Accrual Accounting 101

Question 1

Accounting is known as “the language of _____.”

Answer 1

Business.

Because it communicates a range of business information to different users. This is usually done through financial statements.

Question 2

Accounting expresses business transactions in terms of _____.

Answer 2

Money

Accounting is concerned with transactions and events having a financial character.

Question 3

The main purposes of accounting are: (6)

Answer 3

• systematic recording
• communicating financial status
• assisting decision making
• ensuring control of assets
• planning future activities
• complying with the law

Question 4

Users of a business’s financial statements include: (4)

Answer 4

• owners
• investors
• management
• lenders

Question 5

Three main groups of stakeholders that want to know the story of your business are: (3)

Answer 5

• internal stakeholders
• external stakeholders
• government (IRD)

Question 6

The different ‘languages’ of accounting are: (3)

Answer 6

• financial accounting
• managerial accounting
• tax accounting

Question 7

What is the Accounting Cycle?

Answer 7

The accounting cycle is a step-by-step process of recording, classifying and summarising transactions of a business to generate financial information in the form of financial statements.

Question 8

What are the steps in the accounting cycle? (9)

Answer 8

1. Transactions and events
2. Journal entries
3. Ledgers
4. Unadjusted trial balance
5. Adjusting entries
6. Adjusted trial balance
7. Financial statements
8. Closing entries
9. Closing trial balance

Question 9

Step one of the accounting cycle is _____.

Answer 9

Transactions and events.

Data from transactions and source documents are analysed.

Question 10

Step two of the accounting cycle is _____.

Answer 10

Journal entries.

Transactions are recorded into the first book of accounts. Accuracy is essential at this stage.

Question 11

Step three of the accounting cycle is _____.

Answer 11

Ledgers.

After journalising all of the transactions, the information is recorded in the general ledger in preparation for a trial balance.

Question 12

Step four of the accounting cycle is _____.

Answer 12

Unadjusted trial balance.

The unadjusted balance does not include accrual adjustments.

Question 13

Step five of the accounting cycle is _____. (4 types)

Answer 13

Adjusting entries.

The adjusted entries can include prepaid expenses, accrued expenses, revenue received in advance or accrued income.

Question 14

Step six of the accounting cycle is _____.

Answer 14

Adjusting trial balance.

A fresh trial balance is created once the adjustments are made,

Question 15

Step seven of the accounting cycle is _____.

Answer 15

Financial statements.

Financial statements are created from the adjusted trial balance.

Question 16

Step eight of the accounting cycle is _____.

Answer 16

Closing entries.

At this step, all of the financial statements have been prepared, and all transactions have been recorded analysed, and summarised.

Question 17

Step nine of the accounting cycle is _____.

Answer 17

Closing trial balance.

To ensure that all transactions have been properly recorded, analysed, and summarised, the different accounts have the closing balance recorded. Debit and credit sides should be matched.

Question 18

What is the business cycle?

Answer 18

The business or operating cycle is the business transaction process in which business inventories are purchased, processed, and eventually sold to customers.

Question 19

What is the cash bases of accounting?

Answer 19

The cash basis of accounting recognises and records revenues when cash is received, and expenses when they are paid.

Question 20

What is accrual accounting?

Answer 20

Accrual accounting is where income and expenses are recorded when they are earned, not when the money is actually received.

Question 21

What are two pros of cash accounting?

Answer 21

1. It’s simple and shows how much money a business has on hand.
2. It is an easier option for calculating GST.

Question 22

What are two cons of cash accounting?

Answer 22

1. It’s not 100% accurate as it may show a business as profitable just because the bills have not been paid.
2. Is not reliable information for making business decisions as it only provides a day-to-day view of finances.

Question 23

What are two pros of accrual accounting?

Answer 23

1. A much more accurate picture of the business.

2. Financial decisions can be made with more confidence.

Question 24

What are two cons of accrual accounting?

Answer 24

1. It is more work as invoices need to be monitored and recorded.
2. Tax may need to be paid on income before payment has been received

Question 25

Accountants consider every transaction to involve _____?

Answer 25

A flow of ‘economic benefit’ from a ‘source’ (credit) to a ‘destination’ (debit).