what is accounting and its objectives @2

Accounting is a process of identifying the events of

financial nature, recording them in the journal, classifying
in their respective accounts and summarising them in
profit and loss account and balance sheet and
communicating results to users of such information, viz.
owner, government, creditor, investors, etc.

According to American Institute of Certified Accountants,

1941, “Accounting is the art of recording, classifying and
summarising in a significant manner and in terms of
money, transactions and events that are, in part at least,
of financial character and interpreting the results
thereof.”
In 1970, American Institute of Certified Public
Accountants changed the definition and stated, “The
function of accounting is to provide quantitative
information, primarily financial in nature, about economic
entities, that is intended to be useful in making economic
decisions.”

Objectives of Accounting:

Recording business transactions systematically−

It is necessary to maintain systematic records of every
business transaction, as it is beyond human capacities to
remember such large number of transactions. Skipping
the record of any one of the transactions may lead to
erroneous and faulty results.

Determining profit earned or loss incurred− In order to

determine the net result at the end of an accounting
period, we need to calculate profit or loss. For this
purpose trading and profit and loss account are
prepared. It gives information regarding how much of
goods have been purchased and sold, expenses incurred
and amount earned during a year.

Ascertaining financial position of the firm− Ascertaining

profit earned or loss incurred is not enough; proprietor
also interested in knowing the financial position of his/her
firm, i.e. the value of the assets, amount of liabilities
owed, net increase or decrease in his/her capital. This
purpose is served by preparing the balance sheet that
facilitates in ascertaining the true financial position of the
business.

Assisting management− Systematic accounting helps the

management in effective decision making, efficient
control on cash management policies, preparing budget
and forecasting, etc.

Assessing the progress of the business− Accounting

helps in assessing the progress of business from year to
year, as accounting facilitates the comparison both inter-
firm as well as intra-firm.

Detecting and preventing frauds and errors− It is

necessary to detect and prevent fraud and errors,
mismanagement and wastage of the finance. Systematic
recording helps in the easy detection and rectification of
frauds, errors and inefficiencies, if any.

Communicating accounting information to various users−

The important step in the accounting process is to
communicate financial and accounting information to
various users including both internal and external users
like owners, management, government, labour, tax
authorities, etc. This assists the users to understand and
interpret the accounting data in a meaningful and
appropriate manner without any ambiguity.

2.Accounting Concepts vs. Conventions: What's the Difference?

Accounting concepts and accounting conventions form the basis

for recording financial transactions and performing duties related
to the firm. When working as an accountant, it's important to
understand accounting concepts and conventions to ensure that
you follow all necessary procedures and that all accounting
information is consistent and accurate. Knowing what each term
means and the difference between the two can help you improve
your abilities as an accountant.

Accounting concepts are the fundamental accounting assumptions

that act as a foundation for recording business transactions and
preparation of final accounts. Accounting concepts refers to the
rules of accounting which are to be followed, while recording
business transactions and preparing final accounts.

These concepts provide an integrated structure and rational

approach to the accounting process. Every financial transaction
that occurs is interpreted taking into consideration the accounting
concepts, which guides the accounting methods.

Business Entity Concept: The concept assumes that the business

enterprise is independent of its owners.
Money Measurement Concept: As per this concept, only those
transaction which can be expressed in monetary terms are
recorded in the books of accounts.

Cost concept: This concept holds that all the assets of the
enterprise are recorded in the accounts at their purchase price

Going Concern Concept: The concept assumes that the business

will have a perpetual succession, i.e. it will continue its operations
for an indefinite period.

Dual Aspect Concept: It is the primary rule of accounting, which

states that every transaction effects two accounts.

Realisation Concept: As per this concept, revenue should be

recorded by the firm only when it is realized.

Accrual Concept: The concept states that revenue is to be

recognized when they become receivable, while expenses should
be recognized when they become due for payment.

