Chapter 2: Accounting Information System

Question 1

Explain the difference between a cash and credit transaction

Answer 1

In a cash transaction, payment is made immediately when goods are sold or services are provided. On the other hand, in a credit transaction, payment for goods or services is delayed to an agreed-upon future date

Question 2

Explain why businesses buy on credit instead of paying cash

Answer 2

when a business buys goods and non-current assets on credits, it can receive the goods and non-current assets first and pay later. Thus, cash can be used for other operations of the business

Question 3

State the 4 stages of an accounting cycle

Answer 3

1. Identifying and recording
2. Adjusting
3. Reporting
4. Closing

Question 4

Explain what an accounting information system is

Answer 4

Accounting information system is a system that a business uses to collect, store and process accounting data

Question 5

State the 5 stages in the accounting information system

Answer 5

1. Source documents
2. Journal
3. Ledgers
4. Trial balance
5. Financial statements

Question 6

Define source document

Answer 6

A source document is a written document that provides details of a business transaction to be recorded in a journal. It serves as an objective and verifiable evidence that a transaction has taken place.

Question 7

Explain using a suitable accounting theory, why source documents are important.

Answer 7

Source documents are important as they provide evidence that transactions have taken place. This is consistent with the objectivity theory which states that accounting information is recorded by business must be supported by verifiable and reliable evidence so that financial statements will be free from opinions and biases

Question 8

State two reasons why source documents are important in business transactions

Answer 8

• They serve as an objective and verifiable evidence that a transaction has taken place
• They ensure that the transactions are accurately recorded as all the details of the transactions are captured on the source documents

Question 9

State the purpose of a receipt

Answer 9

To acknowledge payment received from customers after goods have been sold or services have been provided

Question 10

State the purpose of an invoice

Answer 10

To inform credit customers of the amount owed for goods and services provided on credit

Question 11

State the purpose of a credit note

Answer 11

To inform credit customers of a reduction in the amount owed due to an overcharged or goods returned to the business

Question 12

State the purpose of a debit note

Answer 12

To inform credit customers of an increase in the amount owed due to an undercharge

Question 13

State the purpose of a remittance advice

Answer 13

To inform credit suppliers that payment by cheque has been made for a specific invoice

Question 14

State the purpose of a payment voucher

Answer 14

An internal document used by the business to process payment to credit supplier

Question 15

State the purpose of a bank statement

Answer 15

Allows the business to check and tally against the business bank records of its cash at bank account