The document provides an introduction to accounting, defining it as the systematic process of recording business transactions and communicating the financial results to various stakeholders. Key components include financial statements such as the statement of profit or loss, statement of affairs, and cash flow statement, along with objectives like maintaining records, aiding management decisions, and ensuring business control. It also distinguishes between internal and external users of accounting information and explores the meaning of assets, gains, and profits.

1. CHAPTER 01,
Introduction to Accounting
Question 1
What does it mean by accounting?
Answer:
Accounting can be referred to as the activity of maintaining
the numerical transactions of a business. It is the systemised
process of identifying, recording, calculating, classifying and
substantiating each and every transaction of the business.
Accounting further deals with the analyses, interpretation and
the communication of the financial results which comprises of
the state of profit or loss, statement of affairs and the cash
flow statement to the users in order to derive information.
Question 2
State the end product of financial accounting.
Answer:
The end product of the financial accounting includes the
following:
1. Statement of Profit or Loss Account – It is referred to as
the statement which determines the results of business

2. operations by determining the profit/loss incurred by it in
a financial year.
2. Statement of Affairs – The Statement of Affairs presents
the financial position of the business on a particular date.
It thus portrays the picture of the short term and the long
term assets and liabilities of the business and thus
portrays the picture of the performance of the business.
3. Cash Flow Statement – The Cash Flow Statement is
responsible for keeping the record of the inflows and the
outflows of the case by the business that occurs through
the operations of the business, investments and other
financial activities.
Question 3
Enumerate the main objective of the accounting.
Answer:
The main objectives of the accounting are as follows:
1. To maintain the systematic records of each and every
transaction of the business.
2. To calculate the performance and financial position of
the business and determine the profit or loss made by the
business on a given duration of time.

3. 3. To aid the management to by allowing them to take
decisions by producing them with relevant required
reports.
4. To analyse, interpret and communicate the financial
results to the various stakeholders and users.
5. To be able to control the business in the manner such as
frauds and illegal activities are prevented.
Question 4
Who are the users of accounting information?
Answer:
There are two types of users of the accounting information:
Internal users:
The internal users of the business refer to the users who are
able to impact the performance of the business by being inside
it. It thus includes of -
Management- the users who takes the relevant decision for
the business.
Shareholders – the users who invest in the business to directly
impact the performance of the business.

4. Employees – the users who want to know the growth and
profitability of the organisation when they are directly
engaged in the operations of the business.
External Users:
The external users of the business refer to the users who are
not directly involved to determine its performance but may
require the business information. They do not have the powers
of taking decision in the business. It includes of -
Government/ Tax authorities – who want to check the various
compliances of the business and ensure hey abide by the legal
regulations.
Lenders – who want to know the profitability of the business.
Creditors- who are interested in assessing the position of the
liquidity of the business.
General Public – who have to decide whether if they should
invest in the business.
Question 5
State the nature of accounting information required by
long-term lenders.

5. Answer:
The long term lenders are the external users of the business
and thus they may require the financial information to look
into areas such as – liquidity, profitability and the stability of
the business. The financial information of the business helps
the external users to determine their various decisions such as
that of investment by the prospective investor or the decision
of lending loan to the business. Thus the nature of the
accounting information required by the external users requires
them to take the note of the prospects and the efficiency of the
business.
Question 6
Who are the external users of the information?
Answer:
The external users of information are considered to be those
who want to either directly or indirectly pertain the financial
results of the business. These do not have the direct access of
the information of the books of the accounts of the company.
And can view them only through accounts, notes and reports.
Thus the external users of the information are those external
users who want to derive the financial information of the

6. business in order to determine the prospects and efficiency of
the business.
Question 7
Enumerate information needs of the management.
Answer:
The management may need the information of the business
for its various needs such as: To prepare and formulate the
plans of the business in order to take the decisions such as
budgeting and forecasting. Planning areas like budgeting and
forecasting. Management needs information to know the
current growth and accordingly plan for the future.
- Decision making areas like outsource or manufacture,
invest or not, continue or discontinue a particular
product/sector.
- For all kinds of statutory compliances and filing
purposes.
- Areas of exercising control like cost and expenses areas,
error or fraud etc.
Question 8
Give any three examples of revenues.

