Ans.

Q1) Accounting is the process of recording financial transactions pertaining to a

business. The accounting process includes summarizing, analyzing and reporting
these transactions to oversight agencies, regulators and tax collection entities. The
financial statements used in accounting are a concise summary of financial
transactions over an accounting period, summarizing a company's operations,
financial position and Cash flows. Hence the owners of Karagiri has realised correct
that it is essential to prepare books of accounts for users of accounting.
Users of Accounting.
Users of accounting information are internal and external.
Internal users of accounting information

Internal users are that individual who runs, manages and operates the daily activities
of the inside area of an organization.
So here are the internal users of account information.
1. Owners and Stockholders.
2. Directors,
3. Managers,
4. Officers.
5. Internal Departments.
6. Employees
7. Internal Auditor.
Managerial accounting identifies, measures, analyzes and communicates the
financial information needed by management to plan, control, and evaluates a
company’s operations for the internal users.

External users of accounting information

External users are those individuals who take interest in the account information of
an organization but they are not part of the organization’s administrative process.
External users have a direct or indirect interest in accounting information
These reports are important to the external users of accounting information.
Examples of external users of accounting information are;
 Creditors.
 Investors.
 Government.
 Trading partners.
 Regulatory agencies.
 International standardization agencies.
 Journalists.
Uses of accounting information.
Accounting provides companies with various pieces of information regarding
business operations. It is often conducted by a company's internal accounting
department and reviewed by a public accounting firm. Small businesses often have
significantly less financial information recorded during the accounting process.

However, business owners often review this financial information to determine how
well their business is operating. Accounting information can also provide insight on
growing or expanding current business operations.

Business Performance Management

A common use of accounting information is measuring the performance of various

business operations. While financial statements are the classic accounting
information tool used to assess business operations, business owners may conduct
a more thorough analysis of this information when reviewing business operations.
Financial ratios use the accounting information reported on financial statements
and break it down into leading indicators.These indicators can be compared to
other companies in the business environment or an industry standard. This helps
business owners understand how well their companies operate compared to other
established businesses.

Create Company Budgets

Business owners often use accounting information to create budgets for their
companies. Historical financial accounting information provides business owners
with a detailed analysis of how their companies have spent money on certain
business functions. Business owners often take this accounting information and
develop future budgets to ensure they have a financial road map for their
businesses. These budgets can also be adjusted based on current accounting
information to ensure a business owner does not restrict spending on critical
economic resources.

Making Business Decisions

Accounting information is commonly used to make business decisions. For

financial management, an income statement and accounting of expenses provides
an important overview of the business. Decisions may include expanding current
operations, using different economic resources, purchasing new equipment or
facilities, estimating future sales or reviewing new business opportunities.
Accounting information usually provides business owners information about the
cost of various resources or business operations. These costs can be compared to
the potential income of new opportunities during the financial analysis process.
This process helps business owners understand how current business operations
will be affected when expanding or growing their businesses. Opportunities with
low income potential and high costs are often rejected by business owners.

Informing Investment Decisions

External business stakeholders often use accounting information to make

investment decisions. Banks, lenders, venture capitalists or private investors often
review a company's accounting information to review its financial health and
operational profitability. This provides information about whether or not a small
business is a wise investment decision. Many small businesses need external
financing to start up or grow. The inability to provide outside lenders or investors
with accounting information can severely limit financing opportunities for a small
business.
 Ans.Q2) Balance sheet is one of the most important financial statments. To
understand a balance sheet better, Mr Kohli has take a look at the elements of the
balance sheet of Amul Industries. As the balance sheet shows all assets on top, and
then all liabilities and shareholder’s equity below the assets. This style of
presentation is called report form or vertical presentation. Alternatively, balance
sheet an also be presented in a horizontal formation in which the assets will be
shown on the left side, and liabilities and equity will be shown on the right hand side.
In a balance sheet, the total assets will always be equal to the sum of liabilities and
shareholder’s equity.
Asset Side of Balance Sheet

Assets are what the company owns, and this section of the balance sheet tells you
what kind of assets the company owns, and the value of those assets.
The assets can be broadly classified into current assets and property, plant and
equipment.

Current Assets

Current assets include cash, accounts receivable, marketable securities, inventory,

and prepaid expenses such as taxes and insurance. These are the assets that can
be converted into cash in the near future, usually less than one year.

1. Cash and Cash-equivalents – The first kind of current assets are the most liquid –
cash or cash equivalents. Next are marketable securities, which are short-term
investments that can easily be transitioned to cash.

1. Accounts receivable – This refers to money due to the company from sales to
customers.
2. Inventory – This is an investment that the company has made in the manufacture
and production of goods.
3. Prepaid expenses – These are expenses the company has paid ahead of time. This
could include rent, payment on leases, or other expenses paid ahead of time.