Periodicity Concept: The concept says that financial statement

should be prepared for every period, i.e. at the end of the financial
year.

Matching Concept: The concept holds that, the revenue for the
period, should match the expenses.

Accounting Conventions, as the name suggest are the practice

adopted by an enterprise over a period of time, that rely on the
general agreement between the accounting bodies and helps in
assisting the accountant at the time of preparation of financial
statement of the company.

For the purpose of improving quality of financial information, the

accountancy bodies of the world may modify or change any
accounting convention. Given below are the basic accounting
conventions:

Consistency: Financial statements can be compared only when the

accounting policies are followed consistently by the firm over the
period. However, changes can be made only in special
circumstances.

Disclosure: This principle state that the financial statement should

be prepared in such a way that it fairly discloses all the material
information to the users, so as to help them in taking a rational
decision.

Conservatism: This convention states that the firm should not

anticipate incomes and gains, but provide for all expenses and
losses.

Materiality: This concept is an exception to the full disclosure

convention which states that only those items to be disclosed in the
financial statement which has a significant economic effect.

Key Differences Between Accounting Concept and Convention

The difference between accounting concept and convention are

presented in the points given below:

Accounting concept is defined as the accounting assumptions which the

accountant of a firm follows while recording business transactions and
preparing final accounts. Conversely, accounting conventions imply
procedures and principles that are generally accepted by the accounting
bodies and adopted by the firm to guide at the time of preparing the financial
statement.

Accounting concept is nothing but a theoretical notion that is applied while

preparing financial statements. On the contrary, accounting conventions are
the methods and procedure which are followed to give a true and fair view of
the financial statement.

While accounting concept is set by the accounting bodies, accounting

conventions emerge out of common accounting practices, which are
accepted by general agreement.

The accounting concept is basically related to the recording of transactions

and maintenance of accounts. As against, the accounting conventions focus
on the preparation and presentation of financial statements.

There is no possibility of biases or personal judgement in the adoption of

accounting concept, whereas the possibility of biases is high in case of
accounting conventions.
Meaning and Features of Branch and Branch Accounting @3

Branch and Its features

A branch is a separate segment of a business. In order to increase the sales,

business houses are requires to market their products over a larger territory and
may generally split their business into certain divisions or parts. These various
parts or divisions may be located in different part of the same city or in different
cities of the same country or in different countries in the world. These are known
as branches. The head office controls the activities of various branches.

Features of Branch:
a) All branches are controlled by a central office known as head office.
b) A branch does not have a separate legal entity distinct from the head office.
c) Capital in branch is invested by the head office for acquisition of various
assets.
d) Managing director /Authorised person to operate a branch and maintenance
of branch accounts are normally appointed by head office.
e) Branch may dependent, independent or foreign branch.

Branch accounting and its features

Branch accounting is the process through which the accounting system of a

branch is maintained. Branch accounting system is different for dependent,
independent and foreign branch.

Features of Branch Accounting:

a) Dependent branch do not maintain complete set of accounts. Accounts of
dependent branch are maintained by head office. (Dependent branches are those
which do not maintain separate books of account and wholly depend on Head
Office.)
b) Branch account is nominal in nature and it is normally prepared to find profit
or loss of each branch.
c) If goods are sent at invoice price to the branch, the profit included in the
amount of goods sent is eliminated while preparing branch account.
d) Independent branch keeps full system of accounting at its place.
e) Reconciliation of accounts of independent branch and foreign branch are
made before finalizing the accounts of head office.
Purpose or Objectives of Branch accounting ( )
The main objectives and purpose of Branch accounting system are listed below:
a) To ascertain the profit or loss of each branch separately.
b) To ascertain financial position of each branch on a particular date.
c) To evaluate the progress and performance of each branch.
d) To have comparison of the results of a particular branch with previous year
and also with the other branch of the same concern.
e) To differentiate between profit making and loss making branch so that
necessary steps can be taken to improve the performance of loss making
branches.
f) To help the proprietor in formulating policy to expand the business on proper
lines so as to optimize the profits of the concern.
g) To allow branch managers’ commission on the basis of the profits of their
branches; and
h) To generate information, which may be helpful for planning, control, and
evolution of performance of each branch and for taking various managerial
decisions.
i) To meet the requirements of specific enactments as all branches of
company must keep the accounts for audit purposes.

