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1. EXPLAIN OF ACCOUNTING.
The art of recording , classifying and summarizing , in a significant manner and in
terms of money , transaction and events which are, in part at least, of financial
character, and interpreting the result thereof."
2. DEFINE BOOK KEEPING.
Book Keeping is the task of recording, classifying and summarizing (up to trail balance) of
financial transactions and events. It is a part of accounting or can be called as the
fundamental pillars of accounting. Since in earlier days, these financial transactions and
events were written in the logn Bahi Books, registers, copies hence these were known as
book keeping.
Now the form of keeping is getting changed by the advent of technology and these
transactions and events are recorded and processed through computers but still the
substance remain the same and so about the key word "Book Keeping."
3. DIFFERENCE BETWEEN BOOK-KEEPING AND ACCOUNTING?
BASIS
Scope

BOOK-KEEPING
Book keeping is concerned with identifying
financial transactions, measuring them in
terms of money, recording them in the
books of accounts and classifying them.

ACCOUNTING
Accounting is concerned with
summarizing the recoded transactions,
interpreting them and communicating
the results.

Stage

It is a primary stage

It is a secondary stage. It begins where
book keeping ends.

Objective

The objective of book-keeping is to maintain
systematic records of financial transactions.

The objective of accounting is to
ascertain net results of operations and
financial position and to communicate
information to the interested parties.

Nature of
job

This is routine in nature.

This job is analytical and dynamic in
nature.

Need of
special skill.

Book keeping is mechanical in nature and
thus, does not require special skills.

Accounting requires special skills and
ability to analyze and interpret

4. What is the function of book-keeping?
The function of book-keeping is to identify financial transactions and events,
measuring them in money terms, recording them in the books of accounts and
classifying the recorded transactions.
5. What do you mean by accounting information?

Accounting information refers to the financial statements generated through the
process of book-keeping, use of which enables the users to arrive at the correct
decision. The financial statements so generated are the income statement, i.e., Profit
and loss account and the Position statement, i.e., balance sheet.
6. WHAT TYPE INFORMATION IS PROVIDED BY VARIOUS ACCOUNTING STATEMENTS?
INFORMATION FROM INCOME STATEMENTS: the income statement, i.e. Profit and
loss account makes available the accounting information about the profit earned or
loss incurred as a result of business operations or otherwise during an accounting
period. Trading account is the part of the Profit and loss account and it provides the
information about Gross Profit and profit and loss account provides information about
the net profit.
INFORMATION RELATING TO FINANCIAL POSITION: The Position Statement, i.e., the
Balance Sheet makes available the information about the financial position of the
entity. The Position Statement provides information about the assets owned by the
entity, amounts receivable and the cash and bank balance held by it. These are
represented in the liabilities by the amounts owed by the entity towards loans,
creditors and amounts payments.
7. WHAT ARE THE ATTRIBUTES OR FEATURES OF ACCOUNTING?
1. ACCOUNTING IS AN ART AS WELL AS A SCIENCE: Accounting is an art of
recording, classifying and summarizing financial transactions. It helps us in
achieving our objective of maintaining proper accounts.
Any organized knowledge based on principles is a science. Accounting is also a
science. It is an organized knowledge based on certain basic principles.
2. ACCOUNTING RECORDS TRANSACTIONS AND EVENTS OF FINANCIAL NATURE
ONLY: The transactions and events that can be measured in terms of money are
recorded in the books of accounts. It means money is a common denominator of
measurement.
3. ACCOUNTING RECORDS TRANSACTIONS BY EXPRESSING THEM IN TERMS OF
MONEY: money is a common denominator of measurement. This makes the
transaction more meaningful.
4. SERVICE ACTIVITY: Accounting is service activity designed to produce relevant
information of an organization to be used for decision-making.
8. WHAT ARE THE OBJECTIVES OF ACCOUNTIG?
a. MAINTAINING SYSTEMATIC RECORDS OF TRANSACTIONS: The objective of
accounting is to record financial transactions and events of the organization in
the books of accounts in a systematic manner.

b. ASCERTAINING PROFIT AND LOSS: Another objective of accounting is to
ascertain the net result of day-to-day transactions for a period. In other words,
to ascertain whether during the accounting period, the firm earned a profit or
incurred a loss. For this purpose Trading and Profit & loss account is prepared.
c. ASCERTAINING FINANCIAL POSITION: To know the financial position of the firm
a statement called BALANCE SHEET is prepared.
d. ASSISTING THE MANAGEMENT: For taking effective decisions, effective control,
budgeting and forecasting management requires financial information. And this
information is provided by accounting.
e. PREVENTION OF FRAUDS: Maintaining regular and systematic accounting records
helps in preventing possible frauds.
9. EXPLAIN ADVANTAGES OF ACCOUNTIG:
Objectives can be given as objectives.

