Introduction to Accounting Questions and Answers [With PDF]
Accounting is often called the language of business, and this chapter is where you start learning that language. Below are 25 of the most important questions on Introduction to Accounting, answered in simple words with short lists and tables, so you can revise quickly for exams, vivas and job interviews.
This is Chapter 1 of our Accounting course. Read it in order, then test yourself with the quiz at the end.
Meaning, Objectives and Functions
Q1. What is accounting?
Accounting is the process of identifying, measuring, recording, classifying and summarizing the financial transactions of an organization, and then communicating the results to people who need them. Its purpose is to give useful financial information so that users can make good decisions.
Q2. What are the four main activities of accounting?
- Identifying: deciding which events have a financial effect on the business.
- Measuring: giving those events a money value.
- Recording: writing the transactions down in the books in an orderly way.
- Communicating: sending the information, mostly as financial statements, to the people who need it.
Q3. What are the objectives of accounting?
- To keep a permanent and systematic record of transactions.
- To find out the profit or loss of the business.
- To show the financial position (assets, liabilities and capital).
- To help management plan and make decisions.
- To check the arithmetical accuracy of the books.
- To control expenses and prevent fraud and errors.
- To provide figures for tax assessment.
- To ensure accountability of those who manage the business.
Q4. What are the importance and benefits of accounting?
- It replaces memory with permanent records.
- It shows the true profit or loss.
- It shows what the business owns and owes.
- It helps compare income and expenditure and prepare budgets.
- It helps find mistakes and dishonesty.
- It supports tax calculation and legal compliance.
- It helps in obtaining loans because lenders can check the figures.
Q5. What are the functions of accounting?
- Identifying and measuring financial events in money terms.
- Recording and classifying transactions in the books.
- Summarizing balances and preparing a trial balance.
- Making adjustments so the accounts are up to date.
- Preparing financial statements.
- Analyzing and interpreting those statements for users.
Q6. Why is accounting called the “language of business”?
A language carries information between people. In the same way, accounting carries financial information between a business and the people connected with it, such as owners, investors, lenders, suppliers and tax authorities. Profit, assets, debts and cash flow are all explained through accounting terms and statements, so anyone who understands accounting can understand how a business is doing.
Q7. What is the brief history of accounting?
- Early people kept simple records with tally marks and knots. Ancient civilizations such as Mesopotamia recorded trade and storage on clay tablets.
- As trade grew, merchants needed better systems to record sales, purchases, debts and profits.
- In 1494 the Italian mathematician Luca Pacioli published Summa de Arithmetica, Geometria, Proportioni et Proportionalita. It included a clear explanation of the double entry system used by Venetian merchants, so he is called the Father of Accounting.
- Modern accounting grew with industry, companies and laws, and today most records are kept on computers.
Nature, Scope and Related Terms
Q8. What is the nature of accounting?
- A service activity: it provides financial information to help people decide.
- An information system: it collects data, processes it and reports it.
- A profession: it needs education, training and ethical standards.
- Both science and art: it follows rules and principles, but also needs judgement and skill.
- Measured in money: only events that can be expressed in money are recorded.
Q9. What is the scope of accounting?
| Area | How accounting is used |
|---|---|
| Personal and family life | Tracking income, savings and household spending |
| Business organizations | Finding profit, financial position and supporting decisions |
| Non-business organizations | Schools, hospitals, clubs and societies keep track of funds |
| Government | Recording public revenue and spending |
| Professionals | Doctors, lawyers and engineers track their income and tax |
Q10. Is accounting an art or a science?
It is both. It is a science because it has an organized body of rules and principles, such as the double entry system. It is an art because applying those rules needs skill, judgement and experience. It is not an exact science, because accountants must sometimes use estimates and judgement, for example in calculating depreciation.
Q11. What is the difference between accounting and accountancy?
| Point | Accounting | Accountancy |
|---|---|---|
| Meaning | The process of recording, summarizing and reporting transactions | The body of knowledge, principles and theory behind accounting, and the profession |
| Nature | Practical work | Theoretical and professional study |
| Focus | How to do the work | Why and under what rules it is done |
| Example | Preparing a balance sheet | Studying the principles for preparing it |
Q12. What is bookkeeping?
Bookkeeping is the work of recording the day-to-day financial transactions of a business in the books of account in a systematic way. It is the first stage of accounting and mostly covers the journal, ledgers and cash book.