Property, Plant, and Equipment

1. Property, plant, and equipment – These include the land, building, machines,
equipment, and furniture, which are valued at the purchase price or original market
value, whichever is lower.
2. Depreciation – Depreciation is an important consideration for assets that fall in the
category of property, plants, and equipment. Depreciation means the apportionment
of the cost of these assets over their useful lives.  The accumulated depreciation is
the amount that has been recorded as depreciation expense since the date the asset
 was purchased. The balance in the accumulated depreciation account is deducted
from the original cost of the fixed assets.

Assets on a balance sheet can be shown in several ways:

 Total current assets – These are calculated by adding current assets: cash and
marketable securities, accounts receivable, inventory, and prepaid expenses.
 Land, building, and machines – By adding the cost of the land, building machines,
equipment, and furniture, you get the cost of property, plant, and equipment.
 Accumulated depreciation – The accumulated depreciation is subtracted from the
cost of property, plant, and equipment. This is the cost less depreciation to date.
 Total assets figure – The total current assets plus cost less depreciation equals
total assets.

The assets section of the balance sheet provides you with a big picture overview of
the financial health of the company. By understanding the balance sheet, you’ll
understand how much money the company has.

Liabilities Side of Balance Sheet

The liability side of the balance sheet tells you how much money the company owes.
Types of liabilities include:

Current Liabilities

 Accounts payable – These are the bills for which the company owes money to
vendors or suppliers. This includes operating expenses and inventory. The company
has bought these services on credit. The money is generally due within 30 to 60
days.
 Bank notes – These are money the company has borrowed from a commercial
lender, such as a bank. The money must be repaid to the bank within one year.
 Other current liabilities – These are short-term liabilities, usually accruals.
Companies always owe employee salaries, interest, and taxes. Unpaid expenses are
estimated and listed as accruals.
 Current portion of long-term debt – The current portion of long-term debt are the
current liabilities that were originally long-term debts when the company originally
borrowed the money. However, time has passed, and the amounts listed in the
section are due in less than a year.
 Total current liabilities – This is the sum of accounts payable, bank notes, other
current liabilities, and the current portion of long-term debt. The total current liabilities
are due within one year of the date of the balance sheet.

Long-term debt
 This refers to money the company borrowed that is a long-term loan. The loan
matures anywhere from just over a year to thirty years. There are a variety of ways
to fund this debt – debentures, mortgage bonds and convertible bonds. It can also
include tax liabilities.
 Stockholders’ equity
 This is the amount of money owners have invested in the business. It is divided into
preferred stock, common stock, and retained earnings. Stockholders receive
dividends when there is a profit, or they can reinvest earnings, which are called
retained earnings.
 These are the types of liabilities that are listed on the balance sheet. Understanding
these liabilities helps you see what kind of debt the company is carrying.
Ans.Q3a) As the income is earned but not received it is an outstanding or accrue
income.
Accrued profit has been obtained but is not yet receivable. By definition, mutual
funds or other pooled assets which accumulate income over some time but only
payout to shareholders once a year accrue their income. Personal companies can
also receive revenue without necessarily earning it, which is the basis for accrual
accounting.
I am entitled to received Rs. 500 on 5 th March 2019. As the income has been earned
but not received the dividend will be be shown as accrued dividend income in the
profit and loss account for the year ended March’2019 by debiting accrued dividend
account and crediting dividend account. And the accrued dividend account of Rs 500
will be shown as an asset in the balance sheet.
On the next year when I received then I debit the cash account with Rs 500 and
credit the Accrued dividend account by Rs. 500 and credit dividend account by
Rs.500.
Ans.Q3b) As the income has not been earned but it is received in advance it is
known as Income received in advance or unearned income.
If a business has already received a payment for a service, which it has not rendered
by the year-end, then such an income received in advance and should be
excluded from that year’s Profit & Loss Account. This adjustment resembles, in
principle, to prepaid expense adjustment.
On 5th March 2019, as Mehta brothers have received 100% advance of Rs 55000
which was supplied in the next month then the Mehta brothers will debit the cash
account with 55000 Rs. And credit the income received in advance with Rs.55000.As
we have received advance in current financial year and the goods will supply on next
financial it will increase the liability of Mehta brothers. So the income received in
advance of Rs 55000 will be shown in Liability side of balance sheet.
On the next year when, Mehta Brothers invoice the good then they debit the Account
receivable account of Rs.55000 and credit to revenue account with rs.55000. After
that it also pass the entry to clear the advance by debiting income received in
advance account of Rs.55000 and by crediting Account receivables account.