10. EXPLAIN LIMITATIONS OF ACCOUNTING?
I.

ACCOUNTING IS NOT FULLY EXACT: Although most of the transactions are
recorded on the basis of documentary proof but still there are certain
transactions which are recorded on the basis of estimates. For example
Estimating the life of assets for providing depreciation.
Valuation of closing stock.
Possible bad debts.

II.

ACCOUNTING DOES NOT SHOW THE REALIZABLE VALUE OF ASSETS: the
Balance sheet does not show the amount of cash which the firm may realize
by the sale of all the assets.

III.

ACCOUNTING IGNORES THE QUALITATIVE ELEMENTS: Since accounting is
confined to monetary matters only, qualitative elements like quality of staff,
industrial relations and public relations are ignored.

IV.

ACCOUNTING IGNORES THE EFFECT OF PRICE LEVEL CHANGES: Accounting
statements are prepared at historical cost. Money, as measurement unit,
changes in value. It does not remain stable. Unless price level changes are
considered while preparing financial statements, accounting information will
not show true financial results.

V.

ACCOUNTING MAY LEAD TO WINDOW DRESSING: The term window dressing
means manipulation of accounts in a way so as to conceal vital facts and

present the financial statements in way to show better position than what it is
actually. Because of this reason Financial statements fail to show the fair view
of the result of operations of the business.
11. DISCUSS THE QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION.
RELIABILITY: Accounting information must be reliable. Reliability of information
means it is verifiable, free from material error and bias. It depends on :
i.
ii.
iii.
iv.

Neutrality
Prudence
Completeness
Substance over form.

RELEVANCE: The accounting information, besides disclosing statutorily required
information, should disclose other information, after judging its relevance to the
decision making need of its users.
UNDERSTANDABLILITY: Understandability means that the information provided
through the financial statements be presented in a manner that the users are able to
understand.
COMPARABILITY: Comparability means that the users should be able to compare the
accounting information of an enterprise of the period either with that of other
periods, known as intra-firm comparison or with the accounting information of othr
enterprises, known as inter firm comparison.
12. WRITE A NOTE ON DOUBLE ENTRY SYSTEM.
The double entry system was developed in the 15th century in Italy by Lucas Pacioli.
It is a system which recognises and records both aspects of transaction. The bouble
entry system hsas proved to be a scientific and complete system of accounting
followed by everry enterprise and organisation.
Under the system, every transaction has two aspects –Debit and Credit and at the
time of recording a transaction , it is recorded once on the debit side and again on th
credit side.
13. WRITE ANY FOUR ADVANTAGES OF DOUBLE ENTRY SYSTEM.
COMPLETE RECORD OF TRANSACTIONS: Under this system both sides of a
transaction are recorded. It is a complete record as it results in depicting correct
income or loss, assets and liabilities.
HELPS MANAGEMENT IN TAKING DECISION MAKING:the management may bne able
to obtain good information for its work, specially in making decisions.
A CHECK ON THE ACCURACY OF ACCOUNTS: by the use of this system the accuracy
of the accounting work can be established through the trial balance.
COMPLETE RECORD OF TRANSACTIONS: under the system both sides of a
transaction are recorded. It is a complete record as it results in depictin g correct
income or loss, assets and liabliities.

