Introduction to Accounting
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Questions and Answers

What happens to capital when a credit item is recorded in the income statement?

  • Capital remains unchanged.
  • Capital increases. (correct)
  • Capital decreases.
  • Capital is neutralized.

What is the effect of a debit item on profit according to the accounting principles?

  • Profit increases.
  • Profit decreases. (correct)
  • Profit remains the same.
  • Profit fluctuates.

If a business incurs an expense, how does it affect the capital?

  • Capital remains unchanged.
  • Capital increases.
  • Capital decreases. (correct)
  • Capital is temporarily suspended.

Which of the following transactions would not impact the capital directly?

<p>Paying off a debt (A)</p> Signup and view all the answers

How would a sale return affect profit and consequently capital?

<p>Decrease profit and decrease capital. (D)</p> Signup and view all the answers

If Rs. 15,000 worth of goods are purchased on credit, what is the immediate effect on capital?

<p>Capital decreases by Rs. 15,000. (B)</p> Signup and view all the answers

How do drawings by the owner impact the overall equity of the business?

<p>Decrease overall equity. (B)</p> Signup and view all the answers

What is the effect of credit sales on profit and capital when recorded in the accounting system?

<p>Increase profit and increase capital. (B)</p> Signup and view all the answers

What is a requirement for companies regarding financial statements?

<p>They must prepare financial statements for shareholders and relevant regulatory bodies. (D)</p> Signup and view all the answers

Which of the following is NOT true about sole traders and partnership businesses?

<p>They must prepare financial statements for shareholders. (A)</p> Signup and view all the answers

What document is a primary source of GAAPs in Pakistani jurisdiction?

<p>Companies Act, 2017 (C)</p> Signup and view all the answers

Which accounting principles must companies adhere to when preparing financial statements?

<p>Generally Accepted Accounting Principles (GAAPs). (B)</p> Signup and view all the answers

How are financial statements filed by companies, and who can access them?

<p>They are filed with a government agency and can be accessed by the general public. (D)</p> Signup and view all the answers

What was the total amount credited to cash resulting from the return of goods on March 12th?

<p>Rs. 4,000 (A)</p> Signup and view all the answers

How much was the cash payment HK made to the business on March 24th?

<p>Rs. 2,000 (D)</p> Signup and view all the answers

What was the amount spent on office furniture bought on credit on March 17th?

<p>Rs. 20,000 (C)</p> Signup and view all the answers

What total amount was drawn from the bank and placed into the cash till on March 26th?

<p>Rs. 10,000 (D)</p> Signup and view all the answers

What is the total amount of assets according to the information provided?

<p>Rs. 81,000 (B)</p> Signup and view all the answers

Which statement is true regarding the definitions of bookkeeping and accounting?

<p>Bookkeeping involves maintaining ledgers. (B)</p> Signup and view all the answers

Which expense was paid through a cheque on March 29th?

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

What was the total cash received from other income on March 31st?

<p>Rs. 15,000 (B)</p> Signup and view all the answers

What is the correct purpose of financial accounting?

<p>To prepare financial statements for external stakeholders. (D)</p> Signup and view all the answers

What was the amount of goods returned to Asim on March 15th?

<p>Rs. 1,000 (D)</p> Signup and view all the answers

Based on the given information, what was the cash balance after paying the expenses?

<p>Rs. 76,000 (A)</p> Signup and view all the answers

Which statement correctly reflects the relationship between capital and liabilities?

<p>Total assets equal the sum of capital and liabilities. (A)</p> Signup and view all the answers

What was the total utility expense paid on March 27th?

<p>Rs. 4,000 (B)</p> Signup and view all the answers

What is the amount of inventory on credit noted in the documentation?

<p>Rs. 5,000 (A)</p> Signup and view all the answers

In which scenario would financial accounting not be primarily used?

<p>For management decision making. (A)</p> Signup and view all the answers

What was the concluding cash amount after all transactions?

<p>Rs. 76,000 (D)</p> Signup and view all the answers

Which example demonstrates income arising from ordinary activities?

<p>Revenue from the sale of goods (C)</p> Signup and view all the answers

What type of transaction would decrease owner’s equity?

<p>Payment of expenses (A)</p> Signup and view all the answers

Which action will simultaneously affect both assets and liabilities?

<p>Credit sale of inventory (A)</p> Signup and view all the answers

Which of the following statements is correct?

<p>Distribution of profits is an expense (A)</p> Signup and view all the answers

Which actions impact both assets and liabilities in the case of a credit transaction?

<p>Purchase of an asset on credit (D)</p> Signup and view all the answers

What best describes other income?

<p>Income earned irregularly, such as interest and gains (C)</p> Signup and view all the answers

Which scenario involves a decrease in liabilities?

<p>Payment of a loan (C)</p> Signup and view all the answers

Which of the following illustrates a loss impacting expenses?

<p>Loss on disposal of a non-current asset (D)</p> Signup and view all the answers

Which of the following costs should be included in the total cost of acquiring heavy machinery?

<p>Cost of site preparation (B), Cost of the 12-month warranty (D)</p> Signup and view all the answers

What type of costs are NOT treated as capital costs but rather expensed out?

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

Which of the following represents a cost that can be directly attributed to bringing an asset to its working condition?

<p>Insurance in transit (B)</p> Signup and view all the answers

If an entity incurs costs for modifications to install heavy machinery, how should these costs be categorized?

<p>Direct attributable costs (B)</p> Signup and view all the answers

In the context of acquiring machinery, which of the following is NOT considered a directly attributable cost?

<p>Costs relating to errors (D)</p> Signup and view all the answers

Which cost incurred after the purchase of machinery is typically not capitalized?

<p>Non-refundable taxes (C)</p> Signup and view all the answers

What should be the cost of the machinery in the entity’s machinery account if the purchase cost is Rs. 46,000, delivery is Rs. 900, and modifications cost Rs. 3.4 million?

<p>Rs. 3,446,900 (B)</p> Signup and view all the answers

Which of the following costs is categorized as a professional fee that could be included when bringing an asset to working condition?

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

Flashcards

Effect of Income Statement Credits

Credit items on the income statement increase profit and capital, as both are credit balances.

Effect of Income Statement Debits

Debit items on the income statement decrease profit and capital, as both are credit balances.

Business Start-Up

The initial establishment of a business, including investment of capital.

Capital

The owner's investment in the business (assets minus liabilities); it increases with profits and decreases with expenses, withdrawals etc.

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Assets

Resources owned or controlled by the business, with value to the business

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Liabilities

The business's debts or obligations to others

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Cash Sales

Sales made for cash directly.

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Credit Sales

Sales made on account (using credit).

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Account Payable

Obligations owed to suppliers for goods or services received on credit.

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Transaction

Any event or activity that affects the assets, liabilities, or owner's equity of a business.

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Return of goods

Goods previously sold on credit are returned by the customer.

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Purchase of goods

Buying goods from a supplier (e.g. Asim).

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Cash purchase

Goods bought using cash.

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Account purchase

Goods bought on credit (with a promise to pay later).

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Cash receipt from customer

Receiving cash payment from a customer for goods sold.

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Purchase of office furniture

Buying office furniture on account (credit).

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Owner's Drawings

Cash or assets that an owner takes out from the business for personal use.

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Payment of utility expense

Paying utility expenses.

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Payment of postage expense

Paying postage expenses.

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Other Income

Income from sources other than regular business operations.

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Capitalizing Costs

Adding costs directly related to getting an asset ready for use to the asset's value, rather than immediately expensing them.

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Asset Cost (Machinery)

The total amount to include in the machinery account includes the machine's purchase price plus costs directly related to putting it into operating condition.

