Topic 1: Role of accounting

Question 1

1. Define bookkeeping.

Answer 1

Bookkeeping is the process of recording business transactions systematically and accurately.

Question 2

2. Define accounting.

Answer 2

Accounting is the process of recording, summarising, analysing, interpretation and reporting, of financial information of an organization.

Question 3

3. What are the roles of accounting?

Answer 3

(i) Stewardship - it refers to the use of accounting information to keep track of what has been done with the business financial resources that are being entrusted to the managers.
(ii) Decision-making - Accounting information is communicated to various stakeholders to help them make informed financial decisions and take any necessary actions.

Question 4

4. State and explain the 2 professional ethics that accountants need to have.

Answer 4

(i) Integrity - to be straightforward and honest in their business relationships.
(ii) Objectivity - to be unbiased when making a professional judgement in the accounting process.

Question 5

5. State the difference between a trading business and service business and give examples of these 2 businesses.

Answer 5

A trading business is a business that buys and sells goods. Examples are supermarket and furniture shop.

A service business is a business that provide services. Examples are hairdressing salons and bus company.

Question 6

6. Who are the internal users of the financial information?

Answer 6

Owners:
To know about the profitability or liquidity of the business.

Management (e.g. managers):
To plan and control business.

Employees:
To know about stability of jobs.

Question 7

7. What are the external users of the financial information?

Answer 7

Investors:To decide if they should maintain, decrease or increase their investments.

Suppliers:To know if the business is able to pay its debts when they fall due and if they should grant credit to the business.

Bank and other lenders:To assess whether to grant the business loans.

Government:To check if the business comply with regulations.

Customers:To know about the continuity of business.

Public:To decide whether to invest in or work for the business.

Competitors: To review performance against competitors and decide how to make improvements.

Question 8

8. List the characteristics of a company

Answer 8

Limited Company

1) Minimum one owner
2) More complicated and expensive to set up. More regulations to comply too. (disadv)
3) The shareholders received only portions of the company’s profits as dividends.
4) Limited liability - The maximum amount that a shareholder can lose is limited to the amount of their investment in the business. (adv)
5) Banks are more willing to lend to a company. Funds can also be raised from issuing company’s shares. (adv)

Question 9

9. List the characteristics of a sole proprietorship

Answer 9

Sole proprietorship

1) Single owner
2) Easier and less expensive to set up and maintain. (adv)
3) The entire profit of the business belongs to the sole proprietor.
4) Unlimited liability - A sole proprietor may lose more than its investment in the business. (disadv)
5) Banks may be less willing to lend to a sole proprietor. (disadv)