Financial Accounting Chapter 1 & 2
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Questions and Answers

What does a balance on an account indicate?

  • The account has been closed.
  • The total of credits is equal to the total of debits.
  • The total of debits is greater than the total of credits. (correct)
  • There are no transactions recorded.

When is a balance considered to exist on an account?

  • When there are multiple entries on both sides.
  • When total debits and credits are equal.
  • When there is only one transaction recorded.
  • When the totals of debits and credits differ. (correct)

How should the totals of each column be presented when multiple entries exist in the account?

  • Double underline the totals and write them alongside each other. (correct)
  • Leave the totals unmarked.
  • Write totals below each column.
  • Only summarize totals at the end of the account.

In accounts with only one entry on each side, how should the account be finalized?

<p>Double underline the account. (C)</p> Signup and view all the answers

What happens when the totals on each side of an account are not the same?

<p>A balance exists on the account. (C)</p> Signup and view all the answers

Which of the following classifications corresponds to money owed to suppliers?

<p>Liability (D)</p> Signup and view all the answers

What type of classification is a delivery van?

<p>Asset (A)</p> Signup and view all the answers

Which of these is classified as a liability?

<p>Bank loan to be repaid within the next year (B)</p> Signup and view all the answers

What is the capital if the assets amount to £12,231 and liabilities amount to £7,887?

<p>£4,344 (A)</p> Signup and view all the answers

Which of the following assets is typically classified as a current asset?

<p>Bank account (A)</p> Signup and view all the answers

If a company has £9,875 in assets and liabilities of £8,680, what is its capital?

<p>£1,195 (B)</p> Signup and view all the answers

In an accounting context, which of the following represents an obligation to pay?

<p>Amount owing for office fixtures bought on credit (B)</p> Signup and view all the answers

Based on the provided data of assets and liabilities, if the property worth £54,000 and equipment worth £8,200, what is the total asset amount?

<p>£62,200 (A)</p> Signup and view all the answers

Which account should be debited when Jackson purchases goods for resale from C Throup for £89?

<p>Purchases (B)</p> Signup and view all the answers

What is the correct accounting treatment for the return of goods worth £31 by Brown?

<p>Debit Sales Returns, Credit Accounts Receivable (A)</p> Signup and view all the answers

When Jackson transfers £4,500 of his own money into the business bank account, which accounts are affected?

<p>Bank Account debited, Capital Account credited (B)</p> Signup and view all the answers

Which account should be credited when Pierce pays wages by cheque of £320?

<p>Bank Account (D)</p> Signup and view all the answers

What is the impact on accounts when Jackson buys a motor vehicle for £2,900 through cheque?

<p>Debit Vehicle Account, Credit Bank Account (A)</p> Signup and view all the answers

Which account should be debited when cash is banked?

<p>Bank Account (B)</p> Signup and view all the answers

What is the correct entry when rent is paid by cheque?

<p>Debit Rent Expense, Credit Bank Account (B)</p> Signup and view all the answers

When the owner takes a computer used by the business for personal use, which accounts are affected?

<p>Debit Drawings, Credit Equipment (B)</p> Signup and view all the answers

What happens to the returns outwards account when a business returns goods to a supplier?

<p>It is credited, decreasing assets. (C)</p> Signup and view all the answers

What does the term 'drawings' refer to in a business context?

<p>Resources withdrawn from the business by the owner. (C)</p> Signup and view all the answers

In the entries for drawings, which account is credited when an owner takes out assets from the business?

<p>Assets account. (A)</p> Signup and view all the answers

When goods are returned by the business to the supplier, which of the following accounts will be affected?

<p>Inventory. (D)</p> Signup and view all the answers

What entry is made when an owner withdraws £500 from the business bank account?

<p>Credit Bank £500, Debit Drawings £500. (C)</p> Signup and view all the answers

What happens to the drawings at the end of the trading period?

<p>They are transferred to the capital account. (C)</p> Signup and view all the answers

What is the primary effect of a returns outward transaction on trade payables?

<p>It decreases the liability of trade payables. (A)</p> Signup and view all the answers

Which of the following correctly describes the accounting entries for when goods are returned to a supplier?

<p>Credit inventory, debit trade payables. (A)</p> Signup and view all the answers

What is the focus of the introductory chapter in the book?

<p>Basics of business accounting and financial statements for small businesses (B)</p> Signup and view all the answers

Which sectors are commonly classified in economic activity?

