Accounting Basics

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Questions and Answers

What type of business organization has two or more owners, and the owners are called partners?

Partnership (correct)

Service Concern

Cooperative

Corporation

What is the main purpose of Generally Accepted Accounting Principles (GAAP)?

To resolve disputes between business partners

To determine the profit and loss of a business

To guide the preparation and presentation of financial statements (correct)

To manage the day-to-day operations of a business

What type of business involves the purchase of raw materials and converting them into finished products?

Manufacturing Concern (correct)

Trading or Merchandizing

Service Concern

Cooperative

What is the accounting assumption that states a business is separate from its owner or owners?

Business Entity Signup and view all the answers

What type of business provides services to customers, such as tailoring or beauty services?

Service Concern Signup and view all the answers

How many persons are required to form a Corporation?

At least five persons Signup and view all the answers

What is the primary reason why accounting is necessary?

To record transactions and other important events for future reference Signup and view all the answers

What is the main service provided by public accountants?

Auditing Signup and view all the answers

Which field of accounting is concerned with determining and controlling costs in producing a product?

Cost Accounting Signup and view all the answers

What is the purpose of Management Advisory Services?

To design and improve a firm's general accounting system Signup and view all the answers

What is included in the Tax Services provided by public accountants?

Preparing and filing income tax returns Signup and view all the answers

What is the benefit of studying accounting?

To appreciate and understand the financial reports of any business Signup and view all the answers

What is the characteristic of a transaction?

It involves the exchange of values, which may be money, property, or services. Signup and view all the answers

What are assets in the context of business?

Economic resources owned by the business and include properties and other things of value. Signup and view all the answers

What is the main difference between current and non-current assets?

Current assets can be easily converted to cash within a short period, while non-current assets cannot. Signup and view all the answers

What is the normal operating cycle of a service concern?

The period between the rendering of service to the receipt of cash. Signup and view all the answers

What is included in cash or cash on hand and in banks?

Currency of cash items on hand and peso or foreign currency deposits in banks that are unrestricted and immediately available. Signup and view all the answers

What is the result of a transaction on the accounting elements or values?

It affects the accounting elements or values. Signup and view all the answers

What is the correct classification of unearned interest?

Current liabilities Signup and view all the answers

What is the main difference between fixed or long-term liabilities and current liabilities?

The maturity period of the liability Signup and view all the answers

What represents the owner's equity or investment in the business?

Capital Signup and view all the answers

What is the purpose of the accounting equation?

To Express the effects of business transactions on assets, liabilities, and proprietorship Signup and view all the answers

What is the correct accounting equation?

Assets = Liabilities + Proprietorship Signup and view all the answers

What is the effect of Dr. Gil's investment of P100,000 cash on the accounting equation?

Assets increase by P100,000 and Proprietorship increases by P100,000 Signup and view all the answers

What is the effect on Dr. Abanico's assets, liabilities, and capital when he withdrew P15,000 from the business?

Assets decrease, liabilities remain the same, and capital decreases. Signup and view all the answers

What is the effect on Dr. Abanico's assets, liabilities, and capital when he purchased dental supplies for cash P55,000.00?

Assets decrease, liabilities remain the same, and capital remains the same. Signup and view all the answers

What is the effect on Dr. Abanico's assets, liabilities, and capital when he purchased dental equipment from BB Trading on credit, P106,000.00?

Assets increase, liabilities increase, and capital remains the same. Signup and view all the answers

What is the effect on Dr. Abanico's assets, liabilities, and capital when he completed dental work for J.Carlos and collected P12,000.00?

Assets increase, liabilities remain the same, and capital increases. Signup and view all the answers

What is the effect on Dr. Abanico's assets, liabilities, and capital when he paid P60,000.00 to BB Trading as partial settlement of the account?

Assets decrease, liabilities decrease, and capital remains the same. Signup and view all the answers

What is the effect on Dr. Abanico's assets, liabilities, and capital when he completed additional work for J.Carlos and collected P6,000.00 and a promissory note for the balance of 12,000.00 at the end of the month?

Assets increase, liabilities remain the same, and capital increases. Signup and view all the answers

Study Notes

Importance of Accounting

Accounting helps us appreciate and understand the financial reports of any business.
The study of accounting shows us how data from business transactions are gathered.

Fields of Accounting

Public Accounting: a professional service rendered by a CPA and his employees to the public for a fee.
- Auditing: principal service by public accountants, examining and testing the accuracy of financial reports and data.
- Management Advisory Services: design, installation, and improvement of a firm's accounting system, including financial planning, budgeting, forecasting, and inventory control.
- Tax Services: preparation and filing of income tax returns.
Private Accounting: recording transactions and preparing financial reports for the use of management, owners, creditors, governmental units, and other interested parties.
- General Accounting: includes recording transactions and preparing financial reports.
- Cost Accounting: determines and controls costs in producing a product.

Business Organization

As to Ownership:
- Partnership: two or more owners, agreeing on capital contributions, management, distribution of profits and losses, and other matters.
- Corporation: organized by operation of law, with at least five persons.
- Cooperative: governed by the "one-member, one-vote principle".
As to Nature of Business:
- Service Concern: deals with rendering of services to customers, such as tailoring shops, beauty shops, and firms of CPAs, lawyers, and doctors.
- Trading or Merchandising: deals with buying and selling goods for profit, such as sari-sari, department stores, and grocery stores.
- Manufacturing Concern: involves the purchase of raw materials and converting them into finished products.

Generally Accepted Accounting Principles (GAAP)

GAAP are accounting rules, procedures, practices, and standards that guide the preparation and presentation of financial statements.
They were developed based on reason, usage, experience, and necessity.

Accounting Assumptions

Accounting Entity: the business is always considered separate from its owner or owners.
Going Concern: the business is assumed to continue operating for the foreseeable future.
Time Period: financial statements are prepared for a specific period of time.
Monetary Unit: financial transactions are recorded in a common currency.

Business as an Accounting Entity

The business is considered separate from its owner or owners.
The business is treated as an entity distinct from its owner or owners.

Transaction

A transaction is an exchange of values, with a value received and a value parted with.
Transactions affect the accounting elements or values.

Accounting Elements or Values

Assets: economic resources owned by the business, including properties and other things of value.
Assets can be grouped into:
- Current Assets: can be easily converted to cash within a short period of time, usually within one accounting period or within the regular operation of the business.
- Non-Current Assets: not easily converted to cash within a short period of time.

Accounting Equation

The accounting equation represents the effects of business transactions on the assets, liabilities, and proprietorship of the business:

Assets = Liabilities + Proprietorship

Liabilities: represents such claim in the assets of the business and proprietorship is the owner's or owners' interest in the business.

Seat Work

Examples of transactions and their effects on the assets, liabilities, and capital of Dr. Abanico's dental clinic:
- Investing P300,000 cash, purchasing land, building, and dental supplies.
- Purchasing dental equipment on credit.
- Paying for promotion of the clinic.
- Completing dental work and collecting payment.
- Paying partial settlement of the account.
- Paying the dental assistant's salary.
- Completing additional work and collecting payment and a promissory note.

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Description

This quiz covers the basics of accounting, why it's important, and the role of accountants in interpreting financial statements.