Course: Principles of Accounting (5401)
Semester: Autumn, 2021
ASSIGNMENT No. 1
Q. 1 (a) Define Accounting and explain its objectives and branches.
Accounting is basically the systematic process of handling all the financial transactions and business records. In other words, Accounting is a bookkeeping process that records transactions, keeps financial records, performs auditing, etc. It is a platform that helps through many processes, for example, identifying, recording, measuring and provides other financial information.
Accounting is a very important procedure and holds great importance in people’s lives. Accounting aids to a lot of financial procedures and analytics taking place every day. There are specific people for doing this job and they are known as accountants. As said earlier, accounting is a very important process and in addition, holds a lot of objectives and functions.
To move ahead to the functions of accounting, first of all, it is very important to know about the role of accounting. The basic role of accounting is to provide relevant financial information to the businessmen and the stakeholders. Furthermore, facilitating the Aprision making processes and keeping them updated. There are two types of functions of accounting, first, historical functioning and second, managerial functionals.
The historical functioning of accounting involves keeping accurate records of all the past transactions made in the business. This type of functioning of accounting includes:
- Recording the financial transactions and maintain a journal to keep them all.
- It is important to classify and separate the records and the ledger.
- Preparation of brief summary takes place for quick reviews.
- This type of accounting gives the net result other than just keeping the records.
- The preparation of the balance sheet takes place to determine the financial position of the business.
- The analyzed data and records are then used for other purposes.
- The last step is to communicate the obtained financial information to the interested sectors, for instance, owners, suppliers, government, researchers, etc.
In an organization, the management committee looks for all kinds of Aprision making. To ensure that the Aprisions are smooth and beneficial for everyone, they do an evaluation of the past records provided by accounting. These are managerial functions. The five managerial functions of accounting are:
- Formation of plans in addition to controlling the financial policies.
- Besides that, a budget is prepared to estimate the total expenditure for future activities.
- Also, cost control is made possible by comparing the cost with the efficiency of the work.
- The accounting also provides the necessary information during the evaluation of employee’s performance.
- To check for fraud and errors is what the workability of the whole procedure depends on.
Objectives of Accounting
The functions of accounting facilitate the objectives of accounting. there are many objectives of accounting. For instance,
- Accounting facilitates the systematic management of the records of the transaction and other financial data.
- It gives an idea about the chances of profitability or failure or losses.
- The process assists the management by helping them to make the best Aprisions. besides that, accounting ascertains the financial position of an organization.
- It also helps in the evaluation of the employee and their working efficiency, in addition, communicating and spreading the accounting information to the user.
- Accounting contributes the biggest to any organization by preventing fraud and prevents profit risks.
There are eight steps to the accounting cycle.
- Identify Transactions: An organization begins its accounting cycle with the identification of those transactions that comprise a bookkeeping event. This could be a sale, refund, payment to a vendor, and so on.
- Record Transactions in a Journal: Next comerecording of transactions using journal entries. The entries are based on the receipt of an invoice, recognition of a sale, or completion of other economic events.
- Posting: Once a transaction is recorded as a journal entry, it should post to an account in the general ledger. The general ledger provides a breakdown of all accounting activities by account.
- Unadjusted Trial Balance: After the company posts journal entries to individual general ledger accounts, an unadjusted trial balance is prepared. The trial balance ensures that total debits equal the total credits in the financial records.
- Worksheet: Analyzing a worksheet and identifying adjusting entries make up the fifth step in the cycle. A worksheet is created and used to ensure that debits and credits are equal. If there are discrepancies then adjustments will need to be made.
- Adjusting Journal Entries: At the end of the period, adjusting entries are made. These are the result of corrections made on the worksheet and the results from the passage of time. For example, an adjusting entry may accrue interest revenue that has been earned based on the passage of time.
- Financial Statements: Upon the posting of adjusting entries, a company prepares an adjusted trial balance followed by the actual formalized financial statements.
- Closing the Books: An entity finalizes temporary accounts, revenues, and expenses, at the end of the period using closing entries. These closing entries include transfering net income into retained earnings. Finally, a company prepares the post-closing trial balance to ensure debits and credits match and the cycle can begin anew.
(b) What do you mean by double entry system of accounting?
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.
Example of a Double-Entry System
To illustrate double entry, let’s assume that a company borrows $10,000 from its bank. The company’s Cash account must be increased by $10,000 and a liability account must be increased by $10,000. To increase an asset, a debit entry is required. To increase a liability, a credit entry is required. Hence, the account Cash will be debited for $10,000 and the liability Loans Payable will be credited for $10,000.
Double Entry Keeps the Accounting Equation in Balance
Double entry also means that the accounting equation (assets = liabilities + owner’s equity) will always be in balance. In our example, the accounting equation remained in balance because both assets and liabilities were each increased by $10,000.
Q. 2 Mr. Asfer started a sole proprietorship business. The business is newly established and Mr. Asfer hired an Accountant for keeping the journal updated. Suppose you are the accountant of Mr. Asfer’s business, prepare the journal book for the month of April, 2019. You are also required to post journal entries into the ledger and prepare the trial balance. Detail of the transactions during April, 2019 are given as follows:
April 1. Mr. Asfer commenced business with Cash of Rs. 800,000/- Building Rs.2, 500, 000/-
2. Purchased Furniture with cash Rs. 100,000/-
5. Purchased goods from Miss Zara Rs.150,000/-
8. Sold goods to Mr. M. Naeem Rs. 80,000/-
20. Goods returned to Miss Zara Rs.5,000/-
21. Machinery Purchased Rs.100, 000/-
25. Returned goods to Mr. M. Naeem Rs.3,000/-
28. Utility bills paid for the month Rs.40,000/-
30. Rent paid for the month Rs.40,000/-
Q. 3 A firm whose Accounting year is calendar year, purchased on 1st April 2013 machinery costing Rs. 150,000. It purchased further machinery on 1st Oct, 2013 costing Rs. 100,000 and on 1st July 2014, costing Rs. 50,000. On 1st January 2015, machinery installed on 1st April, 2013 became obsolete and was sold for Rs. 45,000. Show how machinery Account would appear in the books of company, if machinery was depreciated by fixed installment method @ 10% p.a. What would be the balance of machinery Account on 1st January 2016?
Q4. The following Trial Balance was extracted from the books of Jaffar Brothers on 31st January, 2019. From the given information you are required to prepare a work sheet for the year ended on 31st Aprember, 2019. Trial Balance on 31st Aprember, 2019 as follow: