Topic 1 - Introduction / Revision

Question 1

What are debits and credits?

Answer 1

They are descriptors for the two sides of an account.

Question 2

Which sides of a T-account are debits and credits placed on?

Answer 2

Debit

Left-hand side

Credit

Right-hand side

Question 3

What is the Accounting Equation?

Answer 3

Assets = Liabilities + Owners Equity

Question 4

How do you balance the accounting equation?

Answer 4

By balancing your journal entries.

Question 5

Asset Accounts:

______ on the DR side and ______ on the CR side

Liability Accounts:

______ on the DR side and ______ on the CR side

Owners Equity Accounts:

______ on the DR side and ______ on the CR side

Answer 5

Asset Accounts:

increase on the DR side and decrease on the CR side

Liability Accounts:

decrease on the DR side and increase on the CR side

Owners Equity Accounts:

decrease on the DR side and increase on the CR side

Question 6

If an asset account increases (DR to asset) how can we make the journal entry balance AND make sure that the accounting equation balances as well?

Answer 6

Decrease another asset account (CR)

Increase a liability account (CR)

Increase an owners equity account (CR)

Question 7

What are the 7 components that journal entries must ALWAYS have?

Answer 7

1. A running reference number
2. Date of the transaction
3. A CLEAR indication of DR and CR
4. Correct account names
5. Amounts (with DR and CR amounts being in balance)
6. Short description
7. An empty line between journal entries

Question 8

How would you correct this journal entry?

Answer 8

Question 9

How are revenue / expense accounts a part of owners equity?

Answer 9

Revenues increase owners equity

– Revenue accounts increase on the CR side

Expenses decrease owners equity

– Expense accounts increase on the DR side

Question 10

Define ‘journal’ and ‘ledger’.

Answer 10

Journal

chronological list of journal entries

Ledger

a ‘book’ that contains all accounts of an entity

Question 11

When posting information from a journal to a ledger you MUST always include what?

Answer 11

A reference in the ledger AND the journal entry.

Question 12

When transferring information from a journal to a ledger, use the DR/CR signs to work out on which side of a ledger account particular transactions/events are recorded and

1. ___________________
2. ___________________

Answer 12

When transferring information from a journal to a ledger, use the DR/CR signs to work out on which side of a ledger account particular transactions/events are recorded and

1. Add contra account numbers to ledger postings
2. Use posting reference in the journal to indicate that information has been posted to the ledger

Question 13

Which accounts have opening balances?

Answer 13

Only balance sheet accounts.

Question 14

Normal opening balances appear on which side?

Answer 14

Normal opening balances appear on the side on which an account increases

• DR side for assets
• CR side for liabilities & owners equity

Question 15

Closing balances are normally recorded on which side?

Answer 15

On the side where the opening balance has not been recorded.

Question 16

What are closing balances equal to?

Answer 16

Closing balances are equal to the amount necessary to balance the DR and CR sides of the account.

Question 17

What are net assets equal to?

Answer 17

assets - liabilities

Question 18

What effect would a cash purchase of supplies have on total assets?

Answer 18

It would have no effect.

Question 19

Debit is a term representing:

Answer 19

the left side of an account

Question 20

Prepaid expenses are classified in the balance sheet as:

Answer 20

assets

Question 21

The entries which set the balances of the temporary accounts to zero are called what?

Answer 21

Closing entries.

Question 22

The IASBs / AASBs conceptual framework provides information regarding what?

1. ?
2. ?
3. ?

Answer 22

1. The scope and objectives of financial reporting
2. The qualitative characteristics that financial information should possess
3. The elements of financial reporting

Question 23

Why is the Conceptual Framework useful?

The development of accounting regulations which are internally consistent requires an agreement on:

1. ?
2. ?
3. ?

Answer 23

1. The objectives and general purpose of financial reporting
2. The qualitative characteristics required of the provided information (i.e. what should good information look like)
3. The definitions of basic financial accounting elements

Question 24

How is the Conceptual Framework used in practice?

1. ?
2. ? :

• ?
• ?

Answer 24

1. Not all possible transactions or events are covered by accounting standards
2. If a transaction / event is not covered in the accounting standards, the accountant must develop a solution that complies with:

• the “true and fair view” requirements
• the AASBs conceptual framework

Question 25

What are the *qualitative* characteristics of financial information in the Conceptual Framework regarding **Relevance**?

Answer 25

Information should: - have the potential to *impact* the **decisions** that users of financial statements make, by having a: **predictive** and/or **confirmatory** value.

Question 26

What are the *qualitative* characteristics of financial information in the Conceptual Framework regarding **Faithful Representation**?

Answer 26

Information should be: **complete** - all information necessary to understand the reported reality **neutral** - without bias **free from error** - prepared systematically without omissions

Question 27

What are the *qualitative* characteristics of financial information in the Conceptual Framework regarding **Enhancing Quality Characteristics** (which improve quality)? * ? * ? * ? * ?

Answer 27

**V-cut** - **V**erifiability - **C**omparability - **U**nderstandability - **T**imeliness

Question 28

What is one approach used to calculate **profits**?

Answer 28

By using the **Asset / Liability** approach: Starting point: *Definition* of assets and liabilities. All other definitions rely on these two "base definitions".

Question 29

Which *five* elements does that **conceptual framework** define?

Answer 29

1. Assets 2. Liabilities 3. Expenses 4. Income 5. Equity The definitions of **3-5** depend partly on the definitions of **Assets** and **Liabilities**.