Chapter 1 (The role of Accounting)

Question 1

Accounting elements:
Define an Asset

Answer 1

An Asset is an economic resource owned and controlled by a business which has the potential to produce a future economic benefit and is always the result of a past transaction.
Assets are classified in a balance sheet according to their liquidity.

Question 2

Accounting elements:
Define a current Asset

Answer 2

A current asset is an economic resource owned and controlled by a business that is reasonably expected to be sold or converted to cash within the next 12 months of the current reporting period.
These kinds of assets are usually purchased for resale by a trading business.

Question 3

Accounting elements:
Define a non-current Asset

Answer 3

A non-current asset is an economic resource controlled by a business that is not expected to produce cash within the next 12 months of the current reporting period. Rather it’s to remain controlled by the business for several years and isn’t normally purchased for the intention of resale.

Question 4

Accounting elements:
Define a liability

Answer 4

A liability is defined as a present obligation placed on a business that is the result of a past event and will yield an economic outflow. Here, a business is obliged to transfer economic resources to another entity.
Liabilities are classified in a balance sheet according to their urgency.

Question 5

Accounting elements:
Define a current liability

Answer 5

A current liability is a present obligation placed on an entity that is reasonably expected to be settled within the next 12 months of the current reporting period.

Question 6

Accounting elements:
Define a non-current liability

Answer 6

A non-current liability is a present obligation placed on a business that is not expected or required to be wholly settled within the next 12 months of the current reporting period.

Question 7

Accounting elements:
Define Owners equity

Answer 7

Owners equity is defined as the residual interest in a business after deducting its liabilities from its assets. Therefore, this is what the business owes the owner.

Question 8

Accounting elements:
Define Revenue

Answer 8

A revenue is defined as an increase in a business’s assets or a reduction in a business’s liabilities. A revenue item will increase the owner’s equity of a business during a specific period of reporting.

Question 9

Accounting elements:
Define an Expense

Answer 9

An expense is defined as either an increase in a business’s liabilities or a reduction/decrease in a business’s assets. An expense will always decrease the owner’s equity in a business during a specific period.

Question 10

Qualitative characteristics:
Identify the six Qualitative characteristics using CRUFTV

Answer 10

Comparability:
Relevance:
Understandably:
Faithful representation:
Timeliness:
Venerability:

Question 11

Qualitative characteristics:
Define relevance

Answer 11

Relevance states that the information found in accounting reports must be of strong interest to the owner of that entity and must significantly impact that owner financial decision making.

Meaning all information impacting the owners decision making must be included within that business’s reports and vice versa. If any information is not significant in the owners decision making it shouldn’t be included in that business’s reports.

Question 12

Qualitative characteristics:
Define faithful representation

Answer 12

Faithful representation states that all information presented in a business’s accounting reports must be displayed wholly and without error or bias to ensure that information is accurately and “faithfully,” representing real economic events which have occurred in the life of that business.

Question 13

Qualitative characteristics:
Define comparability

Answer 13

Comparability states that information contained in accounting reports is of greater use to owners if comparable with other reports prepared by other entities with similar information. And that the information is comparable from previous reports prepared by that same business in prior periods as well.

Comparability allows business performance to be evaluated over the life a business and with competing businesses. Which provides essential information to the owner.

Question 14

Qualitative characteristics:
Define verifiability

Answer 14

Verifiability states that the information contained in accounting reports must be supported by source documents which different users of that information can check off and reach a consistent conclusion as to the meaning of that information.

Which assures users that this presented information is accurate and faithfully represented.

Question 15

Qualitative characteristics:
Define Timeliness

Answer 15

Timeliness states information must be presented in accounting reports as quickly as possible to ensure it can influence the owner’s decision making.

Question 16

Qualitative characteristics:
Define understandability

Answer 16

Understandability states that information presented in accounting reports must be displayed clearly and concisely, with the inclusion of relevant subheadings and graphs. All to ensure the information is easily comprehensible by different users and can actually influence key decision making.

Question 17

Accounting assumptions:
Define the entity assumption

Answer 17

The entity assumption states that a business is a separate entity from its owner and also a separate entity from other businesses as well.

This means the business’s records and reports must be kept separate from those of other entities to ensure they assist the owner in decision-making about their business only.

Question 18

Accounting assumptions:
Define the accrual basis assumption

Answer 18

The accrual basis assumption states that revenues are recorded in the period when the expected inflow of economic benefits can be faithfully and accurately measured. Meaning revenues are recorded when they’re earned and not when cash hits the business.

The accrual basis assumption also emphasizes how expenses are recorded when the consumption of goods and services can be faithfully measured. Meaning expenses are recorded when they’re incurred and not when cash leaves the business.

Thus, the net profit for a business during a period is calculated through the deduction of expenses incurred from revenues earned.

Question 19

Accounting assumptions:
Define the going concern assumption

Answer 19

The going concern assumption states that all business reports are prepared under the assumption that the business will continue to operate into the next reporting period and will continue to operate into future reporting periods indefinitely.

The going concern assumption hence means all reports are prepared assuming the business is in a healthy financial position.

Question 20

Accounting assumptions:
Define the period assumption

Answer 20

The period assumption states that all reports prepared by a business are created in correspondence to a specific period. The duration of a period can vary as long as a report is prepared by a business at least once a year.

The period assumption ensures the life of a business is broken into smaller periods. Hence, comparability of business performance (across different periods) is possible.