FINANCIAL AND MANAGEMENT ACCOUNTING FREQUENTLY ASKED QUESTIONS UNIT 1 Financial Accounting An introduction

Discussion group: Events of non financial character cannot be recorded even though such events may have an impact on the operational results of the firm. Discuss FAQs

1. What is accounting? Accounting analyzes the financial data, communicate and report to the stakeholders. It is used for both internal and external purpose. 2. What is Book Keeping? It is a process of recording transactions in books of account. It leads for the preparation of final accounts. It is more internal matter. 3. What is double entry booking? Book keeping is an accounting technique which records each transaction as both a credit and a debit. Credit entries represent the sources of financing, and the debit entries represent the uses of that financing. 4. What is the difference between financial accounting and management accounting? Financial accounting includes recording, analyzing, interpreting and communicating. It is used by owners, employees, regulatory bodies, Government etc. Management Accounting refers to the use of financial data for the purpose of planning and decision making, performance evaluation etc., The users are top, middle and lower level managers 5. What is cost accounting? It is a specialized field of accounting that deals with analysis of various costs. It is the tool to ascertain the total cost of production. 6. What is credit? Credit is borrowed money that you can use to purchase things you need when you need them and then repay them in the future

7. Who is a Debtor? Debtor is a person who owes something to business. A person to whom goods are sold on credit becomes a trade debtor to the business 8. Who is a Creditor? A creditor is a person to whom the business owes something. He is a person to whom goods are purchased on credit and amount is yet to be paid is called a trade creditor. 9. What is a Transaction? Transaction is transfer of money or goods or service from one person or account to another person or account. There are cash transactions, credit transactions and paper transactions. In all cash transactions, cash is paid or received immediately. Credit transaction is one where there is a promise to pay/receive cash at a future date. Paper transaction is one where there is no cash inflow or outflow but adjustment is made in the records only. (Bad debts of previous year are written off; depreciation provided on fixed assets etc.). 10. What is Capital? Capital is funds brought in to start business, by the owner/s. In the case of a company, capital is collected by issue of shares. Capital used to purchase fixed assets is called fixed capital and that capital used for day to day affairs of business is known as working capital. From business point of view, Capital is a liability. 11. What is a Share? A share in a company is one of the units into which the total capital of the company is divided. 12. What is an Asset? An asset is a resources legally owned by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise. Eg: Land and buildings, plant and machinery, furniture and fixtures, cash in hand and at bank, debtors and stock etc., are regarded as assets, Assets may be fixed, current, liquid or fictitious. 13. What are fixed assets? Fixed assets are those which are held for use in the production or supply of goods and services. Ex: plant and machinery, which is used fairly for long period.

14. What are current assets? Current assets are those which are held or receivable within a year or within the operating cycle of the business. They are intended to be converted into cash within a short period of time. Ex: Stock in trade, debtors, bills receivable, cash at bank etc. 15. What are Liquid assets? Liquid assets are those which can be easily converted into cash and for instance, cash in hand, cash at bank, marketable investments etc., 16. What are fictitious assets? Fictitious assets are in the form of such expenses which could not be written off during the period of their incidence. For example, promotional expenses of a company which could not be treated as expenditure in the year of incidence are shown as fictitious asset. 17. What is a Liability? It is a financial obligation of an enterprise arising from past event the settlement of which is expected to result in an outflow of resources embodying economic benefit. Eg. loan payable, salaries payable, term loans and debentures. 18. What is Current liability? Current liability is that obligation which has to be satisfied within a year. For example, payment to be made sundry creditors for the goods supplied by them on credit; bills payable accepted by the businessman; overdraft raised by the businessman in a bank etc. 19. What is Equity? Equity is the residual interest in the asset of the enterprise after deducting all its liabilities. The equity of a company is called shareholders equity. Its components include share capital, share premium and retained earnings. 20. What is considered as Goods? Commodities or articles purchased for resale are called goods. Furniture items dealt by a furniture dealer constitute goods for that business. If rice dealer purchases furniture, not for resale but for use, it is called purchase of asset and the same furniture becomes asset. Rice for rice dealer is goods, because he purchases only for resale.

21. What do you mean by purchases? It refers to goods bought in exchange for cash or credit. In case of credit purchase, goods are received against a promise to pay the price for the same at a future date.

22. What do you mean by Sales? Goods sold to customers either for cash or for credit are regarded as sales. In case of cash sales, cash is received immediately and in case of credit sales, cash will be received at a future date. 23. What is an Entity? Entity is an economic unit that performs economic activities. 24. What are the different types of business organization? Sole trader: A single individual carrying on business with or without the help of his kith and kin is called sole trader. Partnership: It is a relationship between partners to contribute capital to start business, agree to distribute profits and losses in an agreed proportion and the business being carried on by all or any one acting for all. Partnership firm refers to business where as the partnership refers to relationship caused by agreement. Joint Stock Company: It is an organization, for which the capital is contributed by shareholders to carry on business and it is registered under Companies Act and it has a legal entity, having perpetual existence and a common seal. 25. What is a stock or an inventory? Total goods kept on hand by a trader or industrial enterprise on a given date. It represents unsold part of goods. 26. What is a bill of exchange? It is documentary evidence in writing containing an unconditional order signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or the bearer of the instrument. 27. What is Bills Payable? It is a legal document signifying an obligation to pay a certain sum of money at a specified date. When the supplier of raw material draws bills of exchange on the business entity and when the entity accepts it, it becomes bills payable.

28. What is Bills Receivable? It is a legal document containing an acceptance from the drawee (or Payee) a certain sum of money at a specified date. On sale of goods, the entity draws a bill of exchange on the debtor who, on acceptance becomes, bills receivable for the firm. Bills receivables can be discounted with banks or discount houses.