Advantages and Disadvantages of Branch Accounting ( )

Importance and Advantages of Branch Accounting are listed below:
a) Profit or loss of each branch can be found out.
b) They help in controlling branches.
c) Actual financial position of the business can be found out on the basis of
head office and branch accounts.
d) Commission payable to the manager of branch can be ascertained with the
help of branch.
e) Branch requirements of goods and cash can be estimated with the help of
branch accounting.
f) Evaluation of progress and performance of each branch can be done with
the help of branch accounting.
g) Inter branch and intra branch comparison can be done to assess the
performance of each branch.
h) Suggestions for increasing the efficiency of the branch can be sent on the
basis of branch accounts.
i) They help in complying with the requirements of law because accounts are
maintained as per the requirement of Company’s act 2013.

Disadvantages / Problems and limitations of Branch Accounting:

a) In case of foreign branch, conversion of foreign currency into domestic
currency cannot be properly done due to regular fluctuations in exchange rate.
b) There are certain expenses which are incurred for the organisation as a whole
but cannot be attributable to the branches.
c) Separate Accounts for each branch are maintained which increases the
accounting charges.

What is trial balance and what are the errors that do not affect trial
balance? @2
A trial balance is a bookkeeping worksheet in which the balances of all ledgers are
compiled into debit and credit account column totals that are equal. A company
prepares a trial balance periodically, usually at the end of every reporting period.
The general purpose of producing a trial balance is to ensure that the entries in a
company’s bookkeeping system are mathematically correct.

A trial balance is so called because it provides a test of a fundamental aspect of a

set of books, but is not a full audit of them. A trial balance is often the first step in
an audit procedure, because it allows auditors to make sure there are no
mathematical errors in the bookkeeping system before moving on to more complex
and detailed analyses.

Trial balance is prepared when transactions posted into the accounts are balanced
up. The trial balance is then prepared to check the accuracy of those posted
transaction. It is normal sometimes that some errors may be apparent but despite
this, they may not affect the trial balance. It is very important for any accounting
officer to note that these may occur in one way or another.

Different types of errors which don t affect the trial balance:

Error of omission:

Where in the full transaction is omitted from the books of accounts.

Error of commission:

Where we have entered the correct amounts but in wrong person s

account.

Error of principle:

This type of error takes place when an item is entered in wrong head or
class of accounts.

Error of compensation:

Are that errors which cancel the effects of each other.

Error of complete reversal of entries:

These errors occur when we debit and credit the two or more
aspects of a transaction wrongly using correct figures or amounts.

Error of original entry:

Entering wrong original figure or amount in an accounts.

The key difference between a trial balance and a balance sheet is one of scope. A
balance sheet records not only the closing balances of accounts within a company
but also the assets, liabilities, and equity of the company. It is usually released to
the public, rather than just being used internally, and requires the signature of an
auditor to be regarded as trustworthy.

A trial balance is a less formal document. There are no special conventions about
how trial balances should be prepared, and they may be completed as often as a
company needs them. A trial balance is often used as a tool to keep track of a
company’s finances throughout the year, whereas a balance sheet is a legal
statement of the financial position of a company at the end of a financial year.

what is trading and profit and loss account and its

procedure @2
A business needs to prepare a trading and profit and loss account first before
moving on to the balance sheet. Trading and profit and loss accounts are useful in
identifying the gross profit and net profits that a business earns.
The motive of preparing trading and profit and loss account is to determine the
revenue earned or the losses incurred during the accounting period.

