Accounting Short Question

Journalizing is the process of recording a business transaction in the accounting

records. This activity only applies to the double-entry bookkeeping system. The steps
involved in journalizing are as follows:

1. Examine each business transaction to determine the nature of the transaction. For
example, the receipt of a supplier invoice means that an obligation has been incurred.
Or, throwing out obsolete inventory means that the inventory asset will be reduced.
2. Determine which accounts will be affected. This calls for the identification of the
general ledger accounts that will be altered as a result of the transaction. For
example, recording a supplier invoice could mean that the office supplies expense
account will be increased, as well as the offsetting accounts payable account.
3. Prepare a journal entry. This involves not just entering the transaction in the
accounting system, but also documenting it sufficiently so that someone reviewing
the entry later will understand why it was created. Ideally, the entry should note the
impacted accounts, the debits and credits entered, a journal entry number, and a
narrative comment.

Journalizing in accounting is the system by which all business transactions are recorded
for your financial records. A business transaction is first recorded in a journal, also called
a Book of Original Entry. Your journal keeps a record of all your business transactions,
tracking them in chronological order, as they happen.

Adding new journal entries is called journalizing. The process of journalizing starts
whenever a business transaction occurs.

Q.2

Narration
A short explanation of each transaction is written under each entry which is called narration.
Narration is not required in ledger, whereas it is required in a Journal.
It is the brief explanation that provides the details of Journal entry and helps understand the
account debited or credited. Journal entries are posted to the ledger accounts.
Thus, narration is not necessary in ledger.

Q.3
What is the materiality principle?

The materiality principle expresses that a company may violate another accounting
principle if the amount in question is small enough that the financial statements will not
be misleading.

Accountant should record only those transactions which have significant impact on
financial statement insignificant information should be ignored.

Q.4

Realization Principle

The principle indicates that revenue should be recorded at that time when it is realized or
recognized or we can say that it is earned i.e. when goods are sold or services are
rendered.

Realization Principle

An accounting standard that recognizes revenue only when it is earned. Generally, realiza
tion occurs when goods are sold or a service is rendered.

Q.5

How does a financial analyst measure the Company Performance ?

A financial analyst will thoroughly examine a company's financial statements—

the income statement, balance sheet, and cash flow statement. Financial analysis can be
conducted in both corporate finance and investment finance settings.

For example, return on assets (ROA) is a common ratio used to determine how efficient a
company is at using its assets and as a measure of profitability.

Q.6

What Is the Accounting Cycle?

The accounting cycle is a collective process of identifying, analyzing, and recording the
accounting events of a company. It is a standard 8-step process that begins when a
transaction occurs and ends with its inclusion in the financial statements.

The key steps in the eight-step accounting cycle include recording journal entries, posting
to the general ledger, calculating trial balances, making adjusting entries, and creating
financial statements.

1- Transaction / voucher

2- General Journal

3- Ledger

4- Trial Balance

5- Adjustments

6- Adjusted Trial Balance

7- Financial Statements

8- Closing Entries

9- Post Closed Trial Balance

Q.7

How the Accounting Cycle Works

The accounting cycle is a methodical set of rules to ensure the accuracy and conformity
of financial statements. Computerized accounting systems and the uniform process of the
accounting cycle have helped to reduce mathematical errors. Today, most software fully
automates the accounting cycle, which results in less human effort and errors associated
with manual processing.

Q.8

Steps of the Accounting Cycle

There are eight steps to the accounting cycle.
 1. Identify Transactions: An organization begins its accounting cycle with the
identification of those transactions that comprise a bookkeeping event. This could
be a sale, refund, payment to a vendor, and so on.
2. Record Transactions in a Journal: Next come recording of transactions
using journal entries. The entries are based on the receipt of an invoice,
recognition of a sale, or completion of other economic events.
3. Posting: Once a transaction is recorded as a journal entry, it should post to an
account in the general ledger. The general ledger provides a breakdown of all
accounting activities by account.
4. Unadjusted Trial Balance: After the company posts journal entries to individual
general ledger accounts, an unadjusted trial balance is prepared. The trial
balance ensures that total debits equal the total credits in the financial records.
5. Worksheet: Analyzing a worksheet and identifying adjusting entries make up the
fifth step in the cycle. A worksheet is created and used to ensure that debits and
credits are equal. If there are discrepancies then adjustments will need to be made.
6. Adjusting Journal Entries: At the end of the period, adjusting entries are made.
These are the result of corrections made on the worksheet and the results from the
passage of time. For example, an adjusting entry may accrue interest revenue that
has been earned based on the passage of time.
7. Financial Statements: Upon the posting of adjusting entries, a company prepares
an adjusted trial balance followed by the actual formalized financial statements.
8. Closing the Books: An entity finalizes temporary accounts, revenues, and
expenses, at the end of the period using closing entries. These closing entries
include transfering net income into retained earnings. Finally, a company prepares
the post-closing trial balance to ensure debits and credits match and the cycle can
begin anew.

