101.

01

CONCEPTUAL
ACCOUNTING :

FRAMEWORKS

OF

1. Accounting is an information system Explain.

Ans. There is no doubt about the fact that accounting is an

information system. No organization can function without the use of
money and hence without accounting. Accounting is an information
system for measuring, processing and communicating information that is
useful in making economic decision. Every business is conducted to
make profit. Accounting knowledge is there to assist the business man to
assess whether the business is making profit or loss. In accounting brings
discipline on how to source money, how to spend and how much to save.
Accounting ensures consistency in the treatment of various transactions.
Accounting involves gathering of financial data, recording classifying,
summarizing and communicate the results to the owners of the business,
or to others allowed to receive this information. Accounting should not be
confused with Book keeping as Book keeping is the part of accounting
concerned with recording of financial data. Book keeping is the process
of recording data relating to accounting transactions in the books of
accounts.

2. What are the qualitative characteristics

of accounting information?
The qualitative characteristics of accounting information are given
below-

Relevance- To make a difference in the decision process, information

must possess predictive value and/or feedback value. Generally, useful
information will possess both qualities. For example, if net income and
its components confirm investor expectations about future cash-

generating ability, then net income has feedback value for investors.
This confirmation can also be useful in predicting future cashgenerating ability as expectations are revised.
Reliability- Reliability is the extent to which information is verifiable,
representationally
faithful, and neutral.
Verifiability implies
a
consensus among different measurers. For example, the historical cost
of a piece of land to be reported in the balance sheet of a company is
usually highly verifiable. The cost can be traced to an exchange
transaction, the purchase of the land.
Comparability- Accounting comparability is a quality of accounting
information that addresses the usability of financial information.
Information that is prepared using the same measurement
techniques and reported in a similar fashion is considered
comparable information because this information is similar and
can be judged side by side other similar financial information.
Consistency- The concept of accounting consistency refers to the
principle that companies should use the same accounting methods
to record similar transactions over time. In other words,
companies shouldn't bounce between accounting rules and
treatments to manipulate profits or other statement elements.
Accounting methods should be used consistently.

4. What is meant by Gaap ? Why is it important that all

companies follow GAAP in reporting to external

users?
Ans: Generally Accepted Accounting Principles (GAAP) is a
framework
of
accounting
standards,
rules
and
procedures defined by the professional accounting industry, which
has been adopted by nearly all publicly traded U.S. companies.
GAAP (generally accepted accounting principles) are a
dynamic set of both broad and specific guidelines that a
company should follow in measuring and reporting the
information in their financial statements and related notes. It
is important that all companies follow GAAP so that investors
can compare financial information across companies to make
their resource allocation decisions.

6. Define financial statement. Explain the various

elements of financial statements.
Ans:

Financial statements are a collection of reports about an

organization's financial results, financial condition, and cash
flows.

Elements of financial statementsa.

c.

5. Identify and describe the six underlying assumptions

included in accounting principles.
e.

g.

i.

Assets represent probable

future economic benefits
controlled by the enterprise.
Equity is a residual amount,
the
owners interest in assets
after subtracting liabilities.
Distributions
to
owners are decreases in
equity
resulting
from
transfers to owners.
Gains are increases in
equity from peripheral, or
incidental, transactions of
an entity.
Losses represent decreases
in equity arising from
peripheral, or incidental,
transactions of an entity.

b.

Liabilities represent obligations

to other entities.

d.

Investments by owners are

increases in equity resulting
from transfers of resources
(usually cash) to a company in
exchange for ownership interest.

f.

Revenues are gross inflows

resulting from providing goods
or services to customers.

h.

Expenses are gross outflows

incurred in generating revenues.

j.

Comprehensive income
often
does not equal net income.

7. What are the four basic assumptions underlying

GAAP? Explain why time period assumption causes
accruais and deferrals in accounting.

assumption, (3) theperiodicity assumption, and (4)

monetary unit assumption.Economic Entity Assumption.

Ans:

The four basic assumptions underlying GAAP

are (1) the economic entity assumption, (2) the going concern

the

101.02 REVIEW OF THE ACCOUNTING PROCESS:

1. Define economic events. Differentiate between external events and
Internal events. Give an example of each type of events.
Ans: ECONOMIC EVENT is the transfer of control of an economic
resource from one party to another party.

2. Explain the various steps in Accounting processing cycle.

Ans:

1. Identifying and Analyzing Business Transactions

The accounting process starts with identifying and analyzing
business transactions and events. Not all transactions and events are
entered into the accounting system. Only those that pertain to the
business entity are included in the process.
For example, a personal loan made by the owner that does not have
anything to do with the business entity is not accounted for.

