Chapter 01.1 - The accounting Cycle

Question 1

What’s the accounting cycle?

Answer 1

The recurring sequence of activities and procedures which are used to record financial information.

Question 2

What are the key elements in an accounting Cycle?

Answer 2

1. Receive source documents
2. Record details from source documents in the books of prime entry.
3. Post details from the books of prime entry to ledger accounts, following the rules of double entry.
4. Verify the accuracy of the double entry records with a trial balance, etc.
5. Prepare end of year financial statements applying accounting concepts and then start the cycle again.

Question 3

What are source documents?

Answer 3

Supporting records that provide evidence of all the transactions to be recorded in an accounting system.

Question 4

What are books of prime entry?

Answer 4

These books list the relevant information taken from source documents in date order and provide the information required to prepare the double entry records.

Question 5

Whats a purchase invoice?

Answer 5

Purchase of goods on credit for resale.

Book of prime entry - Purchases Journal

Question 6

Whats a sales invoice?

Answer 6

For sale of goods on credit.

Book of prime entry - Sales journal

Question 7

What’s a debit note/ Credit note received?

Answer 7

Received from a supplier when goods are returned, eg; Returns outwards
Book of prime entry -Returns outwards Journal

Question 8

What’s a credit note issued?

Answer 8

Sent to a customer when goods are returned, eg; returns inwards.
Book of prime entry - Returns inwards Journal

Question 9

Whats a cheque counterfoil?

Answer 9

A cheque counterfoil outlines Details of payments made by cheque.
Book of prime entry - Cash Book

Question 10

What’s a bank statement?

Answer 10

Details of bank charges, dishonoured cheques, etc.

Book of prime entry - Cash Book

Question 11

What’s a petty cash voucher?

Answer 11

Details of small cash payments.

Book of prime entry - Petty Cash Book

Question 12

What’s an invoice?

Answer 12

For purchase and sale of non - current assets on credit.

Book of prime entry - General Journal

Question 13

What’s the accounting equation?

Answer 13

Assets = Capital + Liabilities

Question 14

What is book keeping ?

Answer 14

All financial transactions need to be recorded in a systematic way, so that the owner of the business and other stake holders can be provided with the information they need to make the right decisions. This record keeping aspect of accounting is often called book keeping.

Question 15

What is accounting ?

Answer 15

It is the process of selecting, summarising and classifying financial data in ways that provide the owners and other stakeholders of the business with useful information to help them assess performance and plan future
activities of the business.

Question 16

Describe a sole trader business.

Answer 16

It is a business run by an individual. The individual controls the business. If successful all profits earned will belong to the individual, however if unsuccessful, the individual can lose whatever has been invested and private possessions due to unlimited liability.

Question 17

Describe a partnership.

Answer 17

It is where several individuals own and run the business. Partners jointly control business and share profits. They are also jointly responsible for debts and can lose their private resources if unsuccessful.

Question 18

Describe a Limited Liability company.

Answer 18

These are owned by shareholders who have each contributed funds to establish and run the company.Most shareholders do not take part in day to day management and control of the company but have elected directors to undertake these responsibilities on their behalf. Shareholders are rewarded by some of the profits earned by the company, if successful. Shareholders responsibility for debt is limited to the amount they invest due to limited liability.

Question 19

Describe none profit organisations.

Answer 19

They include clubs and societies, which are formed by members so they can meet for social activities. These organisations do not aim to make profit. But they do have to be financially viable in order to survive.

Question 20

What’s the function of an income statement?

Answer 20

The income statement is the chief source of information about profit or losses for sole traders, partnerships and limited companies.

Question 21

What’s the function of the SOFP ?

Answer 21

The statement of financial position provides details of the resources ( cash and bank balance) owned by the business which can be used to meet commitments.

Question 22

What’s a liability?

Answer 22

Businesses often owe money to other businesses. Amounts owed to other businesses are called liabilities.

Question 23

What’s capital?

Answer 23

Investments made by the owner(s) of the business. it equates to the net value of the business.

Question 24

What’s a delivery note ?

Answer 24

Is a document detailing the goods that have been delivered by a supplier.

Question 25

What’s a remittance advice note ?

Answer 25

A remittance advice note is sent with a payment advising the recipient the invoices are being paid.