The trading and profit and loss account are two different accounts that are formed
within the general ledger. The two parts of the account are:
1. Trading Account
2. Profit and Loss Account

Trading account is the first part of this account, and it is used to determine the
gross profit that is earned by the business while the profit and loss account is the
second part of the account, which is used to determine the net profit of the
business.

1. Trading Account
Trading account is used to determine the gross profit or gross loss of a business
which results from trading activities. Trading activities are mostly related to the
buying and selling activities involved in a business. Trading account is useful for
businesses that are dealing in the trading business. This account helps them to
easily determine the overall gross profit or gross loss of the business. The amount
thus determined is an indicator of the efficiency of the business in buying and
selling.

2. Profit and Loss Account

Profit and loss account shows the net profit and net loss of the business for the
accounting period. This account is prepared in order to determine the net profit or
net loss that occurs during an accounting period for a business concern.
Profit and loss account get initiated by entering the gross loss on the debit side or
gross profit on the credit side. This value is obtained from the balance which is
carried down from the Trading account.

A business will incur many other expenses in addition to the direct expenses.
These expenses are deducted from the profit or are added to gross loss and the
resulting value thus obtained will be net profit or net loss.

The examples of expenses that can be included in a Profit and Loss Account are:
1. Sales Tax
2. Maintenance
3. Depreciation
4. Administrative Expense
5. Selling and Distribution Expense
6. Provisions
7. Freight and carriage on sales
8. Wages and Salaries
These appear in the debit side of Profit and Loss Account while Commission
received, Discount received, profit obtained on sale of assets appear on the credit
side.
What is the purpose of trading profit and loss account?
Trading and profit and loss accounts are useful in identifying the gross profit and
net profits that a business earns. The motive of preparing a trading and profit and
loss account is to determine the revenue earned or the losses incurred during the
accounting period.
How do you calculate gross profit in a trading account?
Gross profit in a trading account can be calculated by subtracting the cost of
goods sold from the net sales.
Gross profit = Net Sales – Cost of goods sold.
What is another name given to a trading profit and loss account?
Another name given to a trading profit and loss account is the income statement.
How do you calculate the profit or loss?
To determine accounting profit and loss perform the following steps
. Add all the income earned during the accounting period.
. Add all the expenses incurred during the accounting period.
. Calculate the difference by subtracting total expenses from total income
. If the value is positive then it is profit, if negative it is loss.

What are assets, capital and liabilities?

Assets are the economic resources belonging to a business. Assets could be

money in a cash register or bank account, or items such as property, fixtures and
furniture, equipment, motor vehicles, and stock or goods for resale. An important
asset in businesses which sell goods or services on credit is money owed to the
enterprise by customers. This asset is known as debtors.

Capital is the value of the investment in the business by the owner(s). It is that
part of the business that belongs to the owner; hence it is often described as the
owner’s interest.

Liabilities are the debts owed by the firm. The main types of liabilities are
creditors (money owed by the business to suppliers of goods and services), bank
overdrafts and bank loans.

What is Hire Purchase and its features?

Meaning:
Hire purchase is a method of financing of the fixed asset to be purchased on
future date. Under this method of financing, the purchase price is paid in
installments. Ownership of the asset is transferred after the payment of the last
installment.

The main features of hire purchase finance are:

