Introduction to Accounting

Question 1

Define Accounting

Answer 1

Accounting is the process of collecting, recording, summarising and communicating financial information.

Question 2

What is the objective of financial statements?

Answer 2

To provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions.

Question 3

What does a financial statement consist of?

Answer 3

. Statement of financial position (formerly known as Balance Sheet)
. Statement of Profit or Loss (formerly known as Profit and Loss Account or “Income Statement”)
. Statement of Cash Flows

Question 4

Define a sole trader

Answer 4

A single person runs the business.

Question 5

What is a partnership?

Answer 5

2 or more people run a business together.

Question 6

What is a Limited Liability Partnership (LLP)?

Answer 6

similar to a partnership, but each partner has limited liability to the partnership

Question 7

What is a company?

Answer 7

. Owned by shareholders and run by a board of directors.
. Company has unlimited liability to its creditors but the shareholders only have limited liability to the company (limited to the value of the shares they own).
. Business is held to be a “separate entity” to the owners, capable of trading in it’s own name.

Question 8

Give some examples of “not for profit” organisations.

Answer 8

Clubs, charities, government departments.

Question 9

What does the profit or loss account tell us?

Answer 9

It tells us the results of the accounting period i.e. shows financial performance by way of profit or loss.

Question 10

Revenue (sometimes called “sales” or “turnover”)

Answer 10

Revenue is a term used to describe the income generated by an organization, especially when it is of a substantial nature.

Question 11

Cost of sales

Answer 11

Direct costs incurred in selling goods or services adjusted for movements in inventory.

Question 12

Gross Profit

Answer 12

The excess of revenue over cost of sales.

Question 13

Other Expenses

Answer 13

All other costs incurred by the business.

Question 14

Net Profit

Answer 14

The excess of revenue over total expenses.

Question 15

Revenue Expenditure

Answer 15

Expenses incurred in everyday trading.

Question 16

Types of Assets

Answer 16

Non-current Assets (Intangible Assets + Tangible Assets)
Current Assets

Question 17

In basic terms, what are assets and liabilities?

Answer 17

Assets are items you own and liabilities are what you owe.

Question 18

Define Capital Expenditure

Answer 18

Purchase/improvement of tangible non-current assets.

Question 19

Where would you find Revenue Expenditure and Capital Expenditure in Financial Statements?

Answer 19

Revenue expenditure is in profit and loss statement and therefore has a direct effect on profit, whilst Capital expenditure would be found in the statement of financial position (Balance Sheet).

Question 20

What is the Statement of Financial Position?

Answer 20

AKA the Balance Sheet. It serves as a snapshot of the business’ assets and liabilities at a particular date.

Question 21

Assets will always =

Answer 21

Capital + Liabilities

Question 22

Capital + Liabilities always =

Answer 22

Assets

Question 23

What is the Accounting Equation?

Answer 23

Assets = Capital + Liabilities

Question 24

Define Asset

Answer 24

A resource controlled by a business as a result of past events and from which future economic benefits are expected to arise - normally something you “own”.

Question 25

What’s the difference between Current and Non-Current Assets?

Answer 25

Current assets flow through the business and are generally used within one year. Non-Current assets are used over a period longer than a year.

Question 26

Examples of Current Assets

Answer 26

Inventory (value of goods not yet sold)
Receivables (amounts owed by customers)
Cash at bank

Question 27

Are tangible and intangible assets considered current or non-current?

Answer 27

Non-current

Question 28

Tangible vs Intangible assets

Answer 28

T - Physical object that can be touched (E.g., Land, buildings, computers, furniture & vehicles).
I - Have no physical existence but still have ongoing value to the business (E.g., Licences, Patents or Goodwill)

Question 29

What is Capital?

Answer 29

The owner’s stake in the business/what the business owes the owner. (In companies this is known as ‘share capital’).

Question 30

What is a Liability?

Answer 30

A present obligation arising from past events, settlement of which will result in an economic outflow of resources i.e. something owing to someone else.

Question 31

Current Liabilities are

Answer 31

Amounts repayable within one year e.g., Bank overdraft, trade payables/creditors (amounts owed by the company to suppliers).

Question 32

Non-current Liabilities are

Answer 32

Amounts repayable after one year e.g., bank loans