Business Types and Accounting Overview
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Questions and Answers

What does the Objectivity Theory in accounting emphasize?

  • Accounting information must be verifiable and reliable. (correct)
  • Financial statements must include personal opinions.
  • Only current assets need to be recorded with evidence.
  • Earnings should always reflect market value.
  • Which of the following is considered a current asset?

  • Inventory (correct)
  • Office equipment
  • Long-term investments
  • Commercial buildings
  • Which type of business is primarily engaged in buying and selling goods to customers?

  • Retail business
  • Service business
  • Trading business (correct)
  • Manufacturing business
  • How is owner's equity calculated?

    <p>Beginning capital + Additional capital + Profit - Drawings</p> Signup and view all the answers

    What is a significant characteristic of a sole proprietorship?

    <p>The owner has full control of the business</p> Signup and view all the answers

    Which of the following is an example of a non-current liability?

    <p>Bank loan due in three years</p> Signup and view all the answers

    What does unlimited liability mean for the owner of a sole proprietorship?

    <p>Owners risk losing personal assets to cover business debts</p> Signup and view all the answers

    What is the primary principle of the double entry accounting system?

    <p>Total debits must always equal total credits.</p> Signup and view all the answers

    Which of the following expenses would be classified as an income-generating cost?

    <p>All of the above</p> Signup and view all the answers

    Which role does an accountant NOT play in a business?

    <p>Making strategic business decisions</p> Signup and view all the answers

    In terms of the expanded accounting equation, profits are defined as?

    <p>Income earned minus expenses incurred.</p> Signup and view all the answers

    What is a crucial attribute of ethical accountants?

    <p>Integrity in professional relationships</p> Signup and view all the answers

    Which of the following statements about transactions is incorrect?

    <p>Transactions can be recorded only in the cash account.</p> Signup and view all the answers

    Which stakeholder is primarily interested in a business's ability to repay loans?

    <p>Lenders</p> Signup and view all the answers

    What is the role of accounting information in decision-making for stakeholders?

    <p>To assist in managing resources and performance</p> Signup and view all the answers

    What does a service business primarily provide to its customers?

    <p>Services to generate a profit</p> Signup and view all the answers

    What is the list price of the inventory sold on credit by the business on January 1, 2020?

    <p>$1500</p> Signup and view all the answers

    What cash discount percentage is applied if payment is received within 7 days?

    <p>2%</p> Signup and view all the answers

    What is classified as a current liability in the statement of financial position?

    <p>Income received in advance</p> Signup and view all the answers

    How much rent income was received in advance on January 1, 2020, by Daniel's grocery store?

    <p>$3000</p> Signup and view all the answers

    What does the adjustment on December 31, 2020, relate to in Daniel's grocery store?

    <p>Income received but not yet earned</p> Signup and view all the answers

    What was the total annual rent income for the year ended December 31, 2020, for Daniel?

    <p>$33000</p> Signup and view all the answers

    Why was $3000 of rent income reversed on January 1, 2020?

    <p>Services for this income were provided in 2019</p> Signup and view all the answers

    According to the accrual basis of accounting, what must happen to income received in advance?

    <p>It should not be recognized as current income</p> Signup and view all the answers

    What is the effect on current assets when commission income receivable of $8000 is not adjusted?

    <p>Understated by $8000</p> Signup and view all the answers

    According to the revenue recognition theory, when should revenue be recognized?

    <p>When goods are delivered or services are provided</p> Signup and view all the answers

    What is the total amount of prepaid rent that should be considered an expense for the financial year ended 31 December 2020?

    <p>$92,000</p> Signup and view all the answers

    What is the journal entry interpretation for the entry made on 1 January 2020 regarding prepaid rent?

    <p>It reverses prepaid rent that will be incurred this year.</p> Signup and view all the answers

    What happens to profit if commission income receivable of $8000 is not adjusted?

    <p>Understated by $8,000</p> Signup and view all the answers

    How is prepaid rent classified on the statement of financial position?

    <p>As a current asset</p> Signup and view all the answers

    What principle explains that revenue should be recorded in the period it is earned regardless of cash receipt?

    <p>Accrual basis of accounting</p> Signup and view all the answers

    If the prepaid rent as of 31 December 2020 is $2000, what portion is accounted as a rent expense?

    <p>$92,000</p> Signup and view all the answers

    What is the effect on Current Assets if prepaid rent is not adjusted?

    <p>Understated by $2000</p> Signup and view all the answers

    What impact does not adjusting prepaid rent have on Profit for the period?

    <p>Understated by $2000</p> Signup and view all the answers

    What type of account is rent expense payable classified as?

    <p>Current Liability</p> Signup and view all the answers

    What amount was paid for rent expense by Rachel Stationary for the year ended 31 December 2020?

    <p>$20,000</p> Signup and view all the answers

    What is the adjustment related to rent expense payable made on 31 December 2020?

    <p>$4,000</p> Signup and view all the answers

    What is the consequence of not adjusting rent expense payable at the end of the financial period?

    <p>Net Profit would be overestimated</p> Signup and view all the answers

    What theory supports adding the rent expense payable into this year's expenses?

    <p>Accrual Basis Accounting</p> Signup and view all the answers

    What was the rent expense payable as at 31 December 2020 for Rachel Stationary?

