Accounting

Ankon Gopal Banik

According to the syllabus of Department of Computer Science & Engineering, Gono Bishwabidyalay
 Accounting

Without the help of our respective teacher

Iqbal Hossain this work was impossible

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 Accounting
Q: 01| What is accounting?
Ans: Accounting is an information system that identifies, records, and communicates the economic
events of an organization to interested users by means of financial reports.

Q: 02| Who Uses Accounting Data?

Ans: The information that a user of financial information needs depends upon the kinds of decisions
the user makes. There are two broad groups of users of financial information: internal users and
external users.
1. Internal Users: Internal users of accounting information are those individuals inside a
company who plan, organize, and run the business. These include: Marketing Managers,
Production Supervisors, Finance Directors, and Company Officers etc.
2. External Users: External users are individuals and organizations outside a company who want
financial information about the company. The two most common types of external users are
as flows:
Investors (Owners) use accounting information to make decisions to buy, hold, or sell
ownership shares of a company.
Creditors (such as suppliers and bankers) use accounting information to evaluate the risk of
granting credit or lending money.

Q: 03| Explain the cost principle.

Ans: The cost principle (or historical cost principle) dictates that companies record assets at their
cost. This is true not only at the time the asset is purchased, but also over the time the asset is held.
For example, if Best Buy purchases land for $300,000, the company initially reports it in its accounting
records at $300,000. But what does Best Buy do if, by the end of the next year, the fair value of the
land has increased to $400,000? Under the cost principle, it continues to report the land at $300,000.

Q: 04| State the accounting equation and define the components.

Ans: According to the accounting equation, assets must equal the sum of liabilities and owner’s
equity. So, the basic accounting equation is as follows-
Assets = Liabilities + Owner’s Equity
Liabilities appear before owner’s equity in the basic accounting equation because they are paid first
if a business is liquidated.
Assets: Assets are the resources a business owns. Business uses its assets in carrying out such
activities as production and sales. The common characteristics of all assets are the capacity to provide
future service or benefits. There are three types of assets-

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I. Long Term Assets: Long term assets provide future benefits in the business. Ex- Land,
building, furniture etc.
II. Short-Term Assets: Short-Term assets are used in the business to co conduct the day to day
business. Ex- Cash, Inventory, Accounts Receivable etc.
III. Intangible Assets: It cannot be seen and touched. Goodwill. Trade mark, etc.
Liability: Liabilities are claims against asset - that is, existing debts and obligation. Business Of all sizes
usually borrows money and purchase merchandise on credit. There are two types of liabilities-
I. Long- Term Liabilities: Long term liabilities that is not due within 12 months. Ex- Loan,
Bond, Mortgage etc.
II. Short-Term Liabilities: Short-Term liabilities that are to pay within 12 months. Ex-
Account payable, Note Payable.
Owner's equity: Owner's equity refers ownership claim on total assets. It is also referred to residual
equity. It is equal to total assets minus total liabilities.
Owner's Equity = Total Assets — Total Liabilities
Owner’s equity is increased by an owner’s investments and by revenues from business operations.
Owner’s equity is decreased by an owner’s withdrawals of assets and by expenses.
I. Investment by owner: Investment by owner is the assets the owner puts into the
business. These investments increase owner's equity. They are recorded in a category
called owner's capital.
II. Revenues: Revenues result from business activities entered into for the purpose of
earning income. Common sources of revenue are: sales, fees, services, commissions,
interest, dividends, royalties, and rent.
III. Drawings: An owner may withdraw cash or other assets for personal use. We use a
separate classification called drawings to determine the total withdrawals for each
accounting period. Drawings decrease owner's equity.
IV. Expenses: Expenses are the cost of assets consumed or services used in the process
of earning revenue. They decrease owner's equity. Common expenses are: salaries
expense, rent expense, utilities expense, tax expense, etc.
The basic accounting equation by showing the accounts that comprise owner’s equity is referred to
as the expanded accounting equation. So, the expanded accounting equation is as follows-
Assets = Liabilities + Owner’s Equity
Owner’s Capital - Drawings + Revenues - Expenses

Q: 05| State the Economic entity assumption.

Ans: Economic entity assumption requires that activities of the entity be kept separate and distinct
from the activities of its owner and all other economic entities.
The economic entity assumption states that there should be a particular unit of accountability.

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Q: 06| Define the term debit and credit.
Ans: The term debit indicates the left side of an account, and credit indicates the right side. They are
commonly abbreviated as Dr. for debit and Cr. for credit. They do not mean increase or decrease, as
is commonly thought. We use the terms debit and credit repeatedly in the recording process to
describe where entries are made in accounts.

For example, the act of entering an amount on the left side of an account is called debiting the
account. Making an entry on the right side is crediting the account. When comparing the totals of the
two sides, an account shows a debit balance if the total of the debit amounts exceeds the credits. An
account shows a credit balance if the credit amounts exceed the debits.

