Test: Introduction To Accounting - 1

The double-entry system of accounting or bookkeeping means that for every business transaction, amounts must be recorded in a minimum of two accounts. The double-entry system also requires that for all transactions, the amounts entered as debits must be equal to the amounts entered as credits.

Bookkeeping is the recording of financial transactions, and is part of the process of accounting in business. Bookkeeping refers mainly to the record-keeping aspects of financial accounting, and involves preparing source documents for all transactions, operations, and other events of a business.

Communication of information is the last step of accounting as process of accounting information. Communicating the information is very necessary for the outsiders so they can look over the affairs and working efficiency of the business..

After the transactions are recorded in the journal, it is then posted in the principal book called as 'Ledger'. The process of transferring the entries from journal to respective ledger accounts is called ledger posting. Balancing of ledgers is carried to find out differences at the end of the year.

Evidence in support of a business transaction is called Voucher. Vouchers are the primary evidence of business transactions having taken place.

Revenue=Cost + profit. So,sales include both Cost as well as Profit. So,that's why sale is also known as Revenue from operations.

External users are people outside the business entity (organization) who use accounting information. Examples of external users are suppliers, banks, customers, investors, potential investors, and tax authorities.

Window dressing is the way in the accounting work to cover-up the fraud done by showing in correct manner. So,this one is the limitation of accounting.

 A trade discount is the amount by which a manufacturer reduces the retail price of a product when it sells to a reseller, rather than to the end customer. The reseller then charges the full retail price to its customers in order to earn a profit on the difference between the amount by which the manufacturer sold the product to it and the price at which it then sells the product to the final customer.

Companies Act, 1956 (The Act) which provides the instructions for the preparation of the Balance Sheet and Statement of the Profit & Loss of the Company. The purpose for revising the reporting format of the financial accounts of the Company was mainly to bring it in par with the International Financial Reporting Standards (IFRS).

Liabilities are to be classified as current if any one of four specified conditions is met. The conditions are:
a) It expects to settle the liability in its current operating cycle
b) It holds the liability primarily for trading
c) The liability is due to be settled within 12 months
d) It does not have an unconditional right to defer settlement of the liability for at least 12 months after the reporting period.
All other liabilities are to be classified as non-current. 

The operating cycle is also known as the cash conversion cycle. In the context of a manufacturer the operating cycle has been described as the amount of time that it takes for a manufacturer's cash to be converted into products plus the time it takes for those products to be sold and turned back into cash. In other words, the manufacturer's operating cycle involves:
- paying for the raw materials needed in its products
- paying for the labor and overhead costs needed to convert the raw materials into products
- holding the finished products in inventory until they are sold
- waiting for the customers' cash payments for the products that have been sold

Fictituous assets are not assets actually, they are expenses and losses shown on asset side of the Balance sheet. Fictitious means “Fake”.
Fictious assets are those assets which couldn’t be written off during the present accounting period.
Examples-
1.preliminary expense
2.promotional expense of a business.
3.discount allowed in issue of shares
4.loss incurred on issue of debentures.
Goodwill  is not an expense as explained below: 
Goodwill is an intangible asset that arises when one company purchases another for a premium value. The value of a company’s brand name, solid customer base, good customer relations, good employee relations ,and any patents or proprietary technology represent goodwill.
Goodwill is considered an intangible asset because it is not a physical asset like buildings or equipment. The goodwill account can be found in the assets portion of a company's balance sheet.

Outstanding expenses are those expenses which have been incurred and consumed during an accounting period and are due to be paid but are not paid.
Examples include outstanding salary, outstanding rent, etc. Outstanding expenses are recorded in the books at the end of an accounting period to show true numbers of a business.

Trade receivables are amounts billed by a business to its customers when it delivers goods or services to them in the ordinary course of business. These billings are typically documented on formal invoices, which are summarized in an accounts receivable aging report. This report is commonly used by the collections staff to collect overdue payments from customers. In the general ledger, trade receivables are recorded in a separate accounts receivable account, and are classified as  current assets on the balance sheet if you expect to receive payment from customers within one year.

Proprietor is the person who invested capital in the business and bear all the risks,and also known as the owner of the business.

Debentures are also long term liabilities. These are the long term loan but company makes bonds and debentures as their products for getting loan money more fastly. Company gives interest on debentures.

Machinery is a permanent asset of the business and can be used for many years but it will benefit to the business until it is installed and erected at a proper place. So amount spent on purchase of machinery, on its installation and erection is capital expenditure.

Prepaid expenses are when a company gives an employee money in advance to pay for a known cost. Instead of asking that employee to pay out of their own pocket, you give them the money before they need it. 

A real account is an account that retains and rolls forward its ending balance from period to period. The areas in the balance sheet in which real accounts are found are assets, liabilities, and equity. Examples of real accounts is assets.