Accounting - term 3

Question 1

Accounting period assumption

Answer 1

Divides the life of an enterprise into arbitrary time periods.

Question 2

Accrual accounting

Answer 2

Recognises transactions and events when revenues are earned and expenses are incurred.

Question 3

Cash accounting

Answer 3

A method of accounting in which the effects of transactions involving revenues and expenses are recorded when the cash is received or paid.

Question 4

Earning capacity

Answer 4

PROFITABLE RATIO: is the ability to earn income within the present financial structure of the enterprise.

Question 5

Matching principle

Answer 5

Matching the revenue earned for the period against the expenses incurred to earn the revenue for the same period.

Question 6

Explain the purpose of balance day adjustments:

Answer 6

Entries made at the end of the accounting period to assign revenues and expenses to the relevant accounting period.

Question 7

Gross profit ratio:

Answer 7

the ability of an enterprise to generate acceptable net profit, return on owners investment and whether it can meet its other operating expenses.

Question 8

Net profit ratio:

Answer 8

The purpose of the net profit ratio is to show the effectiveness of managers to minimise the expenses per dollar of sales.

Question 9

The rate of return on owner’s equity:

Answer 9

Indicates the return to the owner on the amount invested in the business.