market value of this stock may be increased. Normal accounting procedure is to ignore this because of the ___________.
► conservatism

(vi) If a firm receives an order for goods, it would not be included in the sales figure owing to the ___________.
► revenue recognition

(vii) The management of a firm is remarkably incompetent, but the firms accountants can not take this into account while preparing book of accounts because of ___________ concept.
► money measurement

Long Answer Type Questions

Q1. ‘The accounting concepts and accounting standards are generally referred to as the essence of financial accounting’. Comment.
Answer : Financial accounting is concerned with the preparation of the financial statements and provides financial information to various accounting users. It is performed according to the basic accounting concepts like Business Entity, Money Measurement, Consistency, Conservatism, etc. These concepts allow various alternatives to treat the same transaction. For example, there are a number of methods available for calculating stock and depreciation, which can be followed by various firms. This leads to wrong interpretation of financial results by external users due to the problem of inconsistency and incomparability of financial results among different business entities. In order to mitigate inconsistency and incomparability and to bring uniformity in preparation of the financial statements, accounting standards are being issued in India by the Institute of Chartered Accountant of India. Accounting standards help in removing ambiguities and inconsistencies. Hence, accounting standards and accounting concepts are referred as the essence of financial accounting.

Q2. Why is it important to adopt a consistent basis for the preparation of financial statements? Explain.
Answer :
Financial statements are drawn to provide information about growth or decline of business activities over a period of time or comparison of the results, i.e. intra-firm (comparison within the same organisation) or inter-firm comparisons (comparison between different firms). Comparisons can be performed only when the accounting policies are uniform and consistent.
According to the Consistency Principle, accounting practices once selected should be continued over a period of time (i.e. years after years) and should not be changed very frequently. These help in a better understanding of the financial statements and thus make comparisons easy. For example, if a firm is following FIFO method for recording stock, and switches over to the weighted average method, then the results of this year cannot be compared to that of the previous years. Although consistency does not prevent change in the accounting policies, but if change in the policies is essential for better presentation and better understanding of the financial results, then the firm must undertake change in its accounting policies and must fully disclose all the relevant information, reasons and effects of those changes in the financial statements.

Q3. Discuss the concept-based on the premise ‘do not anticipate profits but provide for all losses’.
Answer : According to the Conservatism Principle, profits should not be anticipated; however, all losses should be accounted (irrespective whether they occurred or not). It states that profits should not be recorded until they get recognised; however, all possible losses even though they may happen rarely, should be provided. For example, stock is valued at cost or market price, whichever is lower. If the market price is lower than the cost price, loss should be accounted; whereas, if the former is more than the latter, then this profit should not be recorded until unless the stock is sold. There are numerous provisions that are maintained based on the conservatism principle like, provision for discount to debtors, provision for doubtful bad debts, etc. This principle is based on the common sense and depicts pessimism. This also helps the business to deal uncertainty and unforeseen conditions.

Q4 . What is matching concept? Why should a business concern follow this concept? Discuss?
Answer : Matching Concept states that all expenses incurred during the year, whether paid or not, and all revenues earned during the year, whether received or not, should be taken into account while determining the profit of that year. In other words, expenses incurred in a period should be set off against its revenues earned in the same accounting period for ascertaining profit or loss. For example, insurance premium paid for a year is Rs1200 on July 01 and if accounts are closed on March 31, every year, then the insurance premium of the current year will be ascertained for nine months (i.e. from July to March) and will be calculated as,
Rs 1200 – Rs 900 = Rs 300
Thus, according to the matching concept, the expense of Rs 900 will be taken into account and not Rs 1200 for determining profit, as the benefit of only Rs 900 is availed in the current accounting period.
The business entities follow this concept mainly to ascertain the true profit or loss during an accounting period. It is possible that in the same accounting period, the business may either pay or receive payments that may or may not belong to the same accounting period. This leads to either overcasting or undercasting of the profit or loss, which may not reveal the true efficiency of the business and its activities in the concerned accounting period. Similarly, there may be various expenditures like, purchase of machinery, buildings, etc. These expenditures are capital in nature and their benefits can be availed over a period of time. In such cases, only the depreciation of such assets is treated as an expense and should be taken into account for calculating profit or loss of the concerned year. Thus, it is very necessary for any business entity to follow the matching concept.