7. Answer:
The three examples of the revenues are as following
- Income from rent – Income derived from the rent of the
land/building or any other property of the business.
- Income from the operation of sales: The income earned
by the business through its regular sales of the products
and services to the customers.
- Income from Investments: Income earned through
various investments in the form of interest or dividend.
Question 9
Distinguish between debtors and creditors; profit and
gain.
Answer:
A) Debtors and Creditors :
Debtors Creditors
Debtors are those people or
party to whom the sales are
made in credit.
Creditors are the people or
the party who supplies the
products or services of the
company in credit.

8. They have to compulsorily
pay the due amount to
obliged party or business.
They are the obliged
business or party who have
to receive the payments in
the stipulated time from
debtors.
They are considered to be
the assets of any business.
They are considered to be
the liabilities of any
business.
B)Profit and Gain :
Profit Gain
It is the amount earned
above the cost incurred by
the business.
It is the amount earned
from the appreciation in the
value of the asset.
Profit is earned from the
day-to-day activity of any
business which includes the
transaction of the sale of
the goods and services.
The gains are not earned
from the usual operations
of the business.
Thus in other words, the
day to day usual activities
These are thus referred to
the appreciated values of

9. of the business which
amounts to sales of the
goods and services after the
deduction of the cost of the
operation such as cost of
production and other
related expenses.
the assets held over a
period of time from which
the business benefits when
they are sold.
Question 10
„Accounting information should be comparable‟. Do you
agree with this statement? Give two reasons.
Answer:
Yes. I agree with the statement that ‘Accounting information
should be comparable’. Because
- It enables comparison of our own financial data for
various years. Hence, the growth and performance can be
studied. If any setbacks are found, they can be rectified
in future years.
- It enables inter-organisational comparison. The
performance of the organisation among its competitors

10. and the overall ranking of the organisation in the industry
can be understood.
Question 11
If the accounting information is not clearly presented,
which of the qualitative characteristic of the accounting
information is violated?
Answer:
One of the main objectives of the accounting is to provide the
needed information to the various users of financial
statements from time to time. Thus, if the accounting
information is not clearly presented, it loses its essential
characteristic feature. Hence if the users of the financial
statements are not provided with the required information it
loses its vital important characteristic feature of giving the
clear picture of the performance of the organization. Hence
this may amount the users to derive the false interpretation
and understanding of the organization’s performance.
Question 12
“The role of accounting has changed over the period of
time”- Do you agree? Explain.
Answer:

11. Yes I believe that the role of accounting has changed over the
period of the time. In the initial days, accounting was believed
to be an art whose function was to record, classify and
compile the transactions of the financial transactions of the
business. Later, the function of identifying, analyse and
communicating of the financial information to the financial
users of the business. Now the contemporary functions of the
accounting is conferred with the responsibility of providing
the various reports and information to meet the need of each
user Hence accounting is considered to be as science as well
as art in the current period.
Question 13
Give examples of each by explaining the following
accounting terms:
 Fixed assets
 Revenue
 Expenses
 Short-term liability
 Capital
Answer:

12. Fixed Assets: Fixed Assets are referred to as those assets
which are held for the purpose of selling and manufacturing
goods. These are thus usually held for long duration and are
not meant for the purpose of resale.
Example of fixed assets include: Land, Plant and Machinery,
Computers, Buildings etc.
Revenue: Revenue is referred to as the amount earned by any
organisation in its routine course of business. The revenue is
thus incurred by the selling of goods or providing of services
to the customers of the business.
Example of revenue include: Sales, Dividends, Interest,
Commission etc.
Expenses: Expense is any amount which is spent in the
selling and manufacturing of the product by the business.
Example of expenses include: Wages, Electricity, Rent,
Marketing etc.
Short term liability: All those liabilities which are to be
repaid within a year by the business are termed as short-term
liability.
Example of short term liability include: Bank Overdraft,
Sundry Creditors etc.

13. Capital: Capital is referred to as the amount which is invested
by the owner of the business. Any business has the liability to
repay the invested amount back to the owner and hence the
capital is recorded in the liability section of the balance sheet.
Capital can be brought into the business in the form of assets
or cash.
Question 14
Define revenues and expenses?
Answer:
Revenue: Revenue is referred to as the amount earned by any
organisation in the normal course of the business. Hence these
are derived by the routine operation of selling goods and
services to the customers of the business. Example: Sales,
Commission, Dividends, Interest, Rent etc.
Expenses: Expenses are the amounts which are spent in order
to manufacturing or produce the sales of the products or the
services. They are hence necessary to be incurred in order to
achieve revenues.
Example: Wages, Electricity, Rent, Advertising, Maintenance,
Marketing etc.