● The hire purchaser becomes the owner of the asset after paying
the last installment.
● Every installment is treated as hire charge for using the asset.
● Hire purchaser can use the asset right after making the
agreement with the hire vendor.
● The hire vendor has the right to repossess the asset in case of
difficulties in obtaining the payment of installment.
● Rental payments are paid in installments over the period of the
agreement.
● Each rental payment is considered as a charge for hiring the
asset. This means that, if the hirer defaults on any payment, the seller
has all the rights to take back the assets.
● All the required terms and conditions between both the parties
involved are documented in a contract called Hire-Purchase agreement.
● The frequency of the installments may be annual, half-yearly,
quarterly, monthly, etc. according to the terms of the agreement.
Assets are instantly delivered to the hirer as soon as the agreement is
signed.
● If the hirer uses the option to purchase, the assets are passed
to him after the last installment is paid.
● If the hirer does not want to own the asset, he can return the
assets any time and is not required to pay any installment that falls due
after the return.
● However, once the hirer returns the assets, he cannot claim
back any payments already paid as they are the charges towards the hire
and use of the assets.
● The hirer cannot pledge, sell or mortgage the assets as he is
not the owner of the assets till the last payment is made.
● The hirer, usually, pays a certain amount as an initial deposit /
down payment while signing the agreement.
● Generally, the hirer can terminate the hire purchase agreement
any time before the ownership rights pass to him.

Advantages of Hire Purchase:

Hire purchase as a source of finance has the following advantages:
● Financing of an asset through hire purchase is very easy.
● Hire purchaser becomes the owner of the asset in future.
● Hire purchaser gets the benefit of depreciation on asset hired
 ●

by him/her.
● Hire purchasers also enjoy the tax benefit on the interest
payable by them.
● Immediate use of assets without paying the entire amount.
● Expensive assets can be utilized as the payment is spread over
a period of time.
● Fixed rental payments make budgeting easier as all the
expenditures are known in advance.
● Easy accessibility as it is a secured financing.
● No need to worry about the asset depreciating quickly in value
as there is no obligation to buy the asset.

Disadvantages of Hire Purchase:

Hire purchase financing suffers from following disadvantages:
● Ownership of asset is transferred only after the payment of the
last installment.
● The magnitude of funds involved in hire purchase are very small
and only small types of assets like office equipment’s, automobiles, etc.,
are purchased through it.
● The cost of financing through hire purchase is very high.
● The addition of any covenants increases the cost.
● If the hired asset is no longer needed because of any change in
the business strategy, there may be a resulting penalty.
● Total amount paid towards the asset could be much higher than
the cost of the asset due to substantially high-interest rates.

Term Used in Hire Purchase agreement;

● Hire Purchaser: He is buyer in hire purchase agreement.
● Hire Vendor: He is seller in a hire purchase agreement.
● Cash Price: It is the amount to be paid for outright purchase in
cash.
● Down Payment: It is the of initial payment payable by the hire
purchaser at the time of entering into a hire purchase agreement.
● Hire Purchase Price: It is the total amount payable by the hire
purchasers to the hire vendor of goods are purchased under the hire
purchase system.
What Is a Balance Sheet?
The term balance sheet refers to a financial statement that reports a company's
assets, liabilities, and shareholder equity at a specific point in time. Balance sheets
provide the basis for computing rates of return for investors and evaluating a
company's capital structure.

In short, the balance sheet is a financial statement that provides a snapshot of

what a company owns and owes, as well as the amount invested by shareholders.
Balance sheets can be used with other important financial statements to conduct
fundamental analysis or calculate financial ratios.

The features of a balance sheet are as follows:

● A balance sheet consists of all the liabilities and assets of a company. It
shows their value and nature enabling you to know the position of the
capital on a specific date. However, it does not show any revenues or
expenses.
● Balance sheets follow the equation “Asset = Liability + Capital”, and both
of its sides are always equal.
● It takes into account the credit as well as debit balances of a company’s
current and personal accounts. The credit balance comes under the
personal account and is called the liabilities of a business. In comparison,
the debit balance comes under the real account and is known as the
assets of a business.
● A company’s accountants generally prepare the balance sheet on the last
day of an accounting year. This is so as it is the ultimate step of final
accounts and needs an assessment of the company’s trading as well as
profit and loss account for its preparation.

What is the importance of a balance sheet?

