Question

Q1. “Accounting takes in the process of Identifying, Recording and Communicating”. How would you like to explain the statement? Give support to your answer with examples on Identifying, Recording and Communicating.

Q2. Explain the concept of double entry system and its relationship with accounting equation.

Q3. Imagine yourself to be a Merchandiser and bring out three important merchandise transaction on purchases and sales in a proper journal format.

Answer

Purchase Transactions					Sale Transactions
Date	Description	PR	Debit	Credit	Date	Description	PR	Debit	Credit

Answer 1

As per policy only first question is being answered, please ask the remaining questions seperately.

In 1941, The American Institute of Certified Public Accountants (AICPA) had defined accounting as the art of recording, classifying, and summarising in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof’. With greater economic development resulting in changing role of accounting, its scope, became broader. In 1966, the American Accounting Association (AAA) defined accounting as ‘the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of information’.

In 1970, the Accounting Principles Board of AICPA also emphasised that the function of accounting is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in
making economic decisions. Accounting can therefore be defined as the process of identifying, measuring, recording and communicating the required information relating to the economic events of an organisation to the interested users of such information.

Identification : It means determining what transactions to record, i.e., to identity events which are to be recorded. It involves observing activities and selecting those events that are of considered financial character and relate to the
organisation. The business transactions and other economic events therefore are evaluated for deciding whether it has to be recorded in books of account. For example, the value of human resources, changes in managerial policies
or appointment of personnel are important but none of these are recorded in books of account. However, when a company makes a sale or purchase, whether on cash or credit, or pays salary it is recorded in the books of account.

Measurement : It means quantification (including estimates) of business transactions into financial terms by using monetary unit, viz. Dollar and cent as a measuring unit. If an event cannot be quantified in monetary terms, it is not considered for recording in financial accounts. That is why important items like the appointment of a new managing director, signing of contracts or changes in personnel are not shown in the books of accounts.

Recording: Once the economic events are identified and measured in financial terms, these are recorded in books of account in monetary terms and in a chronological order. Recording is done in a manner that the necessary financial information is summarised as per well-established practice and is made available as and when required. For example, first purchase and then sale is recorded in books of accounts in chronological order.

Communication: The economic events are identified, measured and recorded in order that the pertinent information is generated and communicated in a certain form to management and other internal and external users. The
information is regularly communicated through accounting reports. These reports provide information that are useful to a variety of users who have an interest in assessing the financial performance and the position of an enterprise, planning and controlling business activities and making necessary decisions from time to time. The accounting information system should be designed in such a way that the right information is communicated to the right person at the right time. Reports can be daily, weekly, monthly, or quarterly, depending upon the needs of the users. An important element in the communication process is the accountant’s ability and efficiency in presenting the relevant information. For example, Annual reports (K-10) or Quaterly results are published for communicating results to the public at large.