14. Question 15
What is the primary reason for the business students and
others to familiarise themselves with the accounting
discipline?
Answer:
It is necessary for the students of the business to familiarise
themselves with the discipline of accounting in order to have
the basic understanding and the knowledge of the business
and its related aspects. The success and the growth of any
business organization lie upon the efficiency of its workforce.
The students of the business will be serving the discipline of
business in the future and hence they are required to have the
required understanding of the business so that they will be
able to serve the interest of the business in a positive manner.
Question 16
What is accounting? Define its objectives.
Answer:
In simple terms, accounting can be defined as the process of
recording the numerical transactions of the business. It is the
art of recording, classifying, measuring, compiling, analysing
and interpreting the financial information in order for them to
be communicated to the users of the financial information.

15. The most important objectives of financial accounting are as
follows:
1. To systematically record the transactions of the business-
The first and foremost important objective of the
accounting is to record each and every transaction of the
business in accordance with the standard accounting
principles.
2. To calculate or compute the profit or loss: It is important
for the users of the information to have the knowledge of
its operating results. Accounting thus makes it suitable
for the users to determine the profit or the loss incurred
by it as the result of its operations.
3. To have the knowledge and the understanding of the
financial position: Accounting can help the users to
determine the financial position of the organization by
disclosing the information of assets and liabilities of any
organisation. The Statement of Affairs is thus useful to
determine the net worth of any business organization to
the users.
4. To produce and furnish the required reports: Accounting
produces and furnishes various reports to its users such
as the reports on Loans Payable, reports on debtors,

16. reports for budgeting and analysis etc. This can thus
hence be only done when the business follows a proper
method of accounting.
5. To exercise control over the business: With each
transactions being recorded at one and the other verified
level, the chances for the business for the errors and
frauds is reduced and hence the business has an
opportunity of controlling the matters in the suitable
manner.
6. To analyse, interpret and communicate the financial
results to the various stake holders and the users of the
financial information.
Question 17
Explain the factors which necessitated systematic
accounting.
Answer:
The factors which necessitate the business to systematically
pursue accounting are as follows:
1. Only fiscal events are recorded: Transactions which
involve money is recorded. Not all the events occurring
in an enterprise how much ever important they may be

17. can be accounted for in books. For example – A
marketing manager’s salary can be recorded, his sales
can be recorded but his communication skills cannot be
recorded anywhere in the books.
2. A uniform unit of measurement is used: The uniform unit
that is used all over the accounting is money. i.e. Each
transaction is measured in monetary terms. For example
20 computers worth 8,00,000, 2 acre land worth 1 crore,
3 floor office premise worth 30 lakhs etc. are all shown
as one unit i.e. rupees.
3. Way of book keeping – Each transaction as per order of
date of occurrence is recorded.
4. Grouping of transaction under ledgers - Different
transaction pertaining to a particular asset/ account is
posted under that particular asset/ account. For example
– All the transactions pertaining to furniture will find
place in the furniture account.
5. Compiling of ledgers – All the ledgers are compiled in
Trial Balance and from there it is posted to Trading and
Profit and loss account and Balance sheet.
6. Analysing and interpreting financial data – The objective
of accounting is to enable users to analyse and interpret
financial data as per their requirements. Systematic
accounting facilitates this. The financial data so obtained
is presented in different forms which easily communicate
the result to the users.
Question 18
Describe the information needs of external users.
Answer:

18. The external users of the business have the direct or the
indirect interest towards the financial performance of the
company to meet their varied needs and requirements. For
instance a creditor may require the need of financial
information in order to make his/her decision to provide the
business with credit or the compliance authority may require
them in order to asses if the company or the business is
conducting its activities in an ethical manner.
The importance of the need of the financial information for
the external users can be further derived from the fact that the
external users of the business do not have the direct access of
the books of accounts. Hence the only option available to
them to is to have access to the published annual reports and
notes.
The various external users and their need of information is
mentioned below:
Creditors – The creditors or the suppliers have the interest in
the financial report of the business in order to ascertain the
profitability and the prospects of the business.
Lenders – The lender of the money such as banks and others
are interested in knowing the liquidity, stability and the

19. profitability of the business in order to know whether the
amount invested by them will be recovered back positively.
They hence are interested in having the knowledge of the
varied factors such as current and non-current assets, short-
term and long-term liabilities.
Government/ tax authorities – The government and the tax
authorities might be interested in the information of the
financial related aspects of the business because they may
need to find out the ethical compliances of the business.
General public – General public are inclined to ascertain the
financial position of the business in order for them to make
the investments. They are the prospective investors. They
would want to know the performance and growth
opportunities of the business. Also they are keen in knowing
the return or payout made to the existing share holders.
Competitors – They want to know the strengths of the rival
and to compare their performance against the rival firm.
Question 19
What do you mean by an asset and what are different
types of assets?

