Unit 1: Introduction to Accounting

Question 1

What is accounting?

Answer 1

The process by which financial information about a business is classified, recorded, summarized, interpreted, and
communicated to owners, managers, and other interested parties.

The art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and
events which are, in part at least of financial character, and interpreting the results thereof.

Question 2

GAAP

Answer 2

Generally Accepted Accounting Principles

Question 3

AREAS of Accounting

Answer 3

1. Public Accounting
2. Private Accounting
3. Governmental Accounting

Question 4

Public Accounting

Answer 4

Provide accounting services for other companies

Auditing, Tax Accounting, and Management Advisory Services

Question 5

Private Accounting

Answer 5

Works for a single business entity in a specific industry

Question 6

Governmental Accounting

Answer 6

Keeping financial records and preparing financial reports for the national government, its various departments, and local government units

Question 7

BRANCHES of Accounting

Answer 7

1. Financial Accounting
2. Auditing
3. Cost Accounting
4. Managerial Accounting
5. Government Accounting
6. Tax Accounting
7. Accounting Information System
8. Forensic Accounting

Question 8

PRIMARY USERS of Accounting Information

Answer 8

1. Investors (Individuals, businesses, banks, insurance companies)
2. Lenders, and other creditors (Lenders ensure the business is capable of repaying a loan, creditors/suppliers assess the business’ ability to pay its bills)

Question 9

INTERNAL Users of Accounting Information

Answer 9

INTERNAL Users
1. Owners - Monitor business performance to check return on investment

2. Managers - Evaluate results of company’s operations to make decisions for the future
3. Employees - Ensure that the business can pay salaries and other benefits

Question 10

EXTERNAL Users of Accounting Information

Answer 10

EXTERNAL Users
1. Tax authorities - Collect taxes
2. Regulatory agencies - Oversee the financial information provided by PUBLIC companies
3. Customers
4. Employee unions
5. Trade associations
6. Financial intermediaries

Question 11

Forms of Business Organization

Answer 11

1. Sole Proprietorship
2. Partnership
3. Corporation

Question 12

Forms of Business (Type/Activity)

Answer 12

1. Service - Provides services
2. Merchandising - Buys and sells goods
3. Manufacturing - Converts raw materials to finished goods

Question 13

It is known as the language of business

Answer 13

Accounting

Question 14

What is an Account?

Answer 14

A written record of the assets, liabilities, and owner’s equity of a business

Question 15

Chart of Accounts

Answer 15

A list of all accounts used by a business to record its financial transactions

Question 16

Are INCREASES or DECREASES recorded on the NORMAL BALANCE side of an account?

Answer 16

Increases

Question 17

Are INCREASES or DECREASES recorded on the OPPOSITE SIDE of the normal balance?

Answer 17

Decreases

Question 18

What is Normal Balance?

Answer 18

The normal balance (NB) of an account its normal side in the accounting equation

Question 19

Accounting Equation

Answer 19

Assets = Liabilities + Owners Equity

A = L + OE

Question 20

What is the NORMAL BALANCE SIDE of Assets?

Answer 20

Left side (Debit)

Question 21

What is the NORMAL BALANCE SIDE of Liabilities?

Answer 21

Right side (Credit)

Question 22

What is the NORMAL BALANCE SIDE of Owner’s Equity?

Answer 22

Right side (Credit)

Question 23

Where are INCREASES recorded under Liabilities?

Answer 23

Since the NORMAL BALANCE SIDE of Liabilities is on the right side (credit), increases are recorded on the right (credit)

Question 24

Where are INCREASES recorded under Assets?

Answer 24

Since the NORMAL BALANCE SIDE of Assets is on the left side (debit), increases are recorded on the left (debit)

Question 25

Where are INCREASES recorded under Owner's Equity?

Answer 25

Since the NORMAL BALANCE SIDE of OE is on the right side (credit), increases are recorded on the right (credit)

Question 26

Where are INCREASES recorded in Owner's Capital?

Answer 26

Owner's Capital is a Normal Credit account, thus, increases are recorded on the right side.

Question 27

Where are INCREASES recorded in Owner's Drawing?

Answer 27

Owner's Drawing is a Normal Debit account, thus, increases are recorded on the left side.

Question 28

What is the NORMAL BALANCE SIDE of Revenues?

Answer 28

Revenues is a Normal Credit account, thus, increases are recorded on the right side.

Question 29

What is the NORMAL BALANCE SIDE of Expenses?

Answer 29

Expenses is a Normal Dedit account, thus, increases are recorded on the left side.

Question 30

What is ALORE and their normal balance sides?

Answer 30

Assets DEBIT SIDE Liabilities CREDIT SIDE Owner's Equity CREDIT SIDE Revenues CREDIT SIDE Expenses DEBIT SIDE

Question 31

What accounts go on the Balance Sheet?

Answer 31

Assets, Liabilities, and Owner's Equity ALOBS (ALO-Balance Sheet)

Question 32

What accounts go on the Income Statement or Statement of Profit & Loss or P&L Statement?

Answer 32

Revenues and Expenses REPL (RE-Profit & Loss)

Question 33

Income is an inflow of assets that results from the sales of goods or services or from the use of money or property. T or F

Answer 33

True

Question 34

The form of the statement which shows the liabilities and owner’s equity below the total assets is called the account form of the Statement of Financial Position. T or F

Answer 34

False. Report Form

Question 35

The natural form of Statement of Profit or Loss is generally used by service businesses because of its simplicity. T or F

Answer 35

True

Question 36

Accounting is defined as the process of recording financial and non-financial transactions pertaining to a business. Which includes summarizing, analyzing, and reporting these transactions to various stakeholders. T or F

Answer 36

True

Question 37

The business offers term of 90 days for its sales on account. It records the revenue from these sales as soon as the sales are made rather than waiting until cash is received from the customers. This is in accordance with matching principle. T or F

Answer 37

False. Revenue Recognition Principle

Question 38

Cost-Benefit Test is not difficult to determine as both cost and benefits are easy to measure. T or F

Answer 38

False. Not easily determinable

Question 39

Tax compliance refers to giving advice to clients on how to structure their financial affairs in order to reduce tax liability. T or F

Answer 39

False. Tax planning

Question 40

According to the Conceptual Framework, the primary users of financial statements are the owner/s and managers. T or F

Answer 40

False. Primary users are investors, lenders, and other creditors.

Question 41

Limited liability and indefinite business life are characteristics of a corporation. T or F

Answer 41

True

Question 42

The business entity concept means that...

Answer 42

The entity is an individual economic unit for which data are recorded, analyzed, and reported.

Question 43

The going concern assumption assumes that...

Answer 43

The business will continue to operate indefinitely.

Question 44

Under the accrual basis of accounting...

Answer 44

Revenue is recorded in the period in which it is earned and expenses are recorded in the period in which incurred.

Question 45

Which of the following is the best description of “faithful representation” in relation to information in financial statements? a. Influence on the economic decisions of users b. Freedom from material error c. Comprehensibility to users d. Inclusion of a degree of caution

Answer 45

b. Freedom from material error

Question 46

Owner's drawings increase or decrease owner's equity?

Answer 46

Decrease

Question 47

Equity Formula

Answer 47

Equity = Total Assets - Total Liabilities

Question 48

Liabilities Formula

Answer 48

Total Liabilities = Current Liabilities + Non-current Liabilities