Anmol started a retail outlet of food corner named Anmol Foods in his locality and doing well in his food business. His friend Atul ask him to record the transactions and assess his financial position. Mr. Anmol is not convinced on accounting of the information as he is not sure about the need of accounting when he is earning good money.
You as Mr. Atul, help Mr. Anmol to get an understanding about the term accounting, uses of accounting information – so that he can record the financial information and assess his financial position.
Also, discuss any five accounting terms relevant to recording the financial information.
Answers
Answer:
Accounting can be defined as a process of reporting, recording, interpreting and summarising economic data. The introduction of accounting helps the decision-makers of a company to make effective choices, by providing information on the financial status of the business
Uses of Accounting
1. To maintain a systematic record of business transactions.
2. To ascertain profit and loss.
3. To determine the financial position.
4. To provide information to various users.
5. To assist the management
Any five accounting terms relevant to recording the financial information are -
1. Assets - The economic value of an item which is possessed by the enterprise is referred to as Assets. To put it in other words, assets are those items that can be transformed into cash or that generates income for the enterprise shortly. It is useful in paying any expenses of the business entity or debt.
2. Liabilities - The economic value of an obligation or debt that is payable by the enterprise to other establishment or individual is referred to as liability. To put it in other words, liabilities are the obligations that are rising out of previous transactions, which is payable by the enterprise, through the assets possessed by the enterprise.
3. Capital - Capital refers to a person’s or organization’s financial assets. Capital may include funds in deposit accounts or money from financing sources. Working capital refers to a business’s liquid capital, which the owner can use to pay for day-to-day or ongoing expenses.
4. Revenues - It refers to the amount received from day to day activities of business, viz. amount received from sales of goods and services to customers; rent received, commission received, dividend, royalty, interest received, etc. are items of revenue that are added to the capital.
5. Expenses - Expenses are those costs that are incurred to maintain the profitability of business, likerent, wages, depreciation, interest, salaries, etc. These help in the production, business operations and generating revenues.
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