    <p>$84,000</p> Signup and view all the answers

    Study Notes

    Types of Business

    • Trading businesses buy and sell goods to customers to make a profit, such as bookshops and supermarkets.
    • Service businesses provide services to customers to make a profit, such as hairdressing shops and tuition centers.

    Sole Proprietorship

    • Owned by one individual who contributes capital.
    • Banks may be less likely to lend money due to limited personal assets as a guarantee.
    • Risk: Unlimited liability for the owner.
    • Owner has full control and minimal administrative duties.
    • Ownership transfer requires notifying corporate regulatory authorities.
    • The business lifespan is tied to the owner's life and their desire to continue.

    Role of Accounting

    • Accounting is an information system providing financial data to stakeholders for informed decisions about resource management and business performance.
    • Accountants prepare and provide accounting information for decision-making.
    • Accountants establish accounting information systems and act as stewards of the business.
    • Accountants adapt, solve problems, think critically and provide both accounting and non-accounting information for decision-making.
    • They ensure timely and relevant information is provided, adhering to accounting theory, making it easily understood by stakeholders.

    Professional Ethics

    • Integrity: Accountants must be honest and transparent in all professional relationships.
    • Objectivity: Accountants must remain impartial, avoiding bias, conflict of interest, or undue influence that could affect their professional judgment.

    Stakeholders

    • Owners/Shareholders: Determine whether to continue investing or sell their shares.
    • Lenders: Evaluate the business's ability to repay loans and interest before lending.
    • Suppliers: Decide whether to provide goods on credit (postponed payment).
    • Government: Ensure the business complies with tax regulations and collect the appropriate tax amount.
    • Managers: Use the information to improve business performance.
    • Employees: Decide whether to continue working at the business based on its performance.
    • Customers: Determine if they want to buy from the business based on its ability to provide goods and services.
    • Competitors: Assess their performance compared to the business and develop strategies for improvement.

    Accounting Theories

    • Objectivity Theory: Accounting information should be backed by reliable and verifiable evidence to ensure financial statements are free of opinions and biases.
    • Historical Cost Theory: Transactions are recorded at their original cost.

    Elements of Financial Statements and the Accounting Equation

    • Assets: Resources a business owns or controls, expected to provide future benefits.
      • Non-current Assets: Provide benefits beyond one financial year and are not easily converted to cash (e.g., office equipment, fixtures, fittings).
      • Current Assets: Provide benefits within one financial year and are easily converted to cash (e.g., inventory).
    • Liabilities: Obligations owed by a business to others, expected to be settled in the future.
      • Non-current Liabilities: Due to be paid beyond one financial year.
      • Current Liabilities: Due to be paid within one financial year (e.g., bank loan, trade payable).
    • Equity: The owner's claim on the net assets of a business.
      • Owners' Equity = Beginning Capital + Additional Capital + Profit - Drawings
        • Capital: Resources contributed by the owner for business use.
        • Profit: Income earned - Expenses incurred.
        • Drawings: Assets taken from the business for the owner's personal use.
    • Income: Amount earned from business activities (e.g., rent, interest income).
    • Expenses: Costs incurred to earn income within the same accounting period (e.g., salaries, rent expense).

    Accounting Equation:

    • Assets = Liabilities + Equity
    • Equity = Assets - Liabilities

    Expanded Accounting Equation:

    • Assets = Liabilities + Capital + Income - Expenses - Drawings

    Transactions:

    • Business transactions have a dual effect, affecting at least two accounts.
    • The accounting equation remains balanced for every transaction.

    Double Entry (Journal Entry)

    • Three rules for the double-entry system:
      • At least two accounts are affected by each transaction.
      • One account is debited, and one account is credited.
      • Total debits equal the total credits recorded.

    Revenue and Other Income:

    • Income Received in Advance:
      • Refers to income received but not yet earned.
      • Classified as a current liability on the statement of financial position because the business owes the customer the goods or services.
    • Commission Income Receivable (Un-adjusted):
      • No effect on current liabilities.
      • Current assets are understated by the amount of unadjusted commission income.
      • Profit is understated by the unadjusted income amount.

    Accounting Theories for Revenue:

    • Revenue Recognition Theory: Revenue is earned when goods are delivered or services are provided.
    • Accrual Basis of Accounting Theory: Revenue earned is recorded in the relevant accounting period, regardless of whether cash is received.

    Cost of Sales and Other Expenses

    • Prepaid Expenses:
      • Expenses paid but not yet incurred in the current financial period.
      • Classified as a current asset on the statement of financial position as the business has the right to receive the goods or services paid for.
    • Prepaid Rent (Un-adjusted):
      • No effect on current liabilities.
      • Current assets are understated by the amount of unadjusted prepaid rent.
      • Profit is understated by the unadjusted prepaid rent amount.
    • Expenses Payable:
      • Expenses incurred but not yet paid in the current financial period.
      • Classified as a current liability on the statement of financial position because the business has an obligation to pay for the expenses in the next financial period.
    • Rent Expense Payable (Un-adjusted):
      • No effect on current assets.
      • Current liabilities are understated by the amount of unadjusted rent expense payable.
      • Profit is overstated by the unadjusted rent expense payable amount.

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