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Directly Attributable Costs

Costs specifically needed to put an asset to work (e.g., installation, site preparation, initial delivery).

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Operating Expenses

Costs associated with the ongoing use of an asset (e.g., repairs, maintenance, staff training) NOT capitalized.

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Warranty Costs

Costs related to future repairs or replacements under warranty, expensed, not capitalized.

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Accounting

Accounting is the broader term encompassing recording, classifying, summarizing, and interpreting financial information.

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Bookkeeping

Bookkeeping is the narrower term. It's the recording of financial transactions in the books of accounts and maintaining accounting records.

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Financial Accounting

Financial accounting produces financial statements (like the income statement and balance sheet) used by external stakeholders to understand the business's performance and position.

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Financial Statement

A structured report summarizing a business's financial activities. They are used for external reporting.

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Statement of Financial Position

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

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Statement of Profit or Loss

Reports a company's financial performance over a period of time, showing revenues and expenses leading to net income or loss.

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Assets

Resources a business owns or controls, having measurable value to the business.

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Liabilities

Obligations owed by the business to others.

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Capital

The owner's investment in the business, calculated as assets minus liabilities; it increases with profit.

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Transaction

Any event that affects the assets, liabilities, or owner's equity of a business.

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Inventory on credit

Goods held by a business that were purchased on credit, not immediately paid for.

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Sole Trader Financial Statements

Sole traders and partnerships aren't required to prepare financial statements unless for tax purposes, loan applications, or other regulatory requirements.

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Company Financial Statements

Companies are required to prepare financial statements for shareholders and disclosure to regulatory bodies and tax authorities, which are available to the public.

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GAAPs

Generally Accepted Accounting Principles (GAAPs) are the rules, conventions, and principles for preparing financial statements.

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IFRSs

International Financial Reporting Standards are a common standard for preparing financial statements, especially for companies traded globally.

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Financial Statement Responsibility (Companies)

Company directors are responsible for preparing and filing accurate financial statements.

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Financial Statement Responsibility (Sole Proprietorship)

Sole proprietors and partners are accountable for filing financial statements, usually for tax and loan purposes.

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Public Availability of Company Financial Statements

Company financial statements are publicly accessible; usually, filed with a government agency.

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Revenue

Income generated from the ordinary activities of a business, such as sales or service fees.

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Other Income

Income that comes from sources other than the primary business operations, like interest or asset sales.

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Expenses

Costs incurred in the normal course of running a business, leading to a decrease in owner's equity (excluding owner's withdrawals).

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Decrease in owner's equity (excluding withdrawals)

Expenses lower the value of a business because of costs.

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Purchase of Asset on credit

Acquiring an asset by promising to pay later. This affects both assets (new asset) and liabilities (increased debt).

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Payment of Loan

Repaying a debt. This affects both assets (cash decrease) and liabilities (debt decrease).

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Credit Sales

Sales made on account; the customer promises to pay later.

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Cash Receipt from customers

Payment received from customer for previously sold goods or services.

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Statement I: All revenues are income but all incomes are not revenue

All revenue is income, but not all income is revenue. Revenue specifically refers to income from ordinary business activity.

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Statement II: Distribution of profit is also expense as it decreases the asset of business.

Profit distribution is not an expense; it's a withdrawal of funds by the owner/owners and does not decrease assets of the business.

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Study Notes

Introduction to Accounting

  • Accounting is a broader term than bookkeeping.
  • Bookkeeping involves recording financial transactions in books of accounts and maintaining ledgers.
  • Accounting involves recording, classifying, summarizing, and interpreting financial results.
  • Financial accounting focuses on producing statements of financial position and profit or loss for internal use.

Effect of Income Statement Items on Profit and Capital

  • Credit items in the income statement increase profit and capital.
  • Debit items in the income statement decrease profit and capital, as profit and capital are of credit nature.
  • Examples of credit items: Sales, Purchase Returns, Other Income.
  • Examples of debit items: Purchase, Expense, Drawings.

