Introduction to accounting

Question 1

Statement of financial position

Answer 1

A list of all the assets controlled and all the liabilities owed by a business at a particular date.

A snapshot of the financial position of the business at a particular moment.

Question 2

Equity

Answer 2

The amount invested in a business by the owners.

Question 3

Statement of profit or loss

Answer 3

A statement displaying items of income and expense in a reporting period as components of profit or loss for the period.

The statement shows whether the business has had more income than expense or vice versa.

Question 4

Capital expenditure

Answer 4

Expenditure that results in the acquisition of non-current assets or an improvement or enhancement of their earning capacity.

Capital expenditure is not charged as an expense in the statement of profit or loss.

Capital expenditure on non-current assets is presented in the statement of financial position.

Question 5

Non-current asset

Answer 5

Those which will be kept in the entity for more than one year.

Question 6

Revenue expenditure

Answer 6

Expenditure that is incurred either for trade purposes or to maintain the existing earning capacity of non-current assets.

Revenue expenditure is charged to the statement of profit or loss of a period, provided that it relates to the trading activity and sales of that particular period.

Question 7

Capital income

Answer 7

Proceeds from the sale of non-current assets.

The profits or losses from the sale of non-current assets are included in the statement of profit or loss for the reporting period in which the sale takes place.

Question 8

Revenue income

Answer 8

Income derived from the sale of trading assets, the provision of services, or interest and dividends received from business investments.

Question 9

Asset

Answer 9

A resource controlled by the entity as a result of past events from which future economic benefits are expected to flow to the entity.

Question 10

Examples of assets

Answer 10

• Land and buildings
• Motor vehicles
• Plant and machinery
• Fixtures and fittings
• Cash
• Inventory
• Receivables

Question 11

Liability

Answer 11

A present obligation arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

Question 12

Examples of liabilities

Answer 12

• A bank loan
• An overdraft
• Payables
• Taxation

Question 13

Business entity concept

Answer 13

A business is a separate entity from its owner.

Question 14

Capital

Answer 14

/Equity in the context of a company; The residual interest in the assets of the entity after deducting all its liabilities.

Question 15

Accounting equation

Answer 15

ASSETS = CAPITAL + LIABILITIES

Question 16

Historical cost

Answer 16

Transactions are recorded at their cost when they were incurred.

Question 17

Profit

Answer 17

The excess of income over expenses.

Question 18

Loss

Answer 18

The excess of expenses over income.

Question 19

Income

Answer 19

Increases in economic benefits over a period in the form of inflows or increases of assets, or decreases of liabilities, resulting in increases in equity/capital.

Can include both revenue and gains.

Question 20

Expenses

Answer 20

Decreases in economic benefits over a period in the form of outflows or depletion of assets, or increases in liabilities, resulting in decreases in equity/capital.

Question 21

Elements of financial statements

Answer 21

• Income
• Expenses
• Assets
• Liabilities
• Equity

Question 22

Drawings

Answer 22

Money and goods taken out of a business by its owner.

Question 23

Creditor

Answer 23

Party to whom a business owes money.

Question 24

Trade payables

Answer 24

The amounts due to credit suppliers.

Question 25

Debtor

Answer 25

Party who owes money to the business.

Question 26

Trade receivables

Answer 26

The amounts owed by credit customers.

Question 27

Elements of statement of financial position

Answer 27

• Liabilities
• Capital
• Assets

Question 28

Net assets

Answer 28

Assets less liabilities.

Question 29

Non-current assets

Answer 29

Assets acquired for continuing use within the business, with a view to earning income or making profits from their use, either directly or indirectly, over more than one reporting period.

Question 30

Examples of non-current assets

Answer 30

• Property, plant, and equipment
• Intangible non-current assets
• Long-term investments

Question 31

Current assets

Answer 31

An asset is current when it is expected to be realised in, or intended for sale consumption in, the entity’s normal operating cycle, or is held for being traded, or it is expected to be realised within twelve months of the date of the statement of financial position, or is cash or a cash equivalent.

Question 32

Examples of current assets

Answer 32

• Items owned by the business with the intention of turning them into cash in a short time
• Cash owned by the business

Question 33

Non-current liabilities

Answer 33

A debt which is not payable within one year.

Any liability which is not current must be non-current.

Question 34

Examples of non-current liabilities

Answer 34

• Loans that are not repayable for more than one year

- Loan stock or debentures

Question 35

Current liabilities

Answer 35

Debts of the business that must be paid within one year, or within the entity’s normal operating cycle, or that are held to be traded.

Question 36

Examples of current liabilities

Answer 36

• Loans repayable within one year
• A bank overdraft, which is usually repayable on demand
• Trade payables
• Other payables
• Taxation payable
• Accruals