Topic 1. Introduction

Question 1

What is accounting?

Answer 1

The process of ‘identifying’, ‘classifying’, ‘measuring’, and ‘recording’, financial information to interested parties/stakeholders to help them back ‘informed judgements’ and ‘decisions’.

Question 2

What is the accounting process?

Answer 2

1. Collect information through source docs
2. record source docs into journals
3. post journals into ledgers
4. prepare a trial balance
5. prepare final reports
6. assess performance
7. provide business advice.

Question 3

What is data?

Answer 3

Anything that can be measured and give a money value. (bank deposits, receipts)

Question 4

What is information?

Answer 4

When these raw figures and data are ‘summarised’ or rearranged in a ‘structured’ manner.

Question 5

What is quantitive data?

Answer 5

→ Info expressed in numerical form which is measurable.
→ objective

Question 6

What is qualitative information?

Answer 6

→ all other info (legal, social, environmental, ethical matters)
→ subjective bc it is intuitive or biased

Question 7

what is financial information?

Answer 7

→ information that features monetary value
→ e.g. budgets, ratios, interest rates

Question 8

What is non-financial information?

Answer 8

→ all other info NOT measures in monetary value
→ e.g. customer service, benchmarks

Question 9

What is relevance?

Answer 9

Information that helps users to form predictions about the outcomes AND/OR confirm previous evaluations.

Question 10

What is faithful representation?

Answer 10

→ ensures complete (all details necessary for user to understand), free from material error (accurate verifiable information), and neutral (not subjective or based on opinions)

Question 11

What is materiality?

Answer 11

Relevant info that could ‘influence’ users decisions.

Significant information.

Question 12

What is Accrual Accounting?

Answer 12

Revenue and expense transactions are recorded when they occur, NOT when cash is exchanged.

Question 13

What is Accounting Entity?

Answer 13

A business is seen as SEPERATE from that of its owner for accounting purposes

Question 14

What is Legal Entity?

Answer 14

A legal entity is an organisational unit that is seen by the law as having its own SEPERATE legal status

Question 15

What is Accounting Period?

Answer 15

The life of the business needs to be split into REPORTING (accounting) periods, where it can determine
its level of profit (or loss) from its operations.

Question 16

What is Consistency?

Answer 16

Accountants should apply the same ACCOUNTING METHOD from one period to the next so that
results can be compared effectively

Question 17

What is Duality?

Answer 17

Every transaction has at least two effects on the ACCOUNTING EQUATION and the impact on the
accounting equation is equal of both sides.

Question 18

What is Going Concern?

Answer 18

Financial reports are normally prepared on the assumption that an entity is a going concern and will continue
in operation for the FORESEEABLE FUTURE. This is a reason for why historical cost is used for the valuation of
assets.

Question 19

What is Monetary Unit convention?

Answer 19

Transactions and events should be MEASURE in monetary terms and in the terms of the local country’s
currency.

Question 20

What is Historical Cost?

Answer 20

Assets are RECORDED at their historical cost, (i.e., their purchase price or cost of acquisition)

Question 21

What is Prudence?

Answer 21

Accountants must use care and caution in the valuation of assets and the measurement of profit when
preparing financial statements. This principle serves so as not to OVERSTATE amounts when reporting the
assets and revenue or not to UNDERSTATE the liabilities and expenses of a business

Question 22

What is Realisation?

Answer 22

Accounting standards state that revenue can only be recognised once the goods or services associated with the
revenue have been DELIVERED or TENDERED. Thus, revenue is not recognised until it has actually been
earned.

Question 23

What is Relevance?

Answer 23

Accountants should disclose only information considered relevant to stakeholders and their decision-making.

Question 24

Internal Stakeholders

Answer 24

Those within the entity who utilise the accounting information so as to be able to make decisions within an organisation.

Question 25

External Stakeholders

Answer 25

Those outside of the management who utilise financial information regarding an entity for their own needs.

Question 26

Unincorporated businesses.

Answer 26

→ The business is not seen as separate from the owner in the eyes of the law. → Sole traders and Partnerships Unlimited liability – the owner is personally responsible for the debts of the business. Personal assets can be required to be sold to cover the debts of the business.

Question 27

Incorporated businesses.

Answer 27

→ The business is a separate legal entity to the owner → Private and public companies → Limited liability – owners/shareholders can only lose the amount they have invested in the business. Personal assets are protected should the recovery of business debts be initiated.

Question 28

Advantages of Sole proprietorships

Answer 28

→ FEW legal formalities → receives ALL profits → more FLEXIBILITY → PERSONALISED services → very PRIVATE

Question 29

Disadvantages of Sole proprietorships

Answer 29

→ UNLIMITED LIABILITY → limited SOURCES of FINANCE → more WORKLOAD & STRESS → lack of CONTINUITY → higher PRODUCTION $$$

Question 30

Advantages of Partnerships

Answer 30

→ much more FINANCIAL STRENGTH → benefit from DIVISION of LABOUR & specialisation → no need to PUBLISH financial records

Question 31

Disadvantages of Partnerships

Answer 31

→ UNLIMITED LIABILITY → longer DECISION-MAKING → lack of CONTINUITY if partner leaves/dies → requires HUGE trust → difficulties in RAISING CAPITAL

Question 32

Advantages of Private Limited Companies

Answer 32

All shareholders have LIMITED LIABILITY. (encourages people to buy shares, knowing that the amount they pay is the maximum they could lose if the business is unsuccessful.) → It is an INCORPORATED business and is a separate legal unit. → There is CONTINUITY should one of the shareholders die. → Able to raise CAPITAL from the sale of shares to family, friends and employees → Greater STATUS than an unincorporated business which aids obtaining credit when required.

Question 33

Disadvantages of Private Limited Companies

Answer 33

→ Shares CANNOT be SOLD/TRANSFERRED to anyone w/o shareholder agreement → LESS PRIVATE as counts must be REGISTERED each year → CANNOT offer shares to general public, reducing possibility to raise large capital. → far more BUREAUCRACY

Question 34

Advantages of Public Limited Companies

Answer 34

→ This form of business organisation still offers LIMITED LIABILITY to shareholders. → It is an incorporated business and is a SEPERATE LEGAL entity. → There is CONTINUITY if a shareholder dies. → Opportunity to RAISE very large CAPITAL sums to invest in the business as they are able sell shares to the general public with NO LIMIT to the no. of shareholders. → There is NO RESTRICTION on the buying, selling or transfer of shares. → Usually has HIGH STATUS & if properly managed, easier to attract SUPPLIERS (that sell goods on credit & BANKS willing to lend)

Question 35

Disadvantages of Public Limited Companies

Answer 35

→ The LEGAL FORMALITY are complicated and time consuming. → Many more REGULATIONS and CONTRACTS over public limited companies (to protect the interests of the shareholders) → This includes the PUBLICATION of accounts, which anyone can ask to see. → Some public limited companies grow so large that they become difficult to control and manage – DISECONOMY of SCALE → Original owners may become rich by selling shares but they may LOSE CONTROL over when it 'goes public'.