Today the accounting information’s plays a vital role in a business enterprise. After Trading and Profit and Loss Account, Balance Sheet is prepared to show the financial position of the business. The techniques of recording, classifying and summarising the transactions have been explained in detail later in the book. All such informations are provided by the accounting which helps the management in planning, decision-making and controlling the business. Before allowing goods on credit to any person, first of all, the company checks his credibility, financial status and capacity to pay. Credit policy is made by the management of the company which takes decisions regarding credit period allowed to debtors as well as discount allowed to them for making early payments.
Lending Money:
“The role of accounting has changed over the period of time.” Do you agree? The main purpose of accounting is to communicate the financial information to the users who analyze them as per their individual requirements. Accounting measures the transactions and events in terms of money which are considered as a common unit. Fixed Assets− These are those assets that are held for the long term and increase the profit earning capacity and productive capacity of the business. These assets are not meant for sale, for example, land, building machinery, etc.
A transaction will be recorded in the books of accounts only if it is considered an economic event and can be measured in terms of money. Once the economic events are identified and measured in financial terms, these are recorded in books of account in monetary terms and in chronological order. The recording should be done in a systematic manner so that the information can be made available when required. The role of accounting has been changing over the period of time.
Liquid Assets− Assets that are kept either in cash or cash equivalents are regarded as liquid assets. These can be converted into cash in a very short period of time; for example, cash, bank, bills receivable, etc. Such a profit or loss statement is useful for all parties having stake in business like the management, lenders, investors, the proprietor or the partners or the shareholders, tax authorities and workers, etc. It is so because from its study, the management, can know whether the policies adopted by it were fruitful or not and can decide upon and possible, a change in the selling price or the advertising policy, etc. The relationship between a debtor and a creditor is critical to the extension of credit between parties, as well as the accompanying transfer of assets and liability settlement. When a creditor lends money versus extends credit, the creditor’s actions are somewhat different.
At the end of the month he paid Rs. 5,000 as their salaries. Out of the stationery bought he sold some stationery for Rs. 1,50,000 for cash and some other stationery for Rs. 1,00,000 on credit basis to Mr. Ravi. Subsequently, he bought stationery’ items of Rs. 1,50,000 from Mr. Peace. In the first week of next month there was a fire accident and he lost Rs. 30,000 worth of stationery. A part of the’machinery, which cost Rs. 40,000 was sold for Rs. 45,000.
Introduction to Accounting Questions and Answers Class 11 Accountancy Chapter 1
The productive and confirmatory roles of information are interrelated. For example, information about the current level and structure of asset-holding has value to users when they endeavour to predict the ability of the enterprise to take advantage of opportunities and its ability to react to adverse situations. Revenue in accounting is the income of a recurring (regular) nature from any source. It includes the amount received from sale of goods, rent receipt, commission, dividend and interest received.
Gross profit or gross loss is the difference’ between the cost of goods sold and sales. Profit and Loss Account is prepared to ascertain whether during the period the firm earned a profit or suffered a loss. Net profit increases owner’s capital and net loss decreases it. A businessmen wants to know what the business owes to other and what it owns, and what happened to his capital whether the capital has increased, decreased or remained constant. A systematic record of various assets and liabilities facilitates the preparation of a Position statement (also known as Balance Sheet) which answers all these questions.
This is due to the fact that the quantity of loaned cash might be fairly substantial, putting the creditor at significant risk of loss over a potentially long period of time. A company that lends money is likely to exist purely for the purpose of lending money. Debtors are often grouped in financial reporting based on the period of their debt repayments. Short-term borrowers, for example, are those whose outstanding debt is due within a year. Short-term debtors’ payments are accounted for as short-term receivables in the company’s current assets. Debtors are an integral part of current liabilities and represent the aggregate amount which a customer owe to the business.
Examples
In other words, assets are the monetary values of the properties or the legal rights that are owned by the business organizations. The same information plays a confirmatoty role in respect of past prediction about, for example, the way in which the enterprise would be structured or the outcome of planned operations. Accounting collects information to help management in this regard. For instance, management would be able to know which department is overspending. Top level management requires information for planning, middle level management requires information for controlling the operations. They can be classified into – Financial Accounting, Managerial Accounting, Cost accounting, Internal accounting and Tax accounting.
- Assessment of the relative importance of the characteristics is a matter of professional judgment.
- For example, information about the current level and structure of asset-holding has value to users when they endeavour to predict the ability of the enterprise to take advantage of opportunities and its ability to react to adverse situations.
- External users are those users who are not part of a business but are interested in accounting information.
- In general terms, a debtor is one who is indebted to the entity, in the form of an individual or a firm, a government or a company, etc., who owes money for the products or services sold to him.
Question 2: What is accounting? Define its objectives.
Secured and unsecured creditors are the two types of creditors. Secured creditors only give loans to debtors who can put up a specified asset as security. In the event of a debtor’s bankruptcy, a secured creditor can seize the debtor’s collateral to cover the debtor’s losses. A mortgage, which uses a piece of property as security, is the most well-known example of a secured loan. The relationship that a debtor and a creditor share complements the relationship that a customer and supplier share.
- The sum owing to a debtor is repaid on a regular basis, with or without interest (debt almost always includes interest payments).
- Lenders can know from its study whether the firm is likely to earn profits in future also.
- For example, cash transactions like cash sales, cash purchases, cash expenses are put in one place in the Ledger under Cash Account.
- Fictitious Assets− These are the heavy revenue expenditures, the benefit of whose can be derived in more than one year.
- Faithfully that which it either purpose to represent or could reasonable be expected to represent.
Since the external users (e.g., Banks, Creditors) do not have direct access to all the records of an enterprise, they have to rely on financial statements as the source of information. External users distinguish between debtors and creditors class 11 are basically interested in the solvency and profitability of an enterprise. Besides the function of book-keeping, accounting involves summarizing, analyzing, interpreting the financial statements and communicating the results to the users of these statements. Accounting is the language of business; it means that an enterprise communicates with the outside world, including the proprietors, through accounting statements.
Frequently Asked Questions
Mastery and ample practice of the chapter’s concepts, as provided by these solutions, are the most effective ways to secure top marks in your exams. Tangible Assets− Assets that have a physical existence, i.e., which can be seen and touched, are tangible assets; for example, car, furniture, building, etc. Any valuable thing that has monetary value, which is owned by a business, is its asset.
Then the former company will be debtor while the latter company is the creditor. They are the two parties to a particular transaction and hence there should not be any confusion regarding these two anymore. So, there is a fine line of differences between debtors and creditors which we have discussed in the article below, take a read. To determine the financial position of the business by preparing a balance sheet. Accounting records only those transactions and events which are of financial nature. So, first of all, such transactions and events are identified.