Theoretical Framework

This Chapter is about basics of accounting. It deals with what accounting is and what it does. 

Accounting is the art of  :  
(1) Recording;  (Recording is done in journal)
(2) Classifying and (classifying is done in ledger)
(3) Summarizing. (Summarizing is done in Trail Bal, Trading Account, P/L A/c and Balance Sheet)
- of all the transactions of a financial character. 
- in a significant manner. 
- and to interpret the results thereof.  

Book Keeping
Book Keeping is an art of recording, Classifying transaction and events which are financial in nature in term of money and providing results thereof. 

So in book keeping only recording and classifying is done. Other steps of accounting are ignored. 

ADVANTAGES OF ACCOUNTING
Accounting Replaces memory
Accounting Provides control over assets
Accounting Facilitates the preparation of financial statements:
Accounting Facilitates a comparative study
Accounting Assists the management in decision making
Accounting Helps in Taxation Matters
Accounting Helps in Valuation of Business


LIMITATIONS OF ACCOUNTING
Accounting Records only financial transactions 
Accounting is Based on estimates so it is not fully exact
In Accounting Fixed assets are recorded at the original cost 
Accounting  may lead to Window dressing
Accounting records in terms of money but does not considers change in value of money

TERMS  OF ACCOUNTING
1. Capital - It is the amount invested by owner in the business. 
2. Liability - It is the amount to be given to the outsiders.  
3. Assets - These are those things which are owned by the business.  
4. Debtors - Debtors are the persons from whom business has to take money.  
5. Creditors - Creditors are the persons to whom business has to pay money.  
6. Proprietor - He is the Owner of business.  
7. Drawings - It is the Money or Goods used by proprietor for personal use.  
8. Transaction - It is Any business event to be recorded.  
9. Stock - Stock is goods lying unsold with the business on a particular date.  
10. Expense - Expense is the amount spent to produce and sell the goods.

GOLDEN RULES OF ACCOUNTING
Personal Account : DEBIT THE RECEIVER CREDIT THE GIVER
 (For all personal A/c’s like Ram, Shyam, Mohan, Sita, Geeta, etc.)

Real Account: DEBIT WHAT COMES IN CREDIT WHAT GOES OUT
(For all Real A/c’s like Cash, Table, Plant, Furniture, Building, etc.)

Nominal Account: DEBIT ALL EXPENSES AND LOSSES, CREDIT ALL INCOME AND GAINS
(For all Nominal A/c’s like Profit, Loss, Salary, Rent, Depreciation, etc.)

ACCOUNTING EQUATION
Accounting equation is based on the concept that for every debit, there is an equivalent credit.

Capital + Liabilities = Assets

Capital = Assets -  Liabilities

Closing Capital = Opening capital + Profit/-Loss +Additional Capital – Drawings

These online MCQ Mock tests and MCQ questions includes all main concepts of the chapter in CS foundation Financial Accounting and Auditing.

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