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 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 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.