According to the definition given by American Institute of Certified Public Accountants (CPA) , accounting can be defined as, “Accounting is the art of recording, classifying and summarizing n a significant manner and in terms of money transactions and events which are, in part at least of a financial character, and interpreting the results there of. ” Accounting is instrumental within organizations as a means of determining financial stability. Without accounting, organizations would have no basis or foundation upon which daily and long-term decisions could be made.
The budgets for marketing activities, profit reinvestment, research and development, and company growth all stem from the work of accountants Book-keeping Bookkeeping involves the recording, storing and retrieving of financial orientations for a company, nonprofit organization, individual, etc. Common financial transactions and tasks that are involved in bookkeeping include: Billing for goods sold or services provided to clients. Recording receipts from customers. Verifying and recording invoices from suppliers. Paying suppliers. Processing employees’ pay and the related governmental reports.
Monitoring individual accounts receivable. Recording depreciation and other adjusting entries. Objectives of accounting Permanent Record Any business firm needs a permanent record of the transactions that it indulges in. These records could be vital for internal purpose, for taxation purpose or for any other purpose. Whenever the organization commits any resource of monetary value either within the firm or outside the firm, a record is made. This permanent record is held on for years and can be retrieved as and when need be. Measurement of Outcome A business firm may indulge in numerous transactions every day.
It may make profit in some of these transactions while it may make losses in some other transactions. However, the effect of all these transactions needs to be aggregated over a period of time. There must be daily, weekly and monthly reports which provides information to the organization about how well it is performing its activities. Accounting serves this purpose by providing periodic financial statements which help the firm adjust their operations accordingly. Creditworthiness Firms need resources for their functioning. They do not have any capital stock at hand and need to obtain them from investors.
Investors will give money to the firm only if they have reasonable assurance that the firm will be able to generate enough profit. Past accounting records help a great deal in proving this. All kinds of investors from banks to shareholders ask for past accounting details before they trust the management with their money. Efficient Use of Resources Firms can also conduct useful internal analysis with the help of accounting data. Accounting records tell the firm what resources were committed to what activity and what time. These records also summarize the return that was obtained from these activities.
Management can then analyze how they could have performed better and used resources more efficiently. Projections Accounting helps management and investors look forward. Costs and revenue growths can be projected after substantial data has been accumulated. The assumption made is that the company is likely to behave exactly as it has done in the past. Thus, analysts can make reasonable assumptions about the future based on the past record. Explain GAP and write down the relationship between accounting principles, accounting concepts, and accounting conventions. Explain all the five accounting concepts with an example.
Generally Accepted Accounting Principles – GAP The common set of accounting principles, standards and procedures that impasses use to compile their financial statements. GAP are a combination of authoritative standards (set by policy boards) and simply the commonly accepted ways of recording and reporting accounting information. GAP are imposed on companies so that investors have a minimum level of consistency in the financial statements they use when analyzing companies for investment purposes. GAP cover such things as revenue recognition, balance sheet item classification and outstanding share measurements.
Companies are expected to follow GAP rules when reporting their financial data via financial statements. That said, keep in mind that GAP is only a set of standards. There is plenty of room within GAP for unscrupulous accountants to distort figures. So, even when a company uses GAP, you still need to scrutinize its financial statements. RELATIONSHIP BETWEEN ACCOUNTING PRINCIPLES, ACCOUNTING CONCEPTS AND ACCOUNTING CONVENTIONS. Traditionally, accounting principles were classified into two categories: a) Accounting Concepts b) Accounting Conventions Accounting principles are rules/ policies to be followed by all the organizations.
It includes some concepts which are assumptions that help the accountants o prepare accounting statements and some conventions which give rules for accounting. Accounting conventions are followed universally. Following is a list of the major accounting concepts and principles: Relevance – Information should be relevant to the decision making needs of the user. Information is relevant if it helps users of the financial statements in predicting future trends of the business (Predictive Value) or confirming or correcting any past predictions they have made (Confirmatory Value).
Reliability – Information is reliable if a user can depend upon it to be materially accurate and f it faithfully represents the information that it purports to present. Significant misstatements or omissions in financial statements reduce the reliability of information contained in them. Matching Concept – Matching Principle requires that expenses incurred by an organization must be charged to the income statement in the accounting period in which the revenue, to which those expenses relate, is earned.
