Accounting Book 1

Question 1

what is accounting?

Answer 1

accounting is a management information system that involves collecting, sorting, classifying financial information to assist business owners in decison making

Question 2

ethical considerations?

Answer 2

when the business decisions made by the owner will not only be influenced by financil considerations including those which are social and environmental in nature.

Question 3

financial data

Answer 3

is the facts and figures that financial information is based

Question 4

financial information

Answer 4

is financial data that has been sorted, classified and summarized into a more usable and understandable form

Question 5

what is the accounting process

Answer 5

source documents –> records–> reports–>advice

Question 6

what is a source document?

Answer 6

documents that provide both the evidence that a transaction has occured and the details of the transaction itself.

Question 7

what is the accounting process?

Answer 7

the process of taking financial data and converting it into financial information in order to be able to make decisions

Question 8

what are the 6 types of source documents?

Answer 8

Receipt, Cheque butt, Cheque, Invoice, Memo, Bank statement

Question 9

what is the accounting equation?

Answer 9

assets = liabilities + owners equity

(equation is always in this order + always right)

Question 10

what is a current asset?

Answer 10

a present economic resource controlled by the entity ( as a result of past events) that is reasonably expected to be converted to casg, sold or consumed within the next 12 months after then end of the reporting period
e.g bank

Question 11

what is a non current asset

Answer 11

a present economic resource controlled by the entity ( as a result of past events) that is not held for resale and is resonably expected to be used for more than the next 12 month period after the end of the reporting period
e.g equipment, vehicles

Question 12

what is current liabilities?

Answer 12

a present obligation of the entity (arising from past events) that are reasonably expected to be settled with a transfer of an economic resource within the next 12 months after the end of the reporting period.
e.g loan (due before 12 months)

Question 13

what is non current liability?

Answer 13

a present obligation of the entity (arising from past events) that are reasonable expected to be settled with a transfer of an economic resource within the next 12 month period after the end of the reporting period
e.g Mortgage

Question 14

what is owners equity

Answer 14

residual interest in the asset of the entity after the liabilities are deducted e,g capital

Question 15

what is a balance sheet?

Answer 15

an accounting report that details a firm’s financial position at a particular point in time by reporting its assets, liabilities and owner’s equity

Question 16

what does a balance sheet include?

Answer 16

1. current assets
2. Non current assets
3. current liabilities
4. Non- current liabilities
5. Owners equity

Question 17

what does transaction mean?

Answer 17

an exchange of a good or a service with another party

Question 18

in every transaction what are the affects?

Answer 18

every transaction that a business is involved affects at least two items in the accounting equation. After recording these transactions, the accounting equation should still equal.

Question 19

what is liquidity?

Answer 19

the ability of the business to meet its short term debts as they fall due

Question 20

what is stability?

Answer 20

the ability of a business to meet its debts and continue operation in the long term

Question 21

what is working capital ratio?

Answer 21

a liquidity indicator that measures the ratio of current liabilities to current asstes to assess the firms ability to meet its short-term debts.

WCR = CA/CL

Question 22

what are the two internal sources of finance?

Answer 22

-capital contribution from an owner
- retained profits

Question 23

what are the external sources of finance?

Answer 23

• trade credit
• bank overdraft
• term loan

Question 24

what are the pros and cons of capital (internal finance)?

Answer 24

pros : no set repayment structure
- no interest
- owner(s) willing to wait for a profit before expecting a dividend

cons : limited to the resources of the owner(s)

Question 25

what are pros and cons of trade credit( account payable)[external influence]?

Answer 25

pro : immediate access to goods and services
-can generate sales before payment requires
cons : can only be used with that supplier
- late fees may be incurred if paying late

Question 26

what are pros and cons of bank overdraft [external influence]

Answer 26

pros : available immediately facility is established
- it’s flexible/ can be used for seasonal variations in the business
cons : high interest usually applied to an O/D
- can be recalled at short notice

Question 27

what are pros and cons of term loans (external influence)?

Answer 27

pros : can purchase more expensive assets
- if secured, lower interest rates
cons : interest is charged
-must be paied back in line with contractual terms.