Introduction to Financial Accounting

Question 1

What is accounting?

Answer 1

The process of identifying, measuring and communicating financial information about a business entity

Question 2

3 types of business entity

Answer 2

• Sole trader = a person who is the exclusive owner of a business, entitled to keep all profits after tax has been paid but liable for all losses.
• Company
• Partnership

Question 3

Matching

To calculate financial performance in a period…

Answer 3

To calculate financial performance in a period, all income due must be matched with all expense incurred to generate the income

Question 4

The financial statement which shows ___________ ___________ over a ________ of _____ is called an ________ _____________ or ________ and _____ account

Answer 4

The financial statement which shows financial performance over a period of time is called an Income Statement or Profit and loss account

Question 5

Gross profit equation

Answer 5

Gross profit = sales revenue - purchase cost

Question 5

Net profit equation

Answer 5

Net profit = Sales revenue - total cost

Question 6

Income Statement

Answer 6

Summarises all income and expenditure over a period of time (usually 12 months)

= Its purpose is to show amount of
profit (where income > expenses) or
loss (where income < expenses)

Question 7

Title Convention examples

Answer 7

“for the year ending 2023”
“Balance sheet as at November 25 2023”

Question 8

What do brackets mean?

Answer 8

Means a minus

Question 9

Income Statement can also be known as (2)

Answer 9

• Trading and profit and loss account or
• Profit and loss account

Question 10

Financial Position of the Business

Answer 10

• Cash?
• Amounts owed to him?
• Amounts owed by him?
• Profit or loss?

Question 11

Separate Entity Concept

Answer 11

The activities of the business should be kept separate from the owner’s business

Question 12

Separate Entity Concept - why?

Answer 12

• To understand how the business is operating in its own right
• The Government - HMRC
• Customers
• Finance providers - Banks, Venture capitalists

Question 13

Balance Sheet

Answer 13

The financial statement which shows financial position at a specific point in time

A snapshot of assets, liabilities and capital at a single moment

Question 14

The Accounting Equation

Answer 14

Assets = Liabilities+ Capital

Question 15

Asset definition

Answer 15

Resources owned/controlled by the business to give future economic benefit
- Cash in bank, stock, machinery

Question 16

Liability

Answer 16

What the business owes to third parties (debts, obligations)
- Bank overdraft, money owed to supplier

Question 17

Capital (owed to the owner/s)

Answer 17

• Investment by the owner
• Money introduced, retained profit

Question 18

If a sole trader pays himself a wage it is called ________ and it will count as ________ but if it is a company then it is an _________

Answer 18

If a sole trader pays himself a wage it is called drawings and it will count as capital but if it is a company then it is an expense

Question 19

What are non-current assets and current assets?

Answer 19

Non-current assets = things that bring income in more than 12 months

Current assets = things that bring income in less than 12 months

Question 20

Income/ Revenue/ Turnover

Answer 20

• Transaction or event which causes an increase in the ownership interest

Question 21

Expenditure (Revenue or Capital)

Answer 21

Transaction or event which causes a decrease in the ownership interest

Question 22

Revenue expenditure

Answer 22

Expense used in period or matched with revenue for the period

Question 23

Capital Expenditure

Answer 23

Expenditure on items used in this and future periods

Question 24

Where will revenue expenditure be and where will be capital expenditure be?

Answer 24

Revenue expenditure will be on the income statement whereas capital expenditure will be on the balance sheet

Question 24

Balance Sheet

Answer 24

Shows the financial position of a business at a specific point in time

Question 25

Income Statement

Answer 25

Summarises the income and expenditure of a business = profit or loss