Accounting Terminology

Question 1

Name the 6 accounting assumptions:

Answer 1

• Monetary
• Materiality
• Accounting Entity
• Historical Cost
• Going concern
• Accounting Period

Question 2

Define the following:

Expenses

Answer 2

Consumption or losses of future economic profits in the form of a reduction in assets, or an increase in liabilities of an entity.

Question 3

Define the following:

Accounting entity Assumption

Answer 3

Regards a business as having a seperate existence from that of the owner for accounting purposes. This means that a business’s transactions are recorded separately from the private transactions of the owner.

Question 4

Define the following:

Monetary Assumption

Answer 4

States that an item must be able to be assigned a monetary value before it can be recorded in an accounting system. (AUD$)

Question 5

Materiality Assumption

Answer 5

Refers to the importance of an item to the particular entitiy. Information is material if the omission of this information from a financial report could influence the investment decisions of the users of this report.

Question 6

Historical Cost Assumption

Answer 6

Assumes that business transactions are recorded in terms of their cost at the time the transaction occurred. This means that all transactions record the original monetary value of the item.

Question 7

Define the following:

Accounting Period Assumption

Answer 7

Requires that the life of a business be divided into equal periods of time for reporting purposes. These periods of time are known as reporting periods.

Question 8

Define the following:

Going concern Assumption

Answer 8

Assumes that the business will continue to operate for the forseeable future and its records should, therefore, be kept on that basis.

Question 9

Define the following:

Accounting System

Answer 9

Captures and then produces information that is then used by the owner, lenders, employees, and the government.

Question 10

Define the following:

Revenue/Income

Answer 10

Inflows or enhancements, or savings in outflows of future economic benefits in the form of an increase in assets, or a reduction in the liabilities of an entity.

Question 11

Define the following:

Equity

Answer 11

Residual interest in the assets of an entity after the deductions of its liabilities.

Question 12

Define the following:

Assets

Answer 12

Future economic benefits controlled by an entity as a result of past transactions or other events.

Question 13

Define the following:

Liabilties

Answer 13

Future sacrifice of economic benefits that the entity is obliged to make to other entities as a result of past transactions or other events.

Question 14

Define the following:

Accounting Equation

Answer 14

Assets - Liabilities = Equity

Question 15

Define the following: (List Examples)

Current Assets

Answer 15

Items that are likely to be used or converted into cash within 12 months.
E.x:
- Inventory
- Cash
- Money Owed to a business (Accounts Receivable)

Question 16

Define the following: (List Examples)

Non-Current Assets

Answer 16

Resources the business intends to use for more than 12 months.
E.x:
- Vehicles
- Machinery
- Furniture
- Equipment
- Property

Question 17

Define the following: (List Examples)

Current Liabilities

Answer 17

Liabilities that are expected to be paid within 12 months.
E.x:
- Credit Card Debt
- Accounts payable

Question 18

Define the following: (List Examples)

Non-Current Liabilities

Answer 18

Amounts that are expected to take longer than 12 months to pay.
E.x:
- Car Loans
- Mortgages

Question 19

Define the following:

Purpose of Financial statements, and which?

Answer 19

The income statement and balance sheet can be analysed to assist in determining the performance, financial position and liquidity of a business for a period of time.

Question 20

Define the following:

Balance Sheet
(Statement of Financial Position)

Answer 20

Purpose of the balance sheet is to inform the reader about the current status of the business as of the date listed on the balance sheet. This information is used to estimate the liquidity, funding, and debt position of an entitiy, and is the basis for a number of liquidity ratios.

Question 21

Define the following:

Income Statement
(Statement of performance)

Answer 21

Informs the reader about the ability of a business to generate a profit. It reveals the volume of sales, and the nature of the various types of expenses, depending upon how expense information is aggregated.

Question 22

Define the following:

Elements of an income statement

Answer 22

Income, expenses, and profit/loss

Question 23

Define the following:

Elements of a balance sheet

Answer 23

Classified:
Current/Non Current Assets/Liabilities
Equity
Net Asset

Question 24

Double entry Accounting:

Answer 24

The double entry system of accounting means that for every business transaction, amounts must be recorded in a minimum of two accounts. The double entry system required that for all transactions, the amounts entered as debits must be equal to the amounts entered as credits.