Introduction to Accounting: Meaning, Objectives, Users, Accounting Principles and Accounting Cycle Questions

Question 1

What is capital?

Accepted Answer

**Capital** is the owner’s claim on business assets; it equals **Assets − Liabilities**.

Question 2

Name any one accounting convention.

Accepted Answer

**Conservatism (prudence)** is an accounting convention (any one).

Question 3

Expand GAAP.

Accepted Answer

**GAAP** = **Generally Accepted Accounting Principles**.

Question 4

Explain objectives of accounting (any four).

Accepted Answer

Objectives of accounting (any four):

- maintain a **systematic record** of business transactions.
- ascertain **profit or loss** for a period.
- ascertain **financial position** (assets, liabilities, capital) on a date.
- provide information to users for decision making.
- help in planning, control and legal compliance.

Thus, accounting helps both performance measurement and decision support.

Question 5

Define accounting.

Accepted Answer

**Accounting** is the process of recording, classifying, summarising and communicating financial transactions of a business to users for decision making.

Question 6

What is bookkeeping?

Accepted Answer

**Bookkeeping** is the systematic recording of business transactions in journal and posting them into ledger accounts.

Question 7

State the accounting equation.

Accepted Answer

Accounting equation: **Assets = Liabilities + Capital**.

Question 8

Explain users of accounting information (any four) with examples.

Accepted Answer

Users of accounting information (any four) with examples:

- **Owners**: know profit and capital growth.
- **Management**: planning and control decisions.
- **Creditors/Lenders**: check repayment ability and liquidity.
- **Government**: taxation and regulatory compliance.
- **Employees**: wages, job security, stability.

Hence, accounting reports serve both internal and external decision makers.

Question 9

Differentiate bookkeeping and accounting (any three points) with a table.

Accepted Answer

### **Bookkeeping vs Accounting**

- bookkeeping is mainly **recording** transactions.
- accounting includes bookkeeping plus **analysis, interpretation and reporting**.
- bookkeeping is the basic stage; accounting is broader and decision-oriented.

Table:

| Basis | Bookkeeping | Accounting |
|---|---|---|
| Focus | recording | recording + reporting |
| Output | journal/ledger | financial statements |
| Scope | narrow | broad |

Thus, bookkeeping is a part of accounting.

Question 10

Explain accounting concepts: Business entity, Money measurement and Going concern (brief).

Accepted Answer

### **Accounting Concepts (Brief)**

- **Business entity concept**: business is separate from the owner; personal transactions are not business transactions.
- **Money measurement concept**: only transactions measurable in money are recorded.
- **Going concern concept**: business is assumed to continue; assets are valued on use basis.

Hence, concepts provide the basic foundation for recording and reporting.

Question 11

Explain branches of accounting (any three) with examples.

Accepted Answer

Branches of accounting (any three) with examples:

- **Financial accounting**: prepares financial statements for external users (Trading/P&L/Balance Sheet).
- **Cost accounting**: finds cost of products/services for cost control and pricing.
- **Management accounting**: prepares internal reports for planning and decision making (budgets, variance analysis).
- **Tax accounting**: computes taxable income and supports tax compliance.

Thus, different branches serve different information needs of business and users.

Question 12

Explain matching concept and its importance in profit determination (any three points) with a small example.

Accepted Answer

### **Matching Concept**

Matching concept means expenses should be recorded in the same period as the related revenues to find correct profit.

Importance (any three points):
- ensures **true profit** of the period is calculated.
- prevents overstatement/understatement of profit.
- helps compare performance between periods.

Example: If sales are made in March, related carriage/commission expenses should be charged to March even if paid later.

Hence, matching is essential for accurate periodic profit measurement.

Question 13

Explain accounting cycle with steps (exam-style) using a flowchart.

Accepted Answer

### **Accounting Cycle (Exam-Style)**

**Meaning:** Accounting cycle is the step-by-step process of recording transactions and preparing financial statements for a period.

#### **Steps (brief)**
- identify transactions and collect supporting documents.
- record transactions in **journal**.
- post to **ledger** accounts.
- prepare **trial balance**.
- pass adjustment entries (outstanding, prepaid, depreciation).
- prepare final accounts (Trading, P&L, Balance Sheet).

Flowchart:

```text
Transactions → Journal → Ledger → Trial Balance → Adjustments → Final Accounts
```

**Conclusion:** Accounting cycle ensures systematic recording and correct determination of profit and financial position.

Question 14

Explain accounting principles/conventions: Consistency, Conservatism and Full disclosure (exam-style) with a table.

Accepted Answer

### **Accounting Conventions (Exam-Style)**

#### **1) Consistency**
- use the same accounting method year to year (e.g., depreciation method) for comparability.

#### **2) Conservatism (Prudence)**
- anticipate **losses** but not profits.
- create provisions (e.g., provision for doubtful debts).

#### **3) Full disclosure**
- disclose all material information in statements/notes.

Table:

| Convention | What it means |
|---|---|
| **Consistency** | same method each year |
| **Conservatism** | provide for losses |
| **Full disclosure** | show all material facts |

**Conclusion:** These conventions improve reliability and comparability of financial statements.

Question 15

Explain accrual and matching concepts with a simple example (exam-style) and a mini table.

Accepted Answer

### **Accrual and Matching Concepts (Exam-Style)**

#### **Accrual concept**
- record income when **earned** and expenses when **incurred**, not when cash is received/paid.

#### **Matching concept**
- match related expenses with the revenue of the same period to find correct profit.

Example:
- Salary for March is paid in April.
- Under accrual, salary expense belongs to March.

Mini table:

| Situation | Cash basis | Accrual basis |
|---|---|---|
| Salary paid next month | expense next month | expense this month |

**Conclusion:** Accrual and matching ensure profit is measured correctly for the period.

Introduction to Accounting: Meaning, Objectives, Users, Accounting Principles and Accounting Cycle

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