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Introduction to Accounting

Q. Mention the parties interested in accounting information.

Ans: - Parties interested in accounting information:

                             i.      Owners: The owners provide funds or capital for the organization. Owners, being businessmen, always keep an eye on the returns from the investment.

                           ii.      Management: The management of the business is greatly interested in knowing the position of the firm. The accounts are the basis with the help of which the management can study the merits and demerits of the business activity.

                         iii.      Creditors: Creditors are the persons who supply goods on credit, or bankers or lenders of money. It is usual that these groups are interested to know the financial soundness before granting credit.

                          iv.      Employees: Payment of bonus depends upon the size of profit earned by the firm. The more important point is that the workers expect regular income for living. The increase in wages, Bonus, better working conditions etc. depend upon the profitability of the firm.

                            v.      Investors: The prospective investors, who want to invest their money in a firm, wish to see the progress and prosperity of the firm, before investing their amount, by going through the financial statements of the firm. This is to safeguard the investment.

                          vi.      Government: Government keeps a close watch on the firms which yield good amount of profits. The state and central Governments are interested in the financial statements to know the earnings for the purpose of taxation.

                        vii.      Consumers: These groups are interested in getting the goods at reduced price. Therefore, they wish to know the establishment of a proper accounting control, which in turn will reduce to cost of production, in turn fewer prices to be paid by the consumers.

                      viii.      Research Scholars: Accounting information, being a mirror of the financial performance of a business organization, is of immense value to the research scholar who wants to make a study into the financial operations of a particular firm.


Q. Explain the important functions of accounting.

Ans:- Functions of accounting:

                              i.      Record Keeping Function: The primary function of accounting relates to recording, classification and summary of financial transactions-journalisation, posting, and preparation of final statements. These facilitate to know operating results and financial positions.

                            ii.      Managerial Function: Decision making programme is greatly assisted by accounting. The managerial function and decision making programmes, without accounting, may mislead.

                           iii.      Legal Requirement function: Auditing is compulsory in case of registered firms. Auditing is not possible without accounting. Thus accounting becomes compulsory to comply with legal requirements.

                          iv.      Language of Business: Accounting is the language of business. Various transactions are communicated through accounting. There are many parties-owners, creditors, government, employees etc., who are interested in knowing the results of the firm and this can be communicated only through accounting.


Basic accounting terms:

 Transaction: Transaction means the exchange of money or money’s worth from one account to another account. Events like purchase and sale of goods, receipt and payment of cash for services or on personal accounts, loss or profit in dealings etc., are the transactions”. Transactions are of three types: (a) Cash (b) Credit and (c) non cash transaction.

Cash transaction is one where cash receipt or payment is involved.

 Credit transaction, on the other hand, will not have ‘cash’ either received or paid, but gives rise to debtor and creditor relationship.

 Non-cash transaction is one where the question of receipt or payment of cash does not arise at all, e.g. Depreciation, return of goods etc.,


Debtor: A person who owes money to the firm mostly on account of credit sales of goods is called a debtor. For example, when goods are sold to a person on credit that person pays the price in future, he is called a debtor because he owes the amount to the firm.

Creditor:  A person to whom money owes by the firm is called creditor. For example, Madan is a creditor of the firm when goods are purchased on credit from him

 Capital: It means the amount (in terms of money or assets having money value) which the proprietor has invested in the firm or can claim from the firm. It is also known as owner’s equity, Proprietor’s claim  or net worth. Owner’s equity means owner’s claim against the assets. It will always be equal to assets less liabilities, say: Capital = Assets - Liabilities.


Liability: It means the amount which the firm owes to outsiders except the proprietors. In the words of Finny and Miller, "Liabilities are debts; they are amounts owed to creditors; thus the claims of those who ate not owners are called liabilities”. In simple terms, debts repayable to outsiders by the business are known as liabilities.

Asset: Any physical thing or right owned that has a money value is an asset. In other words, an asset is that expenditure which results in acquiring of some property or benefits of a lasting nature.

 Goods: It is a general term used for the articles in which the business deals; that is, only those articles which are bought for resale for profit are known as Goods.

 Revenue: It is defined as the inflow of assets form business operations which result in an increase in the owner’s equity. It includes all incomes like sales receipts, interest, commission, brokerage etc.  However, receipts of capital nature like additional capital, sale of assets etc., are not a part of revenue.

Expense: The terms ‘expense’ refers to the amount incurred in the process of earning revenue. If the benefit of an expenditure is limited to one year, it is treated as an expense (also know is as revenue expenditure) such as payment of salaries and rent.

Expenditure: Expenditure takes place when an asset or service is acquired. The purchase of goods is expenditure, where as cost of goods sold is an expense. Similarly, if an asset is acquired during the year, it is expenditure, if it is consumed during the same year; it is also an expense of the year.

Purchases: Buying of goods by the trader for selling them to his customers is known as purchases. Purchases can be of two types. viz, cash purchases and credit purchases. If cash is paid immediately for the purchase, it is cash purchases, If the payment is postponed, it is credit purchases.

Sales: When the goods purchased are sold out, it is known as sales. Here, the possession and the ownership right over the goods are transferred to the buyer. It is known as. 'Business Turnover’ or sales proceeds. It can be of two types, viz.,, cash sales and credit sales. If the sale is for immediate cash payment, it is cash sales. If payment for sales is postponed, it is credit sales.

Stock: The goods purchased are for selling, if the goods are not sold out fully, the remaining unsold part said to be a stock. If there is stock at the end of the accounting year, it is said to be a closing stock. This closing stock at the end of the year will be the opening stock for the next year.

Drawings:  It is the amount of money or the value of goods which the proprietor takes for his domestic or personal use. It is usually subtracted from capital.

Losses: Loss really means something against which the firm receives no benefit. It represents money given up without any return. It may be noted that expense leads to revenue but losses do not. (e.g.) loss due to fire, theft and damages payable to others,

Account: It is a statement of the various dealings which occur between a customer and the firm. It can also be expressed as a clear and concise record of the transaction relating to a person or a firm or a property (or assets) or a liability or an expense or an income.

Invoice: While making a sale, the seller prepares a statement giving the particulars such as the quantity, price per unit, the total amount payable, any deductions made and shows the net amount payable by the buyer. Such a statement is called an invoice.

Voucher: A voucher is a written document in support of a transaction. It is a proof that a particular transaction has taken place for the value stated in the voucher. Voucher is necessary to audit the accounts.

Proprietor: The person who makes the investment and bears all the risks connected with the business is known as proprietor.

Discount: When customers are allowed any type of deduction in the prices of goods by the businessman that is called discount. When some discount is allowed in prices of goods on the basis of sales of the items, that is termed as trade discount, but when debtors are allowed some discount in prices of the goods for quick payment, that is termed as cash discount.

Solvent: A person who has assets with realizable values which exceeds his liabilities is insolvent.

Insolvent: A person whose liabilities are more than the realizable values of his assets is called an insolvent.

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