Q5. What is the money measurement concept? Which one factor can make it difficult to compare the monetary values of one year with the monetary values of another year?
Answer : Money Measurement Concept states that only those events that can be expressed in monetary terms are recorded in the books of accounts. For example, 12 television sets of Rs10,000 each are purchased and this event is recorded in the books with a total amount of Rs 1,20,000. Money acts a common denomination for all the transactions and helps in expressing different measurement units into a common unit, for example rupees. Thus, money measurement concept enables consistency in maintaining accounting records. But on the other hand, the adherence to the money measurement concept makes it difficult to compare the monetary values of one period with that of another. It is because of the fact that the money measurement concept ignores the changes in the purchasing power of the money, i.e. only the nominal value of money is concerned with and not the real value. What Rs 1 could buy 10 years back cannot buy today; hence, the nominal value of money makes comparison difficult. In fact, the real value of money would be a more appropriate measure as it considers the price level (inflation), which depicts the changes in profits, expenses, incomes, assets and liabilities of the business.

Page No: 19

Questions for Practice

Short Answers

1. Define Accounting.

Answer

Accounting is the art of recording, classifying, summarising and communicating financial information to users for correct decision making.

2. State the end product of financial accounting.

Answer

The end product of financial accounting are Trading account, Profit and loss account and Balance sheet.

3. Enumerate main objectives of accounting.

Answer

The main objectives of accounting are:
→ To keep a systematic record of all business transactions
→ To determine the profit earned or loss incurred during an accounting period by preparing profit and loss account
→ To ascertain the financial position of the business at the end of each accounting period by preparing balance sheet
→ To assist management for decision making, effective control, forecasting, etc.
→ To assess the progress and growth of business from year to year
→ To detect and prevent errors and frauds
→ To communicate information to various users

4. List any five users who have indirect interest in accounting.

Answer

The five users who have indirect interest in accounting are:
• Trade associations
• Labour unions
• Customers
• Lenders and Financial Institutions
• Tax authorities

5. State the nature of accounting information required by long-term lenders.

Answer

Long term lenders are interested in repaying capacity of the business, profitability, liquidity, operational efficiency, potential growth of business.

6. Who are the external users of information?

Answer

External users of information are the individual or the organisations that have direct or indirect interest in the business firm, however, are not a part of management. They do not have direct access to the internal data of the firm and uses published data or reports like profit and loss accounts, balance sheets, annual reports, press releases, etc. Some examples of external users are government, tax authorities, labour unions, etc.

7. Enumerate informational needs of management.
Answer
The informational needs of management:
→ For Planning: Management would like to know whether sales are increasing or decreasing also the speed of increase in the cost of production which helps the management in estimating future sales and expenses.
→ For Decision making: Management needs information to take number of decisions such as what will be the selling price of goods and how much discount they should offer.
→ For Controlling: Management would like to know that cost incurred is manufacturing the product is reasonable and that no department is overspending.

8. Give any three examples of revenues.
Answer

Three examples of revenue are given below.
• Sales revenue
• Interest received
• Dividends

9. Distinguish between debtors and creditors.

Answer

Basis of difference	Debtors	Creditors
Meaning	Persons or organisations that are liable to pay money to a firm are called debtors.	Persons or organisations to whom the firm is liable to pay money are called creditors.
Nature	They have debit balance to the firm.	They have credit balance to the firm.
Payment	Payments are received from them.	Payments are made to them.
Shown	They are shown as assets in the Balance sheet under Current Assets.	They are shown as liabilities in the Balance Sheet under Current Liabilities.

10. ‘Accounting information should be comparable’. Do you agree with this statement? Give two reasons.

Answer

Yes, accounting information should be comparable because:

→ Comparability is needed to make inter-firm comparisons, i.e., to find out how a firm has performed as compared to the other firms.

→ Comparability is needed to make inter-period comparisons, i.e., to find out how it has performed as compared to the previous years.

11. If the accounting information is not clearly presented, which of the qualitative characteristic of the accounting information is violated?

Answer

If the accounting information is not clearly presented, then it will violate the ‘Reliability and Understandability’ qualitative characteristics of accounting because if accounting information is not clearly presented then it will not be reliable and also cannot be understood easily.

12. The role of accounting has changed over the period of time”- Do you agree? Explain.

Answer

The role of accounting has now shifted from that of a mere recording of business transactions to that of providing information to managers and other various interested parties in order to help them in making appropriate decisions. It now becomes an information system.

