Topic 1: Accounting Basics

Question 1

What is the Basic Accounting Equation?

Answer 1

Assets = Liabilities + Owners Equity
Owners Equity = Assets - Liabilities
Liabilities = Assets - Owners Equity

Question 2

Owners’ Equity Capital Account Closing Balance =?

Answer 2

Owners’ Equity Capital Account Opening Balance + Capital Introduced - Drawings + Revenue - Expenses

Question 3

What is the expanded Accounting Equation?

Answer 3

Assets = Liabilities + Owners’ Equity + Capital Introduced - Drawings + Revenue - Expenses

Question 4

What are the Permanent Accounts?

Answer 4

The items in the Balance Sheet - Assets, Liabilities and Owners’ Equity.

Question 5

What are the Temporary Accounts?

Answer 5

Capital Introduced, Drawings, Revenue, and Expenses.

Question 6

What are the Accounting Elements?

Answer 6

ALOECIDRE

Question 7

What are the 3 Financial Statements?

Answer 7

1. Income Statement (Profit and Loss Statement)
2. Statement of Changes in Equity
3. Balance Sheet

Question 8

What is the Balance Sheet?

Answer 8

It reports the financial position of a business entity at a specific point in time and is composed of Assets, Liabilities and Owners Equity. As At 30 June 2022

Question 9

What is the Income (Profit & Loss) Statement?

Answer 9

Shows the net profit or loss for a specific period. The two main elements are Revenue and Expenses. For the Year Ended 30 June 2022

Question 10

What is the Statement of Changes in Equity?

Answer 10

It represents the owner’s interest in the business. The format is: Owners Capital Opening Balance PLUS Profit PLUS Capital Introduced LESS Drawings EQUALS Owners Equity Closing Balance. Note that Profit = Revenue - Expenses

Question 11

Normal Balances

Answer 11

Asset DR
Liability CR
Owners Equity CR
Capital Introduced CR
Drawings DR
Revenue CR
Expenses DR

Question 12

What is an Asset?

Answer 12

Something we own that provides a future economic benefit.

Question 13

What is a Liability?

Answer 13

Something that we owe that is a future economic sacrifice that you are obliged to make.

Question 14

What is Owners’ Equity?

Answer 14

The difference between assets and liabilities represents the owner’s interest (Net Assets) in the business.

Question 15

What is the Chart of Accounts?

Answer 15

A list of all a businesses accounts and their identifying numbers.

Question 16

What is Revenue?

Answer 16

The gross inflows of economic benefit during an accounting period.

Question 17

What are Expenses?

Answer 17

The cost of operations that a company incurs to generate revenue.

Question 18

What are Current and Non-Current Liabilities?

Answer 18

Current Liabilities are debts that the business expects to pay within 12 months while non-current liabilities are longer term.

Question 19

What are Current and Non-Current Assets?

Answer 19

Current assets can be converted into cash within one year while non-current assets are longer term such as property and machinery.

Question 20

What are the Accounting Principles?

Answer 20

CAMP PEG
Cost - items are recorded at their historical cost
Accounting Period - Accounting information is reported for a specific period (typically 1 year)
Matching - Inputs must be matched to outputs. This means we need to record expenses (inputs) in the same period as the revenues (outputs) that they helped create.
Profit Recognition - Revenue must be recognised in the period in which it was earned.
Prudence Principle - record revenue only when it is certain and expenses when they are probable.
Entity Concept - reports are prepared for a specific entity
Going Concern - accounts are produced on the basis that the entity will continue into the future.

Question 21

What are the Reporting Principles?

Answer 21

CRRUM
Comparable - compare the same business over time (horizontal analysis). Compare one business to another business (vertical analysis).
Relevant - includes information that is useful for decision making.
Reliable - free from material errors and biases
Understandable - should be presented in a form that can be understood by users that have a reasonable knowledge of business.
Materiality - in deciding what and how to measure we should to some extent bear in mind the cost of measurement.