14. DISCUSS FOLLOWING BASIC
ACCOUNTING TERMS
BUSINESS TRANSACTION: the term Business transaction means a fenancial
transaction or event entered into by the parties and recorded in the books of
accounts. It is a finanacial event, which can be expressed in terms of money and
brings change in the financial position of an enterprise.
ACCOUNT: account is a summarised record of transactions relating to a particular
head at one place. It records not only the amount of transactions but also their effect
and direction.
CAPITAL: Capital is the amount invested by the proprietor or partner in lthebusiness.
It may bhe in formk of mobey or assets having money value. It is aa liability of the
business towards the proprietor or partner. Capiota;l is also known as owner’s equity
or net worth.
Capital may be expressed as: Capital= assets-liabilities.
DRAWINGS: It is the amount withdrawn or goods taken by the proprietor for his
personal use. Goods so taken by the proprietor are valued at purchase cose.
Drawings reduce the investment (or capital) of the owners.
LIABILITIES: It is an amount which business ows to outsider. Various kinds kinds of
liabilities are:
Internal Liabililty: Internal liability is the amount woed by thebusiness to the
proprietor of the buisiness. It is represented in the balance sheet as capital and freee
reserves.
External liability: external liability is a liability that is patyable to outsiders, i.e. other
than the propretors. Examples of evternsal liabilites are creditors, bank overdraft,
bills payable, outstanding bills
Long term liablity: these liablities are those liabilites which are payable after a longer
period e.g. long term loans,. Debentures,etc.
Currnt liablities: these are those liabilites wheicf ar payable within a year e.g.
creditors, bills payable, short term loans.
Contingent liabilites: those liabilities which may or may not arise in future depending
on the happening of an event e.g. Bills receivalble discounted.
ASSETS: Any thing in the form of property or legal rights which will enable the firm
to get cash or a benefit in future is an asset. Assets can be classified into:
Tangible assets: tangible assets are those assets which have physical exixtence, ie.e.
they can be seen and touched e.g. land building, machinery. Etc.
Intangible assets: those assets whch do not have physical esxistence. They can not
be seen and touched e.g. goodwill,trade- mark, etc.

Fixed assets: Those assets whch are acquired not with the purpose to resell but to
facilitate business operations and increase the earning capacity of the business by
employing them. Examples of fixed assets are land, building, machinery, computers
vehicles etc.
Curreent assets: those assets which can be converted into cash within a short period
say one year. Examples are debltors, stock, bills receivable etc.
Liquid assets: those assets which are in the form of cash or can be converted into
cash within very short period.
Fictitious Assets: those assets which are neither tangible assets or intangile assets
buit represent loss or expenses yet to be written off. Examples are: Debit balance of
Profit and loss account and deferred revenue expenditure.
GOODS: Goods are the physical items of trade. They are thus stock in trade of an
enterprise, which are purchased or manufactured with a purpose of selling.
DEBTORES: They are the persons who owes amount to the business on account of
credit sales of goods or services made to them. The amount due to them is known as
debt.
GAIN: Gain is a profit of irregular or non-recurrent nature.
PROFIT: It is the profit earned out of day to day business activities. Profit increases
the investment of the owners.
RECEIPTS: Receipt is the amount received or receivable for selling assets, goods or
services. Receipts may be devided into capital receipts and revenue receipts.
Capital receipts:
i. Amount received from the sale of fixed assets or investments.
ii. Capital contributed by propretors, partners or money obtained from issue of
shares and debentures in case of company.
iii. Amount received by way of loans.
Recvenue receipts:
i. Money obtained from sale of goods.
ii. Commissioin and fees received for services rendered.
iii. Interest and dividend received on investments.
EXPENDITURE: Any disbursement of cash or transfer of profperty or incurring a
liability for the pupose of acquiring assets, goods or services is called expenditure.
Expenditure may be classified into three categories:
i.

Capital expenditure: any expenditure which is incurred in acquiring or increasing the
value of a fixed asset is termed as capital expenditure. Amount spent on the
purchase or erection of building, plant, furniture etc. is capital expenditure. Such
expenditure yields benefit over a long period.

ii. Revenue expenditure: any expenditure, the full benefit of which is received during
one accounting period is termed as revenue expenditure. All revenue expenditures
are debited to Trading and Profit and loss account.
iii. Deferred revenue expenditure: There are certain expenditures which are revenue in
nature but the benefit of which is likely to be derived over a number of years. Such
expenditures are termed as Deferred Revenue Expenditures.
DIFFERENTIATE BETWEEN CAPITAL EXPENDITURE AND REVENUE EXPENDITURE:-

iii.

CAPITAL EXPENDITURE
Capital expenditure is incurred for
the acquisition or erection of a
fixed asset.
Capital expenditure is incurred for
the purpose of increasing the
earning capacity of the business.
It yields profit over a long period.

iv.

