the system of accounting q&a

Volume – I

YEAR 2015

WRITTEN BY: SYED AQEEL RAZA

Q&A 01 QA-264

What is an account?

An account, already designed, is the summary of information relating to transactions with it. The word account, a noun, is derived from accounting, an adjective. Accounts are made according to accounting principle “Assets, Liabilities, Proprietorship, Revenues, Expenses (ALPRE) like building a/c, an asset, loan a/c, a liability, capital a/c, equity, sales a/c, and an income and insurance expenses a/c, an expense.

<THE SYSTEM OF ACCOUNTING < VOLIUM 1< SYED AQEEL RAZA<[email protected]>

Q&A 02 QA-265

What are sources and resources terms used in accounting?

Funds or things carried for investment in business are sources of business as capital or owners’ equity and acquiring assets like land, building, merchandise, cash, etc. are resources of the business. Therefore, sources are equal to resources or conversion sources into resources.


Q&A 03 QA-266

Why is drawing contra equity account?

If cash or goods are used for personal above limitation and recorded in business, the destruction of sources of business means assets will be ruined. In order to save sources, the withdrawal of cash or goods from business for personal use is recorded in a separate account named Drawing, reduces or contra the capital account, alarms the owner about ups and downs in business.


Q&A 04 QA-267

What is the difference between double entry system and single entry system?

Single entry is bookless system and consists on revenues and expenses. It is used in small businesses where no remarkable capital, assets and liabilities are applied.

Single entry system has no rule for recording transactions just writing information on registers or verbally.

Double entry system applies five principles in the system of accounting which are assets, liabilities, proprietorship, revenue and expenses where revenues and expenses are is temporary accounts end on income or loss.

The double entry system of accounting has accounting equation “assets=liabilities + proprietorship”.

Double entry system can use in small and large businesses showing true financial picture.


Q&A 05 QA-268

What is the connection of accounting with book keeping?

Accounting is the language of business and provides idea of keeping money in written properly which shows the true picture of finances invested in business.

Accounting defines a complete system and rules of recording transactions to book keeping under five main principle; assets, liabilities, proprietorship, revenue and expenses.

The book keeping is the art of transferring idea of accounting in the shape of books as ledger, cash books, journals and various statements.

The book keeping adopts the system and rules of recording transactions, style, designs, and many more from accounting.

Accounting is an idea and book keeping practical.


Q&A 06 QA-269

Does revenue or expense affect accounting equation?

Revenue or expense is the temporary member of accounting cycle and ends on profit and loss account transferable to capital account. So, they do not affect directly to accounting equation “Assets=Liabilities + Proprietorship” but affect proprietorship indirectly and the proprietorship is the part of accounting equation.


Q&A 07 QA-270

What do you mean by Entity?

In business any unit, division or an organization is an entity. A company may have different entities like unit, department, team, division as well the goods which it sells.

Company’s investments or assets as well as owner and business are also entities.

Entity means individual, team, thing or unit of an organization and the account relating to separate entities.


Q&A 08 QA-271

Explain the period applied on fixed assets for calculation of depreciation. If any asset exists but life is low, then will depreciation applied over it? (Shakir)

The depreciation is accumulated on fixed assets having life over one year or more depending on the value of fixed assets, if the value of fixed assets below the mark, it will directly be charged in expenses. For example a calculator which comes under fixed assets but the price or value of it is cheap so it will be charged directly in expenses as printing and stationery office. But computer, printer, scanners may be fixed assets if comes under the value for calculation of depreciation.

Plant and machinery, office equipment, air conditioning unit, furniture, etc. having long life and heavy values are accumulated for depreciation up to ten years under different methods of depreciation.

It is concluded that the period applied on fixed assets for calculation of depreciation is more than one year depending on the value of asset.


Q&A 09 QA-272

What is Goshwara and how to make it? (Shakir)

The word goshwara is of Urdu word and in English means schedule which means to make details or plan of anything for any department of life but in accounting it represents the summary or detail of accounts relating to the same nature. If a company sales or purchases goods on credit from different parties, different parties accounts are maintained in ledger for paying and receiving in future date and prepares a schedule of creditors and debtors wherein details of paying and receiving amounts from customers or suppliers or makes according to its facilitation as date, amount, maturity of amounts, reasons etc.

In financial statements, some schedule of creditors, debtors and other accounts having huge information indicating notes.

Income tax or sales department also requires schedules or statements relating to details of taxes at the end of the year.

It also refers to statement which prepared at the end of the accounting year for submitting income tax, sales tax and management.


Q&A 10 QA-273

What is accounting cycle and its steps working?

Accounting cycle is the process of accounting and the process of accounting has ten steps which moves the cycle with no end as the source document provides evidence to journal, journal helps ledger to make accounts, ledger enables trial balance unadjusted to summarize accounts, trial balance unadjusted requires adjustment, adjustment provides trial balance adjusted, trial balance adjusted closes entries to worksheet, worksheet to financial statements and balances of financial statements as post closing trial balance re-cycle accounting for the next period like before.

