Question

Give short answers for the following questions:

i.Define ‘Accounting’.
ii.Explain the primary objectives of accounting.
iii.Discuss the limitations of accounting.
iv.What types of activities are included in data evaluation?
v.Outline the main functions of accounting considering the following groups;
?Lenders
?Employees
?Customers
Please suggest information that each one is likely to need from accounting
statements and reports.

Answer 1

Solution :

(i). Accounting is the systematic & comprehensive recording of financial transactions pertaining to a business as well as it also refers to the process of summarizing, analysing & reporting the transactions to third parties. It basically, helps analyse the financial position of the business as on a particular date or time.

(ii). Primary Objectives of Accounting :

1. To follow GAAP : Its an important objective to follow the generally accepted accounting principles. These are the guidelines for preparing accounting records which are followed by almost all companies.

2. To Provide Accurate Information : Information is provided to various entities by accounting function. For Instance , third parties such as banks while giving loans to companies, study their accounting information i.e. Accouting records. Managers of companies decide to raise more capital by studying financial position of business through this accounting information.

3. To calculate results & ascertain financial position : Accounting profits or losses are calculated for a period as required, in order to ascertain the financial position of the company. A company can financially evaluate upto what extent the goals or targets of the company have been achieved. The financial statements prepared from accounting records provide information at various levels in decision making process.

(iii). Limitations of Accounting :

1. All accounting information is based on estimated figures.

2. Accounting is such a field where there are no globally accepted accounting principes. For instance, we cannot compare financial statements of two different companies on a one-to-one basis as the companies may follow different approaches for accounting. & here the different approaches followed may be correct as per their view.

3. The accounting records prepared are subject to frauds & errors. Though there are well established techiques, there is always a room for a fraud or error by which the financials may be manipulated. Hence, a proper internal control system needs to be established.

(iv). Types of Activities included in Data Evaluation :

Conducting tests by groups for evaluating information,

Observation of recording of the whole process of accounting,

Collecting an opinion about the functioning of the process/software used by employees for accounting,

Evaluation of audit trails,

Documenting and reporting the whole process for easy data evaluation.

(v). Main functions of Accounting considering the following groups :

1. Lenders : Proper Accounting of loans borrowed should be maintained. Timely payments of installments to be recorded.

Accounting information needed by lenders : The debt or loan of the company will be analysed by lenders. The debt equity ratio will be calculated and found out whether the company can clear their debts on time. The companies' credibility position will be tested.

2. Employees : Its an important accounting function to train the employees to properly account for transactions. The company is under an obligation to properly pay the incentives to employees keeping them motivated.

Accounting information needed by employees : Employees are mainly interested in the turnover of the company, achieving the sales target. Their view is when they achieve their targets they are eligible for more bonus or incentives. Employees also work hard in order to reduce avoidable cost.

3. Customers : True & Fair accounting figures are given or shown to the customers.

Accounting information needed by customers : Customers are obviously outsiders and they are mostly concerned with profits of the company.