It is shown in balance sheet

i.
ii.

i.
ii.
iii.
iv.

REVENUE EXPENDITURE
Revenue expenditure is incurred
for the day to day running of the
business.
Revenue expenditure is incurred
for maintenance of earning
capacity.
It yields benefit for a maximum
period of one year.
It is shown in trading and profit
and loss account.

EXPENSES: expense is the cost incurred in producing and selling the goods and
services. Following are included in the term expenses:
I.
Cost of goods sold.
II.
Amount paid for rent, commission, salary etc.
III.
Decline in the value of an asset caused by the use of such asset for business
purpose or depreciation is also an expense.
LOSS: This term conveys two different meanings:



Firstly it conveys the result of the business for a period when total expenses exceed
the total revenues.
Secondly it refers to some fact or activity against which firm receives no benefit. For
example loss by fire, loss by theft etc.

CREDITORS: Those persons from whom business has purchased goods on credit.
PURCHASES: The term purchase is used only for the purchase of goods in which the
business deals.
In case of manufacturing concern goods means acquiring of raw material for the purpose of
conversion into finished product and then sale.
In case of trading concern goods are those things which are purchased for resale.
SALES: The term sales are used only for resale purposes. It also includes revenues from
services provided to customers.

DISCOUNT: It is a rebate or an allowance given by the seller in the buyer. It is of two types.
Trade discount: It is a discount which is allowed by one dealer to other dealer or by
manufacturer to dealer. It is allowed as fixed percentage on list price of goods.
Cash discount: It is a discount which is allowed to customers for making prompt payment.
COST: cost can be termed as the amount of resources given up in exchange for some goods
or services. The resources given up are money or money’s equivalent expressed in terms of
money.

BASIS OF ACCOUNTING
15. DISCUSS THE BASIS OF ACCOUNTING.
There are two basis of accounting for ascertaining profit or loss, namely:
CASH BASIS OF ACCOUNTING: Under this basis, incomes are not recorded unless they are received in
cash. Similarly, expenses are recorded only when they are paid in cash. In other words, credit
transactions are not recorded at all and are ignored till cash is actually received or paid for them. Thus
profit is merely the excess of actual cash receipts in respect of sale of goods and other incomes over
actual payments in respect of purchase of goods, expenses on wages, salary, rent etc. this basis is useful
for professional people like lawyers, doctors, chartered accountants etc.
ADVANTAGES:
 This basis is simple, realistic and satisfies the conservative instinct of many people.
 It does not require estimates and personal judgments.
 It is suitable for those enterprises where most of the transactions are on cash basis.
ACCRUAL BASIS OF ACCOUNTING:
Under this basis, incomes are recorded when they are earned or accrued, irrespective of the fact
whether cash is received or not, e.g. sales made on credit will be included in the total sales of the
period. Similarly, expenses are recorded when they incurred or become due and not when the cash is
paid for them.
ADVANTAGES:
 It discloses true profit or loss and financial position of the business at the end of a particular
period.
 It follows the matching principle of accounting.
 It is recognized by company’s act 1956.
16. DISTINGUISH BETWEEN CASH BASIS OF ACCOUNTING AND ACCRUAL BASIS OF
ACCOUNTING

i.
ii.

iii.
iv.

CASH BASIS OF ACCOUNTING
This basis records only the cash
transactions.
This basis does not take into
consideration outstanding expenses,
prepaid expenses, accrued incomes
and incomes received in advance.
This basis is not recognized under
Indian companies’ act 1956.
This basis does not make distinction
between capital and revenue items.

ACCRUAL BASIS OF ACCOUNTING
This basis makes a complete record of all
cash as well as credit transactions.
This basis takes into consideration all such
items.

This basis is recognized under Indian
companies’ act 1956.
This basis makes a distinction between capital
and revenue items.

