Chapter 1 : Introduction to Accounting

Question 1

Explain the differences between trading and service businesses

Answer 1

A trading business buy goods from suppliers and sell goods to customers while a service business provides services to its customers

Question 2

Explain the role of accounting

Answer 2

The role of accounting is to provide accounting information for stakeholders to make informed decisions on the management of resources and performance of businesses

Question 3

State The role of accountants

Answer 3

• Accountants act as stewards of businesses who are responsible for managing resources of the business on behalf of the owner
• Accountants set up an accounting information system ( AIS ) to prepare and provide accounting information to the stakeholders of the business for decision making

Question 4

Explain the Integrity professional ethic

Answer 4

Integrity is being straightfoward and honest in all professional and business relationships

Question 5

Explain the objectivity professional ethic

Answer 5

Objectivity is not letting bias, conflict of interest, and undue influence of others override professional judgement

Question 6

Explain why it is important for accountants to uphold the two principles of professional ethics

Answer 6

As stakeholders rely on financial reports to make business decisions, the information needs to be truthful and accurate. Accountants without professional ethics may provide inaccurate or flase information about the business to the stakeholders which may mislead them into making poor decisions

Question 7

name the stakeholder who would be interested in accounting information of a business ( min. 3 )

Answer 7

• Owners and shareholders : To decide whether to continue to invest in the business depending on the risk and returns related to the business
• Suppliers : To decide whether to sell to the business on credit, depending on its ability to pay
• Bank/Lenders : To decide whether to grant loans to the business depending on the business’ ability to repay loan principal and interest.

Question 8

Explain the accounting entity theory

Answer 8

Business and owners are treated as two seperate entities. All transactions are recorded from the point of view of the business

Question 9

explain the Monetary theory

Answer 9

only business transactions that can be measured in monetary terms are recorded.

Question 10

Explain the going concern theory

Answer 10

A business is assumed to have an indefinite economic life unless there is credible evidence that it may close down

Question 11

Explain the accounting period theory

Answer 11

The life of a business is divided into regular time intervals to allow financial statements to be prepared at fixed periods

Question 12

Explain the historical cost theory

Answer 12

Transactions should be recorded at their original cost

Question 13

Explain the objectivity theory

Answer 13

Accounting information recorded must be supported with verifiable and reliable evidence so that financial statements will be free from biases and opinions

Question 14

Explain the consistency theory

Answer 14

Once an accounting method is chosen, this method should be applied to all future accounting periods to enable meaningful comparison

Question 15

Explain the matching theory

Answer 15

Expenses incurred must be matched against income earned in the same period to determine profit for that period

Question 16

Explain revenue recognition theory

Answer 16

Revenue is recognised as earned when the services have been provided , or when goods are sold and delivered.

Question 17

Explain accrual basis of accounting theory

Answer 17

business activities that have occurred, regardless of whether cash is paid or received, should be recorded in the relevant accounting period.

Question 18

Explain prudence theory

Answer 18

Assets and profits should not be overstated while liabilities and losses should not be understated

Question 19

Explain materiality theory

Answer 19

Relevant information should be recorded in the financial statements if its likely to make a difference to the decision-making proccess.