2. Recording in the Journals

A journal is a book paper or electronic in which transactions are
recorded. Business transactions are recorded using the double-entry
bookkeeping system. They are recorded in journal entries
containing at least two accounts (one debited and one credited).
Transactions are recorded in chronological order and as they occur.
Journals are also known as Books of Original Entry.

3. Posting to the Ledger

7. Financial Statements

Also known as Books of Final Entry, the ledger is a collection of

accounts that shows the changes made to each account as a result of past
transactions, and their current balances.
After the posting all transactions to the ledger, the balances of each
account can now be determined.
For example, all journal entry debits and credits made to Cash would be
transferred into the Cash account in the ledger. We will be able to
calculate the increases and decreases in cash; thus, the ending balance of
Cash can be determined.

When the accounts are already up-to-date and equality between

the debits and credits have been tested, the financial statements
can now be prepared. The financial statements are the endproducts of an accounting system.
A complete set of financial statements is made up of: (1)
Statement of Comprehensive Income (Income Statement and Other
Comprehensive Income), (2) Statement of Changes in Equity, (3)
Statement of Financial Position or Balance Sheet, (4) Statement of
Cash Flows, and (5) Notes to Financial Statements.

8. Closing Entries

4. Trial balance
At the end of the accounting period (which may be a month, quarter, or
year depending on a businesss practices), you calculate a trial balance.

Temporary or nominal accounts, i.e. income statement accounts,

are closed to prepare the system for the next accounting period.
Temporary

accounts

include income,

expense,

and

withdrawal accounts. These items are measured periodically.

5. Adjusting Entries

The accounts are closed to a summary account (usually, Income

Adjusting entries are prepared as an application of the accrual

Summary) and then closed further to the appropriate capital

basis of accounting. At the end of the accounting period, some

account. Take note that closing entries are made only for

expenses may have been incurred but not yet recorded in the

temporary accounts. Real or permanent accounts, i.e. balance

journals. Some income may have been earned but not entered
in the books.
Adjusting entries are prepared to update the accounts before
they are summarized in the financial statements.
Adjusting entries are made for accrual of income, accrual of
expenses,

deferrals (income

method

or

liability

method),

prepayments (asset method or expense method), depreciation, and

9. Post-Closing Trial Balance

In the accounting cycle, the last step is to prepare a post-closing
trial balance. It is prepared to test the equality of debits and
credits after closing entries are made. Since temporary accounts
are already closed at this point, the post-closing trial balance

10. Reversing Entries: Optional step at the beginning of the new

accounting period

6. Adjusted Trial Balance

Reversing entries are optional. They are prepared at the beginning

An adjusted trial balance may be prepared after adjusting entries

of the new accounting period to facilitate a smoother and more

are made and before the financial statements are prepared.

consistent recording process.

This is to test if the debits are equal to credits after adjusting

In this step, the adjusting entries made for accrual of income,

entries are made.

accrual of expenses, deferrals under the income method, and

prepayments under the expense method are simply reversed.

3. What is work sheet? What are purposes of preparing a work

sheet?
Ans:

An accounting worksheet is a tool that businesses use to balance and

close out their books at the end of a period. An accounting
worksheet lists all the balances of each account a business has,
with adjusting and closing entries made to these balances. When
a worksheet is complete, the company prepares financial
statements
from
them.
Chart of Accounts- Every company keeps a chart of accounts
that lists every account the company has. It is divided into five
sections: assets, liabilities, equity, revenue and expenses. Each of
these accounts is in the companys general ledger, where
balances of each account are maintained. An accounting
worksheet begins by listing each account and the balance each
account has.
Adjusting Entries- One main purpose of an accounting worksheet is
to record adjusting entries. Adjusting entries are made at the end
of each period. They are not normal everyday-type entries; they
only take place at the end of a month or period. Examples of
adjusting entries are those adjusting for supplies used, insurance
used, revenue earned and interest earned. These entries are
recorded on the worksheet.
Trial Balance - After adjusting entries are made, each account is
updated on the worksheet. If an account had an adjusting entry,
the previous amount in that account needs to be adjusted. If no
adjusting entry is made to an account, the same balance transfers
over to this column. The worksheet helps to keep the companys
ledger in balance.
Closing Entries- The worksheet is a 10-column ledger and is also
used to calculate and record closing entries. Books are always
closed at the end of every fiscal year, and the worksheet aids the
closing process.
Financial Statements-One of the primary uses for a worksheet is for
the information it contains. After making adjusting entries and
finalizing closing entries, the business can generate financial
statements. The worksheet contains all the information needed to
prepare these statements. After preparing the financial statements
, the company begins a new worksheet for the following year.

