Introduction to Accounting

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Questions and Answers

Which of the following best describes the primary purpose of accounting?

  • To record every financial transaction.
  • To maximize a company's profits.
  • To provide information for informed judgements and economic decisions. (correct)
  • To prepare tax returns for a business.

In the context of the accounting process, what does 'measuring' primarily involve?

  • Classifying the impact of events on specific items.
  • Communicating information to stakeholders.
  • Identifying relevant economic events.
  • Quantifying economic events in financial terms. (correct)

Which type of organization is focused on a purpose other than generating profit?

  • Commercial
  • Non-commercial (correct)
  • Company
  • Sole trader

What is the fundamental accounting equation?

<p>Assets = Liabilities + Equity (B)</p> Signup and view all the answers

If a company's assets increase by $50,000 and its liabilities increase by $20,000, what is the resulting change in equity?

<p>Increase of $30,000 (B)</p> Signup and view all the answers

What is the effect of capital contributions by the owners on the accounting equation?

<p>Increases assets and increases equity. (A)</p> Signup and view all the answers

What does 'drawings' or 'capital withdrawals' represent in accounting?

<p>Withdrawal of assets from the business by its owners. (D)</p> Signup and view all the answers

According to the information, what is the formula to calculate profit?

<p>Income - Expenses (D)</p> Signup and view all the answers

What type of information is provided by the Statement of Changes in Equity?

<p>Changes in equity over a period, linking the balance sheet and income statement. (C)</p> Signup and view all the answers

How are expenses recognized in the income statement?

<p>When there is a decrease in future economic benefits related to a decrease in asset or an increase in liability. (B)</p> Signup and view all the answers

How is income recognized in the income statement?

<p>When there is an increase in future economic benefits related to an increase in an asset or a decrease in a liability. (C)</p> Signup and view all the answers

A business purchases office equipment for $5,000 on credit. What is the immediate impact on the accounting equation?

<p>Assets increase by $5,000, Liabilities increase by $5,000 (A)</p> Signup and view all the answers

A business owner withdraws $500 from the company's bank account for personal use. What is the impact on the accounting equation?

<p>Assets decrease by $500, Equity decreases by $500. (A)</p> Signup and view all the answers

A company sells goods for $1,000 in cash. What is the impact on the accounting equation?

<p>Assets increase by $1,000, Equity increases by $1,000 (A)</p> Signup and view all the answers

A business pays $300 for weekly wages. How does this affect the accounting equation?

<p>Assets decrease by $300, Equity decreases by $300 (C)</p> Signup and view all the answers

Which financial statement shows the financial position of a business at a specific point in time?

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

Which financial statement reports a company's financial performance over a period of time?

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

What are the three key questions to consider when analyzing a transaction?

<p>Which items, How much, Increase/Decrease? (C)</p> Signup and view all the answers

If income is $50,000 and expenses are $30,000, what is the profit and what is the impact on equity?

<p>Profit is $20,000, Equity increases by $20,000 (A)</p> Signup and view all the answers

The Conceptual Framework's purpose is to:

<p>All of the above. (D)</p> Signup and view all the answers

Flashcards

What is accounting?

The process of identifying, measuring, recording, and communicating economic information for informed judgements and decisions.

Balance Sheet

A financial report showing a business's assets, liabilities, and equity at a specific point in time.

What are assets?

Resources controlled by an entity as a result of past events, expected to generate future economic benefits.

What are liabilities?

Present obligations arising from past events, expected to result in an outflow of resources.

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What is equity?

The residual interest in the assets of the entity after deducting all its liabilities.

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Income Statement

Financial report listing a business's income, expenses, and profit or loss over a period of time.

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What is income?

Increases in economic benefits during the accounting period, resulting in increases in equity.

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What are expenses?

Decreases in economic benefits during the accounting period, resulting in decreases in equity.

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What is profit?

The change in equity during a period from all events other than owner contributions or withdrawals.

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What is a loss?

Excess of expenses over income.

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Statement of Changes in Equity

Link between the balance sheet and the income statement, explaining changes in equity during a period.

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Capital Contributions

The amounts contributed by the owners to the entity; it increases equity.

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Drawings (Capital Withdrawals)

The withdrawal of assets from the business by its owners; Decreases equity.

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Identification (Accounting)

Select transactions/economic events which have consequences for the entity.

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Measurement (Accounting)

Measure the quantitative effect of the event, e.g., financial attribute in $A.

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Recording (Accounting)

Classify consequences of the event in terms of the affect on specific items.

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Accounting Equation

Assets = Liabilities + Equity

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Expense Recognition

Expenses are recognised when a decrease in future economic benefits occur.

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Income Recognition

Income is recognised when an increase in future economic benefits occur.

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Study Notes

  • Accounting defined as identifying, measuring, recording, and communicating economic information for informed judgements and economic decisions

Financial Accounting Process

  • The process involves establishing goals
  • The process involves gathering information on alternatives
  • The process involves determining consequences
  • The process involves choosing a course of action

Accounting Information

  • Involves identification of transactions
  • Measurement includes quantification in dollar terms
  • Recording consists of classification and summarization
  • Communication includes accounting reports, analysis, and interpretation

Types of Organizations

  • By purpose: commercial (for profit) or non-commercial (non-profit)
  • By form: sole trader, partnership, or company

Conceptual Framework

  • A guide for regulators to develop consistent and logically formulated accounting standards
  • Provides guidance to accountants where no standards exist

Balance Sheet

  • A report listing assets, liabilities, and equity of a business at a specific date
  • Assets: a resource controlled by the entity from past events, expected to yield future economic benefits
  • Liabilities: a present obligation from past events, expected to result in an outflow of resources
  • Equity: the residual interest in the assets after deducting all liabilities

Income Statement

  • A report listing income, expenses, and profit or loss of a business for a certain time period
  • Income: increases in economic benefits during the accounting period, leading to increases in equity (excluding contributions from equity participants)
  • Expenses: decreases in economic benefits during the accounting period, leading to decreases in equity (excluding distributions to equity participants)
  • Profit: The change in equity from all events other than contributions or withdrawals by owners
  • Loss: the excess of expenses over income

Statement of Changes in Equity

  • Links the balance sheet and the income statement
  • Explains the changes in equity during the period

Financial Accounting Process

  • Identification: selecting transactions/economic events which affect financial statement elements
  • Measurement: measuring the quantitative effect of events, including measurement attribute (e.g., financial attribute) and unit (e.g., $A)
  • Recording: classifying consequences of events, affecting at least two items
  • Communication

Accounting Equation

  • Assets = Liabilities + Equity

  • Equity = Capital Contributions - Drawings + Income - Expenses

  • Profit = Income - Expenses, which increases Equity

  • Capital Contributions: amounts contributed by owners, increasing equity

  • Drawings (Capital Withdrawals): assets withdrawn by owners, decreasing equity

Transaction Analysis

  • Expenses: recognized when a decrease in future economic benefits related to a decrease in an asset or increase in liability can be reliably measured
  • Recognition of expenses occurs with the recognition of an increase in liabilities or a decrease in assets
  • Income: recognized when an increase in future economic benefits related to an increase in an asset or decrease in liability can be reliably measured
  • Recognition of income occurs with the recognition of increases in assets or decreases in liabilities

Three Transaction Analysis Questions

  • Which items are affected (at least 2)?
  • How much is the change?
  • Does the item increase, or decrease?

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