Chapter 1: Introduction to Accounting

Question 1

Define accounting.

Answer 1

A process of classifying, recording and summarizing transactions and business events into monetary terms, and interpreting and communicating the accounting information to the users.

It provides relevant and reliable financial information for decision making purposes.

Question 2

Define Bookkeeping.

Answer 2

Is a subset of accounting.

Bookkeeping is mainly related to identifying, measuring, and recording, financial transactions.

The objective of bookkeeping is to keep the records of all financial transactions proper and systematic.

Question 3

State different natures of businesses.

Answer 3

Service business – provides services to the customers.

Merchandise/trading business – buys finished products from other businesses and sells to customers.

Manufacturing business – manufacture their own products to be sold to other businesses or directly to customers.

Question 4

Identify the users of accounting information.

Answer 4

INTERNAL USERS
Owners – interested in profits, financial stability and growth.
Managers – planning, organizing and controlling purposes.
Employees – interested in business stability and career growth.

EXTERNAL USERS
Lenders & creditors – the ability of business to pay back debts
Investors – the ability of business to survive and prosper and its financial strength
Government (Inland Revenue) – tax purposes
Consumers – does the company offer products at fair prices?

Question 5

List and explain the advantages and disadvantages of the three business organizations.

Answer 5

Organizations
- Sole proprietorship.
- Partnership.
- Limited company.

Explain in terms of; capital contribution, ownership, management and control, liability, profit and loss, books and accounts. Refer textbook, page 2 and 3 for more information.

Question 6

What are the purposes of accounting information?

Answer 6

• To know the financial status of the organization, whether the businesses are making a profit or running at a loss.
• For easier reference, because humans have limitations in memorizing large amounts of information.
• To avoid the presentation of misleading financial statements.

Question 7

Describe the accounting process

Answer 7

1. Transactions
2. Source documents
   (Journalising)
3. Journals
   (Posting)
4. Ledgers
5. Trial Balance
6. Any adjustment; If yes, back to journals
7. Financial statements