Question

Give short answers to the following questions: (16)
i. Who is an accountant?
ii. Describe various roles and activities that accountants perform.
iii. What type of duties does a controller perform?
iv. What is a double entry system? Outline the steps involved in Double entry system.
v. What is the meaning of ‘Debit’ and ‘Credit’ in accounting?
vi. What is meant by ‘Hybrid basis’ accounting? How the entries are recorded using this method?
vii. What is the difference between ‘Real Accounts’ and ‘Personal Accounts’?
viii. How do we record the entries using cash basis accounting method

Answer 1

i) Accountant:

Accountant is a person who has the the kwoledge of Accounting.

He records business transactions on behalf of an organization,

He reports the company performance to management, and prepares financial statements(profit & loss account,balance sheet, notes to accounts etc).

(ii)Examples of various functions performed by accountant

• Issuing an invoice to a customer, which involves recording a sale and account receivable.
• Receiving an invoice from a supplier, which involves recording an expense or asset and an account payable.
• Issuing a salary or wage payment to an employee, which involves recording an expense and the outflow of cash.
• Reconciling a bank statement, which likely produces adjustments to the cash account

iv)Double entry system:

Double entry system of book-keeping has emerged in the process of evolution of various

accounting techniques. It is the only scientific system of accounting. According to it, every

transaction has two-fold aspects–debit and credit and both the aspects are to be recorded in

the books of accounts. For example, if a business acquires something then either it must have

been given by someone or it must have been acquired by giving up something. On purchase of

furniture either the cash balance will be reduced or a liability to the supplier will arise. This has

been made clear already, the Double Entry System is so named since it records both the aspects.

We may define the Double Entry System as the system which recognises and records both the

aspects of transactions. This system has proved to be systematic and has been found of great use

for recording the financial affairs for all institutions requiring use of money.

V)Debit and Credit

In single line it is impossible to explain/understand, you need to understand the total concept because entire accounting is depends on debit and credit .

accounting equation.

Assets = Liabilities + Capital

or

Assets – Liabilities = Capital

i) Increases in assets are recorded on the left-hand side and decreases in them on the right-hand

side; and

(ii) in the case of liabilities and capital, increases are recorded on the right-hand side and decreases

on the left-hand side.

When two sides are put together in T form, the left-hand side is called the ‘debit side’ and the

right hand side is ‘credit side’. When in an account a record is made on the debit or left-hand

side, one says that one has debited that account; similary to record an amount on the right-hand

side is to credit it.

From the above, the following rules can be obtained:

(i) When there is an increase in the amount of an asset, its account is debited; the account will

be credited if there is a reduction in the amount of the asset concerned : Suppose a firm

purchases furniture for ` 800, the furniture account will be debited by ` 800 since the asset

has increased by this amount. Suppose later the firm sells furniture to the extent of ` 300,

the reduction will be recorded by crediting the furniture account by ` 300.

(ii) If the amount of a liability increases, the increase will be entered on the credit side of the liability

account, i.e. the account will be credited : similarly, a liability account will be debited if there is a

reduction in the amount of the liability. Suppose a firm borrows ` 500 from Mohan; Mohan’s

account will be credited since ` 500 is now owing to him. If, later, the loan is repaid, Mohan’s

account will be debited since the liability no longer exists.

(iii) An increase in the owner’s capital is recorded by crediting the capital account : Suppose the proprietor

introduces additional capital, the capital account will be credited. If the owner withdraws

some money, i.e., makes a drawing, the capital account will be debited.

(iv) Profit leads to an increase in the capital and a loss to reduction : According to the rule mentioned in

(iii) above, profit may be directly credited to the capital account and losses may be similarly

debited.

However, it is more useful to record all incomes, gains, expenses and losses separately.

By doing so, very useful information will be available regarding the factors which have

contributed to the year’s profits and losses. Later the net result of all these is ascertained and

adjusted in the capital account.

(v) Expenses are debited and Incomes are credited : Since incomes and gains increase capital, the rule

is to credit all gains and incomes in the accounts concerned and since expenses and losses

decrease capital, the rule is to debit all expenses and losses. Of course, if there is a reduction

in any income or gain, the account concerned will be debited; similarly, for any reduction

in an expenses or loss the concerned account will be credited.

The rules given above are summarised below:

(i) Increases in assets are debits; decreases are credits;

(ii) Increases in liabilities are credits; decreases are debits;

(iii) Increases in owner’s capital are credits; decreases are debits;

(iv) Increases in expenses are debits; decreases are credits; and

(v) Increases in revenue or incomes are credits; decreases are debits.

The terms debit and credit should not be taken to mean, respectively, favourable and unfavourable

things. They merely describe the two sides of accounts.

vii) Real and Personal Accounts:

(a) Natural personal accounts: It relates to transactions of human beings like Ram, Rita, etc.

(b) Artificial (legal) personal account: For business purpose, business entities are treated

to have separate entity. They are recognised as persons in the eye of law for dealing

with other persons. For example: Government, Companies (private or limited), Clubs,

Co-operative societies etc.

(c) Representative personal accounts: These are not in the name of any person or

organisation but are represented as personal accounts. For example: outstanding liability

account or prepaid account, capital account, drawings account.

(ii) Impersonal Accounts: Accounts which are not personal such as machinery account, cash

account, rent account etc. These can be further sub-divided as follows:

(a) Real Accounts: Accounts which relate to assets of the firm but not debt. For example,

accounts regarding land, building, investment, fixed deposits etc., are real accounts.

Cash in hand and Cash at the bank accounts are also real.

(b) Nominal Accounts: Accounts which relate to expenses, losses, gains, revenue, etc. like

salary account, interest paid account, commission received account. The net result of

all the nominal accounts is reflected as profit or loss which is transferred to the capital

account. Nominal accounts are, therefore, temporary.

viii)Cash Basic Accounting:

In cash basis accounting, transactions are recorded only when cash received and when cash paid,but not when transactions are taken place.

When cash received it will be debited and when cash paid it will be credite