<p>Public and private sectors (B)</p> Signup and view all the answers

What does the public sector include?

<p>Organizations owned and controlled by the government, funded by taxpayers (D)</p> Signup and view all the answers

What does the introduction to the textbook aim to prepare students for?

<p>Grasping various types of business organizations and their aims (B)</p> Signup and view all the answers

Who is credited for making the teaching of accounting engaging for the author?

<p>The students of Colchester Sixth Form College (A)</p> Signup and view all the answers

What major aspect of accounting will be discussed in the book besides financial accounting for sole traders?

<p>Financial accounting practices for limited companies (A)</p> Signup and view all the answers

Why is accounting considered a jargon-heavy subject?

<p>It has a variety of terms and concepts that can change over time (D)</p> Signup and view all the answers

What major aims does the textbook intend to accomplish for its readers?

<p>Introducing basic concepts and terminology in business accounting (D)</p> Signup and view all the answers

What is the primary purpose of the provision for doubtful debts?

<p>To estimate potential losses from uncollectible accounts (A)</p> Signup and view all the answers

Which method of depreciation spreads the cost of an asset evenly over its useful life?

<p>Straight line method (B)</p> Signup and view all the answers

How are errors that do not affect the trial balance addressed?

<p>They need to be recorded in a suspense account (D)</p> Signup and view all the answers

What do control accounts primarily help to manage?

<p>Individual account balances and transactions (B)</p> Signup and view all the answers

Which of the following is NOT a section typically included in a bank reconciliation statement?

<p>Sales revenue for the month (D)</p> Signup and view all the answers

What is the result of recognizing bad debts recovered in the financial statements?

<p>Reduction in provisions for bad debts (A)</p> Signup and view all the answers

Which accounting method allows for higher depreciation in earlier years of an asset's life?

<p>Reducing balance method (C)</p> Signup and view all the answers

What type of company issues shares to the public and offers them for public trading?

<p>Public limited company (A)</p> Signup and view all the answers

What characterizes the reducing balance method of depreciation?

<p>It uses a fixed percentage of the asset's book value each year (C)</p> Signup and view all the answers

Which account reflects only the amounts due to suppliers and is not included in the sales revenue?

<p>Accounts payable (D)</p> Signup and view all the answers

What happens to the accounting records when a company changes its method of depreciation?

<p>The change affects all future calculations but not the past. (B)</p> Signup and view all the answers

What is the importance of having a provision for discounts on debtors?

<p>To anticipate discounts that may be given to customers (C)</p> Signup and view all the answers

How does the preparation of manufacturing accounts help in cost management?

<p>It provides a detailed breakdown of all expenses and profits associated with production (C)</p> Signup and view all the answers

Flashcards

Public Sector

The part of the economy owned and controlled by the government, funded by taxes.

Private Sector

The part of the economy owned and run by individuals or groups, not the government.

Financial Accounting

The system of recording and summarizing financial transactions for a business.

Double-entry Bookkeeping

A method used in accounting where every transaction is recorded with two entries.

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Financial Statements

A summary of a company's financial performance over a period of time (usually a year).

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Sole Trader

A business owned and run by a single person.

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Limited Company

A business with a separate legal identity from its owners, with limited liability.

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Jargon

Specialised words and phrases used in a particular subject area.

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What are assets?

Assets are resources owned by a business that have a monetary value. Examples include cash, vehicles, and buildings.

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What are liabilities?

Liabilities are financial obligations that a business owes to others. Examples include bank loans, unpaid bills, and money owed to suppliers.

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What is the capital of a business?

Capital is the owner's investment in the business. It represents the difference between assets and liabilities.

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What is the accounting equation?

The accounting equation states that assets are equal to the sum of liabilities and capital. (Assets = Liabilities + Capital)

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Are goods bought for resale considered assets?

Goods bought with the intention of selling them for a profit are considered assets as these have the potential to generate future revenue.

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Is money owed to suppliers a liability?

Money owed to suppliers is considered a liability. This is because a business is obliged to pay back the money it owes.

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Is a bank loan a liability?

A bank loan represents a liability because the business needs to repay the money borrowed, plus interest.

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Is a delivery van an asset?

A delivery van is an asset for a business as it is a valuable resource they own. The van contributes to the business's operations and has monetary value.

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Depreciation

The loss of value of an asset over time due to usage, wear and tear, obsolescence, or other factors.

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Straight Line Method

A method of depreciation that spreads the cost of an asset evenly over its useful life.

