ACCOUNTANCY CHAPTER 1 (class 11)

ACCOUNTANCY WORKSHEET 1

INTRODUCTION TO ACCOUNTING 

1. Briefly explain the classification of accounting.

    Accounting can be classified into three categories

(a) Financial Accounting
(b) Cost Accounting
(c) Management Accounting

2. What are the functions of Financial Accounting?

a) Book-keeping Function: Financial accounting is the scientific process of record financial data of the business. Accounting is supportive and supplementary to human memory. Business transactions are recorded in journal, subsidiary books and ledger.

b) Classification of information: The data of one particular type is classified into one segment. This is done in the form of ledger accounts. The transactions of different activities are collected in one place. Full information about specific items is shown under separate heads called “Accounts” in the ledger.

c) Preparation of Financial Statements: Business transactions are summarized by preparing the principal statements of the business. i.e., Profit and Loss Account and the Balance Sheet. These statements are the indicators of operational efficiency and financial position of an enterprise.

d) Segregating of Financial Transactions: The economic transactions relating to a business are measured in terms of money. The financial accounting is concerned with transactions which are measurable in monetary terms. Any information of the business which cannot be expressed in terms of money is not considered. It is a basic concept of accounting called “money measurement concept”.

e) Interpretation of Financial Data: The management interprets the financial data for decision making. Various parties concerned with an enterprise such as shareholders, creditors, bankers and other agencies are facilitated because of the interpretation of financial data provided in various contexts and they may draw their own conclusions.

f) Reporting of information: Financial Accounting not only records data but also communicates data by way of profit and loss account and the balance sheet to all concerned at frequent intervals.

g) Providing Accurate and Reliable Information: Yet another information function of accounting is to provide accurate, reliable, and useful information. This function is performed by following established Accounting Standards. Moreover, the accounting policies are consistently practiced to maintain uniformity and accuracy.

 3.  What are the limitations of Financial Accounting?

 Modern business has become competitive and so complex that financial statements prepared by                                          financial accounting fall short of management’s requirements of information for decision making. 

a) Historical Data: Financial accounting is historical in nature. It records business transactions after they occur during a period. Predetermination in business transaction has little place financial accounts. Managerial decisions are future oriented. Hence information about future is required, which financial accounts fails to provide.

b) Financial Statements for the enterprise as a whole: Financial Accounting provides, summarized statements for the entire organization. Specific information is not usually available – product-wise, department-wise or process-wise. It is imperative to have information ‘activity wise’ so that individual activity-wise performance can be evaluated.

c) Financial Accounting fails to help price fixation: Cost of products can be ascertained only after the costs are incurred: the prices of products cannot be fixed in advance. Submission of quotations or tenders is very difficult since accurate price cannot be determined with the help of financial statements.

d) Not useful in cost control: Cost figures are available only after they are incurred. Cost control process involves constant comparison of predetermined cost with actual cost. If the cost are incurred and information is available subsequently nothing can be done to control them. Financial accounts fail to reveal whether the cost incurred are ‘high’ and ‘low’.

e) Evaluation of Policies not possible: The efficiency or otherwise of business activities cannot be ascertained as the information is available only at the end of the period. Financial accounting fails to be helpful in operating budgetary control and standard costing. Profits are the only criterion available for evaluating performance.

f) Actual costs alone are recorded: Financial accounts record cost only after they are incurred. Various assets are recorded at actual cost of acquisition, whereas the prices of these assets change over a period of time. Financial accounting fails to record price changes.

g) Does not provide information for strategic decision making: Management has to make strategic decisions like mechanization, shutting down of a division or discontinuation of an existing line of production or introduction of a new product etc. Financial accounting fails to provide the required information for decision making.

h) Complicated and Technical subject: Financial statements require accounting knowledge to interpret and understand. A person who is not familiar with accounting principles has not utility of financial accounts.

i) Monetary Nature: Financial Accounting considers only those transactions which are measured in terms of money. Government policies and competitors’ strategies, etc. will have direct bearing on the business. Such quantitative factors are ignored by financial statement.

j) Chances for manipulation or window dressing: The profit figures of business can be inflated or decreased to suit the whims of management. Over valuation or under valuation of inventory, policies regarding depreciation, etc. can vary the amount of profits. More profits may be revealed to claim more remuneration, to pay more dividends and to increase the share prices in the market. Less profits may be shown to save income tax and pay less bonus to workers. 

4.  Distinguish between cost accounting and financial accounting.

	FINANCIAL ACCOUNTING	COST ACCOUNTING
1)    Objectives	The main objective of financial accounting is to prepare Profit and Loss A/c and Balance Sheet to report to owners and outsiders.	The main objective of cost accounting is to provide cost information to management for decision making.
2)    Legal requirement	Financial records are maintained as per the requirement of companies Act and Income Tax Act.	Cost Accounts are maintained to fulfill the internal requirements of the management as per conventional guidelines.
3)    Classification  of transactions.	Financial Accounting classifies records and analyses transactions in a subjective-manner i.e, according to nature of expenses.	Cost Accounting records and analyses expenditure in an objective manner. According to purpose for which cost are incurred.
4)    Stock Valuation	In financial accounts, stocks are valued at costs or realizable value, whichever is lesser.	In cost accounts stocks are valued at costs.
5)    Analysis of profit and cost	In Financial accounts, the Profit or Loss of the entire enterprises is dislocated in  total.	Cost accounts reveal Profit or Loss of different products, departments separately.
6)    Accounting period	Financial reports are prepared annually.	Cost reports are of continuous process and are prepared as per the requirements of managements, may be daily, weekly, monthly, quarterly, or annually.
7)    Emphasis	Emphasis is laid on the recording of transactions and control aspect is not given importance.	Cost accounting lays emphasis on ascertainment of cost and cost control.
8)    Nature	Financial accounts are maintained on the basis of historical records.	Cost accounts lay emphasis on  both historical and predetermined costs.