Fundementals of accounting

Question 1

What are the purposes of accounting?

Answer 1

to monitor progress progress of the business
to prepare financial statements
for decision making, whether or not people want to invest in your company

Question 2

What is the difference between book keeping and accounting?

Answer 2

book keeping is a detailed recording of all financial transactions of a business and is done on a daily basis
accounting is prepare financial statements at regular intervals from book keeping records

Question 3

what is the accounting principle applied when using the double entry system of book keeping?

Answer 3

duality concept

Question 4

state reasons why business would keep books of account?

Answer 4

to record business transactions
to be able to prepare financial statements
to know balances of credit customers and suppliers or bank

Question 5

define the term ‘‘assets’’

Answer 5

anything owned by the business or owed to the business are called assets

Question 6

define the term ‘‘non-current assets’’

Answer 6

an item which is held for more than 12 months, an item which is not for resale

Question 7

What are the two types of non-current assets?

Answer 7

Tangible non-current assets and intangible non current assets

Question 8

Define the term ‘‘tangible non current asset’’

Answer 8

A non current asset that is an asset held for the long term for use by a business and is not for resale it helps business to earn revenue

Question 9

define the term ‘‘intangible non-current asset’’

Answer 9

An intangible asset is a non-physical asset having a useful life greater than one year (eg- goodwill, patent rights)

Question 10

What are the features of non-current assets?

Answer 10

An item held for more than 12 months
an item which is not for resale
Asset value do not fluctuate frequently
Assets which are acquired to aid the business earn revenue

Question 11

Define the term ‘‘current asset’’

Answer 11

An item held short term, an item which can be turned into cash quickly

Question 12

What are the features of a current asset?

Answer 12

short term assets
assets which are either in from of cash or which can be turned into cash relatively easily
arise from normal trading activities of the business
values are constantly changing

Question 13

Shiromi is a trader in office equipment. Shiromi bought office equipment on credit. State why this transaction increased shiromi’s current assets.

Answer 13

These are good for resale/ these goods are purchased for resale nor for business use/ inventory would increase/ these are short term assets

Question 14

define the term ‘‘liabilities’’

Answer 14

anything owed by the business to outside parties are called liabilities

Question 15

what are the features of non current liabilities?

Answer 15

Liabilities which are not due for repayment within 12 or it is a long term debt

Question 16

define the term ‘‘current liability’’

Answer 16

an amount owed to be paid within a year

Question 17

define the term ‘‘owners capital/ owners equity’’

Answer 17

funds and resources provided by the owner or amount owed by the business to the owner

Question 18

What is a profit?

Answer 18

profit is the difference between incomes and expenses of a particular business

Question 19

define the term ‘‘inventory’’

Answer 19

goods bought for resale but not yet sold

Question 20

define the term ‘‘drawings’’

Answer 20

any value (cash or goods) taken from the business by the owner for his own use

Question 21

what are examples of drawings of a business?

Answer 21

Cash, goods, non-current assets

Question 22

What is the purpose of measuring a businesses profit and loss?

Answer 22

1- to asses past performance of the business
2- current year’s profit could be used as a basis of
future planning
3- control the future activities of the business
4- identifying areas where corrective action is
required

Question 23

define the term ‘‘bad debts’’

Answer 23

a debt owing to a business which is unlikely to be paid by customers

Question 24

Suggest two ways in which a business could reduce the possibility of bad debts

Answer 24

1- reduce credit sales
2- obtain references from new credit customers
3- fix a credit limit for each customer
4- improve credit control

Question 25

What are the advantages of maintaining three ledgers?

Answer 25

1- Work can be shared between several people 2- easier for reference as same type of accounts are kept together 3- easier to introduce checking procedures

Question 26

what is meant by the term ''trial balance''

Answer 26

a list of account balances at a specific date

Question 27

What are the purposes/ advantages of preparing a trial balance?

Answer 27

1- the main purpose is to check the arithmetical accuracy of the double entry, it is also useful as a basis for preparing financial statements

Question 28

What are the limitations of a trial balance?

Answer 28

1- trial balance only reveals only arithmetical errors 2- some errors will not be revealed by the the trial balance 3- though the trial balance reveals arithmetical errors it does not show the account in which the error might be 4- transactions omitted will not be recorded in the books

Question 29

What is a cash discount?

Answer 29

cash discounts is offered to credit customers as an incentive ti pay their accounts promptly

Question 30

What are the advantages of offering cash discounts to customers?

Answer 30

1- it may reduce the number of bad debts 2- it improves the cash flow of the business

Question 31

What is a trade discount?

Answer 31

trade discount is an allowance given to businesses in the same trade and is given to encourage loyalty or bulk buying

Question 32

What are the advantages of offering trade discounts?

Answer 32

1- it encourages bulk buying by customers 2- it increases the loyal customers

Question 33

state why the purchases account has a debit balance

Answer 33

because purchases represent costs to the business/ purchases are amounts which reduce the profit/ purchases are amounts paid by the business/