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Reducing Balance Method

A method of depreciation that charges a higher depreciation expense in the early years of an asset's life and a lower expense in later years.

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Error that doesn't affect trial balance

A type of error in accounting that does not affect the trial balance agreement - the total debits and credits are still equal.

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Error that affects trial balance

A type of error in accounting that does affect the trial balance agreement - the total debits and credits are no longer equal.

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Suspense Account

An account used temporarily to hold transactions that are uncertain or have not yet been fully investigated.

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Control Account

A summary account that consolidates all the individual balances of similar transactions in a subsidiary ledger.

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Memorandum Account

A separate account used to record details of specific transactions related to a control account.

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Bank Reconciliation Statement

A statement that reconciles the bank balance as per the bank statement with the balance in the cash book.

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Prime Cost

The costs directly related to the production of goods or services.

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Indirect Manufacturing Costs

Costs associated with manufacturing, but not directly related to the production of goods or services.

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Shares

Units of ownership in a limited company, representing a share of the company's profits and assets.

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Debentures

Formal debt instruments issued by a company to raise capital.

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Reserves

Accumulated profits retained by a company for future investment or other purposes.

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Returns Outwards

Inventory returned by a business to its supplier. This decreases the business's inventory and reduces the amount owed to the supplier.

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Returns Inwards

Inventory returned to the business from a customer. This increases the business's inventory and reduces the amount the customer owes.

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Drawings

Resources taken out of a business by the owner for personal use. Decreases business assets and reduces the owner's capital.

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Drawings Account

The account used to record the owner's withdrawals from the business. Debited when the owner takes resources.

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Credit Returns Outwards

The value of goods returned to the supplier. This reduces the amount owed to the supplier.

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Debit Returns Inwards

The value of goods returned by the customer. This increases the amount owed by the customer.

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Debit Drawings Account

The amount of money taken by the owner from the business is recorded in this account. This reduces the owner's capital.

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Credit Asset Account

The asset that the owner removes from the business is credited. This decreases the business's assets (e.g., bank, inventory).

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Ledger account

The record of all transactions related to a specific account, such as cash, sales, or purchases.

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Purchase

A business transaction that involves the exchange of goods for money.

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Sale

A business transaction that involves the sale of goods for money.

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Return

A business transaction that involves the return of goods to the seller.

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Credit sale

A business transaction that involves the exchange of goods for money, but the payment is made at a later date.

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Debtors

The amount of money owed to a business by its customers.

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Creditors

The amount of money a business owes to its suppliers.

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No balance account

An account that has an equal total of debits and credits, resulting in a zero balance.

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Account with a balance

An account where debits and credits are not equal, resulting in a difference called the balance.

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Total debits

The total amount of all debits in an account.

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Total credits

The total amount of all credits in an account.

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Double-underlining account totals

The process of adding up all the debits and credits in an account and marking the totals with a double underline to signify completion.

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Study Notes

Chapter 1: Introduction

  • Sectors in the economy: Classified into public and private sectors.
  • Public sector: Owned and controlled by government, funded by taxpayers.
  • Private sector: Businesses owned and operated by individuals or groups of individuals, not by the government.
  • Business organizations: various forms of business organizations exist within the private sector.

Chapter 2: Double-Entry Bookkeeping

  • Drawings: Resources taken out of the business by the owner for personal use.
    • Drawings are recorded as a debit to the drawings account and a credit to the related asset account.
  • Balancing accounts: Accounts are balanced when debits equal credits.
    • Accounts with multiple entries have totals added and double underlined.
    • Accounts with single entries double underlined.

Financial Accounting Concepts (Implied)

  • Assets: Possessions of the business (e.g., vehicles, computer, goods, cash, bank accounts)
  • Liabilities: Amounts owed by the business (e.g., debt to suppliers, loan repayments)
  • Capital: The owner's stake in the business; calculated as assets minus liabilities).
  • Accounting Equation: Assets = Liabilities + Capital.
  • Returns inwards/outwards: Goods returned to the business or by the business to suppliers, decreases inventory
  • Double-entry bookkeeping: Every transaction has a debit and a corresponding credit.
  • Ledgers: Accounts that record each transaction of a particular item.
  • Accounts: specific records of transactions

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Description

This quiz covers key concepts from the first two chapters of Financial Accounting, focusing on the classification of sectors in the economy and the principles of double-entry bookkeeping. Understand the distinctions between public and private sectors as well as managing drawings and balancing accounts.

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