Q.9

Users of Financial Statements

The users of accounting information include: the owners and investors, management,
suppliers, lenders, employees, customers, the government, and the general public.
1. Owners and investors
Stockholders of corporations need financial information to help them make decisions on
what to do with their investments (shares of stock), i.e. hold, sell, or buy more.
Prospective investors need information to assess the company's potential for success and
profitability. In the same way, small business owners need financial information to
determine if the business is profitable and whether to continue, improve or drop it.
2. Management
In small businesses, management may include the owners. In huge organizations,
however, management is usually made up of hired professionals who are entrusted with
the responsibility of operating the business or a part of the business. They act as agents of
the owners.
The managers, whether owners or hired, regularly face economic decisions – How much
supplies will we purchase? Do we have enough cash? How much did we make last year?
Did we meet our targets? All those, and many other questions and business decisions,
require analysis of accounting information.
3. Lenders
Lenders of funds such as banks and other financial institutions are interested in the
company’s ability to pay liabilities upon maturity (solvency).
4. Trade creditors or suppliers
Like lenders, trade creditors or suppliers are interested in the company’s ability to pay
obligations when they become due. They are nonetheless especially interested in the
company's liquidity – its ability to pay short-term obligations.
5. Government
Governing bodies of the state, especially the tax authorities, are interested in an entity's
financial information for taxation and regulatory purposes. Taxes are computed based on
the results of operations and other tax bases. In general, the state would like to know how
much the taxpayer makes to determine the tax due thereon.
6. Employees
Employees are interested in the company’s profitability and stability. They are after the
ability of the company to pay salaries and provide employee benefits. They may also be
interested in its financial position and performance to assess company expansion
possibilities and career development opportunities.
7. Customers
When there is a long-term involvement or contract between the company and its
customers, the customers become interested in the company’s ability to continue its
existence and maintain stability of operations. This need is also heightened in cases
where the customers depend upon the entity.
For example, a distributor (reseller), the customer in this case, is dependent upon the
manufacturing company from which it purchases the items it resells.
8. General Public
Anyone outside the company such as researchers, students, analysts and others are
interested in the financial statements of a company for some valid reason.
Internal and External Users
The users may be classified into internal and external users.
Internal users refer to managers who use accounting information in making decisions
related to the company's operations.
External users, on the other hand, are not involved in the operations of the company but
hold some financial interest. The external users may be classified further into users
with direct financial interest – owners, investors, creditors; and users
with indirect financial interest – government, employees, customers and the others.

Q.10

The purpose of financial statements

The general purpose of the financial statements is to provide information about the
results of operations, financial position , and cash flows of an organization. This
information is used by the readers of financial statements to make decisions
regarding the allocation of resources. At a more refined level, there is a different
purpose associated with each of the financial statements. The income statement
informs the reader about the ability of a business to generate a profit. In addition, it
reveals the volume of sales, and the nature of the various types of expenses,
depending upon how expense information is aggregated. When reviewed over
multiple time periods, the income statement can also be used to analyze trends in the
results of company operations.

The purpose of the balance sheet is to inform the reader about the current status of
the business as of the date listed on the balance sheet. This information is used to
estimate the liquidity, funding, and debt position of an entity, and is the basis for a
number of liquidity ratios . Finally, the purpose of the statement of cash flows is to
show the nature of cash receipts and cash disbursements , by a variety of categories.
This information is of considerable use, since cash flows do not always match the
sales and expenses shown in the income statement.

As a group, the entire set of financial statements can also be assigned several
additional purposes, which are:
 Credit decisions. Lenders use the entire set of information in the financials to determine
whether they should extend credit to a business, or restrict the amount of credit already
extended.
 Investment decisions. Investors use the information to decide whether to invest, and the
price per share at which they want to invest. An acquirer uses the information to
develop a price at which to offer to buy a business.
 Taxation decisions. Government entities may tax a business based on its assets or
income, and can derive this information from the financials.
 Union bargaining decisions. A union can base its bargaining positions on the perceived
ability of a business to pay; this information can be gleaned from the financial
statements.