13. Giving examples, explain each of the following accounting terms:
• Fixed assets
• Revenue
• Expenses
• Short-term liability
• Capital

Answer

• Fixed Assets: Fixed Assets refers to those assets which are held for continued use in the business for the purpose of producing goods and services and not meant for resale. Examples: Plant and Machinery, Land and Building etc.

• Revenue: Revenues refer to the amount received from day to day activities of the business, likesale proceeds of goods and rendering services to the customers. Example: Commission received, dividend, royalty etc.

• Expenses: Expense is the cost incurred in producing and selling the goods and services. Example: wages, depreciation, salaries etc.

• Short-term liability: Those liabilities which are to be paid in near future (normally within one year). Example: Bank Overdraft, Bills payable etc.

• Capital: It refers to the amount invested by the proprietor in a business enterprise. It is the amount with the help of which goods and assets are purchased in the business.

14. Define revenues and expenses?

Answer

Revenues is the income of a regular nature such as receipts from sale of goods, rent, commission etc.
Expense is the cost incurred in producing and selling the goods and services.

15. What is the primary reason for the business students and others to familiarise themselves with the accounting discipline?

Answer

Every monetary transaction must be recorded in such a manner that various accounting users must understand and interpret these results in the same manner without any ambiguity. The primary reason to study accounting discipline because it helps in the learning:
• the various aspects of accounting.
• how to maintain books of accounts.
• how to summarise accounting information.
• how to interpret the accounting information with relative accuracy.

Long Answer Type Questions:

Q1. Explain the factors, which necessitated systematic accounting.
Answer: The factors that necessitated systematic accounting are given below.
1. Only financial transactions are recorded- Those events that are financial in nature are only recorded in the books of accounts. For example, salary of an employee is recorded in the books but his/her educational qualification is not recorded.
2. Transactions are recorded in monetary terms- Only those transactions which can be expressed in monetary terms are recorded in the books. For example, if a business has two buildings and four machines, then their monetary values is recorded in the books, i.e. two buildings costing Rs 2,00,000, four machines costing Rs 8,00,000. Thus the total value of assets is Rs 10,00,000.
3. Art of recording- Transactions are recorded in the order of their occurrence.
4. Classification of transaction- Business transactions of similar nature are classified and posted under their respective accounts. For example, all the transactions relating to machinery will be posted in the Machinery Account.
5. Summarising of data- All business transactions are summarised in the form of Trial Balance, Trading Account, Profit and Loss Account and Balance Sheet that provides necessary information to various users.
6. Analysing and interpreting data- Systematic accounting records enable users to analyse and interpret the accounting data in a proper and appropriate manner. These accounting data and information are presented in form of graphs, statements, charts that leads to easy communication and understandability by various users. Moreover, these facilitates in decision making and future predictions.

Q2. Describe the brief history of accounting.
Answer: The history of accounting can be traced long back in civilisation. Around 4000 B.C., in Babylonia and Egypt, payment of wages and taxes were recorded on clay tablets. As history claims that Egyptians kept the record of gold and valuables deposits and withdrawal from the treasuries. These records were reported on daily basis by the incharge of treasuries to the wazir, who used to forward the monthly reports to the king. Babylonia and Egypt used this method to rectify and remove errors, frauds and inefficiency from the records. Around 2000 B.C., China used sophisticated form of accounting. In Greece, accounting was used to maintain total receipts and total payments and to balance government accounts. In Rome, around 700 B.C., receipts and payments were recorded in daybook and were posted in the ledger at the end of the month. In India, around twenty three centuries ago, Kautilya wrote the book Arthshastra, which describes how accounting records have to be maintained. In 1494, Luca Pacioli wrote the book Summa de Arithmetica Geometria Proportioni et Proportionalita. In this, he explained the term debit and credit, which are used in accounting till date.

Q3. Explain the development of and role of accounting.
Answer : Development of accounting
In ancient times, around 4000 B.C., accounting was used for recording wages and salaries, deposits and withdrawals of valuable goods (such as gold and silver) from the treasures of the king. Afterwards, it was used to record the receipts and payments and balancing of government financial transactions. During 1500 A.D., accounting was used by business firms for recording transactions related to business. In 1800 A.D., accounting was used to record transactions and also to provide information to various users of financial data.