4. Definition with purpose of : (a) adjusting entries; (b) closing

entries; (c) reversing entries.
Ans:
(a) Adjusting entries:

Bookkeeping entries posted at the end of an accounting

period (the balance
sheet date)
to assign expenses to
the period in which they were incurred, and revenue to the period
in which it was earned. Adjusting entries are used also to correct
entries that could not be accurately made earlier.
Also called correcting entries.
(b) Closing entries:

The closing entry is used to transfer data in the temporary accounts

to the permanent balance sheet or income statement accounts. The
purpose of the closing entry is to bring the temporary journal
account balances to zero for the next accounting period, which aids
in keeping the accounts reconciled.
(c) Reversing entries:

Revenues are reported on the income statement in the period in

which the cash is received from customers.
2.
Expenses are reported on the income statement when the cash
is paid out.
1.

Under the accrual basis of accounting...

1.
Revenues are reported on the income statement when they
are earnedwhich often occurs before the cash is received from
the customers.
2.
Expenses are reported on the income statement in the period
when they occur or when they expirewhich is often in a period
different from when the payment is made.
6. What is special journal? Name some special journals. What are
advantage of special journal?
Ans: Special Journals are designed to facilitate the process of

A journal entry made on the first day of a new accounting period to

undo the accrual type adjusting entries made prior to the
preparation of the financial statements dated one day earlier.
Reversing entries allow for an effortless way to avoid doublecounting revenues or expenses that were accrued at the end of an
accounting period.

journalizing and posting transactions. They are used for the most
frequent transactions in a business. For example, in merchandising
businesses, companies acquire merchandise from vendors, and
then in turn sell the merchandise to individuals or other
businesses. Sales and purchases are
the
most
common
transactions for the merchandising businesses.
a. Sales journal- Sales journals record transactions that involve
sales on credit.

5. Define cash basis and accrual basis of accounting. Distinguish

between them. What basis is internationally accepted?

b. Cash receipts journal- A cash receipts journal (CRJ) records

transactions that involve payments received with cash.

Cash Basis' A major accounting method that recognizes revenues

and expenses at the time physical cash is actually received or paid
out.
Under the accrual basis of accounting, expenses are matched with
the related revenues and/or are reported when the expense occurs,
not when the cash is paid. The result of accrual accounting is an
income statement that better measures the profitability of a
company during a specific time period.
Distinguish between them:
Under the cash basis of accounting...

c. Cash Payments Journal- Cash Payments Journals record

transactions that involve expenditures paid with cash
d. Expense journals
e. Purchases Journal- Purchases Journals record transactions
that involve purchases on credit.

101.03 BALANCE SHEET AND FINANCIAL DISCLOSURES (IAS-1, IAS-24,

IAS-10 & IFRS-1)
1. DEFINE BALANCE SHEET. DESCRIBE THE PURPOSES AND
LIMITATIONS OF BALANCE SHEET.

2. INCOME STATEMENT IS A CONNECTING LINK BETWEEN THE

BEGINNING AND ENDING BALANCING SHEETS.- EXPLAIN.

ANS: A balance sheet is a financial statement that summarizes a

company's assets, liabilities and shareholders' equity at a specific point
in time. The balance sheet adheres to the following formula: Assets =
Liabilities + Shareholders' Equity
A Another name for the balance sheet is the statement of financial
position. Creditors and interested stock investors use the balance
sheet to determine a company's financial standing because it lists
what a company owns and what it owes. The balance sheet
contains summarized information on a company's assets -- the
things that it owns and its liabilities -- the debts it has. When you
subtract the company's liabilities from the assets, what is left is

called stockholder's equity, the amount that is held by the

company's owners or stockholders.
LIMITATIONS-

1. It is prepared on a historical cost basis. Changes in prices are not

considered.

2. Window-dressing may be done in Balance Sheet.

3. Historical Cost of Balance Sheet does not convey fruitful
information.
4. Different assets are valued according to different rules.
5. It cannot reflect the ability or skill of staff.
6. It is measured in terms of money or moneys worth. That is, only
those assets are recorded in it which can be expressed in money.
7. In inflationary trend, if the readers are not expert may mislead.

Net Income
Comprehensive Income
Net income or net loss is equal Comprehensive income is equal to
to the sum of all revenues
net
income
plus
other
in the period minus the
comprehensive income.
sum of all expenses in the
period.
4. What is discontinued operation? How it is reported in the
income statement.
Ans: A segment of a company's business that has been sold, disposed

of or abandoned. Discontinued operations can range from a

certain product line to an entire line of business. When operations
are discontinued, this is reported on the company's income
statement as
separate from income from continued operations.
5.

What are capital transactions and why are they

reported on to retained earnings statement?

Ans: transactions affecting non-current items such as fixed assets,

long-term
debt or share
capital,
rather
than revenue
transactions.

6. Explain the factors that contribute to the reliability of

financial statements.
Ans:

3. How does comprehensive income differ from net income?

Ans: