Term 3- Theory Exam-Definitions

Question 1

Earning Capacity

Answer 1

Earning Capacity is the ability to earn income within the current financial structure of the business

Question 2

Gross Profit

Answer 2

Gross profit indicates the ability of a trading enterprise to generate gross profit from sales

Question 3

Net Profit

Answer 3

Net Profit indicates the ability of the business to generate a return on the owner’s investment

Question 4

The Rate of Return on Owners’ Equity

Answer 4

The Rate of Return on Owners’ Equity indicates the return on the owner’s investment in the business

Question 5

Accounting Period Assumption

Answer 5

In order for a business to determine the profit made on a regular basis, the life of the business is divided into arbitrary time periods. This is known as the Accounting Period Assumption

Question 6

Cash Accounting

Answer 6

Cash Accounting is when the effects of a transaction are recognised only when cash is received or paid out.

Question 7

Accrual Accounting

Answer 7

Whereas, accrual accounting involves recording transactions of revenues and expenses which are earned or incurred in the accounting period which they relate. .

Question 8

Balance Day Adjustments

Answer 8

Balance day adjustments are entries made at the end of the accounting period to allocate revenues and expenses to the relevant accounting period.

Question 9

Matching Principle

Answer 9

By recording balance day adjustments, the matching principle matches the revenues earned in the period agains the expenses incurred in earning the revenue