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Principles of Accounts > The Accounting Information System: 2.1 - 2.3 (Incuding Source Documents) > Flashcards

The Accounting Information System: 2.1 - 2.3 (Incuding Source Documents) Flashcards

See Textbook, Page 13

1
Q

What does a business do? or

What does a business exchange goods and services for?

A

A business exchanges goods and services for money.

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2
Q

What is a business transaction?

A

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

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3
Q

Give some examples of business transactions.

A
  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)
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4
Q

Recall: What is accounting?

A

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

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5
Q

What do financial reports refer to?

A

Income Statement and Balance Sheet

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6
Q

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

A

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

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7
Q

Does accounting record the personal activities of the business owner?

A

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

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8
Q

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

A

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

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9
Q

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

A

Business entity concept

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10
Q

What does the accounting entity / business entity concept state?

A

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.

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11
Q

Are the following transactions recorded in the books of the business?

  1. Owner provides resources to the business for its operations, i.e. owner invests / puts in capital into the business.
  2. Owner withdraws resources from the business (i.e. drawings of cash or goods from the business by the owner)
A
  1. Yes

2. Yes

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12
Q

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

A

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

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13
Q

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.

A

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.

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14
Q

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.

A

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

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15
Q

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.

A

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

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16
Q

What is ‘Capital’?

A

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

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17
Q

What is ‘Drawings’?

A

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.

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18
Q

What are accounting theories?

A

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.

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19
Q

Why is there a need for accounting theories?

A

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

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20
Q

What does the monetary concept state?

A

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.

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21
Q

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

A

Yes.

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22
Q

Can a monetary value be assigned to the following?

  1. Good location
  2. Hardworking employees
  3. Customer loyalty
  4. Good relationships with suppliers
A

No. These aspects cannot be recorded because it is difficult to assign / attach a monetary value to them.

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23
Q

How is monetary value measured?

A

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

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24
Q

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

A

No. An idea cannot be measured in monetary terms.

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25
Q

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.

A

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

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26
Q

Can the following be measured in monetary terms?

Best customer service in the city.

A

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

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27
Q

What are the two main types of business transactions?

A

a. Cash transaction

b. Credit transaction

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28
Q

What are cash transactions?

A

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

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29
Q

Give an example of a cash transaction.

A

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

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30
Q

What are credit transactions?

A

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.

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31
Q

What is a system?

A

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

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32
Q

What is the use of a system?

A

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

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33
Q

How are business transactions processed?

A

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.

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34
Q

What is the accounting information system made up of?

A

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
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35
Q

What does a business use to remember the multiple /many transactions it engages in every day?

A

Source documents.

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36
Q

What is a source document?

A

It is a written document that provides details of a transaction and the evidence (documentary proof) that the transaction has taken place.

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37
Q

What is a source document used for?

A

To capture information about a business transaction, e.g. the date of the transaction, a description of the transaction, the value and the parties involved. It is like taking a photograph of the event.

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38
Q

What information does a source document contain?

A

It contains information on which all accounting entries are based…. E.g. transaction date, amount involved, parties to the transaction, etc.

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39
Q

Why are source documents important?

A

They are important because:
•They provide proof / evidence that a transaction has taken place since all the important information about the transactions are captured on the source document. (objectivity principle is adhered to / observed)
•They are used as part of a process to record information into the books of original / prime entry / first books accurately.
•They are required for audit purposes
• Both parties involved in a transaction have copies of the source document. Thus, both are clear about the value and why the transaction took place.

40
Q

What source documents does a business use for credit purchases and credit sales?

A
  1. Invoice. When the seller sells goods and services to the buyer on credit, the seller will issue an invoice to the buyer.
  2. Credit Note
  3. Debit Note
41
Q

What does the invoice state?

A

The amount that the buyer owes the seller.

42
Q

What is an invoice?

A

It is a source document that is sent by the seller (supplier / creditor) to the buyer (customer / debtor). It is a bill.

43
Q

What purpose does an invoice serve?