A balance sheet is an essential component that assists in the smooth running of a
business. Here are some of the reasons that explain the importance of a
company’s balance sheet:
● Assist banks in evaluating a firm’s net worth
When a business wants to expand its operations and make future investments, it
seeks loans from banks. Under such circumstances, the banks will look at the
firm’s balance sheet to evaluate whether or not it has the financial position to pay
back the loan amount.
● Helps investors take decisions
While choosing a firm for the purpose of investment, a majority of investors look at
the company’s balance sheet to determine its financial position. Moreover, they
combine it with various other factors to assess the firm’s future growth potential.
● Serves as a determiner for risk and returns
If you are a business owner, maintaining a balance sheet will enable you to
determine the ease at which you can meet your short-term obligations.
Furthermore, you can also put a check on the liabilities of your business if they are
rapidly growing and avoid the chances of bankruptcy.
● Enables financial analysis
Having a proper balance sheet will let you get a clear idea of the liquidity
conditions of your company. Thus, you can view the cash flow of your firm,
working capital funding, trade receivable status and also how much daily
transactions your business can afford.

Define Accounting standards ? What are the objectives of setting

accounting standards ? @2

Accounting Standards (AS) are basic policy documents. Their main aim is to
ensure transparency, reliability, consistency, and comparability of the financial
statements. They do so by standardizing accounting policies and principles of a
nation/economy. So the transactions of all companies will be recorded in a similar
manner if they follow these accounting standards.

These Accounting Standards (AS) are issued by an accounting body or a

regulatory board or sometimes by the government directly. In India, the Indian
Accounting Standards are issued by the Institute of Chartered Accountants of
India (ICAI).

Accounting Standards mainly deal with four major issues of accounting, namely
● Recognition of financial events
● Measurement of financial transactions
● Presentation of financial statements in a fair manner
● Disclosure requirement of companies to ensure stakeholders are not
misinformed

Objectives of Accounting Standards

Accounting is often considered the language of business, as it communicates to
others the financial position of the company. And like every language has certain
syntax and grammar rules the same is true here. These rules in the case of
accounting are the Accounting Standards (AS). They are the framework of rules
and regulations for accounting and reporting in a country. Let us see the main
objectives of forming these standards.

. The main aim is to improve the reliability of financial statements. Now

because the financial statements have to be made following the
standards the users can rely on them. They know that not conforming to
these standards can have serious consequences for the companies.
. Then there is comparability. Following these standards will allow for inter-
firm and intra-firm comparisons. This allows us to check the progress of
the firm and its position in the market.
. It also looks to provide one set of accounting policies that include the
necessary disclosure requirements and the valuation methods of various
financial transactions.

Benefits of Accounting Standards

Accounting Standards are the ruling authority in the world of accounting. It makes
sure that the information provided to potential investors is not misleading in any
way. Let us take a look at the benefits of AS.
1] Attains Uniformity in Accounting
Accounting Standards provides rules for standard treatment and recording of
transactions. They even have a standard format for financial statements. These
are steps in achieving uniformity in accounting methods.
2] Improves Reliability of Financial Statements
There are many stakeholders of a company and they rely on the financial
statements for their information. Many of these stakeholders base their decisions
on the data provided by these financial statements. Then there are also potential
investors who make their investment decisions based on such financial
statements.
So it is essential these statements present a true and fair picture of the financial
situation of the company. The Accounting Standards (AS) ensure this. They make
sure the statements are reliable and trustworthy.
3] Prevents Frauds and Accounting Manipulations
Accounting Standards (AS) lay down the accounting principles and methodologies
that all entities must follow. One outcome of this is that the management of an
entity cannot manipulate with financial data. Following these standards is not
optional, it is compulsory.
So these standards make it difficult for the management to misrepresent any
financial information. It even makes it harder for them to commit any frauds.
4] Assists Auditors
Now the accounting standards lay down all the accounting policies, rules,
regulations, etc in a written format. These policies have to be followed. So if an
auditor checks that the policies have been correctly followed he can be assured
that the financial statements are true and fair.
5] Comparability
This is another major objective of accounting standards. Since all entities of the
country follow the same set of standards their financial accounts become
comparable to some extent. The users of the financial statements can analyze and
compare the financial performances of various companies before taking any
decisions.
Also, two statements of the same company from different years can be compared.
This will show the growth curve of the company to the users.
6] Determining Managerial Accountability
The accounting standards help measure the performance of the management of
an entity. It can help measure the management’s ability to increase profitability,
maintain the solvency of the firm, and other such important financial duties of the
management.
Management also must wisely choose their accounting policies. Constant changes
in the accounting policies lead to confusion for the user of these financial
statements. Also, the principle of consistency and comparability are lost.

