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NIOS Class 12 Accountancy Chapter 1 Accounting – An Introduction
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Accounting – An Introduction
Chapter: 1
| Module – 1: Basic Accounting |
INTEXT QUESTIONS 1.1
1. Fill in the blanks with suitable word/words:
(i) Keeping systematic record of business transactions is known as ___________.
Ans: Book keeping.
(ii) The next step after classification of recorded transactions is ___________.
Ans: Analysing.
(iii) The whole process of recording, classifying, summarizing and interpreting the business transactions systematically and communicating business results to the interested users of financial information is known as ___________.
Ans: Accounting.
(iv) Interested users of accounting information are ___________.
Ans: Investors, Creditors etc.
2. Identify transactions related to Book-Keeping or Accounting and write B for book-keeping and A for accounting against the space provided:
(i) Credit Sales/Purchases () —
Ans: B.
(ii) Cash Purchases/Sales () —
Ans: B.
(iii) Calculation of business profits () —
Ans: A.
(iv) Find out total debtors () —
Ans: A.
(v) Find out financial position of the business enterprise (________) —
Ans: A.
INTEXT QUESTIONS 1.2
1. Following are the statements relating to various branches of accounting. Write against each the name of the branch of accounting to which the same belongs:
(i) It analyses the expenditure so as to ascertain the cost of products manufactured by the concern.
Ans: Cost accounting.
(ii) Accounting that discloses the social benefits and the costs incurred by the business enterprises.
Ans: Social accounting.
(iii) Accounting that is concerned with generating information that will enable the management in decision making.
Ans: Management accounting.
2. How each of the following statements is a limitation of accounting?
(i) Fixed assets are recorded in the accounting records at the original cost.
Ans: The effect of rise in price is not taken into consideration.
(ii) Accounting information is sometimes based on estimates.
Ans: Estimates are sometimes inaccurate.
(iii) Accounting information cannot be used as the only test of managerial performance on the basis of mere profit.
Ans: Profit can be manipulated by window dressing.
(iv) Accounting information is expressed in terms of money.
Ans: Non monetary transactions are completely omitted.
3. How each of the following statements is an advantage of Accounting:
(i) Evidence in Court.
Ans: Systematic records are accepted as evidence in court.
(ii) Replaces Memory.
Ans: Systematic record keeping replaces memory.
(iii) Financial Information about Business.
Ans: Accounting provides the financial information for decision making.
INTEXT QUESTIONS 1.3
1. State whether the following statements are True or False:
(i) Systematic record of transactions is often accepted by the Courts as good evidence.
Ans: True.
(ii) The balance sheet makes available the information about the financial health of the enterprises.
Ans: True.
(iii) Creditors are internal users of accounting information.
Ans: False.
INTEXT QUESTIONS 1.4
1. Fill in the blanks:
(i) Stock is a ___________ asset.
Ans: Current.
(ii) Liabilities = Assets – ___________
Ans: Capital.
(iii) Debentures are ___________ term liabilities.
Ans: Long.
(iv) Creditors are ___________ term liabilities.
Ans: Short.
INTEXT QUESTIONS 1.5
1. Write against the following statements the terms for which these are made in reference to accounting information.
(i) It is a common language used to communicate financial information.
Ans: Accounting.
(ii) Managing Director, functional managers, shareholders etc. using the accounting information.
Ans: Users.
(iii) Ability of the firm to meet all its short-term or current obligations as and when they fall due.
Ans: Language of business.
2. State in each case, whether the items are to be regarded as goods or assets.
(i) Furniture purchased by Makhan Singh, a dealer in furniture.
Ans: Goods.
(ii) Automatic Machine purchased by a workshop for manufacturing products.
Ans: Assets.
(iii) Machine manufactured by a firm for sale to a mill.
Ans: Goods.
(iv) Furniture purchased by Malti, a stationery shop-owner.
Ans: Assets.
3. Multiple Choice Questions:
(i) Goods in hand at the end of a year is called ___________.
(a) Purchases.
(b) Cost.
(c) Stock.
(d) Profit.
Ans: (c) Stock.
(ii) A Bill of Exchange is considered as _________ from the view point of creditors.
(a) Bills Receivable.
(b) Bills Payable.
(c) Discounting.
(d) None of the above.
Ans: (a) Bills Receivable.
(iii) A Bill of Exchange is ______________ from the view point of debtors.
(a) Bills Receivable.
(b) Bills Payable.
(c) Endorsement.
(d) None of the above.
Ans: (b) Bills Payable.
(iv) _____________ are reductions allowed either on selling price or on the amount due.
(a) Discount.
(b) Cost.
(c) Bills.
(d) All of the above.
Ans: (a) Discount.
| TERMINAL EXERCISE |
1. What is accounting? What are its objectives and limitations?
Ans: Accounting is a systematic process of identifying, recording, classifying, summarising, analysing, and interpreting financial transactions of a business. It helps in communicating financial information to various interested users such as owners, managers, investors, creditors, and government authorities.
