Accounting Concepts

Question 1

What is “capital”?

Answer 1

The amount of money the owner uses to start up the business

Question 2

What is “owner’s equity”?

Answer 2

The total owner’s interest in the business

Question 3

What are “drawings”?

Answer 3

Money withdrawn from the business for personal use by the owner

Question 4

What is a “liability”?

Answer 4

Any money borrowed by the business

Question 5

Why is “capital” treated in the same way as a liability?

Answer 5

The owner basically ‘loans’ the money to the business. But this capital remains the property of the owner. This means that the capital is treated as money that the business owes to the owner

Question 6

What happens if the owner withdraws money from the business for their own personal use?

Answer 6

Unlike other payments made by the business for business expenses, it is not treated as an expense but simply decreases the value of owner’s equity

Question 7

What are expenses?

Answer 7

Payment for services and consumable goods that a business buys in order to keep to keep the business running. They have no lasting value

Question 8

What are “assets”

Answer 8

Possessions that have a certain value. These possessions are owned by the business and are purchased by means of a transaction

Question 9

What is a transaction?

Answer 9

Events at which buyers and sellers exchange assets for money

Question 10

What are the 2 types of assets?

Answer 10

Fixed (tangible) assets
Current assets

Question 11

What are fixed/tangible assets?

Answer 11

Assets with a long life expectancy. They are bought for the purpose of running and maintaining the business. These assets are not bought so that they can be sold for profit. They usually have a lifespan of more than one year

Question 12

What are current assets?

Answer 12

Assets that can be converted into cash quite easily, usually within a short period (one year). These assets are used within the business’s cycle of business activities. They are often available in the form of cash. Therefore, a business’s current assets are temporary and can change on a continuous basis

Question 13

What is the difference between fixed/tangible assets and current assets?

Answer 13

A fixed/tangible asset has a lifespan of more than one year and is not easily sold for cash
A current asset has a short lifespan and can be easily converted into cash

Question 14

What are the 2 types of liabilities?

Answer 14

Long-term liabilities (non-current liabilities)
Short-term liabilities (current liabilities)

Question 15

What are long term liabilities?

Answer 15

Depts repayable over a period of more than one year. It is usually repaid over a number of years, from 3 up to 20 years

Question 16

Give some examples of long-term liabilities.

Answer 16

. Mortage bonds (taking out a loan to buy the premises)
. Loans from bank to expand the business
. Lease agreements to buy assets such as vehicles or machinery

Question 17

Give an example of fixed assets.

Answer 17

.Land and buildings
.Vehicles
.Equipment

Question 18

Give an example of current assets.

Answer 18

.Trading stock (goods bought to be sold in a shop)
.Debtors (clients who owe money to the business)
.Cash (money in the business’s bank account, cash float and petty cash)

Question 19

What are short-term/current liabilities?

Answer 19

Debts repayable within a year or less

Question 20

Give an example of short-term/current liabilities.

Answer 20

. Creditors, where money is owed by the business to suppliers when they bought goods on credit (on account)
. Bank overdraft, where the bank allows the business to spend more money than there is in their bank account, and then this money is owed to the bank
. Income tax or VAT owed to the government on profits pf the business

Question 21

What is income?

Answer 21

When a business sells goods or services, they expect to be paid money in return. This money is an income for the business. Income is money (receipts) that increase the owner’s equity in the business

Question 22

A business can generate several forms of income:

Answer 22

.current income or sales
.rent income, which is earned when you rent out part of your premises to another business
.discount received from suppliers, either for paying in cash or paying before the due date
.profit from selling assets

Question 23

Give an example of business expenses.

Answer 23

. Telephone accounts of the business
. Water and electricity used by the business
. Wages and salaries paid to people working for the business
. Stationary used by the business, showing the business logo
. Consumable goods such as items used to make the goods the business sells

Question 24

What is profit?

Answer 24

The money a business makes after taking all the income and deducting all the expenses. Profit can be seen as payment for the services rendered by the business, or for the entrepreneurship dispayed by the owner for taking the risk to invest money in the business

Question 25

What is profit motive?

Answer 25

The desire to make a profit, motivates one to engage in business activities

Question 26

Where does the profit go?

Answer 26

Any profit that is gained goes to the business’s owners, who may or may not decide to spend it on the business

Question 27

What is the calculation for profit?

Answer 27

Profit = Income - Expenses

Question 28

What are losses?

Answer 28

Loss can be described as the loss of money or decrease in financial value. A net loss in a business is when the expenses are more than the income earned in a certain period. A loss can take place when a business sells an asset for less than it is worth in the books at that time. Any losses that take place will decrease the owner’s interest in the business

Question 29

What is a budget?

Answer 29

A list showing the money you expect to receive (receipts) and the expenses you expect to have to cover (payments) within a specific period. It is a way of planning for what you are going to spend, save or borrow

Question 30

What do you call the budget for a country?

Answer 30

The National Budget

Question 31

What are savings?

Answer 31

The money that you put away when you have covered your expenses

Question 32

In what ways can you save money?

Answer 32

. Never spend mpre than the amount you earn
. Think about buying what you need first. Think very carefully about buying what you want
. Pay off all your debt and stay out of debt
. Always have cash to buy the basic things you need
. Keep some emergency funds for doctors, vets, vehicles, house cost and other bills
. Learn from the past and plan for the future
. Think about your future being longer than just five years - think long term

Question 33

What is banking?

Answer 33

The act of using the services that a bank provides, with a bank being a financial institution that works with your money on your behalf

Question 34

What is a bank?

Answer 34

Banks give individuals and businesses the opportunity to save money with them or borrow money from them. Individuals and businesses earn interest on money they save and pay interest on money they borrow. Individuals or businesses can borrow money from a bank to increase their capital value by buying vehicles, equipment or land

Question 35

Why does borrowing money from a bank and using it on capital investments boost the economy of any country?

Answer 35

. It creates work opportunities
. It promotes the country’s economic growth
. It stimulates the country’s needs and wants

Question 36

List 8 services that banks offer.

Answer 36

1. Cellphone and internet banking
2. Bank balances
3. Bank statements
4. Payment to third parties
5. Exchange rate enquiries
6. Opening and closing accounts
7. Loan applications
8. Wills, financial planning and retirement planning

Question 37

What is accounting?

Answer 37

The process of keeping a business’s financial records so that other people in the business, as well as shareholders, know how the business is using its money

Question 38

What are financial records?

Answer 38

Records of the business’s financial transactions

Question 39

What are financial transactions?

Answer 39

Events at which buyers and sellers exchange assets for money

Question 40

Why do businesses keep financial records?

Answer 40

To prevent fraud and to provide documentation to the SARS that the earnings they have declared are correct. It is illegal not to keep financial records of a business’s earnings

Question 41

What is SARS?

Answer 41

the South African Revenue Services, the government body responsible for collecting all of the country’s taxes