Week 2 - Classification and Analysis of Business Transactions

Question 1

What are the three components that are required in an assets definition?

Answer 1

o Assets must provide future economic benefit
o Controlled by their firm/entity
o Result of a past event

Question 2

What is the recognition criteria that assets must meet?

Answer 2

o Probably received

o Reliably measured

Question 3

What are the three components that are required in a liabilities definition?

Answer 3

o Must be a present obligation
o They must result from past events
o Settled by an outflow of economic benefits

Question 4

What is the recognition criteria that liabilities must meet?

Answer 4

o They will probably be paid

o Reliably measured

Question 5

Define Expenses

Answer 5

Any event that causes an increase in assets or a decrease in liabilities which results in a decrease in equity (except for transactions with owners).

Question 6

Define Revenues

Answer 6

Any events that causes an increase in assets or a decrease in liabilities which results in an increase in equity. (except for transactions with the owners)

Question 7

Define the Basic Accounting Equation

Answer 7

o The underlying framework for recording and summarising the economic events of an entity.

Question 8

What is vital to the accounting equation

Answer 8

IT MUST BALANCE

Question 9

What is owner’s equity comprised of?

Answer 9

o OE = Capital contributions + Revenues – Drawings – Expenses

Question 10

What is the extended accounting equation

Answer 10

o A= L + C – D + R – E

Question 11

What is the equation for net profit/income

Answer 11

o Net Income/Profit= Revenue (Income) – Expenses

Question 12

What is the equation for owner’s capital

Answer 12

o Owner’s Capital= Capital – Drawings

Question 13

What can affect owner’s equity

Answer 13

o Owner’s Equity can increase by investments from the owner and income, and it can decrease from withdrawls from the owner and expenses.

Question 14

What are business transactions?

Answer 14

o Business transactions are the economic events of a business

Question 15

What is a transaction

Answer 15

o A transaction is an event that has a financial impact on the entity

Question 16

What happens to transactions in order to prepare a financial statement?

Answer 16

o Transactions are required to be classified, analysed and summarised in order to prepare financial statements.

Question 17

Define Cash Accounting

Answer 17

o All business transactions are recorded on the basis of when the case is actually received or paid.

Question 18

Who generally uses cash accounting?

Answer 18

o Generally used for small businesses, it is an unfair representation for big companies.

Question 19

What is the profit based on for cash accounting?

Answer 19

o Profit with this system is the difference of cash received as an income and cash paid for expenses.

Question 20

Define Accrual Accounting

Answer 20

o Records revenues when they have been incurred, not when they have been payed.
o Records expenses when they have been incurred, not when they have been paid for.

Question 21

Explain the benefits of accrual accounting over cash accounting

Answer 21

o Accrual accounting is more accurate
o Accrual accounting reflects all transactions completed during the period.
o Profit in accrual accounting is based on the difference between revenue earned and expenses incurred.
Provides information that provides for a more accurate prediction of future financial transactions.

Question 22

What is transaction analysis?

Answer 22

o Transaction analysis is the process of identifying the specific effects of transactions and events on the accounting equation

Question 23

What are the three steps in transaction analysis?

Answer 23

o Which element is affected? E.g assets, liabilities, owner’s equity
o Which specific item (account) is affected? E.g cash, wages, loan
o By how much is the element (account) increasing or decreasing?