What is accounting?

Question 1

What is accounting?

Answer 1

The scoring system for business.

Question 2

What two basic activities does it consist of?

Answer 2

Recording and reporting.

Question 3

What is recording?

Answer 3

Writing down the effects of a business’s transactions, or “bookkeeping”.

Question 4

What is reporting?

Answer 4

Process of preparing financial statements.

Question 5

Which financial statements do businesses prepare? (4)

Answer 5

1. Statement of comprehensive income
2. Statement of financial position
3. Statement of changes in equity
4. Statement of cash flows

Question 6

What objectives might a business have?

Answer 6

To serve customers, take care of employees, protect the environment, contribute to communities etc

Question 7

What is the defining objective of business?

Answer 7

To make the owner(s) wealthier.

Question 8

List the four decisions a business can make (4)

Answer 8

1. Financing decision
2. Investing decision
3. Operating decision
4. Distribution decision

Question 9

Who are the financial statements for? (4)

Answer 9

1. Existing investors
2. Potential investors
3. Lenders
4. Other creditors

Question 10

What objective do these stakeholders care most about?

Answer 10

Making the owner(s) wealthier

Question 11

What is another term for the owners wealth?

Answer 11

Equity

Question 12

How is equity measured?

Answer 12

Equity = Assets - Liabilities

Question 13

How can the accounting equation be rearranged?

Answer 13

Assets = Equity + Liabilities

Question 14

Define Equity

Answer 14

The owner’s wealth in the business/ the owner’s claim on the business

Question 15

What is an entity?

Answer 15

Entity = Legal organisation

Question 16

What is the entity concept?

Answer 16

the owner’s personal transactions are not recorded or reported by the business

Question 17

What are the exceptions to the entity concept?

Answer 17

The financing decision and distribution decision

Question 18

What is capital?

Answer 18

the net flow of investment transaction into a business.

Question 19

What is another word for “stock”?

Answer 19

Inventory

Question 20

What does it mean to purchase on “credit”?

Answer 20

It means you owe the supplier, over time, in the form of a liability known as: “trade payables”.

Question 21

Define income

Answer 21

An increase in equity not due to a transaction with the owner(s).

Question 22

Define expense

Answer 22

A decrease in equity not due to a transaction with the owner(s).

Question 23

Define profit or loss

Answer 23

Income less expenses or a net change in equity not due to transactions with the owner(s).

Question 24

Define Net asset value

Answer 24

Assets minus liabilities and therefore equity

Question 25

What is accrual accounting? (2)

Answer 25

1. It depicts the effects of transactions in the period in which those effects occur, even if the resulting cash flows occur in a different period.
2. Recognises income when it’s earned, and expenses when they’re incurred.