Accounting Fundamentals Quiz

Accounting and Its Concepts

• Accounting is the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information.
• It is also called the "Language of the Business".
• The overall objective of accounting is to provide information that can be used in making sound economic decisions.

Learning Objectives

• Describe the nature of accounting.
• Describe the overall objective of accounting and why it's important in terms of financial analysis.
• Explain how accounting information links economic activities to decision-making.
• Understand the development of Generally Accepted Accounting Principles (GAAP).
• Explain the relationship between accounting and financial management.

Three Important Activities in Accounting

• Identifying: Analyzing events and transactions to determine whether or not they will be recognized.
• Measuring: Assigning numbers (usually monetary) to economic transactions and events. This includes valuation by fact or opinion.
• Communicating: Transforming economic data into useful accounting information such as financial statements and other accounting reports for dissemination to users.

Types of Information Provided by Accounting

• Quantitative information
• Qualitative information
• Financial information

Types of Accounting Information for Users

• General purpose accounting information
• Special purpose accounting information

Distinction Between Accounting and Financial Management

Users of Financial Information

• Internal Decision Makers: Management
• External Decision Makers: Investors, employees, lenders, suppliers, customers, government agencies, and the public.

Accounting Concepts

• Accounting principles: The broad principles upon which accounting is based.
• Accounting assumptions: Fundamental concepts/principles/basic notions that provide the foundation of accounting processes.
• Accounting theory: Logical reasoning in the form of broad principles (e.g., Conceptual Framework and Philippine Financial Reporting Standards (PFRS)).

Specific Accounting Concepts

• Double-entry system: Each accountable event is recorded in two parts.
• Going concern assumption: The entity is assumed to carry on its operations indefinitely.
• Separate entity: The entity is viewed separately from its owners.
• Monetary unit assumption: Assets, liabilities, equity, income, and expenses are stated in terms of a common unit of measure (e.g., Philippine Peso).
• Time period: The life of an entity is divided into reporting periods (e.g., calendar year or fiscal year).
• Materiality concept: Information is material if its omission or misstatement could influence economic decisions.
• Cost-benefit: The cost of processing and communicating information should not exceed the benefits derived from it.
• Accrual basis of accounting: The effects of transactions and events are recognized when they occur, not necessarily when cash is received or paid.
• Historical cost concept: The value of an asset is determined based on acquisition cost.
• Concept of articulation: All concepts of a complete set of financial statements are interrelated.
• Full disclosure principle: The nature and amount of included information reflect a series of judgmental trade-offs.
• Consistency concept: Financial statements are prepared using consistently applied accounting principles from one reporting period to the next.
• Matching: Costs are recognized as expenses during the same period as the related revenue is recognized.
• Entity theory: Accounting objectives are geared towards proper income determination.
• Proprietary theory: Accounting objectives are geared towards proper asset valuation.
• Residual equity theory: Applicable when two classes of shares are issued (e.g., ordinary and preferred).
• Fund theory: Accounting's objective is the custody and administration of funds, not necessarily income determination or asset valuation. Focuses on cash flows.
• Realization: Process of converting non-cash assets to cash or claims for cash.
• Conservatism: Caution in making estimates under conditions of uncertainty; assets/income aren't overstated, and liabilities/expenses aren't understated.

Test your knowledge on the essential concepts and principles of accounting with this quiz. Explore key activities, concepts, and theories that define accounting as the language of business. Perfect for students and professionals looking to reinforce their understanding of accounting basics.