Q13. What is the difference between bookkeeping and accounting?
| Point | Bookkeeping | Accounting |
|---|---|---|
| Work | Recording and classifying transactions | Summarizing, analyzing, interpreting and reporting |
| Stage | First stage | Starts where bookkeeping ends |
| Output | Journal, ledger and trial balance | Financial statements and analysis |
| Skill level | Needs care and accuracy | Needs analytical and professional skill |
| Use | Supplies the raw data | Helps users make decisions |
Users of Accounting Information
Q14. Who are the users of accounting information?
Users are the people who use financial information to make decisions. They fall into two groups: internal users who run the business, and external users who are outside it but have an interest in it.
Q15. Who are the internal users?
Internal users are directly involved in managing the business. They include owners, directors, managers, department heads, finance officers and supervisors. They use detailed accounting information to plan, control and improve operations.
Q16. Who are the external users, and what do they want to know?
| External user | What they want to know |
|---|---|
| Investors | Is the business profitable and worth investing in? |
| Lenders and creditors | Can the business repay its loans and bills? |
| Tax authorities | What is the correct taxable income? |
| Customers and suppliers | Is the business stable and reliable? |
| Regulators | Is the business following the law? |
| Researchers and the public | How is the business or industry performing? |
Accounting Information System
Q17. What is an accounting information system (AIS)?
An AIS is a system of people, procedures, data, software and hardware that collects, stores and processes financial data and turns it into useful reports. Most businesses today use computer-based systems for this.
Q18. What is the objective of an accounting information system?
Its objective is to collect, store, process and report financial data accurately and on time, so that managers, auditors, lenders, tax authorities and other users can make sound decisions. It also supports internal control by keeping a clear trail of every transaction.
Q19. Why is accounting called an information system?
Because it works like any information system: it takes raw data (transactions), processes it (recording, classifying and summarizing) and produces output (financial statements) for users. It links the source of the information, the accountant, with the people who use it.
Q20. What is the difference between accounting and an accounting information system?
- Accounting is the process of recording, classifying and reporting financial transactions.
- An accounting information system is the whole framework (people, rules, software and controls) that supports that process from data collection to reporting.
- In short, accounting is the activity, and the AIS is the system in which it happens.
Q21. What are the limitations of an accounting information system?
- It can be costly to buy, set up and maintain.
- Staff need training, which takes time.
- Wrong data entered into the system gives wrong reports.
- Computer systems can fail, or lose data without proper backups.
- Data can be misused or stolen if security is weak.
- Every business is different, so a system may need customizing.
Branches, Careers and Accountability
Q22. What are the main branches of accounting?
| Branch | What it does |
|---|---|
| Financial accounting | Records transactions and prepares statements for outside users |
| Cost accounting | Finds and controls the cost of products and services |
| Management accounting | Gives managers information for planning and control |
| Tax accounting | Calculates income and tax according to tax law |
| Auditing | Independently examines the accounts and gives an opinion |
| Government accounting | Records public funds and spending |
| Forensic accounting | Investigates fraud and financial crimes |
Q23. What does an accountant do?
- Records and checks the financial transactions of the business.
- Prepares financial statements and reports.
- Prepares budgets and helps with financial planning.
- Prepares tax returns and keeps the business within the law.
- Advises management on costs, profits and investments.
Accountants can work inside a company, in an accounting firm, in government or as independent consultants. An auditor is a different role: an independent person who checks the accounts and is appointed, for example, by the owners or shareholders, not by the management being checked.
Q24. How is accounting related to other subjects?
| Subject | Link with accounting |
|---|---|
| Economics | Ideas such as cost, income and value come from economics |
| Management | Accounting information supports planning and control |
| Finance and banking | Financial decisions and loans depend on accounting data |
| Marketing | Costs and sales figures guide pricing and promotion |
| Law | Company and tax laws set accounting rules |
| Mathematics and statistics | They are used in calculations and data analysis |
| Computer science | Software stores, processes and reports accounting data |
Q25. How does accounting create accountability?
- Records: every transaction is written down, so decisions can be checked later.
- Budgets and standard costs: managers are compared against planned figures, and differences are explained.
- Responsibility accounting: each manager is held answerable for the revenues and costs they control.
- Auditing: independent checking helps detect errors and dishonesty.
- Reporting: financial statements show owners and the public how resources were used.
Quick Revision Points
- Accounting = identify, measure, record, classify, summarize and communicate.
- Luca Pacioli (1494) is the Father of Accounting.
- Bookkeeping records. Accounting summarizes and interprets.
- Internal users manage the business. External users are outside it.
- Accounting is both a science and an art.
Ready to test yourself? Take the chapter quiz below, then move on to the next chapter, Transaction.