Timeliness – Timeliness principle in accounting refers to the need for accounting information to be presented to the users in time to fulfill their decision making needs. Neutrality – Information contained in the financial statements must be free from bias. It should reflect a balanced view of the affairs of the company without attempting to present them in a favored light. Information may be deliberately biased or systematically biased. Q. List down the classification of accounts according to accounting equation approach. Give the meaning and examples for all the types of accounts.
Accounting equation is based on dual (debit and credit) aspect concept. Though the Americans make use of double entry system, the procedure of recording he business transaction in the general journal is different. Under this approach transactions are recorded based on the accounting equation, i. E. , Assets – Liabilities + Capital.  The accounting equation is a statement of equality between the debits and the credits. The rules of debit and credit depend on the nature of an account. According to Modern approach Accounts are classified into five groups: Asset Expense Revenue Liability Capital What is cash book?
Differentiate between other subsidiary books and cash book. Cash Book is a sub-division of Journal recording transactions pertaining o cash receipts and payments. Firstly, all cash transactions are recorded in the Cash Book wherefrom they are posted subsequently to the respective ledger accounts. The Cash Book is maintained in the form of a ledger with the required explanation called as narration and hence, it plays a dual role of a journal as well as ledger. All cash receipts are recorded on the debit side and all cash payments are recorded on the credit side.
All cash transactions are recorded chronologically in the Cash Book. The Cash Book will always show a debit balance since payments cannot exceed the receipts at any time. What is management accounting? Explain the roles of management accounting and write down about any 2 functions of management accounting. Management accounting or managerial accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions.
In contrast to financial accountancy information, management accounting information is: primarily forward-looking, instead of historically del based with a degree of abstraction to support decision making generically, instead of case based; designed and intended for use by managers within the organization, instead of being intended for use by shareholders, creditors, and public regulators; usually confidential and used by management, instead of publicly reported; computed by reference to the needs of managers, often using management information systems, instead of by reference to general financial accounting standards.
Role within a corporation Consistent with other roles in today’s corporation, management accountants eve a dual reporting relationship. As a strategic partner and provider of decision based financial and operational information, management accountants are responsible for managing the business team and at the same time having to report relationships and responsibilities to the corporation’s finance organization.
The activities management accountants provide inclusive of forecasting and planning, performing variance analysis, reviewing and monitoring costs inherent in the business are ones that have dual accountability to both finance and the business team. Examples of tasks where accountability ay be more meaningful to the business management team vs.. The corporate finance department are the development of new product costing, operations research, business driver metrics, sales management scorecard, and client profitability analysis. See Financial modeling. ) Conversely, the preparation of certain financial reports, reconciliations of the financial data to source systems, risk and regulatory reporting will be more useful to the corporate finance team as they are charged with aggregating certain financial information from all segments of the corporation. Management SST Planning and Forecasting Function: In 2005, Mr.. A started his small business. He was well educated of management accounting tools. By effective use of management accounting, he developed his small business.
Now, after 5 years, he is operating good company. Management accounting’s basic functions like to study ratio analysis and cash and fund flow statements can develop any small business like Mr.. A. How is it possible? One – Businessman can easily watch in which project he invested his cash and fund. He can see whether its ROI and ROE is better than any other investment. Second – He also makes good plan to reduce his investment in that project whose return is not sufficient. ND Modification of Data Function: Second good function of management accounting is to modify of raw accounting data. After this, businessman bids fair to effective use these modify data in business’s management. Management accounting can be used to classify every accounting item in different views. There are so many accounting software which can be helpful to show sale or purchase or any other accounting items according to production level, area, season, country, age or quality of debtors or creditors.
One Side, it will build up analytic approach of company and other side, it will be helpful to check up each and every accounting item from different angels. 3rd Interpretation Function: It is also function of management accounting to do complete interpretation of financial analysis. It cuts down work burden of manager because management accountant supports him by providing fact and interpretation of financial data after its analysis. 4th Management Control Function: Management control can be possible only with management accounting function.