Module 1: Fundamental Accounting Concepts

Question 1

Accounting Records

Answer 1

The records of a business’ financial position at the end of a particular period and its financial performance during that period.

Question 2

Reporting entity

Answer 2

The legal form of a business’ operation for accounting purposes.

Question 3

HMRC accounting record requirements for Sole Traders

Answer 3

All sales and income
All business expenses
VAT records (if registered for VAT)
Income tax records (for employees)
Records about personal income

Question 4

Further accounting records for companies (required by Companies Act 2006)

Answer 4

Debtors - owed but not yet received
Creditors - owe but not yet paid
Value of stock at the end of the period
Year-end bank balances
Capital - amount invested in the period
Drawings - amount removed in the period

Question 5

International Accounting Standards Board’s Conceptual Framework

Answer 5

ISAB document which sets out concepts underlying the preparation and presentation of financial statements for external users.

Question 6

Financial Statements

Answer 6

Reports that provide information about the reporting entity’s financial position and performance.

Question 7

Elements of Financial statements

Answer 7

Financial Position - Assets, Liabilities and Equity

Financial Performance - Income and Expensesq

Question 8

Assets

Answer 8

A present economic resource controlled by the entity as a result of past events.

Question 9

Liabilities

Answer 9

A present obligation of the entity to transfer an economic resource as a result of past events.

Question 10

Debtor

Answer 10

An example of an asset which represents the right to receive money from a customer as the result of a past sale on credit.

Question 11

Creditor

Answer 11

An example of a liability which represents an obligation to pay money to a supplier as a result of a past purchase on credit.

Question 12

Equity (Capital)

Answer 12

The residual interest in the assets of the entity after deducting all its liabilities e.g. the net assets.

Question 13

Income

Answer 13

Increase in assets or decreases in liabilities that result in an increase in equity, or gains e.g. sales (cash or crediting debtor).

Question 14

Expense

Answer 14

Decrease in assets or increase in liabilities that result in a decrease in equity, or losses e.g. wages (paid or taxed owed - creditor).

Question 15

Sole Trader

Answer 15

The owner runs the business so has unlimited personal liability and is not a separate legal entity from the owner.

Question 16

Monetary amounts

Answer 16

Essential for recording financial information, with financial statements given in monetary amounts.

Question 17

Dual Effect

Answer 17

Every transaction involving financial info has a dual effect giving rise to double-entry bookkeeping.

Question 18

Accounting Periods

Answer 18

The period of time covered by an entity’s financial statements, normally 12 months with a year-end date (not necessarily matching calendar year).

Question 19

Accrual Accounting

Answer 19

Depicts the effects of transactions in the periods in which those effects occur, even if the resulting
cash receipts and payments occur in a different period

i.e. income/expenses are recorded as being earned/incurred when a transaction takes place and not
necessarily at the point of issuing/ receiving an invoice or receiving/ paying cash.

Question 20

Matching

Answer 20

Income earned and the related expenses incurred should be

matched against each other within the periods in which those effects occur.

Question 21

Prudence

Answer 21

The exercise of caution when making judgements under conditions of uncertainty, meaning that assets/income are not overstated and liabilities/expenses are not understated (and vice versa).

Question 22

Users of Financial Information

Answer 22

• Management;
• Owners of the business (e.g., proprietors or shareholders);
• Suppliers;
• Providers of finance (e.g., banks and lenders);
• Customers;
• Government and agencies (e.g., HMRC);
• Employees;
• General public.