13 - Revision Flashcards
Can you think of more examples of assets? How does each of these examples meet the definition of assets?
Cash is one very important asset that any business must have. Cash is something of value that the business uses to operate. Others will include motor vehicles, furniture and fixtures, plants, and machinery. These are all fixed assets which the business uses to operate and earn revenue.
Why are at least two effects of each transaction recorded in a business’s accounting system?
A business’s accounting system is designed so that two effects of each transaction are recorded in order to maintain the equality of the accounting equation. Under the dual effect of transactions, recording a transaction involves at least two changes in the assets, liabilities, and owner’s equity of a business.
What are revenues and expenses, and how is the accounting equation expanded to record these items?
Revenues are the amounts earned by a business charging customers for goods or services provided during an accounting period. Expenses are the costs of providing the goods or services during the period. Net income is the excess of revenues over expenses for the period. The accounting equation is expanded as follows to record revenues and expenses:
Assets = Liabilities + [Owner’s capital + (Revenues – Expenses)]
Is it possible to prepare basic financial reports for a business from the running totals of the accounting equation?
We use the total totals for revenue and expenses in the owner’s equity section of the equation to calculate net income. We use the totals in the assets section to find total assets and relate this to total liabilities plus owner’s equity total after adding or subtracting the net income (profit) or loss.
What are the monetary unit and historical cost concepts? How do they affect the recording of transactions?
The monetary unit concept means that transactions are recorded in terms of money. The historical cost concept states that a business records its transactions based on the monetary value exchanged (the cost) at the time the transaction occurred and that the business’s accounting records continue to show the cost, regardless of whether the value has changed over time. So transactions are recorded in monetary terms based on the cost exchanged at the time of the transaction.
Define liabilities. Give two examples.
Liabilities are the economic obligations (debts) of a business. Examples include bank overdrafts, accounts payable, salaries payable, notes payable, and mortgage payable.
Define owner’s equity. What items affect the owner’s equity positively? What items affect the owner’s equity negatively?
The owner’s equity comprises the capital that the owner has invested into the business. It is what the business is worth to the owner. Profits made will increase the owner’s equity and will further injections of capital.
Losses made will decrease the owner’s equity as will any drawings that the owner takes from the business.
What is meant by the dual effect of transactions? How does it relate to the accounting equation?
The meaning of the dual effect of transactions is that when each transaction of a business is recorded, at least two changes must be made in the assets, liabilities, or owner’s equity of the business in order to keep the accounting equation in balance.
What is accrual accounting, and why is it important?
When a business uses accrual accounting, the business records its revenue and related expense transactions in the same accounting period that it provides goods or services, regardless of whether it receives or pays cash in that period. Accrual accounting is important because it makes accounting information helpful to external users by not letting cash receipts and cash payments distort a business’s net income.
What is a bank reconciliation, and what are the causes of the difference between a business’s cash balance in its accounting records and its cash balance on its bank statement?
A bank reconciliation is an analysis that a business uses to resolve the difference between the cash balance in its accounting records and the cash balance reported by the bank on its bank statement. The causes of the difference are deposits in transit, outstanding payments/cheques, deposits made directly by the bank, charges made directly by the bank, and errors.
Why does a business need to manage its working capital?
A business manages its working capital because it wants to keep the right amount on hand to finance its day-to-day operating activities plus an extra amount in case something unexpected happens, such as an opportunity to buy inventory at a reduced price or when a customer doesn’t pay its account when expected.
Briefly discuss the controls over inventory.
There are three controls over inventory:
1. First, a business should control the ordering and acceptance of inventory deliveries. 2. Second, a business should establish physical controls over inventory while it is being held for sale. 3. Third, a business should periodically take a physical count of its inventory.
Identify the parts and subsections of a retail business’s classified income statement. What is included in each part?
A retail business’s classified income statement has two parts: an operating income section and another items section. The operating income section has three sub-sections:
* Revenues * Cost of goods sold * Operating expenses.
The operating income section includes all the revenues earned and expenses incurred in the primary operating activities of the business. The other items section includes any revenues and expenses not directly related to the primary operations of the business.
When do businesses normally recognise and record (a) revenues and (b) expenses?
Under the accrual system, when they are accrued. Revenue and expenses are recognised in the period that they are incurred, regardless of whether cash has been received or paid.
What is the link between the income statement and the statement of owner’s equity?
The net profit or loss that is calculated in the income statement is transferred to the owner’s equity statement as the owners are the recipients of all profits and must also bear all losses.
