Week 1 - The Accounting Environment

Question 1

Define Accounting

Answer 1

Accounting is an information system that identifies, records and communicates the economic events of an entity to interested users.

Question 2

What is the purpose of Accounting?

Answer 2

The purpose of accounting is to aid people in making choices about the allocation of scarce resources, whether internal or external to an entity.

Question 3

What are the three steps in the accounting process?

Answer 3

Identification
Recording
Communication

Question 4

What is the difference between bookkeepers and accountants?

Answer 4

Bookkeepers only record the economic events (which is only one part of the accounting process. They do not communicate their findings

Question 5

Define Internal Users of Accounting Data

Answer 5

Internal users of accounting information are managers who plan, organise and run a business.

Question 6

Examples of Internal Users of Accounting Data

Answer 6

Marketing managers, production supervisors and chief financial officers.

Question 7

Define External Users of Accounting Data

Answer 7

Investors to make decisions to buy, hold or sell shares
Creditors, to evaluate risks of giving credit and lending money
Government and regulatory bodies

Question 8

Define Management Accounting

Answer 8

Management accounting provides economic and financial information for managers and other internal users.

Question 9

Define Financial Accounting

Answer 9

Financial accounting is providing economic and financial information to external users such as creditors.

Question 10

Who governs accountants?

Answer 10

Accountants are self-governed and self-regulated

Question 11

What is accounting regulation formed by?

Answer 11

Accounting Regulation is formed by legislation (set by the government) and accounting standards (FRC, AASB, IASB)

Question 12

What is conceptual framework?

Answer 12

Set out the concepts that underlie the preparation and presentation of financial standards for external users.

Question 13

What does conceptual framework provide?

Answer 13

The framework is not an AAS (Australian Accounting Standards) standard but does provide information about the formulation of the AAS.
The framework assists the AASB in the development of future standards.

Question 14

Explain Integrated Reporting

Answer 14

Concise reports about future prospects, in the context of its external environments.
They are required for financial stability

Question 15

Explain Global Reporting Initiative

Answer 15

Voluntary organisation that has established requirements wen reporting on environmental and social aspects.

Question 16

Define Assets

Answer 16

Assets are the resources owned or controlled the entity and are the result of past transactions or events. Assets provide future economic benefit.

Question 17

Examples of Assets

Answer 17

Cash at bank, inventory, accounts receivable, prepayments (pre-paid rent)

Question 18

Define Liabilities

Answer 18

Liabilities are claims of those to whom money is owed and result in future economic sacrifice. Liabilities are owed to an external party

Question 19

Examples of Liabilities

Answer 19

Accounts payable, loans, mortgages etc.

Question 20

Define Owner’s Equity

Answer 20

Represent’s the owner’s claim on the (net) assets of the entity. It is the residual interest in the assets of the entity, after deducting all its liabilities.

Question 21

What are Capital Contributions?

Answer 21

An owners personal money that has been placed into the business

Question 22

What are drawings

Answer 22

Money taken out of a business for personal use

Question 23

Define Revenue

Answer 23

The value of transaction with the customers/clients of a business and the amounts earned from the sale or good of service

Question 24

When are revenues incurred?

Answer 24

Revenues are incurred when there is a net increase in assets
OR
Revenues are incurred when there is a net decrease in liabilities as a result of a business activity.

Question 25

Examples of Revenue

Answer 25

sales revenue, fee income from providing services

Question 26

Define Expenses

Answer 26

Costs incurred in running the business in order to earn good income. Expenses include the value of goods/assets are being consumed and the value of services “used up”.

Question 27

When are expenses incurred?

Answer 27

Expenses are incurred when there is a net decrease in assets OR Expenses are incurred when there is a net increase in liabilities as a result of a business activity

Question 28

Examples of Expenses

Answer 28

costs of goods sold, rent, interest, utilities

Question 29

What is the Accounting Equation?

Answer 29

ACCOUNTING EQUATION: ASSETS = LIABILITIES + OWNER’S EQUITY

Question 30

Define Proprietorship

Answer 30

A business that is owned by one person is generally a sole proprietorship. The owner is often the manager/operator of the business.

Question 31

Define Partnership

Answer 31

A business owned by two or more persons associated as partners is a partnership.

Question 32

Define Company

Answer 32

A business organised as a separate legal entity under the corporations of the law and having ownerships divided into transferable shares, is a company.

Question 33

Explain the Identification Process

Answer 33

Identifying events that are considered evidence of economic activity and are relevant to a particular business.

Question 34

Explain the Recording Step in the Process

Answer 34

Economic events are recorded to provide a financial history of the financial activities. Recording in a chronological diary ensuring events are recorded in an orderly and systematic manner.

Question 35

Explain the Communication Step in the Process

Answer 35

The information is then communicated through the preparation and distribution of accounting reports.

Question 36

How does accounting provide relevant data to internal users?

Answer 36

They provide them with internal reports.