difference between fixed installment method and reducing

installment method
Differentiate between sinking fund depreciation and annuity
method of depreciation.

The major differences between sinking fund depreciation and annuity method
of depreciation.

Sinking fund depreciation

● Amount generated through depreciation is invested in market securities.
● Funds available for replacement of assets.
● First entry of interest will be made at the end of second year.
● Sinking fund table is used to calculate depreciation.
● Cost – interest = depreciation charged.
● Interest increases with years.
● Asset value is same.
● Effect on P&L is same.

Annuity method of depreciation

● Amount generated through depreciation is not invested in market
securities.
● Funds not available for replacement of funds.
● Interest will be earned from starting day onwards.
● Annuity table is used to calculate depreciation.
● Cost + interest = depreciation charged.
● Interest decreases with years.
● Asset value decreases.
● Effect on P&L account increases.

DIFFERENCE BETWEEN SINKING FUND METHOD AND INSURANCE

POLICY METHOD
Difference between Hire Purchase and Installment System

Both hire purchase and installment sales are popular methods of financing goods.
There are 3 parties in Hire Purchase trade namely the seller, the financier, and the
buyer. There are only 2 parties involved in Installment sale namely the seller and
buyer. The main dissimilarities or difference between hire purchase system and the
installment system can be pointed out as follows.

Difference between Hire Purchase and Installment System –

(1) Nature of Contract
● Hire Purchase System: It is a hiring goods agreement. System of buying
goods by making regular payments until the full price is paid.
● Installment System: It is an agreement of sale. System of credit sale in
which a sum of money or debt is paid regularly in installment.
(2) Ownership
● Hire Purchase System: Ownership of goods is transferred after the
payment of the final installment. Ownership of goods remains with the
seller until the full price is paid
● Installment System: Ownership of the goods passes to the buyer just
signing the agreement. Ownership is transferred immediately after the
first installment
(3) Right
● Hire Purchase System: The buyer can not sell, destroy or transfer the
goods.
● Installment System: The buyer can sell, destroy or mortgage or transfer
as his/her wish.
(4) Risk
● Hire Purchase System: All the risks are borne by the vendor before the
payment of the final installment.
● Installment System: All the risks are to be borne by the buyer from the
date of the agreement.
(5) Right of Return
● Hire Purchase System: The buyer can return the goods before making the
final installment. Goods can be returned to the seller before the final
installment.
● Installment System: The buyer can not return the goods to the seller.
(6) Repair and Maintenance
● Hire Purchase System: The liability of repair and maintenance lies with
the seller-provided that the buyer takes the utmost good care.
● Installment System: The buyer is responsible for repair and maintenance.
Goods cannot be returned.
(7) Forfeiture of Installment Paid
● Hire Purchase System: In case of default in payment of installment, paid
installment will be forfeited and treated as hire charges.
● Installment System: The act of forfeiture can not be activated.

Need and Importance of Final Accounts

Final accounts are considered as one of the essential elements of the

organization. It is prepared at the final stage of the accounting process.

Why do we need a final account?

