Module 1 Fundemental Accounting Concepts

Question 1

What elements of the financial statements show the financial position?

Answer 1

Assets

Liabilities

Equity (Capital)

Question 2

Definition of Assets?

Answer 2

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

Question 3

What elements of the financial statements show the financial performance?

Answer 3

Income

Expense

Question 4

Definition of Liabilities?

Answer 4

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

Question 5

Definition of Equity (Capital)?

Answer 5

The residual interest in the assets of the entity after deducting all its liabilities (i.e., its net assets).

Question 6

Definition of income?

Answer 6

Increases in assets, or decreases in liabilities, that result in increase in equity, other than those relating to contributions from holder of equity claims (i.e., excluding capital introduced).

Question 7

Definition of Expense?

Answer 7

Decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distributions to holder of equity claims (i.e., excluding dividends and drawings).

Question 8

The reporting entity

Answer 8

An entity that prepares financial statements.

Question 9

Monetary amounts

Answer 9

The amount that is essential when recording financial information.

Question 10

Dual effect

Answer 10

Every transaction involving financial information has a dual effect. The dual effect gives rise to the method of recording financial information known as double-entry bookkeeping.

Question 11

Accounting periods

Answer 11

An accounting period is the period of time covered by an entity’s financial statements.

Question 12

Accrual accounting

Answer 12

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

Question 13

Matching

Answer 13

Income earned and the related expense incurred should be matched against each other within the periods in which those effects occur.

Question 14

Prudence

Answer 14

Prudence is the exercise of caution when making judgements under conditions of uncertainty. The exercise of prudence means that assets and income are not overstated and liabilities and expense are not understated.