Accounting

Question 1

Accounting

Answer 1

Accounting is an art
Accounting involves interconnected phases
Concerned with transaction and events having financial character
Business transactions are expressed in money
Interpreting the results

Question 2

Purpose of accounting

Answer 2

provide information to different users. The users utilize the information in making economic decisions.

Question 3

Users of financial statement

Answer 3

Owners Andie esters
Managers
Lenders
Suppliers
Government
Public

Question 4

Types of accounting

Answer 4

Financial accounting
Managerial accounting
Cost accounting
Auditing
Tax accounting
Forensic accounting

Question 5

Areas of accounting

Answer 5

Private accounting
Public accounting
Government accounting

Question 6

Types of business

Answer 6

Service business
Merchandising business
Manufacturing business
Hybrid business-restaurant

Question 7

Forms of business organization

Answer 7

Sole partnership
Partnership
Corporation
Limited liability company

Question 8

Elements of accounting

Answer 8

Assets
Liability
Capital

Question 9

Assets

Answer 9

assets are properties or rights owned by the business.

Question 10

Types of assets

Answer 10

1 Current. - useful for a period of 12 months
Cash , accounts receivable,inventories

2Non current-useful for a period of more than 12 months
Long term investment ,land ,building

Question 11

Liabilities

Answer 11

Liabilities are economic obligations or payables of the business.

Question 12

Types of liabilities

Answer 12

Current —due within 12 months
Ex -accounts payable ,interest payable,rent payable

Non current-not due within next 12months

Ex -mortgage

Question 13

Capital

Answer 13

capital is equal to total assets minus total liabilities.

Capital also known as equity

Question 14

Income

Answer 14

Income refers to an increase in economic benefit during the accounting period in the form of an increase in asset or a decrease in liabili

Question 15

Expense

Answer 15

decrease in asset or an increase in liability that result in decrease in equity,

Question 16

Basic accounting equation

Answer 16

Asset=liability+Capital

Question 17

GAAP generally Accepted Accounting Principle

Answer 17

Primary purpose of GAAP is to ensure usefulness of financial information

Question 18

Principles of GAAP

Answer 18

1Business entity principle

Every business accounted separately from its owner

Question 19

2cost constraint principle(GAAP)

Answer 19

All transactions are recorded based on actual cash

Question 20

3going concern assumption principle(GAAP)

Answer 20

Business will continue operating instead closed

Question 21

Currency (GAAP)

Answer 21

Transactions and events must expressed in money

Question 22

Revenue recognition principle(GAAP)

Answer 22

Revenue is recognized at the time it is earned

Question 23

Measurement (GAAP)

Answer 23

Key methods of recording financial transactions 
Historical cost
Current cost
Realizable value
Present value

Question 24

Single entry book keeping

Answer 24

The single entry bookkeeping system does not explicitly record the two-fold effect of transactions. Under this method, separate books are maintained for the company’s basic accounts such as cash, receivables, and payables. Therefore, the accounting records are incomplete.

Question 25

Double entry bookkeeping

Answer 25

Under the double entry method, every transaction is recorded in at least two accounts.
All accounts have a debit and a credit side. Debit means left and credit means right.

Now, here is the rule: To increase an asset, you debit it; to decrease an asset, you credit it. The opposite applies to liabilities and capital. To increase a liability or a capital account, you credit it; to decrease a liability or capital account, you debit it. Expenses are debited when incurred and income is credited when earned.

Question 26

Accounting cicycle

Answer 26

Identifying and analyzing business transactions and events
Recording transactions in the journals
Posting journal entries to the ledger
Preparing an unadjusted trial balance
Recording and posting adjusting entries
Preparing an adjusted trial balance
Preparing the financial statements
Recording and posting closing entries
Preparing a post-closing trial balance

Question 27

Financial statement

Answer 27

Financial statements refer to a specific set of reports produced in an entity’s accounting system

Question 28

Components of financial statement

Answer 28

1 Income statement
Information about revenues and expense(total revanue-total expanse=profit or loss)

2Statement of changes in equity
Capital is affected by contributions and withdrawals of owners, income, and expenses.

3Balance Sheet
Both side of the accounting equation must equal

Question 29

Account

Answer 29

An account is a storage unit that stores similar items or transactions.

Question 30

Three parts of an account

Answer 30

1Account title
2Debit(left)
3Credit (Right)

Question 31

Debit and credit

Answer 31

Let us take Cash. Cash is an asset account. Again, asset accounts normally have debit balances. Therefore, to increase Cash you debit it. To decrease Cash, you credit it.

Another example – let’s take Accounts Payable. It is a liability account. Liability accounts normally have credit balances. Thus, if you want to increase Accounts Payable, you credit it. If you want to decrease Accounts Payable, you debit it.

The same rules apply to all asset, liability, and capital accounts.

To Sum It Up

Here’s a table summarizing the normal balances of the accounting elements, and the actions to increase or decrease them. Notice that the normal balance is the same as the action to increase the account.