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Accounting Basics

Accounting Basics

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7 views

Accounting Basics

Accounting Basics

Uploaded by

docdoc
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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1. What is Accounting?

Answer:

Accounting is the practice of maintaining precise records of the financial dealings of a business.
It involves identifying business transactions, recording them, and summarizing the same to
communicate important financial information to the stakeholders of the business. It is also
referred to as the language of business/finance.

2. Why is Accounting Essential for a Business?

Answer:

Accounting is essential for a business because it helps answer crucial questions such as:

- What is the total value of business assets?

- Is the business earning profits or incurring losses?

- How much do third parties owe the business?

- How much does the business owe to third parties?

- Should a specific operation be withdrawn?

- Can the business be expanded?

3. What are the Phases of the Accounting Cycle?

Answer:

The phases of the accounting cycle are:

1. Understanding the Transaction: Recording details like date, debit, and credit amounts.

2. Journal Entry: Recording transactions by debiting and crediting accounts.

3. Ledger Posting: Transferring recorded transactions to corresponding ledger accounts.

4. Trial Balance: Ensuring the debit and credit columns of ledger accounts are equal.

5. Profit & Loss Account: Determining the net profit or loss for the accounting period.

6. Balance Sheet: Summarizing the financial balances of the business.

In manual accounting, all activities are performed manually, but accounting software automates
most of these tasks except understanding transactions and voucher entry.
4. What are Basic Accounting Terms?

Answer:

Here are some basic accounting terms:

1. Capital: Money or money’s worth introduced into the business by the owner.

2. Transaction: A business activity involving the transfer of money or its worth between two
accounts. It can be a cash transaction or a credit transaction.

3. Assets: Items of economic value owned by an individual or corporation that could be


converted into cash.

4. Liability: Amounts owed by the entity to outsiders, such as loans and payables.

5. Drawings: Money or value withdrawn by the owner from the business for personal use.

6. Bad Debts: Amounts that cannot be recovered from debtors who have become insolvent.

7. Purchases: Goods bought by a business for use or resale, either as cash or credit purchases.

8. Purchase Returns: Goods returned to the seller before consumption due to issues like quality
or damage.

9. Sales: Goods sold by a business, either as cash or credit sales.

10. Sales Returns: Goods sold but returned by the buyer due to quality or damage.

11. Debtor: A person who receives benefits from the business but will pay in the future.

12. Creditor: A person who provides benefits without immediate payment and will claim payment
in the future.

13. Stock: Unsold goods and raw materials held by the business.

14. Revenue: Earnings through business activities and operations.

5. What are the Key Accounting Concepts?

Answer:

Key accounting concepts include:

1. Business Entity Concept: Business transactions must be recorded separately from the owner’s
personal transactions.

2. Going Concern Concept: Assumes that the business will continue to operate indefinitely.

3. Money Measurement Concept: Only transactions measurable in monetary terms are recorded.

4. Cost Concept: Assets are recorded at their cost price.


5. Dual Aspect Concept: Every transaction affects two accounts: one debit and one credit.

6. Accounting Period Concept: The business’s financial activities are divided into periodic
intervals for reporting.

7. Revenue Realization Concept: Revenue is recognized when earned, not when received.

8. Accrual Concept: Records income and expenses when they are incurred, regardless of actual
receipt or payment.

9. Matching Concept: Matches revenues with the costs incurred to earn them within the same
period.

10. Verifiable and Objective Evidence Concept: Requires transactions to be supported by


documentary evidence.

6. What is the Double Entry System of Accounting?

Answer:

The Double Entry System of Accounting is a method where every financial transaction affects
two accounts: one account is debited, and the other is credited. This system ensures that the
accounting equation (Assets = Liabilities + Equity) remains balanced.

7. What are the Rules of Debit and Credit?

Answer:

Rules of Debit and Credit vary depending on the type of account:

- Assets: Increase with a debit and decrease with a credit.

- Liabilities: Increase with a credit and decrease with a debit.

- Capital: Increase with a credit and decrease with a debit.

- Revenue: Increase with a credit and decrease with a debit.

- Expenses: Increase with a debit and decrease with a credit.

8. How is the Double Entry System Applied to Transactions?

Answer:

Every transaction involves two aspects: one where the business receives a benefit (Debit) and
one where it provides a benefit (Credit). For example, if Suman commences business with
₹15,00,000 by cheque:

- Debit: Bank account (Increases asset)


- Credit: Suman’s capital account (Increases capital)

These entries reflect the dual aspect of the transaction where the bank balance increases and
the owner’s capital increases.

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