Nature & Objectives Of Accounting - 10%

Question 1

What are the three main types of business entities ?

Answer 1

• sole trader
• partnership
• limited liability company

Question 2

What is a sole trader?

Answer 2

• When a business is owed and managed by one person
• when the owner contributes the capital to start the business & benefits from all of the business’s profits & is liable for all its debts

Question 3

What is a partnership ?

Answer 3

• when the business is owned and managed by 2 or more people.
• when the partners contribute the capital and the partners of the business share the profits according to the partnership profit- sharing agreement.
• all the partners are jointly liable for all of the business’s debts

Question 4

What is a limited liability company ?

Answer 4

• the owners ( the share holders) and managers ( boards of directors ) of the business are separate.
• shareholders may receive a share of the business’s profits in the form of dividend and their liability for the business debt is limited to their investment

Question 5

What is book keeping

Answer 5

The recording of monetary transactions in a business

Question 6

What is Accounting

Answer 6

The process of recording, analysing and summarising the transactions of a business

Question 7

Who are the 7 users of financial information ?

Answer 7

• investors
• managers of the business
• customers
• suppliers
• lenders
• tax authorities
• governments and their agencies
• the public

Question 8

What is financial accounting

Answer 8

The preparation of accounting reports for external use.

Question 9

Characteristics of financial accounts

Answer 9

• solely concerned with summarising historical data
• use same information as management accounts but in a different way
• external users have different interests from management
• prepared under constraints that do not apply to management accounts

Question 10

What is management accounting ?

Answer 10

The preparation if accounting reports for internal use

Question 11

Management accounts characteristics

Answer 11

• detailed information split between departments
• based on historical information BUT forward looking
• used to prepare forecasts and budgets
• compare actual performance with budget and take corrective action

Question 12

What is the separate entity concept ?

Answer 12

• always treat a business as a separate entity from its owner
• personal transactions of the owner SHOULD NEVER be mixed with business transactions, regardless of the type of business entity