The connection of every step is joined to each other enables accounting cycle rounding with no end.


Q&A 11 QA-274

What do you mean by purchase and sale?

In accounting, purchase or sale relates to goods or merchandise used in doing business. In manufacturing concerns, materials are purchased and converted in finished goods, and sold to distributors or whole sellers; distributors and whole seller purchase and sale to retailers and retailers purchase and sell to end user.

Purchase and sale both have transactions of cash and credit. Purchase is asset and sale is revenue then purchase is debited and sale is credited. Purchase and sale are temporary account and make the cause of income or loss, and end on income and loss statement.

Therefore, purchase and sale are the main source of rounding account cycle.


Q&A 12 QA-275

Explain the difference between tangible and intangible assets?

Tangible assets are the assets which have long term physical existence like plant, machinery, equipment, furniture and fixtures etc and or touchable assets like cash, account receivable, merchandise inventory, prepaid expense etc. Tangible assets are acquired for operation of business and not for sale like commodities

When intangible assets have no physical existence like trade mark, goodwill, copy right etc. but convert into current asset to sell them. Intangible assets are the long term recourses of business and made slowly by reputation. Intangible assets help business in bad times to acquire to loan against fire or any hazards in business.


Q&A 13 QA-276

What do you understand by single entry and doe single entry accounting system convert into double entry?

Single entry relates to cash receipts and payments or expenses and revenues and receivables and payables and it does not involve accounting equation of double entry system. This system of accounting is used in small business where the transactions or information are in diary, register or in memory.

Single entry accounting system may be converted into double entry accounting system because payments and receipts, expenses and revenues, and receivables and payments can be taken from diary, register or memory and the amount brought for doing business as capital depends on the information or on estimation.

Financial statements may be prepared basing the information from diary, register or memory but the true financial picture under this system may be under question.

Self assessment of accounts by income tax is based on the same system of accounting.


Q&A 14 QA-277

What do understand by double entry accounting system and does double entry convert into single entry system of accounting?

In double entry accounting system all transactions are recorded according to rules of debit and credit and the rules of debit and credit should be in accordance with accounting equation as Assets=liabilities + proprietorship. The amount of debit must be equal to the amount of credit and there may be two or more debit and credit.

The single entry system is quite different because it has only information of transactions on diary, register or in memory which may be recovered in individual accounts according to the five principles of accounts.

As far as the question does double entry convert into single entry system is concerned, it may be said that the trial balance or post closing trial balance which resulted the information of transactions is the example of single entry wherein debit and credit is shown of every individual account.

Double entry accounting system provides true accounting picture, every transaction has proof and complete books of accounts presentable to income tax, sales tax, management, shareholders etc.


Q&A 15 QA-278

How many kinds of business?

There are three types of businesses wherein trading, manufacturing and services are in practice but purpose of each business is to make profit by its investment and efforts. Trading and manufacturing business require capital to start business but services business does not require capital but requires efforts.


Q&A 16 QA-279

What do you known about trading business, explain many aspect of it?

This type of business relates to commodities. In trading business, trader purchases commodities from manufacturer or importer and sale to wholesaler or retailer in profit.

In trading business many aspects of trading are therein;

- Trader has to invest his capital and from this capital, he purchases goods and sale to others in profit.

- The trader sells commodities on commission to link business parties. This business is called Commission trading.

- The trader gets commodities on credit and pays the amount after sale it is called credit trading.

- A trading in which trader holds commodities and searches parties, on getting parties he picks up the commodities on credit and/or on cash and sale it out by his own price.

Nowadays, trading from internet is flourishing. Any trader can find out parties to trade his products.


Q&A 17 QA-280

What do you mean by transaction?

Exchange of values is meant by transaction and transaction affects by double entry accounting system under debit and credit rules. It may be on cash and on credit.


Q&A 18 QA-281

What do you mean by accrual?

Accrual, relates to payment and receipt, and is journalized to create liability or revenue before payment and receipt. An accrual as an expense relates to liability of the period when it occurred but not paid and as revenue relates to receivables of the period when it earned but not received.


Q&A 19 QA-282

What is deferred used in accounting?

Deferred, relates to income and expense, and is referred by unconsumed or unsettled part of account at the end of accounting period shown in balance sheet directly or without appearing in income statement.

Deferred refers to payment made but reported as an expenses in a later period and revenue received but earned in future accounting period.


Q&A 20 QA-283

Describe the rules of transaction and its affect?

Everything or system is moving with rules which makes thing better to perform functioning. In the system of accounting, the rules of transaction are described under accounting equation as to assets=liabilities + owners’ Equity which increase or decrease the five principle of accounts; assets, liabilities, proprietorships, revenue and expenses with equal value of increase or decreases to one account to one account, one account to more account.

