The Accounting Information System - 2.1, 2.1 and 2.3 (excluding source documents) of textbook

Question 1

What does a business do? or

What does a business exchange goods and services for?

Answer 1

A business exchanges goods and services for money.

Question 2

What is a business transaction?

Answer 2

A business transaction is an activity carried out by the business to provide such goods and services in exchange for money.

Question 3

Give some examples of business transactions.

Answer 3

1. Purchases of candies (goods) from suppliers
2. Sales of candies (goods) to customers
3. Purchases of display shelves / furniture
4. Payment to suppliers / creditors / credit sellers of goods
5. Receipts (of cash) from customers / debtors / credit buyers of goods
6. Payments of salaries to employees
7. Payments for rental and utilities (light, water and electricity)

Question 4

Recall: What is accounting?

Answer 4

Accounting is a process of recording, summarising, analysing, interpreting and reporting of business transactions in the financial reports.

Question 5

What do financial reports refer to?

Answer 5

Income Statement and Balance Sheet

Question 6

Is it important to differentiate between business activities carried out by the business and the personal activities carried out by the business owner?

Answer 6

Yes, there is a need to observe the Business Entity / Accounting Entity Concept.

Question 7

Does accounting record the personal activities of the business owner?

Answer 7

No. This practice adheres to / follows the accounting entity / business entity concept.

Question 8

What type of business activities does the book keeper / accountant record?

Answer 8

Only business activities that have monetary values. This is in accordance with the monetary concept.

Question 9

What is the accounting entity concept commonly / also known as?

Answer 9

Business entity concept

Question 10

What does the accounting entity / business entity concept state?

Answer 10

The business entity concept states that the business is a separate entity from its owner, and that all transactions are recorded from the point of view of the business; or
only business transactions affecting the business are recorded in the books of the business. The personal transactions of the owner are not recorded.

Question 11

Is the following transaction recorded in the books of the business?
Owner provides resources to the business for its operations, i.e. owner invests / puts in capital into the business.

Answer 11

Yes

Question 12

Is the following transaction recorded in the books of the business?
Owner withdraws resources from the business (i.e. drawings of cash or goods from the business by the owner).

Answer 12

Yes

Question 13

Give an example of the owner withdrawing resources from the business for his own/personal/private use.

Answer 13

Owner takes $200 from the daily sales of the business to pay for his son’s music lessons. This transaction should be recorded in the books of the business as:
Dr Drawings
Cr Cash

Question 14

Should this transaction be recorded in the books of the business?
Owner withdraws $150 from his personal bank account to buy his wife a gift.

Answer 14

No. Since the owner has taken money from his own bank account for personal / private use, this transaction does not affect the business, and is therefore not recorded.

Question 15

Should this transaction be recorded in the books of the business?
Owner withdrew $150 from his personal bank account to pay the suppliers of the business.

Answer 15

Yes. Since the money was used for the purpose of the business, it is recorded. This is known as capital, as the owner has introduced his personal resources for use in the business. This transaction should be recorded as:
Dr. Creditors / Account Payable
Cr. Capital

Question 16

Should this transaction be recorded in the books of the business?
Owner takes $300 from the business’ bank account to pay for his wife’s gift.

Answer 16

Yes, since the owner took the money from the business, this transaction affects the business and should be recorded. This is known as drawings, as the owner has used the resources (cash) of the business for his personal / private purpose.
Dr. Drawings
Cr. Bank

Question 17

What is ‘Capital’?

Answer 17

Capital refers to the funds or resources provided to an entity by the owner.

Question 18

What is ‘Drawings’?

Answer 18

Drawings refer to the withdrawal of cash, goods or other assets from an entity by its owner(s) for his / her own / personal / private use.

Question 19

What are accounting theories?

Answer 19

Accounting theories are general guidelines for carrying out the accounting process. These guidelines are generally accepted by accounting professionals to help them prepare financial reports that are fair and objective.

Question 20

Why is there a need for accounting theories?