A
  1. To inform / notify the buyer of how much to pay for the goods / services supplied. 2. To request for payment from the debtor. 3. To increase / add to the amount owing by the debtor. (Debit Debtor Account)
44
Q

Who is the sender of the invoice?

A

The seller / supplier / creditor will send out the original copy of the invoice to the buyer. He will retain / keep the carbon / duplicate copy.

45
Q

Who is the receiver / recipient of the invoice?

A

The customer / buyer / debtor will receive the original copy of the invoice.

46
Q

When is an invoice sent out?

A

An invoice is sent out when a credit sales (i.e. credit transaction) has taken place, i.e. when the buyer will buy first and pay later and the supplier will subsequently send the invoice to request for payment.

47
Q

What is a credit note?

A

It is a source document that is sent by the seller / supplier / creditor of the business to the buyer / customer /debtor when the buyer returns goods after the credit sales.

48
Q

What is the purpose of sending a credit note?

A
  • To inform the buyer / customer / debtor of an overcharge (i.e. to tell the buyer to pay less) due possibly to sales returns / returns inwards.
  • To reduce / deduct / minus the amount owing by the debtor. (i.e. credit debtor)
49
Q

In what colour is the credit note printed in normally?

A

Red

50
Q

What does the credit note state?

A

The amount to be reduced from the invoice that was issued earlier. As a result, the buyer will owe a lower amount to the seller.

51
Q

What is a debit note?

A

It is a source document that is sent by the seller / supplier / creditor to the buyer / customer / debtor. It is just an extra bill / invoice.
If the seller finds that there is an undercharge after the credit sales, the seller will issue a debit note to the buyer.

52
Q

What is the purpose of a debit note?

A
  • To inform the buyer / customer / debtor of an undercharge, i.e. the debtor has been ‘short-billed’.
  • To increase / add on to the amount owing by the debtor. (i.e. Debit Debtor / add to debtor)
53
Q

What does the debit note state?

A

It states the amount to be added on to the invoice that was issued earlier. The buyer will owe a higher amount to the seller.

54
Q

What colour is a debit note printed in?

A

Black

55
Q

Why is a debit note printed in black?

A

To distinguish / differentiate it from a credit note.

56
Q

Name the source document used by a business for its cash purchases and cash sales, i.e. cash transactions.

A

Receipt

57
Q

What is a receipt?

A

A receipt is a written statement that you give to someone, showing that you have received money or goods from them: Keep all your receipts for work-related expenses; or
When the seller sells goods and services to the buyer and collects money immediately, the seller will issue a receipt to the buyer.
Note that a receipt can be handwritten, computer-generated or printed from a cash register.

58
Q

What is a cash register? What is it also known as?

A

A cash register is a machine in a shop or other business that records sales and into which money received is put.
It is also known as a till.

59
Q

Where are cash registers commonly used at?

A

Cashier counters in retail outlets such as supermarkets.

60
Q

Other than the payment of cash, how else can a buyer pay the seller?

A

By cheque or by electronic bank transfer.

61
Q

Which is the party that will always issue the receipt?

A

Seller, i.e. the party who receives the money will always issue the receipt.

62
Q

Which party keeps the original copy of the receipt?

A

The buyer (i.e. the party who pays) keeps the original copy of the receipt.

63
Q

Which party keeps the duplicate copy of the receipt?

A

The seller, i.e. the party who receives the money.

64
Q

Name the source documents for transactions relating to payments for credit purchases and collections for credit sales.

A
  1. Remittance advice
  2. Payment voucher
  3. Receipt
65
Q

What documents does the business prepare when the buyer pays for credit purchases?

A

Payment voucher and a cheque.

66
Q

What is a payment voucher?

A

A payment voucher is a source document that is prepared to record payment of money (either cash or cheque) to a named party / payee.

67
Q

What is the payment voucher used for?

A

To record payment of money to a named party.

68
Q

What does a payment voucher come with?

A

A remittance advice which states the invoice number and the amount paid.

