Chapter 1- The Accounting System

Question 1

What are financial transactions?

Answer 1

a money agreement between a buyer and seller to exchange an asset for payment.

Question 2

Selling goods and services info

Answer 2

• immediate payment= cash sales
• cash can be payment made by credit/debit card as well as notes and coins
• a payment at a later date is a credit sale

Question 3

What is a credit sale?

Answer 3

A credit sale is a payment made at a later date.

Question 4

Examples of purchases and expenses:

Answer 4

• large and small transactions
• settling purchase invoices
• buying an item used in the business
• buying fuel for delivery van
• buying stamps for office using cash

Question 5

Examples of payments in and out of the bank:

Answer 5

• cash
• cheques
• electronic payments
• settling company credit card by direct debit
• paying weekly wages
• drawing cash out for office

Question 6

What does a business need to keep track off?

Answer 6

• expenses and purchases
• wages paid
• what a customer owes and when
• what is owed to suppliers and when
• amount paid in and out of the bank

Question 7

What are the 5 stages of the accounting system?

Answer 7

1. Financial transactions
2. Financial statements
3. Books of prime entry
4. Ledger accounts
5. Trial balance

Question 8

Examples of a financial transaction:

Answer 8

• a sale
• a purchase
• a payment

Question 9

Examples of financial documents:

Answer 9

• an invoice
• a credit note
• petty cash voucher

Question 10

What are the books of prime entry?

Answer 10

• sales day book and sales returns day book
• purchase day book and purchase returns day book
• cash book
• petty cash book

Question 11

Sales Transactions

Answer 11

Sales Day Book and Sales Returns Day Book:

• customer sales —>(debit & credit)
• customer returns —> (debit & credit)

Question 12

Purchase Transactions

Answer 12

Purchase Day Book and Purchase Returns Day Book:

• purchases from suppliers —> (debit & credit)
• returns to suppliers —> (debit & credit)

Question 13

Cash and Bank Transactions

Answer 13

Cash Book:

-payments received and payments made —> (debit and credit)

Question 14

Small Cash transactions

Answer 14

Petty Cash Book:

- small cash payments made and cash received —> (debit and credit)

Question 15

Day Books

Answer 15

• credit sales and sales returns which involve customers

- credit purchases and purchases returns which involve suppliers

Question 16

Cash Books

Answer 16

-records payments into and out of the bank

Question 17

Petty Cash Book

Answer 17

-records payments in and out of a cash float used for small payments and purchases

Question 18

What is a Ledger Account?

Answer 18

-the formal accounting record for financial transactions involving customers and suppliers and business assets, expenses, income, liabilities and capital

Question 19

What is a ledger?

Answer 19

-a book where business transactions are entered into individual accounts

Question 20

What is a sales ledger?

Answer 20

-customer individual accounts which contains sales made on credit, returned goods or payments received

Question 21

What is a purchase ledger?

Answer 21

-suppliers personal accounts which contains purchases made on credit, returned goods and payments made to suppliers

Question 22

What is a general ledger?

Answer 22

• this ledger contains all other transactions made by the business such as assets, liabilities, owners capital, expenses items and income items

Question 23

What are assets?

Answer 23

• items owned by a business

- e.g a delivery van

Question 24

What are liabilities?

Answer 24

• items owed by a business

- e.g a bank loan

Question 25

What is capital?

Answer 25

-the investment made in a business by the owner(s)

Question 26

What is a control account?

Answer 26

- a control account is contained in the general ledger and used for information about the financial state of a business - they summarise a number of other accounts

Question 27

Examples of control accounts:

Answer 27

- sales ledger control account | - purchase ledger control account

Question 28

What is a sales ledger control account?

Answer 28

- contains the total of all trade receivable (debtors) accounts in the sales ledger - shows how much all customers owe

Question 29

What is a purchases ledger control account?

Answer 29

- contains the total of all trade payables (creditors) accounts in the purchase ledger - shows how much a business owes to its suppliers

Question 30

What is a trade receivable? (Debtor)

Answer 30

-a customer who owes a business money

Question 31

What is a trade payable? (Creditor)

Answer 31

-a supplier a business owes money to

Question 32

What is the trial balance?

Answer 32

- a list of balances of the ledger accounts drawn up into 2 columns (debit and credit) - the totals should be the same

Question 33

What are the two financial statements?

Answer 33

- statement of profit or loss | - statement of financial position

Question 34

What is a statement of profit or loss?

Answer 34

- shows day to day business income received over a given period, shows expenses incurred, cost of production and running costs - equation: income minus expenses = profit - if income is > than expenses = profit - if income is < than expenses= loss

Question 35

What is a statement of financial position?

Answer 35

- gives a snapshot of a business at a certain date and shows the value of owners investment - Accounting equation: Assets minus liabilities = Capital

Question 36

What is a financial document?

Answer 36

- a term given to a doc which results from a financial transaction - for example an invoice

Question 37

What is a cash sale?

Answer 37

-a sale where a payment is made straightaway

Question 38

What are double-entry accounts?

Answer 38

-ledger accounts set up on the double- entry system (debit and a credit entry) are made for each transaction

Question 39

What is the ‘dual effect’?

Answer 39

- every transaction will be recorded in two accounts - one account will be debited (receive value) - one account will be credited (give value)

Question 40

Debit

Answer 40

- gains value - records an asset - records an expense

Question 41

Credit

Answer 41

- gives value - records a liability - records an income item

Question 42

In and Out rule

Answer 42

- In= Left= Debit | - Out= Right= Credit