Podcast
Questions and Answers
What happens to capital when a credit item is recorded in the income statement?
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?
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?
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?
Which of the following transactions would not impact the capital directly?
How would a sale return affect profit and consequently capital?
How would a sale return affect profit and consequently capital?
If Rs. 15,000 worth of goods are purchased on credit, what is the immediate effect on capital?
If Rs. 15,000 worth of goods are purchased on credit, what is the immediate effect on capital?
How do drawings by the owner impact the overall equity of the business?
How do drawings by the owner impact the overall equity of the business?
What is the effect of credit sales on profit and capital when recorded in the accounting system?
What is the effect of credit sales on profit and capital when recorded in the accounting system?
What is a requirement for companies regarding financial statements?
What is a requirement for companies regarding financial statements?
Which of the following is NOT true about sole traders and partnership businesses?
Which of the following is NOT true about sole traders and partnership businesses?
What document is a primary source of GAAPs in Pakistani jurisdiction?
What document is a primary source of GAAPs in Pakistani jurisdiction?
Which accounting principles must companies adhere to when preparing financial statements?
Which accounting principles must companies adhere to when preparing financial statements?
How are financial statements filed by companies, and who can access them?
How are financial statements filed by companies, and who can access them?
What was the total amount credited to cash resulting from the return of goods on March 12th?
What was the total amount credited to cash resulting from the return of goods on March 12th?
How much was the cash payment HK made to the business on March 24th?
How much was the cash payment HK made to the business on March 24th?
What was the amount spent on office furniture bought on credit on March 17th?
What was the amount spent on office furniture bought on credit on March 17th?
What total amount was drawn from the bank and placed into the cash till on March 26th?
What total amount was drawn from the bank and placed into the cash till on March 26th?
What is the total amount of assets according to the information provided?
What is the total amount of assets according to the information provided?
Which statement is true regarding the definitions of bookkeeping and accounting?
Which statement is true regarding the definitions of bookkeeping and accounting?
Which expense was paid through a cheque on March 29th?
Which expense was paid through a cheque on March 29th?
What was the total cash received from other income on March 31st?
What was the total cash received from other income on March 31st?
What is the correct purpose of financial accounting?
What is the correct purpose of financial accounting?
What was the amount of goods returned to Asim on March 15th?
What was the amount of goods returned to Asim on March 15th?
Based on the given information, what was the cash balance after paying the expenses?
Based on the given information, what was the cash balance after paying the expenses?
Which statement correctly reflects the relationship between capital and liabilities?
Which statement correctly reflects the relationship between capital and liabilities?
What was the total utility expense paid on March 27th?
What was the total utility expense paid on March 27th?
What is the amount of inventory on credit noted in the documentation?
What is the amount of inventory on credit noted in the documentation?
In which scenario would financial accounting not be primarily used?
In which scenario would financial accounting not be primarily used?
What was the concluding cash amount after all transactions?
What was the concluding cash amount after all transactions?
Which example demonstrates income arising from ordinary activities?
Which example demonstrates income arising from ordinary activities?
What type of transaction would decrease owner’s equity?
What type of transaction would decrease owner’s equity?
Which action will simultaneously affect both assets and liabilities?
Which action will simultaneously affect both assets and liabilities?
Which of the following statements is correct?
Which of the following statements is correct?
Which actions impact both assets and liabilities in the case of a credit transaction?
Which actions impact both assets and liabilities in the case of a credit transaction?
What best describes other income?
What best describes other income?
Which scenario involves a decrease in liabilities?
Which scenario involves a decrease in liabilities?
Which of the following illustrates a loss impacting expenses?
Which of the following illustrates a loss impacting expenses?
Which of the following costs should be included in the total cost of acquiring heavy machinery?
Which of the following costs should be included in the total cost of acquiring heavy machinery?
What type of costs are NOT treated as capital costs but rather expensed out?
What type of costs are NOT treated as capital costs but rather expensed out?
Which of the following represents a cost that can be directly attributed to bringing an asset to its working condition?
Which of the following represents a cost that can be directly attributed to bringing an asset to its working condition?
If an entity incurs costs for modifications to install heavy machinery, how should these costs be categorized?
If an entity incurs costs for modifications to install heavy machinery, how should these costs be categorized?
In the context of acquiring machinery, which of the following is NOT considered a directly attributable cost?
In the context of acquiring machinery, which of the following is NOT considered a directly attributable cost?
Which cost incurred after the purchase of machinery is typically not capitalized?
Which cost incurred after the purchase of machinery is typically not capitalized?
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?
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?
Which of the following costs is categorized as a professional fee that could be included when bringing an asset to working condition?
Which of the following costs is categorized as a professional fee that could be included when bringing an asset to working condition?
Flashcards
Effect of Income Statement Credits
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
Effect of Income Statement Debits
Debit items on the income statement decrease profit and capital, as both are credit balances.
Business Start-Up
Business Start-Up
The initial establishment of a business, including investment of capital.
Capital
Capital
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Assets
Assets
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Liabilities
Liabilities
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Cash Sales
Cash Sales
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Credit Sales
Credit Sales
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Account Payable
Account Payable
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Transaction
Transaction
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Return of goods
Return of goods
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Purchase of goods
Purchase of goods
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Cash purchase
Cash purchase
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Account purchase
Account purchase
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Cash receipt from customer
Cash receipt from customer
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Purchase of office furniture
Purchase of office furniture
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Owner's Drawings
Owner's Drawings
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Payment of utility expense
Payment of utility expense
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Payment of postage expense
Payment of postage expense
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Other Income
Other Income
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Capitalizing Costs
Capitalizing Costs
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Asset Cost (Machinery)
Asset Cost (Machinery)
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Directly Attributable Costs
Directly Attributable Costs
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Operating Expenses
Operating Expenses
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Warranty Costs
Warranty Costs
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Accounting
Accounting
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Bookkeeping
Bookkeeping
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Financial Accounting
Financial Accounting
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Financial Statement
Financial Statement
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Statement of Financial Position
Statement of Financial Position
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Statement of Profit or Loss
Statement of Profit or Loss
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Assets
Assets
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Liabilities
Liabilities
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Capital
Capital
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Transaction
Transaction
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Inventory on credit
Inventory on credit
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Sole Trader Financial Statements
Sole Trader Financial Statements
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Company Financial Statements
Company Financial Statements
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GAAPs
GAAPs
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IFRSs
IFRSs
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Financial Statement Responsibility (Companies)
Financial Statement Responsibility (Companies)
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Financial Statement Responsibility (Sole Proprietorship)
Financial Statement Responsibility (Sole Proprietorship)
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Public Availability of Company Financial Statements
Public Availability of Company Financial Statements
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Revenue
Revenue
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Other Income
Other Income
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Expenses
Expenses
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Decrease in owner's equity (excluding withdrawals)
Decrease in owner's equity (excluding withdrawals)
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Purchase of Asset on credit
Purchase of Asset on credit
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Payment of Loan
Payment of Loan
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Credit Sales
Credit Sales
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Cash Receipt from customers
Cash Receipt from customers
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Statement I: All revenues are income but all incomes are not revenue
Statement I: All revenues are income but all incomes are not revenue
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Statement II: Distribution of profit is also expense as it decreases the asset of business.
Statement II: Distribution of profit is also expense as it decreases the asset of 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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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.