14: General Theory

Question 1

Role of accounting

Answer 1

Accounting is an information system that provides accounting information for stakeholders to make informed decisions regarding the management of resources and performance of business.

Question 2

State the function of the accounting information system

Answer 2

The accounting information system is a system that a business uses to collect, store and process accounting data.

Question 3

State 2 roles of accountants

Answer 3

Set up accounting information system and being responsible for managing the resources of the business on behalf on the owner(s).

Question 4

State professional ethics that accountants need to have.

Answer 4

(i) Integrity

(ii) Objectivity

Question 5

Explain objectivity of the professional ethics.

Answer 5

Objectivity – not let bias, conflict of interest or the undue influence of others override the accountant professional judgement.

Question 6

Explain integrity of the professional ethics.

Answer 6

Integrity – to be straightforward and honest in all professional relationships.

Question 7

State the difference between a trading business and service business and give examples of these 2 businesses.

Answer 7

A trading business is a business that buys and sells goods. Examples are supermarket and furniture shop.

A service business is a business that provide services. Examples are hairdressing salons and bus company.

Question 8

What is the difference between cash transaction and credit transaction?

Answer 8

Cash transaction is a transaction where payment is made immediately during a cash sales or purchases while credit transaction is a transaction where payment is postponed during a credit sales or purchases.

Question 9

What is the purpose of preparing a trial balance?

Answer 9

A trial balance is prepared to facilitate the preparation of the financial statements or and ensure arithmetic accuracy in recording of transactions.

Question 10

Stages of accounting information system

Answer 10

Source document - Journal – Ledger – Trial Balance – Statement of financial performance

Question 11

Stages of the accounting cycle

Answer 11

Identifying and recording – adjusting – reporting - Closing

Question 12

State the account equation

Answer 12

Assets = Equity + liabilities

Question 13

Define Assets

Answer 13

Assets are resource owned by the business to help it the generate income.

Question 14

Define liabilities

Answer 14

Liabilities are obligations owed by a business to others that expected to be settled in the future.

Question 15

Define equity

Answer 15

Equity refer to the claim by the owner(s) on the net assets of a business

Question 16

What is net asset?

Answer 16

Net asset = assets – liabilities.

Question 17

Define drawings

Answer 17

Drawings refer to the withdrawal of business assets by the owner for personal use.

Question 18

Define income

Answer 18

It refers to amount earned through the activities of the business.

Question 19

Define expenses

Answer 19

It refers to costs incurred in the operation of a business to earn income in the same accounting period.

Question 20

Reasons for goods to be returned.

Answer 20

Defective/damaged/faulty goods

Goods are of the wrong specifications (Example: Wrong colour, wrong size, wrong quantity etc.)

Question 21

Differences between trade discount and cash discount.

when it is given?

Answer 21

TRADE DISCOUNT:
● Trade discount is given at the point of trade.

CASH DISCOUNT:
● Cash discount is given at the point of payment of debts.

Question 22

Differences between trade discount and cash discount.

It’s purpose?

Answer 22

TRADE DISCOUNT:
● Trade discount is given to encourage bulk purchase and to clear inventory.

CASH DISCOUNT:
● Cash discount is given to encourage prompt payment of debts.
●

Question 23

Differences between trade discount and cash discount.

Definition?

Answer 23

TRADE DISCOUNT:
● Trade discount is a reduction off the list price or original price of the product.

CASH DISCOUNT:
● Cash discount is a reduction off the invoice price at the point of receipt of payment from credit customers or at point of payment to credit supplier.

Question 24

Differences between trade discount and cash discount.

It is recorded?

Answer 24

TRADE DISCOUNT:
● It is not recorded in the double entries.

CASH DISCOUNT:
● Cash discount is recorded as a discount allowed or discount received.