Accounting Fundamentals Quiz

Accounting Fundamentals

• Accounting is the process of identifying, measuring, and communicating economic information. This allows users to make informed decisions.
• The accounting process includes recording transactions, classifying information, analyzing and interpreting transactions and reports. This enables businesses to make decisions and plan for the future.
• All businesses use general bookkeeping rules and principles. Differences in accounting arise from how owner's capital and profits are accounted for.

Users of Accounting Information

• Internal users: Individuals or groups within a company who rely on financial information for decision-making and operational planning.
  • Management: Use financial information to make decisions and plan for the future.
  • Employees: Use financial statements to assess job security and negotiate wages.
  • Owners: Monitor company financial health and performance.
• External users: Individuals or groups outside the company who rely on financial information for their own decisions.
  • Investors: Use financial information to evaluate company performance for investment decisions.
  • Customers & Suppliers: Use financial information to evaluate a company's ability to fulfill orders and maintain stability.
  • Competitors: Analyze financial information for strategic planning.

Ethical Principles in Accounting

• Ethics are morals governing human behavior. Professional ethics are codes of behavior considered acceptable within a specific profession.
• Factors influencing ethical behavior include culture, laws, consequences, and codes of ethics.
• The International Ethics Standards Board for Accountants (IESBA) Code of Ethics outlines five fundamental ethical principles for accountants: integrity, objectivity, professional competence and due care, confidentiality, and professional behavior.
• Unacceptable behavior in accounting includes not working in the best interest of employers, dishonesty, disregarding confidentiality, undermining colleagues, causing conflict, harassment, and accepting bribes.
• When working in the financial industry, employees must exhibit competency, willingness to work in teams, effective communication skills, continuous training, uphold confidentiality, act open and honestly, and trust their colleagues' judgments.
• Honesty and accountability are vital. Poor behavior, such as fraudulent reporting, failure to record sales, theft, misappropriation of funds, and tax evasion lead to loss of trust, disciplinary actions by professional bodies, fines, imprisonment, loss of employment, and difficulties obtaining future financial loans.

Technology and Accounting

• Accounting records are increasingly computerized, utilizing software packages like Sage, QuickBooks, and Microsoft Dynamics.
• Computerized systems automate many processes, like record updating, producing financial statements, handling inventory, generating payroll records, and providing management information.
• Computerized accounting systems provide benefits like accuracy, speed, and easier information access. However, drawbacks include initial capital expenditures, ongoing update costs, technical staff training, and potential data loss risks.

Accounting Concepts and Conventions

• Accounting concepts and conventions are assumptions generally accepted without proof, which guide the preparing of financial reports.
• Concepts include business entity (separate from owners) and monetary (common unit of monetary transactions). Other significant ones are historical cost (transaction's cost at time of event), going concern (business will continue), accounting period (splitting the business year), objectivity (evidence-based), accrual (revenues & expenses recognized when earned/incurred), matching (costs associated with products match revenues), consistency (same treatments for similar items), and prudence (conservatism).
• Realization recognizes revenue at the point of sale.

Accounting Cycle

• The accounting cycle outlines the steps of processing business transactions to generate financial reports.
• This cycle sequence includes source documents, books of original entry, ledgers, trial balance, adjusting entries, and financial reports (profit & loss account and balance sheet). Financial reports are the final step in the cycle.

Main Financial Statements

• Main financial statements include the income statement (profit & loss), balance sheet, and cash flow statement.
• The income statement shows a company's performance over a set time.
• The balance sheet presents a company's financial position on a specific date.
• The cash flow statement tracks cash inflows and outflows over a period, categorizing these activities into operating, investing, and financing types.

Accounting Equation

• The accounting equation is a fundamental concept that shows the relationship between assets, liabilities, and owner's equity.
• Assets = Liabilities + Owner's Equity
• Assets are resources owned by the business; liabilities are obligations owed by the business; owner's equity is the owner's investment in the business.