Definition of Accounting

Question 1

Definition

Answer 1

The process of identifying, recording, summarizing and communicating economic information to allow for
informed judgements and decisions by users of the information.

Question 2

Users of accounting information

Internal users

Answer 2

• Owners
• Managers
• Employees

Question 3

Users of accounting information

External users

Answer 3

• Suppliers
• Customers
• Financial institutions
• Government
• Financial analysts and press
• Community at large

Question 4

The Accounting Equation

Answer 4

-The accounting equation states that the value of all the resources owned by a business, that is the assets, must equal the value of all the money introduced into or owned by the business, i.e. capital and liabilities.
-When the assets have been supplied by the owner’s own capital then the following accounting information will hold:-
Assets = Owner’s Equity (Capital)
-Some of the assets will normally have been provided by someone other than the owner Indebtedness of the owner for these resources is known as liabilities.
The equation can be expressed as:
Assets = capital + liabilities

Question 5

The Accounting Equation

Answer 5

The equation can be rearranged so as to enable the calculation of missing figures:
Assets = Capital + Liabilities
Capital = Assets – Liabilities
Liabilities = Assets - Capital

Question 6

ASSETS

Answer 6

Assets are economic resources that the company owns or controls from past transactions/events that it expects to help generate future benefits.
Assets can be divided into:
Current assets –
Non Current assets (fixed assets)

Question 7

Examples of Current Assets

Answer 7

-Cash and cash equivalents
-Accounts Receivable (Customer bought it on
credit)
-Inventories (Merchandise, Supplies, Parts)
-Prepaid Expenses (taxes, utilities, insurance)

Question 8

Examples of Non-current Assets

Answer 8

• Property
• Plant
• Equipment

Question 9

Liabilities

Answer 9

Liabilities are economic obligations of the organization to outsiders from past transactions /events that it expects to pay in the future  Liabilities can be divided into:
-Current – amounts falling due within a period of one year e.g: accounts payable (creditors)
Non Current (long term liability) – amounts falling due after more than one year e.g: long term bank loan

Question 10

Equity

Answer 10

Owners’ equity, also called capital, is the owners’ claim on the organization’s assets, i.e., assets minus liabilities

Question 11

Expenses & Revenue

Answer 11

-Expenses - payments made by the business for services received from others
e.g: telephone, electricity, rent paid, commission paid…
-Revenue/ Gains/ Income - payments received by the business for services rendered to others.
e.g: commission received, rent received,
discount received…

Question 12

Balance Sheet

Answer 12

The balance sheet (also called statement of financial position or statement of financial condition) is a snapshot of the financial status of an organization at a
point in time.

Question 13

Income Statement

Answer 13

The income statement measures the performance of an organization by matching its accomplishments (revenue from customers, which is usually called sales) and its
efforts (cost of goods sold and other expenses).

Question 14

Types of accounting:

Financial

Answer 14

• Production of summary financial statements for external users
• Prepared on a periodic basis e.g. monthly
• Generally required by law
• Information is calculated and presented in accordance with strict legal requirements

Question 15

Types of accounting:

Management

Answer 15

-Production of detailed accounts for use by management to control the business and plan for the
future
-Normally prepared on a monthly, often on a rolling basis
-Includes budgets and forecasts of future activities, as well as reflecting past performance
-Information is computed an presented in order to be
relevant to managers