17. EXPLAIN THE TERMS PROVISIONS AND RESERVES ALONG WITH EXAMPLES.
PROVISION:
Provision is an amount set aside, by charging it in the profit and loss account, to provide for a
known liability the amount of which cannot be determined with accuracy. It is charged in the
profit and loss account on estimate basis. The main examples are:
 Provision for depreciation.
 Provision for doubtful debts.
 Provision for repairs.
 Provision for tax.
Provision differs from liability to the extent that provision is an estimated amount while liability
is ascertained amount.
RESERVES: Reserves are the amount set aside out of profits. It is an appropriation of profits to
strengthen the financial position of the business. These are not meant to cover any liability
rather these set aside to meet known or unknown contingency that may arise in future.
Examples are:





General reserve.
Reserve for expansion.
Dividend equalization fund.
Reserve for increased cost of replacement.

18. DISTINGUISH BETWEEN RESERVE AND PROVISION.
RESERVE
1. It is an appropriation of profit.
2. It is created to strengthen the financial
position and to meet unforeseen
liabilities or losses.
3. It is debited to profit and loss
appropriation account

PROVISION
It is charge against profit.
It is made to meet known liability or
contingency, if the amount is not determined.
It is debited to profit and loss account.

4. It may be invested outside the
business.
5. Unutilized part can be distributed as
dividend.

It is not invested.
It cannot be used for distribution as profit.

19. EXPLAIN REVENUE RESERVE AND CAPITAL RESERVE ALONG WITH EXAMPLES.
REVENUE RESERVE: these are created out of revenue profits which are available for distribution
as dividend. Examples are:
 General reserves.
 Dividend equalization reserve.
 Debenture redemption reserve and
 Investment fluctuation reserve.
CAPITAL RESERVE: these are created out of capital profits and are normally not available for
distribution as dividend. Examples are:
 Profit prior to incorporation.
 Premium on issue of shares and debentures.
 Profit on redemption of debentures.
 Profit on forfeiture of shares.
 Profit on sale of fixed assets.
20. Distinguish between revenue reserves and capital reserves.
Revenue reserve
 It is created out of business profits.
 It can be used for distribution of
dividends without any precondition.
 It is created for strengthening the
financial position and meeting the
unforeseen contingencies or some
specific purpose.

Capital reserve
 It is created out of capital profits.
 It can be used for distribution of
dividends only if the company satisfies
certain conditions prescribed by the
companies act.
 It is created for meeting capital losses
or to be used for purposes specified by
the companies act.

EXPLAIN THE TERMS GENERAL RESERVE AND SPECIFIC RESERVE.
GENERAL RESERVE: it is the amount set aside out of profits for no specific purpose. It is available
for any future contingency or expansion of business. Such reserves strengthen the financial
position of the business.
SPECIFIC RESERVE: It is that reserve which is created for a specific purpose and can be utilized
only for that purpose.

21. WHAT IS A SOURCE DOCUMENT?
A source document is first evidence of a transaction having taken place. These documents provide
the information on the basis of which the transaction is recorded in books. In other words a source
document is a written document containing details of the transaction prepared at the time it is
entered into. Examples are:
 Cash memo.
 Invoice or bill
 Receipt
 Pay-in-slip.
 Cheque.
 Debit note.
 Credit note.
22. What are vouchers?
Vouchers are support documents, which are prepared on the basis of source documents. On the
basis of these documents transaction is recorded in the books of original entry. Each firm prints
its vouchers separately.
23. Explain various types of vouchers.
Voucher may be classified into two categories as follows:
a. Cash vouchers
b. Noncash vouchers or transfer vouchers.
CASH VOUCHERS: Cash voucher are prepared for cash transactions. These are of two types:
i.

ii.

Debit vouchers: these are prepared for transactions involving cash payments such as:
 For cash payment of expenses.
 For cash purchases of goods.
 For cash purchases of investments.
 For cash purchases of fixed assets.
 For cash payments to creditors.
 For depositing cash into the bank.
 (LOOK FORMAT FROM BOOK)
Credit vouchers: these are prepared for transactions involving cash receipts such as:
 Cash receipt of income.
 Cash sales of goods.
 Cash sales of investments.
 Cash sales of fixed assets.
 (LOOK FORMAT FROM BOOK)

CREDIT VOUCHERS OR NON CASH VOUCHERS. These vouchers are prepared for non cash transactions
such as:







For credit purchase or credit sale of goods.
For credit purchase or credit sale of fixed assets.
For return of goods.
For providing depreciation.
For writing off bad debts.
(LOOK FORMAT FROM BOOK)

For principles and I.F.R.S. you will get photostated
notes.

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