CH1

Question 1

What are the activities of Accounting?

Answer 1

1. Identifying the economic events relevant to the business.
2. Recording those events
3. Communicating the collected information to interested users by means of accounting reports.

Question 2

Why is owners equity also called residual equity?

Answer 2

Since the assets of a business are claimed by either the creditors or owners, and creditors must be paid before owners, therefore, owner’s equity is often referred to as residual equity.

Question 3

Why the owner’s drawing is not an expense despite it decreasing the owner’s equity?

Answer 3

Expenses are the cost of assets consumed or services used in the process of generating revenue. They are decreases in owner’s equity that result from operating the business. While owner’s drawing also decreases the owner’s equity it is not related to business operations neither it generates revenue. Owners draw out cash from the business for their personal uses, and according to the Economic Entity Assumption, the transactions of the business’s and those of owner’s should be separated. For this reason, owner’s drawing is not an expense.

Question 4

What is the expanded Accounting Equation?

Answer 4

Assets = Liabilities + Owner’s Capital - Owner’s Drawings + Revenue - Expenses

Question 5

What is the Accounting Cycle?

Answer 5

1. Analyze Business Transactions
2. Journalise
3. Posting
4. Trial Balance
5. Adjusting Entries
6. Adjusted Trial Balance
7. Financial Statements
8. Closing Entries
9. Post Closing Trial Balance

Question 6

What is the purpose of transaction analysis?

Answer 6

1. To identify the type of account involved.
2. To determine whether to make a debit or credit.

Question 7

What is Accounting Information System (AIS)?

Answer 7

The system of collecting and processing transaction data and communicating financial information to decision makers is known as accounting information system.

Question 8

What factors shape the Accounting Information System?

Answer 8

1. the nature of the company’s business.
2. the types of transactions, the size of the company.
3. the volume of data, and the information demands of management and others.

Question 9

What are the four financial statements?

Answer 9

1. An income statement presents the revenues and expenses and resulting net income or net loss for a specific period of time.
2. An owners’ equity statement summaries the changes in owners’ equity for a specific period of time.
3. A statement of cash flows summarises information about the cash inflows (receipts) and outflows (payments) for a specific period of time.
4. A balance sheet reports the assets, liabilities, and owners’ equity at a specific date.

Question 10

What are the interrelationships of the four financial statements?

Answer 10

• Net income is computed first and is needed to determine the ending balance in owners’ equity.

-The ending balance in owners’ equity is needed in preparing the balance sheet.

• The cash shown on the balance sheet is needed in preparing the statement of cash flows.

Question 11

What is Public Accounting?

Answer 11

1. Auditing: A major portion of public accounting involves auditing. In auditing, a Certified Public Accountant (CPA) examines company financial statements and provides an opinion as to how accurately the financial statements present the company’s results and financial position.
2. Taxation: Taxation is another major area of public accounting. The work that tax specialists perform includes tax advice and planning, preparing tax returns, and representing clients before governmental agencies such as the Internal Revenue Service.
3. Management Consulting: Management consulting is a professional service that helps organizations improve their performance, efficiency, and strategy. Consulting firms or individual consultants analyze business problems, provide expert advice, and implement solutions to help companies achieve their goals. Some top consulting firms, McKinsey and Company, Boston Consulting Group, Bain and Company, Big Four (Deloitte, PwC, EY, KPMG).

Question 12

What is Private Accounting?

Answer 12

Private accounting refers to accounting work performed within a specific company or organization rather than for multiple clients, as in public accounting. Private accountants are employed by a business, nonprofit, or government entity to manage its internal financial records, reporting, and compliance.

Responsibilities of Private Accountants:
1. Financial Reporting
2. Budgeting and Forecasting
3. Cost Accounting
4. Tax Compliance
5. Internal Controls and Compliance
6. Payroll Accounts Payable/Receivable

Question 13

What is Government Accounting?

Answer 13

Government accounting is the process of recording, managing, and reporting financial transactions for public sector entities, such as federal, state, and local governments. It ensures transparency, accountability, and efficient use of public funds.

Key Features of Government Accounting
1. Public Accountability – Ensures taxpayer money is used appropriately.

2. Budgetary Control – Tracks spending against approved budgets.
3. Fund Accounting - Separates financial resources into different funds (e.g., general fund, capital projects fund).
4. Compliance with Laws & Regulations – Adheres to government financial policies, such as International Public Sector Accounting Standards (IPSAS) or national standards.

Question 14

What is Forensic Accounting?

Answer 14

Forensic accounting is a specialized field of accounting that involves investigating financial records to detect fraud, embezzlement, or other financial crimes. It combines accounting, auditing, and investigative skills to analyze financial transactions and provide evidence for legal cases.

Forensic accountants are hired to:
- Investigate fraud, corruption, and financial crimes.
- Assist in legal disputes related to financial matters.
- Provide expert witness testimony in courts.
- Support companies in preventing financial misconduct.