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Questions and Answers
Define Accounting.
Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events of at least a financial character, and interpreting the results thereof.
Which type of business involves the buying of goods or merchandise to be sold at a price higher than the purchase cost?
Sole proprietorship is a business owned and operated by multiple people.
False
The business entity concept states that the business is separate and has a distinct identity from the ________.
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Match the following accounting principles with their descriptions:
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What is the purpose of a Trial Balance?
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What are examples of expenses that are usually paid in advance?
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What is unearned income also known as?
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Bad debts are now referred to as Impairment Loss. Is this statement true?
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What does depreciation refer to?
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What does FOB Shipping Point refer to?
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A document listing items ordered or sold, quantity, price, terms of sale is called ____________.
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Study Notes
Accounting Definition
- Accounting is the art of recording, classifying, and summarizing transactions and events of a financial character, and interpreting the results.
Types of Business
- Trading or Merchandising: buying goods or merchandise to sell at a higher price.
- Manufacturing: converting raw materials into finished products to sell at a higher price.
- Servicing: rendering services for a fee higher than the cost of the service.
Forms of Business
- Sole Proprietorship: owned and operated by one person, with advantages of owning all profits and having control, but with disadvantages of limited capitalization and unlimited liability.
- Partnership: owned by two or more persons, with advantages of bigger capitalization, but with disadvantages of sharing profits and unlimited liability.
- Corporation: owned by several people called shareholders, with advantages of limited liability and unlimited capitalization.
- Cooperative: owned by several people, usually poor, with limited liability and unlimited capitalization.
Characteristics of Forms of Business
- Sole Proprietorship: one owner, unlimited liability, owner manages business.
- Partnership: two or more owners, unlimited liability, managing partner.
- Corporation: unlimited owners, limited liability, management vested in board of directors.
- Cooperative: unlimited owners, limited liability, management vested in board of directors.
Accounting Principles
- Business Entity Concept: business is separate from owners.
- Going Concern Concept: business will continue operations indefinitely.
- Accrual Basis of Accounting: expenses and revenue are recorded when incurred, regardless of payment.
- Objectivity: transactions are recorded based on verifiable evidence.
- Cost Principle: assets are recorded at actual cost.
- Matching Principle: costs are matched against revenue.
- Consistency: accounting methods are consistent from one period to the next.
- Accounting Period: business life is divided into periods for financial reporting.
- Full Disclosure: financial statements include all significant information.
Accounting Elements
- Assets: properties or economic resources owned by the business.
- Liabilities: amounts owed by the business.
- Capital (Owner's Equity): owner's interest in the business.
- Drawing: owner's withdrawal of assets.
- Revenues: inflows of assets resulting from sales.
- Expenses: outflows of assets resulting from business operations.
Functions of Accounting
- Recording: documenting business transactions.
- Classifying: grouping transactions into similar categories.
- Summarizing: preparing financial statements.
- Interpreting: analyzing financial statements.
Roles of Accounting in Business
- Helps owners and managers make plans and decisions.
- Reports and analyzes business transactions.
- Communicates financial information to stakeholders.
Accounting Equation
- Assets = Liabilities + Owner's Equity.
Trial Balance
- A listing of all account balances as of a given time.
- Purposes: checks accuracy of posting, aids in locating errors, serves as a basis for preparing financial statements.
Adjusting Entries
- Made to conform to the principle of "Matching Costs Against Revenue".
- Purposes: to arrive at correct valuation of assets and liabilities, and to determine correct owner's equity.
Accounting for Merchandising Business
- Accounting for purchases of merchandise: includes cash, credit, and credit terms.
- Accounting for sales of merchandise: includes sales invoice, delivery receipt, credit memo, sales returns, and sales discount.
Inventory Methods
- Periodic Inventory Method: records purchases and sales, and takes a physical count of merchandise at the end of the period.
- Perpetual Inventory Method: records purchases and sales, and updates merchandise inventory continuously.
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Description
This quiz covers the basics of accounting, including the definition and types of business such as trading and manufacturing.
