Introduction to accounting

Question 1

Define book-keeping.

Answer 1

Book-keeping is the process of recording business transactions.

Question 2

Define accounting.

Answer 2

Accounting is the process of recording, summarizing, analyzing, interpreting and reporting the financial information of an organization.

Question 3

State the 2 roles of accounting.

Answer 3

1. Stewardship

2. Decision-making

Question 4

Explain the stewardship role of accounting.

Answer 4

An accountant is the steward of the financial affairs of the business who provide financial information to help the owner make decisions on how to manage and operate the business.

Question 5

Explain the decision-making role of accounting.

Answer 5

The accountant provides financial information to various stakeholders to help them make decisions relating to the business.

Question 6

State 2 internal users of the financial information of a business.

Answer 6

1. Owner
2. Manager
3. Employees

Question 7

State 2 external users of the financial information of a business.

Answer 7

1. Banks
2. Customers
3. Suppliers
4. Government
5. Shareholders and investors
6. Competitors

Question 8

State and define the 2 professional ethics of accountants.

Answer 8

1) Integrity- To be straightforward and honest in all professional and business relationships.
2) Objectivity- To be unbiased and not being influenced by personal feelings, personal gains or other people when making professional judgment

Question 9

Explain the importance of having integrity and being objective in the preparation and presentation of accounting information.

Answer 9

Stakeholders rely on the financial reports prepared by the accountant to make business decisions. If they are given false or inaccurate information about the business, they are likely to make poor decisions.

Question 10

Distinguish between the financial statements of a trading business and a service business.

Answer 10

Trading business

1) Includes a Trading portion in the income statement
2) The balance sheet will include inventory.
3) Main source of income: Sales revenue from selling goods

Service business

1) No Trading portion in income statement
2) No inventory in the balance sheet
3) Main source of income: Fees income from providing a service

Question 11

Explain 2 advantages of a sole proprietorship over a limited company (For 4E5N students only)

Answer 11

1) Easier and less expensive to set up and maintain a sole proprietorship
2) The entire profit of the business belongs to the sole proprietor. For a limited company, shareholders receive only a portion of the company’s profits.

Question 12

Explain 2 disadvantages of a sole proprietorship compared to a limited company (For 4E5N students only).

Answer 12

1) Unlimited liability – A sole proprietor may lose more than his investment in thebusiness. For a limited company, the shareholder’s maximum loss is limited to his investment in the business
2) Banks may be less willing to lend to a sole proprietor

Question 13

Explain the difference between cash and credit transactions.

Answer 13

Cash transaction - cash is received/paid at the same time as the sales/purchases

Credit transaction - cash is received/paid at a later date

Question 14

State the order of how each type of accounting transaction is processed through the accounting system.

Answer 14

Source documents - journals - ledgers - trial balance - income statement and balance sheet