The main need for preparing the final account is to keep a track of all the
business activities of an organization by the end of every accounting period. Every
organization is required to record financial transactions, prepare financial reports,
analytics and information.
Final accounts data is considered as extremely crucial information for the
organization and administration for making informed judgments. Final accounts
are needed by various users of the financial statements such as shareholders,
lenders, creditors, suppliers, customers and government.

Importance of Final Accounts

1. Final accounts assist the shareholders to evaluate their investments which help
them to make accurate decisions. Shareholders are more interested to know the
liquidity position of the organization and the amount of profit and dividends
earned by them.

2. Final accounts are essential for the tax department to make sure that the
organization makes the payment of various taxes and additional duties on time
without any delay. Therefore preparation of final accounts (Income statement) is
very important for computing tax.

3. Final accounts provide important facts and figures regarding performance,

liquidity, progress and deposition of an enterprise. This helps the internal
management to make quick, informed and accurate future decisions on the
various aspects of the organization.

4. Final accounts allow lenders and creditors to have a look at the financial health
and soundness of the organization. Creditors use the following information to
assess the risk, credibility and its ability to repay the debt on the agreed date.

5. Final accounts help the employees to know about the company’s profitability
and its adverse effects on job security, remuneration, transfers, salary hikes,
incentives and various other bonuses.

6. Final accounts play an important role in helping the organization to achieve

steady growth and development by deploying various techniques and strategies
for improving revenue, developing a strong customer base and providing more
employment opportunities.
 Write short note on manufacturing account.

Manufacturing of goods is the conversion of raw materials into finished or semi-

finished goods. There are many products which need to be manufactured before
selling to the general public like lays, Parle G biscuits, coca cola etc. In order to
manufacture finished goods, companies will acquire raw materials, engage labour,
and other inputs necessary to change the raw materials into finished goods.

The main purpose of preparing the manufacturing account is to ascertain the cost
of goods manufactured during the financial year and to ascertain the amount of
any profit or loss occurred during the manufacturing process.

The manufacturing account provides information of all the expenses and costs
incurred in the preparation of the goods to be sold. It includes the expenses
incurred in preparing the goods but not the finished goods. All the expenses
including the cost of raw materials, the cost of machines and their maintenance,
the salaries and wages of both skilled and unskilled workers, depreciation of the
assets are also included under this account.

Majorly Manufacturing Costs are Divided into the Following Types:

. Direct Material Costs: These are costs which are directly used in the
manufacturing of a product. For example, materials used in the
preparation of plastic tables like glue plastic sheets, paints etc.
. Direct labour costs: Costs which are paid directly to the worker involved
in the manufacturing of a product. For example, in the preparation of
Plastic tables wages are paid to the worker involved directly.
. Direct Expenses: Expenses incurred in the manufacture of a product.
For example, charges for special equipment used in the process of
manufacture.
. Factory Overheads: Expenses incurred indirectly in the manufacturing
of a product. For example, factory rents, factory power and lighting etc.
. Administrative Expenses: Administrative expenses are the expenses
incurred in the process of planning, controlling and directing the
business organization. For example, office rents, office electricity etc.
. Selling and Distribution Expenses: Expenses incurred in the process of
selling, marketing and distributing the goods manufactured. For example
 .

cost of advertising, carriage outwards, salary to salesperson etc.

. Finance Costs: Expenses such as bank charges, discounts allowed and
other monetary expenses are included in Factory Expenses.

Steps Involved in the Preparation of the Manufacturing Account

The following steps will be followed in order to prepare a manufacturing account:
. Opening stock of raw materials will be added to the purchases and the
stock of raw materials shall be deducted. We will get the cost of
materials used during the period.
. All the Indirect costs will be added
. All the indirect manufacturing costs will be added
. To get the production cost of all goods completed, opening stock of
Work in progress shall be added and thereafter closing stock of work in
progress will be deducted
. The total in the manufacturing account shows the total available for sale
during the period.