Accounting Transactions: Example

  • Mr. Ahmad started a business on 01 March 2020.
  • Initial capital: Rs. 600,000 in cash and Rs. 300,000 in cheque.
  • Bought goods on account from Asim for Rs. 15,000.
  • Cash sales for Rs. 3,000.
  • Deposited Rs. 30,000 into the bank.
  • Sold goods on credit to HK for Rs. 20,000.
  • Returned goods to HK for Rs. 4,000.
  • Purchased goods for Rs. 1,000 from Asim.
  • Bought office furniture for Rs. 20,000 on account.
  • Cash purchases for Rs. 5,000.
  • Cash payment to business for Rs. 2,000.
  • Mr. Owner drew Rs. 10,000 from the bank.
  • Paid Rs. 4,000 for utility expenses.
  • Paid Rs. 3,000 for postage.
  • Received Rs. 15,000 as other income.

Statement of Financial Position

  • Presents the financial position of an entity as at a particular date.
  • Assets = Capital + Liabilities.
  • Includes Non-current assets (like office furniture), Current assets (trade receivables, cash & bank)
  • Includes equity (capital), Non-current liabilities (long-term loan), and current liabilities.

Capital Expenditure vs. Revenue Expenditure

  • Capital expenditure is used to acquire or improve long-term assets.
  • Revenue expenditure relates to day-to-day operating expenses.
  • When revenue expenditure increases an asset's useful life, quality, or capacity, it's considered capital expenditure.

Determining the Cost of an Asset

  • The cost of an asset involves the purchase price, less discounts, rebates, and subsidies.
  • Additional costs include carriage inward, freight, octroi charges, assembling costs, insurance in transit, clearing agent charges, test costs, non-refundable taxes, replacement of parts, site preparation costs, and dismantling costs.

Operating Expenses

  • General overheads, apportioned overheads, staff training costs, repair costs, maintenance costs, overhauling costs, warranty costs, and administrative costs are not considered costs but are expensed out.

Examples of Capital Expenditure

  • Cost of machinery, delivery, and 12-month warranty.
  • Modifications needed to install machinery.
  • Costs of initial adaptation of a building, legal costs, monthly cleaning contract, cost of air conditioning units, and machinery costs.

Accounting Concepts

  • Business entity: Business transactions are separate from owners.
  • Going concern: Business continues indefinitely.
  • Prudence: Avoid overstating assets or income.
  • Accrual: Record revenue when earned and expenses when incurred.
  • Matching: Expenses related to revenue should be recorded in the same year.
  • Materiality: Only significant items need to be recorded.

Financial Reporting Concepts

  • Presented with an objective to provide financial information to investors, lenders, suppliers, the government, employees, customers, and managers.
  • List of stakeholders, regulation, source

Definitions

  • Assets: A present economic resource controlled by the entity as a result of past events.
  • Liabilities: A present obligation of the entity to transfer an economic resource as a result of past events.
  • Equity: Residual interest in the assets of the entity after deducting all its liabilities.
  • Revenue: Income arising in the course of ordinary activities.
  • Expenses: Decreases in assets or increases in liabilities, resulting from activities other than distributions or owners.

Important Transactions

  • Purchase of assets on credit and on cash both affect asset and liability side at the same time.
  • Payment of loans affects the liabilities.
  • Distribution of assets may increase owner's equity or decrease the equity.
  • Credit sales of inventory, receipt of cash from customers, purchase of office furniture on credit affect both assets and liabilities.

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Chapter 1 Introduction to Accounting PDF

Description

This quiz covers the fundamentals of accounting, differentiating between bookkeeping and accounting practices. It focuses on the impact of various items in the income statement on profit and capital, and provides practical examples of accounting transactions. Test your knowledge on these essential concepts of financial accounting.

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