Introduction to accounting

Question 1

Name 4 types of Business Entitys

Answer 1

Sole Trader
partnership
Non Profit organisation
Limited Liability company ( Private[ltd] and Public[plc)

Question 2

Name multiple Users of Financial Information

Answer 2

Owners
Customers
Competitors
Employees
Government Agencies

Question 3

For Information to be Useful what characteristics must it have

Answer 3

Relevant
Faithful Representation
Understandable
Comparable

Question 4

Name and Describe 5 different Accounting Conventions

Answer 4

Money measurement
Accounts only deal with items to which monetary values can be attributed

Historic Cost
Items are usually recorded in the accounts at their cost price

Prudence
Choose the accounting procedure which gives the less optimistic view of profitability and assets

Duality (Dual Aspect)
Every transaction has two effects. This underpins double entry bookkeeping

Question 5

What are the 2 consequences when an owner invests money into a business

Answer 5

The business owns the cash (asset)

The business owes the cash to the owner (capital)

Question 6

Definition of Financial Accounting

Answer 6

Records and summarises financial transactions for use by owners and other external users

Question 7

Definition of management accounting

Answer 7

Provision of information that helps managers with decision making, planning and control

Question 8

Why Do Business Entities Keep good Accounting Records?

Answer 8

To manage the business and make it grow
To prepare accounts to measure success or failure
To stay organised when dealing with customers and suppliers
To calculate tax due
To comply with statutory requirements
To borrow money
To find out how much can be paid to owners

Question 9

Name 2 financial statements

Answer 9

The Balance Sheet
(Statement of Financial Position)

The Profit and Loss Account
(Income Statement)

Question 10

Definition of Capital and Liabilities

Answer 10

CAPITAL represents the claim of the owner against the business.

LIABILITIES represent the claims of all individuals and organisations other than the owner

Question 11

Name 2 Balance Sheet Equations

Answer 11

Assets = Claims

Assets = Liabilities + Capital

Question 12

How does the value of capital change?

Answer 12

Amounts are taken out of the business by the owner (drawings)

If income exceeds expenses:
A profit is made and the owner’s capital increases

If expenses exceed income:
The business makes a loss, and the owners’ capital decreases