1 Introduction to Financial accounting Financial Accounting is the procedure in which business exchanges are recorded deliberately in the different books of records kept up by the association keeping in mind the end goal to get ready monetary explanations. These monetary articulations are fundamentally of two sorts: First is Profitability Statement or Profit and Loss Account and second is Balance Sheet. Therefore, accounting concept is considered to be of great importance to any particular firm for it will enable it to estimate its annual spending. That is, the company will be able to gauge whether it is making a profit from a particular investment or making a loss. From this analysis, the company management will be in a better position to make an informed decision on whether to continue investing in that particular project or decide to drop the project. In addition, the accounting concept also enables an organization to detect and correct errors in financial reports of the firm and hence enabling the firm to remain on the right track as far as its financial state is concerned. Q1: Explain the Characteristics of Financial Accounting. 1) Monetary Transactions: In financial accounting only transactions in monetary terms are considered. Transactions not expressed in monetary terms do not find any place in financial accounting, howsoever important they may be from business point of view. 2) Historical Nature: Financial accounting considers only those transactions which are of historical nature i.e the transaction which have already taken place. No futuristic transactions find any place in financial accounting, howsoever important they may be from business point of view. 3) Legal Requirement: Financial accounting is a legal requirement. It is necessary to maintain the financial accounting and prepare financial statements there from. It is also obligatory to get these financial statements audited. 2 4) External Use: Financial accounting is for those people who are not part of decision making process regarding the organization like investors, customers, suppliers, financial institutions etc. Thus, it is for external use. 5) Disclosure of Financial Status: It discloses the financial status and financial performance of the business as a whole. 6) Interim Reports: Financial statements which are based on financial accounting are interim reports and cannot be the final ones. 7) Financial Accounting Process: The process of financial accounting gets affected due to the different accounting policies followed by the accountants. These accounting policies differ mainly in two areas: Valuation of inventory and Calculation of depreciation. Q2: What do you understand by double entry accounting system? Give Examples The double entry system of accounting or bookkeeping means that every business transaction will involve two accounts (or more). For example, when a company borrows money from its bank, the company's Cash account will increase and its liability account Loans Payable will increase. If a company pays $200 for an advertisement, its Cash account will decrease and its account Advertising Expense will increase. Double entry also allows for the accounting equation (assets = liabilities + owner's equity) to always be in balance. In our example involving Advertising Expense, the accounting equation remained in balance because expenses cause owner's equity to decrease. In that example, the asset Cash decreased and the owner's capital account within owner's equity also decreased. A third aspect of double entry is that the amounts entered into the general ledger accounts as debits must be equal to the amounts entered as credits. 3 For example, if we start a business with our own $500,000. The equation would look like $500,000 = $0 + $500,000. If we take out a $100,000 loan, it shifts to $600,000 = $100,000 + $500,000. Pay an employee $5,000 and we end up with $595,000 = $100,000 + $495,000. Examples of Double Entry 1. Purchase of machine by cash Debit Credit Machine Cash Increase in Asset Decrease in Asset 2. Payment of utility bills Debit Credit Utility Expense Cash Increase in Expense Decrease in Asset 3. Interest received on bank deposit account Debit Credit Cash Finance Income Increase in Asset Increase in Income 4. Receipt of bank loan principal Debit Credit Cash Bank Loan Increase in Asset Increase in Liability 5. Issue of ordinary shares for cash Debit Credit Cash Share Capital Increase in Asset Increase in Equity In summary, Double entry accounting system provides true accounting picture, every transaction has proof and complete books of accounts presentable to income tax, sales tax, management, shareholders etc. 4 Q3:Write briefly on the history and development of accounting. Mesopotamia and Egypt In ancient Mesopotamia, around the year 2000 BC, a form of accounting was also used. A Mesopotamian Scribe used clay to form a way of writing contracts and holding people accountable for their debts. In ancient Egypt a form of accounting was also used. Although the double-entry system was not yet designed, Egyptians kept precise records of all of their business dealings. Oldest Surviving Accounting Record The oldest accounting record found in the English language is called the Pipe Roll or “Great Roll of the Exchequer.” This ancient document dates back to around 1100 AD and provides a detailed description of rents, fines, and all taxes due to the King of England. This document proves that accounting was part of the process used in maintaining records. Although the accounting was recorded differently than now, it was their system of keeping track of money paid and received. Luca Pacioli Luca Pacioli was a mathematician born in 1445 in Sansepolcro, Tuscany. He is known to this day as the, “Father of Accounting,” based on the description he wrote of the double-entry accounting method. He published a book in 1494 titled, “The Collected Knowledge of Arithmetic, Geometry, Proportion, and Proportionality.” In this book, one section was devoted to what is known today as the double-entry accounting method. Although he did not call it this, this method is outlined in detail in his book and this system is what is still currently used. Italian Renaissance During the period of the Renaissance, the fourteenth through sixteenth centuries, the birth of accounting took place. This was the period in which the double-entry system was first designed and businesses began integrating their records with it. Businesses started getting larger and this system proved to work best. Present Today in present times, accounting is used worldwide in various ways for all types of businesses. The double-entry system is widely used as a general concept in accounting. Businesses must use accounting to track their transactions of their company. Without accounting principles, businesses would have a horrible time trying to keep track of their records. Through the doubleentry system, accounting records are easily maintained. 5 Q4: What circumstance might lead you to write off debt as bad? At some point a debt will actually go bad -- a customer will fail to pay a bill for long enough that the company concludes that the account is uncollectible. When that happens, the company writes off the debt. Possible circumstances : 1- The debtor may be refusing to pay one of a number of invoices; 2- The debtor may be refusing to pay part of an invoice; 3- The debtor may owe payment on a number of invoices and has indicated that only a proportion of the total amount due will ever be paid because the debtor’s business has failed; 4- The debtor’s business has failed and nothing is ever likely to be received. 5- Whatever the reason, once a debt has been declared ‘bad’, the journal entry is the same. You debit the bad debt account with the amount of the bad debt and credit the debtor’s account in the Sales Ledger to complete the double entry. At the end of the period, the total of the bad debts account is transferred to the profit and loss account. 
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