Role of accounting- While in the earlier times accounting was merely concerned with recording the financial events (i.e. record-keeping activity); however, now-a-days, accounting is done with the rationale of not only maintaining records, but also providing an information system that provides important and relevant information to various accounting users.
1. Substitute of memory- As, it is beyond human capabilities to remember each and every business transaction, so accounting plays an important role in recording these transactions in the book of accounts.
2. Assistance to management- Management uses accounting information for short term and long term planning of business activities and to control various costs and budgets.
3. Comparative study- In order to ascertain the performance of the business, accounting enables comparison of current year’s profit with that of previous years (intra-firm comparison)and also with other firms in the same business (inter-firm comparison).
4. Evidence in court- It acts as evidence that can be used or presented in the court, if any discrepancy arises in the future.

Q4. Define accounting and state its objectives.
Answer :Accounting is a process of identifying the events of financial nature, recording them in the journal, classifying in their respective accounts and summarising them in profit and loss account and balance sheet and communicating results to users of such information, viz. owner, government, creditor, investors, etc.
According to American Institute of Certified Accountants, 1941, “Accounting is the art of recording, classifying and summarising in a significant manner and in terms of money, transactions and events that are, in part at least, of financial character and interpreting the results thereof.”
In 1970, American Institute of Certified Public Accountants changed the definition and stated, “The function of accounting is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decisions.”
Objectives of Accounting:
1. Recording business transactions systematically- It is necessary to maintain systematic records of every business transaction, as it is beyond human capacities to remember such large number of transactions. Skipping the record of any one of the transactions may lead to erroneous and faulty results.
2. Determining profit earned or loss incurred- In order to determine the net result at the end of an accounting period, we need to calculate profit or loss. For this purpose trading and profit and loss account are prepared. It gives information regarding how much of goods have been purchased and sold, expenses incurred and amount earned during a year.
3. Ascertaining financial position of the firm- Ascertaining profit earned or loss incurred is not enough; proprietor also interested in knowing the financial position of his/her firm, i.e. the value of the assets, amount of liabilities owed, net increase or decrease in his/her capital. This purpose is served by preparing the balance sheet that facilitates in ascertaining the true financial position of the business.
4. Assisting management- Systematic accounting helps the management in effective decision making, efficient control on cash management policies, preparing budget and forecasting, etc.
5. Assessing the progress of the business- Accounting helps in assessing the progress of business from year to year, as accounting facilitates the comparison both inter-firm as well as intra-firm.
6. Detecting and preventing frauds and errors- It is necessary to detect and prevent fraud and errors, mismanagement and wastage of the finance. Systematic recording helps in the easy detection and rectification of frauds, errors and inefficiencies, if any.
7. Communicating accounting information to various users- The important step in the accounting process is to communicate financial and accounting information to various users including both internal and external users like owners, management, government, labour, tax authorities, etc. This assists the users to understand and interpret the accounting data in a meaningful and appropriate manner without any ambiguity.

Q5. Describe the informational needs of external users.
Answer : There are various external users of accounting who need accounting information for decision making, investment planning and to assess the financial position of the business. The various external users are given below.
1. Banks and other financial institutions- Banks provide finance in form of loans and advances to various businesses. Thus, they need information regarding liquidity, creditworthiness, solvency and profitability to advance loans.
2. Creditors- These are those individuals and organisations to whom a business owes money on account of credit purchases of goods and receiving services; hence, the creditors require information about credit worthiness of the business.
3. Investors and potential investors- They invest or plan to invest in the business. Hence, in order to assess the viability and prospectus of their investment, creditors need information about profitability and solvency of the business.
4. Tax authorities- They need information about sales, revenues, profit and taxable income in order to determine the levy various types of tax on the business.
5. Government- It needs information to determine national income, GDP, industrial growth, etc. The accounting information assist the government in the formulation of various policies measures and to address various economic problems like employment, poverty etc.
6. Researcher- Various research institutes like NGOs and other independent research institutions like CRISIL, stock exchanges, etc. undertake various research projects and the accounting information facilitates their research work.
7. Consumer- Every business tries to build up reputation in the eyes of consumers, which can be created by the supply of better quality products and post-sale services at reasonable and affordable prices. Business that has transparent financial records, assists the customers to know the correct cost of production and accordingly assess the degree of reasonability of the price charged by the business for its products and thus helps in repo building of the business.
8. Public- Public is keenly interested to know the proportion of the profit that the business spends on various public welfare schemes; for example, charitable hospitals, funding schools, etc. This information is also revealed by the profit and loss account and balance sheet of the business.

