Theory

Question 0

Explain the “accounting entity assumption”

Answer 0

The accounting entity assumption presumes that a business enterprise has an existence separate from the private financial affairs of its owner/s

Question 1

What is accounting?

Answer 1

Accounting is the process of communicating, identifying, measuring and interpreting financial and other information to interested parties.

Question 2

Explain “Legal Entity”

Answer 2

A legal entity, considers the private financial affairs of its owner/s (in the case of sole traders and partnerships) to be included in the business enterprise.

Question 3

What is the difference between how a business is viewed as an accounting entity to a legal entity?

Answer 3

From an accounting perspective the business entity is viewed to have an existence separate from the private financial affairs of its owner/s. Whereas from a legal perspective the private financial affairs of sole traders and partnership owners are seen as part of the business enterprise.

Question 4

What three accounts make up the accounting equation?

Answer 4

Owner’s equity
Liabilities
Assets

Question 5

What is the accounting equation?

Answer 5

OE= A - L
A = OE + L
L = A - OE

Question 6

How are revenues accounted for in the accounting equation?

Answer 6

Revenues increase owners equity and therefore have a credit nature.

Question 7

How are expenses accounted for in the accounting equation?

Answer 7

Expenses decrease owners equity and are therefore debit on nature.

Question 8

Define GST

Answer 8

GST is the Goods and Services Tax that is applied to the purchase and sale of most goods consumed in Australia.

Question 9

Does GST impact on a business’ profits?

Answer 9

GST does not impact on a business’ profit. As the extra 10% for GST that is charged in sales is remitted to the ATO. Also the extra 10% that is paid during purchases it claimed back from the ATO.

Question 10

Explain why GST is debited when a business is purchases an item

Answer 10

GST is debited when a purchase is made as this money can be claimed back from the ATO.

Question 11

Explain why GST is credited when the business sells and item

Answer 11

GST is credited when the business sell an item as this money must be remitted to the ATO.

Question 12

Name three accounts that are GST free

Answer 12

Wages
Drawings
Capital