The main objectives and functions of financial accounting are:
(i) Finding out Various Balances Systematic recording provides vital information about balances such as cash balance and bank balance.
(ii) Providing Knowledge of Transactions Systematic maintenance of books provides the details of every transaction.
(iii) Ascertaining Net Profit or Loss Summarization in the form of a Profit and Loss Account provides the business income over a period of time.
(iv) Depicting Financial Position A Balance Sheet is prepared to show the financial position of the business, meaning what the business owns and what it owes to others.
(v) Information to All Interested Users Business performance and position are analysed, interpreted, and communicated to interested users.
(vi) Fulfilling Legal Obligations Vital accounting information helps in fulfilling legal requirements, such as those related to sales tax and income tax.
Limitations of Accounting
The limitations of accounting include:
(i) Expressed in Terms of Money Accounting information is expressed in monetary terms, meaning that non-monetary events or transactions (like changes in managerial policies) are completely omitted.
(ii) Original Cost Recording Fixed assets are recorded at their original cost (actual amount spent plus incidental charges), and the effect of the rise in prices is not considered. Consequently, the Balance Sheet may not represent the true financial position.
(iii) Based on Estimates Accounting information sometimes relies on estimates, which are often inaccurate (e.g., predicting the actual life of an asset for depreciation).
(iv) Possibility of Manipulation Accounting information cannot be used as the only test of managerial performance, as profit can readily be manipulated for a period by omitting certain expenses like advertisement, research and development, or depreciation, a process known as window dressing.
(v) Lack of Neutrality Accounting information is not always neutral or unbiased. Accountants may consider only selected revenues and expenses, and they often do not include the cost of items like water, noise, or air pollution (social cost). They may also use different methods for valuing stock or depreciation.
2. Distinguish between book-keeping and accounting.
Ans:
| Basis of Difference | Book-keeping | Accounting |
| 1. Nature | It deals with identifying financial transactions, measuring them in monetary terms, recording, and classifying them in books of original entry and ledgers. | It deals with summarizing the recorded data, interpreting financial information, and communicating the final results to users. |
| 2. Objective | To maintain systematic and accurate records of all financial transactions. | To ascertain profit or loss, determine financial position, and provide useful information for decision-making. |
| 3. Function / Scope | Its function is limited to recording business transactions only. Therefore, its scope is narrow and basic. | It includes recording, classifying, summarizing, analyzing, interpreting, and communicating information, giving it a much wider scope. |
| 4. Basis | Based on vouchers, bills, receipts, and other supporting documents used as evidence for recording transactions. | Book-keeping itself becomes the basis for preparing accounts such as Trading A/c, P&L A/c, and Balance Sheet. |
| 5. Level of Knowledge Required | Requires elementary or basic accounting knowledge. | Requires advanced, analytical, and in-depth knowledge of accounting principles and financial analysis. |
| 6. Relation | Book-keeping is the first step of the accounting process. | Accounting starts where book-keeping ends, i.e., after all transactions are recorded. |
| 7. Scope | Limited to recording and classification. | Wide, including interpreting and reporting financial results. |
3. Explain the different branches of accounting.
Ans: The changing requirements of business have given rise to specialized branches of accounting:
(i) Financial Accounting: This branch records transactions of a financial character, summarises and interprets them, and communicates the results to users. Its purpose is to ascertain the profit earned or loss incurred during a period and the financial position at the end of that period. The terms ‘accounting’ and ‘financial accounting’ are often used interchangeably.
(ii) Cost Accounting: This involves analysing expenditure to determine the cost of various products manufactured by the firm and to fix their prices. It is also essential for controlling costs and providing necessary costing information to management for decision making.
(iii) Management Accounting: This generates information related to funds, costs, and profits to assist the management in decision making. It is basically meant to help the management take rational policy decisions and evaluate the impact of its actions and the performance of various departments.
(iv) Tax Accounting: This branch grew in response to difficult tax laws concerning income tax, sales tax, etc., requiring the accountant to be fully aware of various tax legislations.
(v) Social Accounting (Social Reporting or Social Responsibility Accounting): This branch discloses the social benefits created and the costs incurred by the enterprise. Social benefits include facilities like medical care, education, and provident funds, while social costs might include exploitation of employees, environmental pollution, or unreasonable terminations
4. Explain the role of an accountant in the society.
Ans: The accountant, due to their specialized knowledge, extensive training, and experience, plays an important role in society, helping management discharge their duties effectively and ensuring efficient utilization of resources.
The accountant’s roles include:
(i) Maintaining Records: Maintaining proper books of accounts which portray a true and fair view of the results of the business.
(ii) Information Provider: Providing information and reports to management to enable them to discharge their duties more effectively.
(iii) Auditor: Acting as an external auditor for the attestation of accounts as required by law.
(iv) Internal Control: Acting as an internal auditor to assist and strengthen the hands of the management.
(v) Tax Consultant: Handling the tax matters of the business by acting as a tax consultant.
(vi) Management Consultant: Providing services regarding the financial planning of the business to clients by acting as a management consultant
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