69
Q

Which party keeps the payment voucher and which party keeps the cheque and the remittance advice?

A

The payment voucher is kept with the business while the cheque and remittance advice are sent to the seller.

70
Q

Besides cheques, how can the buyer pay for his credit purchases?

A

Via electronic bank transfers.

71
Q

Which party is the issuer of the remittance advice and cheque?

A

The buyer (the party who pays) will always issue the remittance advice and cheque (if the buyer paid by cheque).

72
Q

What does the seller, i.e. the party that receives the cheque) do with the cheque he / she receives?

A

The seller will deposit the cheque into the business’ bank account and keep the remittance advice.

73
Q

Does the seller need to issue receipts for his / her collections of payments from credit customers?

A

The seller may not issue receipts for such collections from credit customers as the bank records for payments are proofs of payments.

74
Q

What are ‘credit purchases’?

A

‘Credit purchases’ means to buy goods or services and pay for them at a later date.

75
Q

What are ‘credit sales’?

A

‘Credit sales’ means to sell goods or provide services and receive money for them at a later date.

76
Q

What are ‘cash purchases’?

A

‘Cash purchases’ means to buy goods or services and pay for them immediately.

77
Q

What are ‘cash sales’?

A

‘Cash sales’ means to sell goods or provide services, and receive money for them immediately.

78
Q

State the relevant source document for other collections and payments.

A

Bank statement.

79
Q

What is a ‘bank statement’?

A

It is a monthly report sent by the commercial bank to its customer who maintains a cheque (current) account.

80
Q

What does the bank statement show?

A

It gives details of the money drawn (-/dr) and the deposits (+/cr) made by the customer during that particular month in relation to his account. It is not the same as a statement of account; or
The bank statement states the deposits and payments made from the bank account and the remaining amount in the bank account. The bank statement also states the electronic transfers into and out from the bank account, bank charges, interest income and interest expense.

81
Q

Where does the business keep the majority of its money?

A

In the bank.

82
Q

How often does the bank issue a bank statement to the business?

A

Weekly or monthly (usually).

83
Q

What does the business use the bank statement for?

A

To record the amounts collected or paid via electronic bank transfers as well as bank charges, interest income and interest expense.

84
Q

What will happen if a business just keeps stacks of source documents?

A

The business will not know how much cash it has, who owes it money, whom it owes money to, etc.

85
Q

How should the details in the source documents be recorded?

A

In an orderly manner / in chronological order / in order of date.

86
Q

How are business transactions recorded?

A

At their original cost, i.e. the amount stated in the source documents.

87
Q

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

A

To adhere / follow / observe:

  1. historical cost concept
  2. objectivity concept
88
Q

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

A

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.

89
Q

Explain the ‘historical cost concept’.

A

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.

90
Q

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?

A

No.

91
Q

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.

A

$20,000

92
Q

What should the value of the following item be recorded as if the business follows the historical cost concept?
A piece of land owned by a business is now valued at $20 million, 10 times its original cost of $2 million.

A

$2 million

93
Q

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.

A

$1000

94
Q

What should the value of the following item be recorded as if the business follows the historical cost concept?
Due to heavy pollution in the area, a piece of land owned by a business is now valued at $400,000. The land was initially bought for $900,000.

A

$900,000

95
Q

Explain the ‘objectivity’ concept.

A

Transactions are recorded based on information that is reliable and verifiable (i.e. supported by source documents or evidence).

96
Q

Can some values of business transactions that are estimated by the accountants be objective?

A

Yes. Such estimates are objective if two independent accountants make the similar estimates using the same information provided.

97
Q

Scenario: The owner of a new business has given his used delivery truck to the business. He feels that the delivery truck should have a value of $60,000. A second-hand car dealer is selling a similar used delivery truck at $50,000. At which value should the new business record this second-hand delivery truck and why?

A

The new business should record the second-hand delivery truck at a value of $50,000. This is the market value of the used delivery truck. The estimate of $60,000 made by the business owner is not based on evidence.

Principles of Accounts (7 decks)

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