The rules of transactions are described here;

Assets Increase Debit Decreases Credit

Liabilities Decreases Debit Increases Credit

Proprietorship Decreases Debit Increases Credit


QA-284

Revenue Decreases Debit Increases Credit

Expenses Increases Debit Decreases Credit

The rules of transaction affect the equation as;

- Assets are acquired by Assets cash and asset affects to asset.

- Liabilities acquired by asset cash from others and asset affects to liabilities.

- Proprietorship or capital come from investment and investment affects asset and capital.

- Revenues come from asset cash and asset affects income to capital.

- Expenses pay by asset cash and asset affects income to capital.


Q&A 21 QA-285

Explain connection between manufacturing, trading and services businesses?

Manufacturing is the process of making goods or products from raw materials acquired locally or from abroad. This process involves land, building, plant and machineries, laborers and complete system of administration and sell to traders on cash or credit. This type of business is concern with trading business.

In trading business, traders acquire goods or commodities on cash or on credit from manufacturer and sell to wholesaler, retailer or end user. Trading business is concern with manufacturing business.


QA-286

No capital involves in services business but efforts or skill works to earn. Service business involves in manufacturing and trading. A man employed to work, technician repairs machineries, and a worker involves in manufacturing, a man to sell products, a consultant or legal advisor gives advice are providing services.

If to see then manufacturing, trading and services business involves each other in whole system as;

Manufacturing business produces products, sells goods to traders and acquired man power from services business for manufacturing process.

Trading business sells goods to customer, goods comes from manufacturing and selling requires man power by services business.

Service business provides technical support or manpower to manufacturing and trading business to work.

Therefore, it may be said that manufacturing, trading and services are connection with each other in every respect.


Q&A 22 QA-287

Explain the roll in business of an accountant and the quality of good accountant?

The word accountant is derived from account and to write it is called accountant or writer of accounts moves accounting cycle and may say him the driver of accounting cycle, the accounting cycle starts from source document enables accountant to keep records of all transactions crystallizes and makes legal accounts to post closing enables accountant to recycle the next accounting process and so on.

The accountant may equip with logical knowledge created itself cracks hard nuts enables accountant to overcome the problems in writing books of accounts, making financial statements and satisfying management in taking decisions may come before him during accountancy besides education of accounts manually or computerized.


QA-288

The quality of good accountant requires honesty, this is the first of his being accountant, and to prove honesty he must have all records, evidence and balances up to date physically facilitate auditors to check and make reports as the older said the honest is the best policy, faithfulness is the part of faith restricts him to perform bad and do good with collogue, management, parties and all relating to his circle and to all matters of finances and may say faithfulness is the second pillar or condition of his being accountant. The third condition of his being accountant is secrecy which does not allow accountant to show facts and figures of accounts to others inside or outside which saves from many difficulties, quarrels and causes.

The last and four conditions of his being accountant is to love his profession, prepares true accounts having evidence, resist to de shape or de figure statements of accounts.

The accountant, the driver of accounting cycle, is the pillar of business and the base of his profession stands on four pillars; honest, faithfulness, secrecy, love to profession.


Q&A23 QA-289

FILL IN THE BLANKS

- Account is the language of _________________and book keeping is defined to record_______________.

- Business means __________ under classification of ______types of business i________ii_________iii______________.

- The main types of business organization are a_____________b___________c___________d______________.

- Any exchange of value is called_______________ and sub divided into ________transaction and _____________transaction.

- The posting of business transaction in book is called____________.

- Business entity means ________________.

- ALPRE is the short form of _________________________________________.

- <THE SYSTEM OF ACCOUNTING < VOLIUM 1< SYED AQEEL RAZA<[email protected]>

QA-290

- Assets are ______________ and investment _______________.

- __________ asset covers accounting period and ______ assets are longer than one year.

- Tangible assets are ________and intangible ___________.

- Prepaid expenses are __________assets.

- Liability means the claim of supplier under head account___________.

- There are two types of equities i______________ii______________.

- Drawing is a __________asset.

- Credit sale is recorded under head account _______________.

- <THE SYSTEM OF ACCOUNTING < VOLIUM 1< SYED AQEEL RAZA<[email protected]>

QA-291

- Expenses are mainly divided into two categories i__________________ii______________.

- Assets = liabilities + proprietorship is accounting _______________.

-

- Cash increases__________ and decreases________________.

- Capital increases______________ decreases_________________.

- Account payable increases_______________ decreases__________.

- Account Receivable is ________________.

Expense increases_____________decreases_______.

A sale is _____________ and increases ___________.

Accounting cycle starts from____________________ and end on______________.


Volume – I

WRITTEN BY: SYED AQEEL RAZA

YEAR 2015

THE END

the system of accounting q&a

Education