Q6. What do you mean by an asset and what are different types of assets?
Answer :Any valuable thing that has monetary value, which is owned by a business, is its asset. In other words, assets are the monetary values of the properties or the legal rights that are owned by the business organisations.

Fixed Assets- These are those assets that are hold for the long term and increase the profit earning capacity and productive capacity of the business. These assets are not meant for sale, for example, land, building machinery, etc.
Current Assets- Assets that can be easily converted into cash or cash equivalents are termed as current assets. These are required to run day to day business activities; for example, cash, debtors, stock, etc.
Tangible Assets- Assets that have physical existence, i.e., which can be seen and touched, are tangible assets; for example, car, furniture, building, etc.
Intangible Assets- Assets that cannot be seen or touched, i.e. those assets that do not have physical existence, are intangible assets; for example, goodwill, patents, trade mark, etc.
Liquid Assets- Assets that are kept either in cash or cash equivalents are regarded as liquid assets. These can be converted into cash in a very short period of time; for example, cash, bank, bills receivable, etc.
Fictitious Assets- These are the heavy revenue expenditures, the benefit of whose can be derived in more than one year. They represent loss or expense that are written off over a period of time, for example, if advertisement expenditure is Rs 1,00,000 for 5 years, then each year Rs 2,00,000 will be written off.

Q7. Explain the meaning of gain and profit. Distinguish between these two terms.
Answer :
Profit- Excess of revenue over expense is known as profit. It is normally categorised into gross profit or net profit. It increases the owner’s capital as it is added to the capital at the end of each accounting period. For example, goods costing Rs 1, 00,000 is sold at Rs 1,20,000, then the sale proceeds of Rs 1,20,000 is the revenue and 1,00,000 is the expense to generate this revenue. Hence, accounting profit of Rs 20,000 (i.e. Rs 1,20,000 – Rs 1,00,000) is the difference between the revenue and expense that is earned by the business.
Gain- It arises from irregular activities or non-recurring transactions. In other words, a gain is a result of transactions that are incidental to the business, other than operating transactions. For example, an old machinery of book value Rs 20,000 is sold at Rs 25,000. Hence, the gain is Rs 5,000 (i.e. Rs 25,000 – Rs 20,000). Here, the sale of the old machinery is an irregular activity; so, the difference is termed as gain
Thus, in other words the only difference between profit and gain is that profit is the excess of revenue over expense and gain arises from other than operating transactions.

Q8. Explain the qualitative characteristics of accounting information.
Answer :

The following are the qualitative characteristics of accounting information:
1. Reliability- It means that the user can rely on the accounting information. All accounting information is verifiable and can be verified from the source document (voucher), viz. cash memos, bills, etc. Hence, the available information should be free from any errors and unbiased.
2. Relevance- It means that essential and appropriate information should be easily and timely available and any irrelevant information should be avoided. The users of accounting information need relevant information for decision making, planning and predicting the future conditions.
3. Understandability- Accounting information should be presented in such a way that every user is able to interpret the information without any difficulty in a meaningful and appropriate manner.
4. Comparability- It is the most important quality of accounting information. Comparability means accounting information of a current year can be comparable with that of the previous years. Comparability enables intra-firm and inter-firm comparison. This assists in assessing the outcomes of various policies and programmes adopted in different time horizons by the same or different businesses. Further, it helps to ascertain the growth and progress of the business over time and in comparison to other businesses.

Q9. Describe the role of accounting in the modern world.
Answer: The role of accounting has been changing over a period of time. In the modern world, the role of accounting is not only limited to record financial transactions but also to provide a basic framework for various decision making, providing relevant information to various users and assists in both short-run and long run planning. The role of accounting in the modern world are given below.
1. Assisting management- Management uses accounting information for short term and long term planning of business activities, to predict the future conditions, prepare budgets and various control measures.
2. Comparative study- In the modern world, accounting information helps us to know the performance of the business by comparing current year’s profit with that of the previous years and also with other firms in the same industry.
3. Substitute of memory- In the modern world, every business incurs large number of transactions and it is beyond human capability to memorise each and every transaction. Hence, it is very necessary to record transactions in the books of accounts.
4. Information to end user- Accounting plays an important role in recording, summarising and providing relevant and reliable information to its users, in form of financial data that helps in decision making.