In addition, financial statements can be presented for individual subsidiaries or

business segments, to determine their results at a more refined level of detail.

Q.11

GAAP provide the general frame-work for determining what information is included
in financial statements and how this information is to be presented.

GAAP includes broad principles of measurement and presentation as well as detailed

rules that are used by professional accountant in preparing accounting information
and reports.

Q.12

Who Establish the GAAP?

Basically two organizations are particularly important in establishing general
accepted accounting principles.
1-The Financial Accounting Standards Board (FASB
2-The Securities and Exchange Commission (SEC)

Financial Accounting Standards Board (FASB):

FASB is a private organization. FASB is an independent rule making body,
consisting of seven members from the Accounting Profession, Industry, Government
and Accounting Education.
Securities and Exchange Commission (SEC):
SEC is a governmental agency with legal power to establish accounting principles
and financial reporting requirements for publicly owned corporations. SEC is rule
enforcing authority. SEC enforces compliance with generally accepted accounting
principles that are established primarily by the FASB.

Q.13

General Accepted Accounting Principles (GAAP):

GAAP consist of some basic concepts and conventions.

Concept:
Some basic assumptions and conditions upon which the accounting is based.

Convention:
It consist of some customs and traditions which help the accountant while preparing
the financial statements.

Business Entity Concept:

GAAP requires that a set of financial statements describe the affairs of a business
entity. For accounting purpose, the business entity is regarded as separate from the
personnel affairs of its owner. This principle states that accountant should record
business transactions separately from personal transactions of the owner.

This principle also states that business has separate legal entity from its owner. It can
sue and be sued with its own name. It can buy and sell with its own name.

Going Concern Concept:

Accounting information should be recorded with this assumption that the business
will run or exist for longer time to come. Accountant should record assets like land,
building with this assumption that the asset will use in business not for resale and it
remains in business for longer time to come.
Accounting Period Concept:
The life of the business is not definite or longer time to come. To know the financial
result of the business the life of the business is divided into small parts or segment
each part or segment is called Accounting Period. It may be shorter like one week or
longer like one year.

Cost Concept / Objectivity Principle:

This concept states that accountant should record assets in the books of accounts at
that price at which it is acquired or purchase.
Another reason for using cost rather than market value in accounting for assets is the
need for a definite, factual basis for valuation. Accountant use the term objective to
describe asset valuations that are factual and can be verified by independent experts.

Dual Aspect Concept:

This is a basic concept of accounting. Modern accounting system is based on dual
concept. Dual concept may be stated as “for every debit, there is a credit”. Every
transaction should have two sided effect to the extent of same amount.

Money Measurement Concept / Unit of Measure Concept:

Accounting records only those transactions which can be expressed in terms of
money. Transaction or events which cannot be expressed in money do not find place
in the books of accounts though they may be very useful for the business. The unit of
measure concept requires that economic data be recorded in dollars.

Realization Concept:
This principle indicates that revenue should be recorded at that time when it is
realized or recognized or we can say that it is earned i.e. when goods are sold or
services are rendered.

Matching Concept:
This principle indicates that expense should be offset against the revenue of the same
period (cause and effect). This concept emphasis that profit should be considered
only when realized.
 Conventions:
Consistency Principle:
Accountant should use same policies and methods year by year. This convention
means that accounting practices should remain unchanged from one period to
another.

Conservatism Principle:
This convention means a caution approach or policy of “play safe”. This convention
ensures that uncertainties and risks inherent in business transactions should be given
a proper consideration. If there is a possibility of loss, it should be taken into account
at the earliest. On the other hand, a prospect of profit should be ignored up to the
time it does not materialize.

Materiality Principle:
Accountant should record only those transactions which have significant impact on
financial statement insignificant information should be ignored.

Convention of Disclosure:
Accountant should disclose each and every information while preparing the financial
statements.

Systems of Accounting:

Cash System of Accounting:

It is a system of Accounting in which entries are made only when cash is received or
paid. No entry is made when a payment or receipt is merely due.

Accrual System of Accounting:

It is a system of Accounting in which accounting entries are made on the basis of

amount having become due for payment or receipt.
Q.14

Q.15

Q.16

Q.17

Q.18

Q.19

Q.20