Answer 20

They are needed to help accounting professional prepare financial reports that are fair and objective / true and fair.

Question 21

What does the monetary concept state?

Answer 21

The monetary concept states that only transactions which can be expressed in terms of money are to be recorded. / The monetary concept states that only business activities that can be measured in monetary terms are recorded in the books of the business.

Question 22

Can a monetary value be assigned to a delivery van that a business buys for use in its daily operations?

Answer 22

Yes

Question 23

Can a monetary value be assigned to the following?

Answer 23

1. Good location
2. Hardworking employees
3. Customer loyalty
4. Good relationships with suppliers
   No. These aspects cannot be recorded because it is difficult to assign / attach a monetary value to them.

Question 24

How is monetary value measured?

Answer 24

In units of currency, e.g. Singapore dollars, Euros, US Dollars, etc.

Question 25

Can the following be measured in monetary terms / dollars and cents?

Answer 25

A brilliant idea to market a product / a brilliant idea that will help the business increase its sales revenue to more than $1 million dollars.
No. An idea cannot be measured in monetary terms

Question 26

Can the following be measured in monetary terms?

A staff training programme that the business pays for to improve the work-related skills of the employees.

Answer 26

Yes, the cost of the training can be measured in monetary terms.

Question 27

Can the following be measured in monetary terms?

Best customer service in the city.

Answer 27

No, the value of customer service cannot be measured in monetary terms.

Question 28

What are the two main types of business transactions?

Answer 28

a. Cash transaction

b. Credit transaction

Question 29

What are cash transactions?

Answer 29

Cash transactions mean that cash from the purchase or sale is paid or received at the same time as the purchase or sale.

Question 30

Give an example of a cash transaction.

Answer 30

Payments made to the supplier at the point of buying the goods, or money received from a customer when a sale is made.

Question 31

What are credit transactions?

Answer 31

Transactions that do not involve cash at the time of purchase or sale. / No cash is collected when the sale takes place. / Cash from the purchase or sale is paid or received at a later date than the purchase or sale.

Question 32

What is a system?

Answer 32

A system is a way of working that follows a fixed set of rules.

Question 33

What is the use of a system?

Answer 33

A system helps to organise how work is to be completed and clarifies the purpose of each part of the process.

Question 34

How are business transactions processed?

Answer 34

With the use of an accounting information system which records the transactions of a business, summarises them and reports these transactions in the financial reports, i.e. income statement and balance sheet.

Question 35

What is the accounting information system made up of?

Answer 35

The accounting information system comprises of the following parts:

1. Identify and recording transactions:
   a. Source documents
   b. Journals
   c. Ledgers
2. Trial Balance
3. Preparation of financial reports:
   a. Income Statement
   b. Balance Sheet

Question 36

Why are business transactions recorded at their original cost, which is the amount stated in the source documents?

Answer 36

To adhere / follow / observe:

1. historical cost concept
2. objectivity concept

Question 37

Which accounting principles do the use of source documents fulfill / observe / adhere to?

Answer 37

Objectivity principle: There must always be objective verifiable evidence for the occurrence of any business transaction.

Historical Cost Accounting Concept: all transactions are recorded at the original cost to the business.

Question 38

Explain the ‘historical cost concept’.

Answer 38

The historical cost concept states that transactions should be recorded at their original cost. The original cost is the amount reflected in the source documents.

Question 39

Should the owner of a shop who initially bought his shop at $1 million still continue to record the value of his shop at the original cost price (i.e. $1 million) when the value of his shop goes up to $1.5 million?

Answer 39

No.

Question 40

What should the value of the following item be recorded as if the business follows the historical cost concept?
A delivery van used in a business was bought for $20,000 in 20X1. An offer is made to buy it for $25,000.

Answer 40

$20,000

Question 41

What should the value of the following item be recorded as if the business follows the historical cost concept?

Answer 41

$2 million

Question 42

What should the value of the following item be recorded as if the business follows the historical cost concept?
The goods bought by the business cost $1000 but could be sold for $1500.

Answer 42

$1000.