Question

Question 01: Elucidate upon the various Accounting Concepts and Conventions. (200 words)

Question 02: Discuss in brief the various qualitative characteristics of the financial statements. (200 words)

Question 03: Explain Accounting Equation. Discuss also the concept of extended accounting equation. (200 words)

Question 04: Define Accounting. What are the various function performed by accounting explain with suitable examples? (200 words)

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Note: Plagiarism is strictly prohibited

Answer 1

Answer 1.

Accounting Concepts and Conventions exist to serve the basic objective of accounting, i.e, to present a true and fair picture of the books of accounts of any business. While accounting concepts are the basic rules or assumptions that act as a basis for recording accounting transactions of a business, accounting conventions are the generally followed practices or methods used in accounting that are universally accepted. Various accounting concepts and conventions are described below:

Accounting Concepts :

1. Business entity concept: This concept states that from financial point of view, business and owners are two separate entities. Therefore, the amount invested by owner is treated as capital of business, amount withdrawn is treated as drawings.
2. Money measurement concept: This concept states that only those business transactions to be recorded in books of accounts which can be measured in terms of money. Non-financial events do not find a place in books of accounts of a firm.
3. Dual aspect concept : It states that every transaction has two effects. A debit will have a corresponding credit. Both these aspects to be recorded in accounting. For e.g. if purchases made in cash, purchases is debited and cash credited.
4. Going concern concept : This concept assumes that the business will go on indefinitely. This is necessary for recording long-term assets and long-term liabilities.
5. Cost concept : It states that the fixed assets of a business are recorded on their original cost less depreciation. Changes in market values should not be taken into account.
6. Accounting year concept : This concept breaks the entire life of the business into accounting periods, usually a year, calendar year or financial year. At the end of each accounting period, business financials are evaluated for the period in question.
7. Matching concept : This concept states that for each revenue recorded in an accounting period, the matching expense entry has to be correctly recorded for calculating profit or loss in that period.
8. Realisation concept: As per this concept, revenue or profit is recognized only when it is earned. Advance receipts should not be considered as revenues until product or service is delivered in the future.

Accounting Conventions :

1. Conservatism: According to this convention, business should always have a conservative approach, i.e., when two values of a transaction are available, the lower value should always be recorded. As caution, business should never over-estimate profits and should always reserve provision for losses.
2. Consistency: This convention states that accounting policies and procedures should remain consistent from one accounting period to other, unless dire need arises to change for the betterment of accounting procedures. This is necessary for comparison of accounts from one accounting period to other.
3. Materiality: This convention states that all material financial information of a business should be recorded in the books of accounts. Insignificant data should not be recorded in the books of accounts. Material financial information such as contingent liabilities which cannot be quantified as of now should also be disclosed in footnotes.
4. Full disclosure: This convention states that all relevant financial information of a business to all its stakeholders, whether good or bad, must be disclosed in books of accounts and any material information must not be hidden.

Answer 2.

Financial statements are prepared for the purpose of presenting a true and fair view of the business to its various stakeholders. For this purpose, they must be prepared with utmost care to ensure that they are of use to the stakeholders and convey the information sought.

The qualitative characteristics of financial statements include:

1. Understandability: As stated above, financial statements are prepared for use by various stakeholders. So it is important that they are prepared in such a manner that they are easily understood by the users of financial statements. They must be clear and prepared following all statutory rules, necessary disclosures, explanatory notes must be provided wherever necessary.
2. Relevance: The information provided in the financial statements must be of relevance to its users, i.e., shareholders, management, creditors, institutional lenders, statutory auditors. They should meet the “information needs” of all these stakeholders.
3. Reliability: The data presented in the financial statements must be reliable. Accountants should always record transactions with prudence, exercise due caution, and refrain from “window dressing” the accounts and must always attempt to provide a true and fair view of the business.
4. Comparability: The financial statements must be prepared in such a way that the financial results can be compared over various accounting periods. This is necessary for decision-making.
5. Timeliness: Needless to say, financial data is relevant only when available in a timely fashion. Financial statements must be prepared and presented within relevant span of time to be of use to stakeholders.

Answer 3.

The accounting equation basically describes that a business’ assets is equal to the sum of its liabilities and owner’s equity. The accounting equation is the basis of double-entry system, which states that every debit has a corresponding credit, such that the balance sheet of any business is always balance,i.e, assets side is equal to liabilities side.

Accounting equation is,

Assets = Liabilities + Owner’s equity

The assets side includes all the assets of a business, short-term, long-term, tangible, intangible. The liabilities side basically consists of two portions – external liabilities (loans from lenders, creditors, bills payables) + owner’s equity (since owner is considered as a separate entity from business, so amount invested by owner in a business is a liability for the business).

The accounting equation shows the amount of assets of a business and how much portion of it is financed by external liabilities and how much by owner’s equity.

The extended accounting equation further expands the owner’s equity portion. It goes as follows:

Assets = Liabilities + Owner’s capital + Revenues – Expenses – Owner’s drawings

The extended accounting equations helps understand the increase/decrease in owner’s equity by excess of revenues over expenses (profits) or excess of expenses over revenues (losses) and the increase/decrease in owner’s equity as a result of drawings or additional capital introduced.

Answer 4.

Accounting is the process of systematic recording, summarizing, analyzing and reporting of financial transactions of a business pertaining to an accounting period. Its basic function is to present economic data of a business to its stakeholders.

The main functions of accounting include:

1. Recording and journalizing of financial transactions of a business.
2. Classifying the transactions into separate relevant accounts in a ledger.
3. Preparation of summary of accounts in a trial balance.
4. Preparation of trading and profit and loss account for determination of profit/loss for an accounting period.
5. Preparation of balance sheet revealing the assets and liabilities position of the business.
6. Presenting of financial statements to various stakeholders of a business.
7. Aid in decision-making by management of a business.
8. Planning, forecasting and budgeting based on accounting records of previous periods.