20. Answer:
Asset is considered to be anything which has a monetary
value and which is owned and controlled by the company for
the purpose of the production of the goods and services which
generates the revenue for the company.
Types of Asset:
Assets are classified based on Physical existence and
Convertibility period.
Based on Physical existence: On the basis of the physical
existence the assets can be classified as the tangible and the
intangible assets.
Tangible assets: The tangible assets are considered to be
those which have a physical existence. In other words, this
can be seen and touched. Example: building, land, cash,
securities.
Intangible assets: The intangible assets are considered to be
those which cannot be physically touched or seen . They do
not have a physical form. Example: goodwill, patent,
franchise etc.

21. Based on Convertibility: On the basis of the convertibility of
the assets, they can be classified as the current and the non-
current assets.
Current assets: The current assets are those assets which can
be very easily converted into cash. They are also called as the
liquid assets. Example: Marketable securities, inventory,
debtors etc.
Noncurrent assets: The non-current assets are those assets
which can not be easily converted into cash as they are fixed
in nature. Their conversion to cash involves the significant
process and procedures which is time consuming. Example:
Building, Plant & Machinery, Land etc.
Question 20
Explain the meaning of gain and profit. Distinguish
between these two terms.
Answer:
Gain Profit
Gains are referred to as
the amount which is
earned from the
Profits are considered to b
the amount which is
earned above the cost.

22. appreciation in the
value of the asset.
Gains are not in the
usual practice of the
business operation.
Profits are earned from the
the day-to-day activity of
the business such as the
transaction of sales.
Gains are made when
the assets are held by
the organisation over a
period of time which
causes the appreciation
in the value.
Profits are made from the
day to day usual routine
activities of the business
after when the deduction
from the cost incurred in
doing so is done.
Question 21
Explain the qualitative characteristics of accounting
information.
Answer:
Accounting information has 4 most important qualitative
characteristics. They are
Reliable - Financial data are the basis for each decision in a
business organisation. Such financial data prepared and

23. presented must be true and trustworthy. Otherwise the very
purpose of presenting it to various users gets defeated. Each
transaction is recorded with supporting documents from the
stage of journal entry. Hence, every transaction is reliable and
must be verified.
Comparable – Financial data must enable comparison to know
the growth of the organisation over the years and also growth
against its competitors. This comparability will help in
knowing the result of new policies or practices initiated.
Relevant – Financial data presented must be relevant for the
users in order to take the needed appropriate decisions.
Unwanted information should be avoided as it leads to
confusion. Facts and data which are relevant to the user in
making their decision alone should be given.
Understandable – The financial data thus produced should be
represented in the manner which is understandable to the
general user without any complexities and difficulties.
Question 22
Describe the role of accounting in the modern world.
Answer:
The role of Accounting has changed over the period of time.

24. In the beginning, accounting was considered as an art. It
required the function of the accounting merely to record,
classify and compiling the transaction made by the business.
Later this function became more dynamic which included the
function so of the accounting to identify, analyse and
communicate the information to the users of the financial
data.
Now, the function of the accounting has reached at the all
time high in terms of the vibrancy where it is considered to be
science. Accounting is thus now has the ability to provide the
customised reports to the users of the financial information to
meet their varying needs.
The role of accounting in the modern world thus encompass
of the following:
 Management guide: The accounting information is used
to produce varied information and reports dealing with
the aspects such as budgeting which allows the
management to take various decisions at various point of
time.
 Relative study: The accounting information enables the
management to make comparison at the both inter-firm
and intra-firm levels. The management makes the

25. relative studies of the financial information of current
year with the previous year as well as that of one
organization from the others.
 Backup: The Accounting data can play the function of
providing backup to the top the management as the
transactions from the initial date are recorded in the
books of accounts which can be referred as needed to
assess the information of the given date. Hence the
accounting information can act as a proxy to the human
memory.
 End user information: The field of accounting has
evolved and developed over the years where its function
does not merely includes the function of the accounting
to record, but to also interpret and communicate the
information. Thus the users of the financial information
can use the information and the data as per their
requirement.
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