The Accounting Information System - The Accounting Cycle and More Accounting Theory

Question 1

What is the business assumed to have?

Answer 1

An indefinite (i.e. without an end) economic life, unless there is evidence showing that the business will be closed down in the foreseeable future.

Question 2

What is this assumption that a business has an indefinite economic life in accordance with?

Answer 2

The going concern concept.

Question 3

Explain the ‘going concern’ concept.

Answer 3

The business entity will continue to operate indefinitely; or
The going concern concept assumes that the business has an indefinite economic life.

Question 4

What does the business do as a going concern?

Answer 4

The business will buy assets (for example, equipment, buildings) to help it carry out its operations in the long term.

Question 5

Are the assets that the business buys to help it carry out its operations in the long term expected to be sold off soon after they are acquired?

Answer 5

No.

Question 6

How are the assets the business buys to help it carry out its operations in the long term valued and recorded?

Answer 6

At the historical cost (i.e. the price at which they were bought).

Question 7

How would the business value the assets it has bought if there were evidence indicating that the business may close down in the foreseeable future?

Answer 7

These assets have to be valued at the value that they can be sold for and no longer at historical cost.

Question 8

Is this business a going concern?

A coffee shop buys a computerised ordering payment system in anticipation of increased sales.

Answer 8

A going concern.

Question 9

Is this business a going concern?
A dance school has not paid rent and salaries for six months. It has also not conducted a single dance class for four months.

Answer 9

Not a going concern.

Question 10

Is this business a going concern?

A business holds a closing-down sale of used furniture.

Answer 10

Not a going concern.

Question 11

Will stakeholders want to know the financial performance of the business at regular time intervals?

Answer 11

Yes.

Question 12

What is the practice of breaking up the life of a business into regular time intervals known as?

Answer 12

Accounting period concept.

Question 13

Is it common for businesses to prepare financial statements at regular intervals, such as at the end of each month, each quarter, each half-year or each year?

Answer 13

Yes.

Question 14

Is it possible to wait until the end of the life of a business entity to measure its performance?

Answer 14

No. The life of a business entity can be divided into specific periods of time for the purpose of preparing financial / accounting reports. Such a period is called an accounting period.

Question 15

Give examples of accounting periods.

Answer 15

1. a month
2. every quarter (three months)
3. a half-year
4. a full year

Question 16

Define the ‘accounting period’ concept.

Answer 16

The economic life of a business can be divided into specific time periods for the purpose of preparing financial reports.

Question 17

What does the law require some businesses to do?

Answer 17

Some businesses are required to prepare their financial statements at least once a quarter (i.e. every three months) and for other businesses, once a year.

Question 18

What is the end of a one-month accounting period if the beginning of accounting period is 1 February 2014?

Answer 18

28 February 2014

Question 19

What is the beginning of a quarter of a year accounting period if the end of accounting period is 31 May 2013?

Answer 19

1 March 2013

Question 20

What is the beginning of a half-year accounting period if the end of accounting period is 30 June 2014?

Answer 20

1 January 2014

Question 21

What is the end of a one-year accounting period if the beginning of accounting period is 1 September 2013?

Answer 21

31 August 2014.

Question 22

Name the months that have 31 days.

Answer 22

January, March, May, July, August, October, December.

Question 23

Name the months that have 30 days.

Answer 23

April, June, September, November.

Question 24

How many days are there in the month of February?

Answer 24

Non-leap years: 28 days
Leap years (i.e. every four years): 29 days in 2012, 2016, 2020, 2024, 2028, 2032, etc.

Question 25

How can I remember the number of days each month has?

Answer 25

By memorising the following:
"Thirty days hath September, April, June and November
All the rest have 31.
Excepting February alone: 
Which hath but 28, in fine
Till leap year gives it 29."

Question 26

What is the process in which the business has to process its transactions regularly in order to present its financial performance regularly called?

Answer 26

The accounting cycle.

Question 27

Describe the phases in the accounting cycle.

Answer 27

See Page 25 of textbook.

1. The identifying and recording phase.
2. The adjusting phase.
3. The reporting phase.
4. The closing phase.

Question 28

Describe the identifying and recording phase.

Answer 28

Source documents are sorted and the transactions recorded in journals. The entries in the journals are then posted to the ledgers.

Question 29

Describe the adjusting phase.

Answer 29

The business checks that it has recorded all the transactions, and the Trial Balance is usually prepared in this phase. Any transactions not recorded or not correctly recorded are corrected with adjusting entries (some of which are listed in Table 2.3 of textbook).

Question 30

Describe the reporting phase.

Answer 30

The financial reports are prepared. The business must prepare its financial reports at least once in a financial year. However, it may prepare them more frequently (e.g. monthly, quarterly or half-yearly).

Question 31

Describe the closing phase.

Answer 31

The accounting information system is prepared for the next financial year. The closing entries mentioned in Table 2.3 of textbook will be posted. Closing is carried out once at the end of the financial year. After this phase, no transactions for the financial year should be recorded.

Question 32

What happens after the closing phase?

Answer 32

The business moves on to the next financial year.