The nature and functions of accounting and bookkeeping.Worksheet 1

Question 1

1.Explain the term ‘accounting’.

Answer 1

Accounting is classifying,summarising and recording the financial transactions of a business enterprise in monetary terms.

Question 2

2.Explain the term ‘bookkeeping’.

Answer 2

Bookkeeping is keeping records of the financial activities of a business.

Question 3

3.Distinguish between accounting and bookkeeping.

Answer 3

Both forms part of the finance department.
Bookkeeping is the 1st stage- keeping systematic records of the business’s activities.
Accounting then analyses the bookkeeping records to prepare reports & proposals and gives reasons for the financial actions that the business takes.

Question 4

4.Explain different objectives of accounting.

Answer 4

–To calculate the profit or loss for any period
–To check for errors and correct them
–To calculate the cost of production
–To check for fraud or misuse of money of the business
–To help management formulate policies

Question 5

5.Name the various users of accounting information.

Answer 5

Internal users: Users of financial statements; people employed by the business and responsible for its management.

External users: Users of financial statements; persons not directly concerned with the management of the business.

Question 6

6.Explain the importance of accounting information to the various users of accounting information.

Answer 6

Internal users
1.Management wants to know:
–The sales
–The expense
–The suppliers
–The money available in the business
–If the business is making a profit

2. The employees want to know:
   –If the business is profitable for possible salary, increases & bonuses.
   –Whether their jobs are safe
3. The investors/owner wants to know:
   –If the business is run efficiently
   –If the business is doing well
   –Whether it was a good investment

External
1. Customers want to know:
–That they are receiving quality goods for reasonable prices with good service.
–Credit customers need to know what they owe to the business.

2. Suppliers want to know:
   –That the business can pay them for goods supplied on credit.
3. Financial institutions want to know:
   –If the business is making a profit and if they can repay loans. They can also assist the business with information on possible investments.
4. Government wants to know:
   –That all VAT that the business receives less VAT than the business pays.

Question 7

7.Identify the three branches of accounting.

Answer 7

–Financial accounting
–Cost & Management accounting
–Auditing

Question 8

8.Explain the three branches of accounting.

Answer 8

Financial accounting:
Is the information received from bookkeeping that is used to draw up the financial statement and final accounts.

Cost & Management accounting:
Cost accounting includes cost control, quality control, budgetary control and planning or decision making of the business.
Management accounting includes planning, stock control, overheads of the business, fixing selling prices & wages as well as preparing budgets for the business.

Auditing:
For a specific financial period, all the books are checked if it was done correctly or not from the books of first entry to the final accounts.

Question 9

9.Explain the business entity principle and make use of examples.

Answer 9

The business entity principle means that the business is separate of the owner and their books should be kept separate with two sets of books.

Example: You are the owner of a business called …………… You (the owner) should show an amount that was paid to the business. In the business’s books it will be shown as a capital contribution.

Question 10

10.Explain the money measuring principle and give examples.

Answer 10

The money measuring principle means that only transactions with a monetary value can be record in the book of the business.

Example: Only the salary of an employee at the business can be entered in the books of the business, not his/her degree, loyalty towards the business, hard work ,nor management style.

Question 11

11.What does GAAP mean?

Answer 11

GAAP= General accepted accounting principles.

Relates to the rules to be applied.

Question 12

12.What does IFRS mean?

Answer 12

IFRS=International financial Reporting Standards.

Relates to the internationally accepted set of principles that the business must follow for financial reporting.