Q: 07| Show the debit and credit effects on the accounting equation.
Ans: We know that both sides of the basic equation (Assets = Liabilities + Owner’s Equity) must be
equal. It therefore follows that increases and decreases in liabilities will have to be recorded opposite
from increases and decreases in assets. Thus, increases in liabilities must be entered on the right or
credit side, and decreases in liabilities must be entered on the left or debit side. The effects that
debits and credits have on assets and liabilities are summarized in bellow-
Asset accounts normally show debit balances. That is, debits to a specific asset account should exceed
credits to that account.

Likewise, liability accounts normally show credit balances. That is, credits to a liability account should
exceed debits to that account.

Credits increase this account, and debits decrease it. When an owner invests cash in the business,
the company debits (increases) Cash and credits (increases) Owner’s Capital. When the owner’s
investment in the business is reduced, Owner’s Capital is debited (decreased).

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Credits to revenue accounts should exceed debits. Debits to expense accounts should exceed credits.
Thus, revenue accounts normally show credit balances, and expense accounts normally show debit
balances. We can diagram the normal balances as follows.

Bellow figure shows a summary of the debit/credit rules and effects on each type of account-

Q: 08| Define the following term-

• Direct materials
• Indirect materials
• Opportunity cost
• Sunk cost
Ans: Direct materials: Raw materials that can be physically and directly associated with the finished
product during the manufacturing process are called direct materials. Examples include flour in the
baking of bread, syrup in the bottling of soft drinks, and steel in the making of automobiles.
Indirect materials: Some raw materials cannot be easily associated with the finished product. These
are called indirect materials.
Opportunity cost: Opportunity cost is the potential benefit that may be obtained by following an
alternative course of action.
Sunk cost: A sunk cost (also known as retrospective cost) is a cost that has already been incurred and
cannot be recovered.

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Q: 09| What are the difference between period and product cost?
Ans: The difference between period and product cost is as follows-

Product cost Period cost

Products costs only incurred if products are period costs are associated with the passage
acquired or produced of time i.e., a business that has no production
or inventory purchasing activities will incur no
product costs, but will still incur period costs.
It comprises of manufacturing Non-manufacturing cost, i.e. Office &
or production cost administration, selling & distribution, etc.
Ex: Cost of raw material, production Ex: Salary, rent, audit depreciation on office
overheads, depreciation on machinery, wages assets etc
to labour
It is variable cost It is fixed cost

Q: 10| Ray Neal decides to open a computer programming service which he names Sofbyte. On
September 1, 2010; a summary of September transactions is presented below.
1. Invested TK. 15,000 cash to start the business.
2. Purchased Equipment for TK. 7,000 cash.
3. Purchased of Supplies on account TK. 1,600 from Acme Supply Company
4. Services provided for cash TK. 1,200
5. Purchased of Advertising on credit TK. 250 from the Daily News.
6. Services provided for Cash and Credit TK. 1,500 and 2,000 respectively.
7. Payment of Expenses in cash for September: Store rent TK. 600. salaries and wages of
employees T K. 900, and utilities TK. 200.
8. Payment of Accounts Payable [in transaction (5)]
9. Receipt of Cash on Account [in transaction (6)]
10. Withdrawal of Cash by Owner TK. 1,300
Prepare a tabular analysis and prove the accounting equation.
Ans: Tabular Analysis

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Total Assets = Cash + Account Receivable + Supplies + Equipment

8050 + 1400 + 1600 + 7000
18050
Total Liabilities = Account Payable Tk. 1600
Total Owner’s Equity = Owner’s capital - Owner’s Drawings + Revenues – Expenses
15000 - 13000 + 47000 - 1950
16450
Basic Accounting Equation:
Assets = Liabilities + Owner’s Equity
18050 = 1600 + 16450
18050

Q: 11| Selected transactions for Line brink Lawn Care Company are listed below
1. Made cash investment to start business.
2. Paid monthly rent.
3. Purchased equipment on account.
4. Billed customers for service performed.
5. Withdrew cash for owner's personal use.
6. Received cash from customers billed in (4)
7. Incurred advertising expense on account.
8. Purchased additional equipment for cash.
9. Received cash from customers when service was performed.

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List the numbers of the above transactions and describe the effect of each transaction on assets,
liabilities and owner's equity.
Ans: The effect of each transaction on assets, liabilities and owner's equity is as follows-
Transactions Account Titles Increase/Decrease
1. Made cash investment to start business Asset Increase
Owner’s Equity Increase
2. Paid monthly rent. Owner’s Equity Decrease
Asset Decrease
3. Purchased equipment on account. Asset Increase
Liabilities Increase
4. Billed customers for service performed Asset Increase
Owner’s Equity Increase
5. Withdrew cash for owner's personal use Owner’s Equity Decrease
Asset Decrease
6. Received cash from customers billed in (4) Asset Increase
Asset Decrease
7. Incurred advertising expense on account Owner’s Equity Decrease
Liabilities Increase
8. Purchased additional equipment for cash Asset Increase
Asset Decrease
9. Received cash from customers when service Asset Increase
was performed Owner’s Equity Increase