Unit 01 - Accounting & Its Importance
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Questions and Answers

What is included in the Property plant and equipment account at NBV?

  • Disposal (Cost)
  • Annual Depreciation
  • Revaluation Gain (correct)
  • BBF (NBV) (correct)

Which method should be followed if an accounting standard is applicable to a transaction?

  • Adhere to the standard specified for the transaction. (correct)
  • Use an alternative accounting method regardless of standards.
  • Develop an appropriate policy based on management judgment.
  • Refer to past practices of the enterprise.

Which of the following best describes a change in accounting estimates?

  • An adjustment based on current assessments of benefits and obligations. (correct)
  • A complete overhaul of accounting policies.
  • A review of historical data alignments.
  • A re-evaluation of net profit margins.

What can cause errors in financial statements?

<p>Incorrect recognition of an event. (B)</p> Signup and view all the answers

Which of the following is NOT considered when selecting accounting policies?

<p>Personal judgments of management. (D)</p> Signup and view all the answers

In the provision for Property plant and equipment account format, which element is directly related to the asset's usage over time?

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

Which statement about accounting policies is correct?

<p>They refer to principles adopted for financial presentation. (B)</p> Signup and view all the answers

What aspect is NOT typically estimated in financial statements?

<p>Market value of assets. (D)</p> Signup and view all the answers

What is typically the first step in calculating the depreciation of an asset?

<p>Find net book value (D)</p> Signup and view all the answers

Which of the following does NOT require the application of SLFRS 16?

<p>A lease for furniture valued under a specified threshold (B), A lease for a car with a term of 10 months (C)</p> Signup and view all the answers

How should the cost of a right of use asset be measured?

<p>At cost at the commencement date (A)</p> Signup and view all the answers

What comprises the cost of the right of use asset?

<p>Initial measurement of the lease liability and associated lease payments, less incentives (B)</p> Signup and view all the answers

How is the lease liability measured according to SLFRS 16?

<p>At the present value of unpaid lease payments (C)</p> Signup and view all the answers

Which of the following would be included in lease payments under SLFRS 16?

<p>Fixed payments minus lease incentives (C)</p> Signup and view all the answers

What should be deducted when calculating depreciation for an asset?

<p>Residual value of the asset (C)</p> Signup and view all the answers

Which of the following statements about the lessee and lessor is incorrect?

<p>The lessor retains full ownership of the asset during the lease. (A)</p> Signup and view all the answers

What should be included in a Purchase Return Journal?

<p>Debit Note Number (C)</p> Signup and view all the answers

Which account is affected when recording a sales return?

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

What is the primary purpose of a Trial Balance?

<p>To ensure mathematical accuracy in the accounting process. (C)</p> Signup and view all the answers

Which type of error would NOT affect the Trial Balance?

<p>Duplicated Entries (C)</p> Signup and view all the answers

In a sales journal, what must be recorded if the business is VAT registered?

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

What document serves as the basis for transactions in the General Ledger?

<p>Prime Entry Books (D)</p> Signup and view all the answers

If an Income account is debited, how will it affect Net Profit?

<p>Decrease Net Profit (A)</p> Signup and view all the answers

Which of the following is NOT a cause for differences in Bank Reconciliation?

<p>National Holidays (C)</p> Signup and view all the answers

What is the definition of an Asset in accounting?

<p>A resource controlled by the business with potential economic benefits. (D)</p> Signup and view all the answers

In reconciliation, which of the following would indicate an unpresented cheque?

<p>A cheque issued but not yet cashed (B)</p> Signup and view all the answers

What happens to the Equity when liabilities are deducted from assets?

<p>Equity decreases. (C)</p> Signup and view all the answers

Which account is debited when bad debts are recognized?

<p>Bad Debts Account (A)</p> Signup and view all the answers

When VAT is calculated as 15% of an amount, what is the VAT on a sale of $200?

<p>$30 (D)</p> Signup and view all the answers

Which account would typically be credited when sales are made on credit?

<p>Sales Account (C)</p> Signup and view all the answers

What is the primary purpose of the consistency concept in accounting?

<p>To compare financial statements over different periods (B)</p> Signup and view all the answers

Which accounting concept addresses the importance of separately recording material items?

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

Which principle is violated by revaluing assets to their fair market value?

<p>Historical cost concept (D)</p> Signup and view all the answers

What is the recognition treatment for accrued expenses?

<p>Recorded as a liability (C)</p> Signup and view all the answers

In calculating total cost, what is included in the prime cost?

<p>Direct materials, direct labor, and direct overheads (B)</p> Signup and view all the answers

How is the closing accumulated fund calculated?

<p>Closing assets minus closing liabilities (C)</p> Signup and view all the answers

Which accounting method is used for a nonprofit organization's closing balance?

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

What is classified as a liability when received for life membership in a nonprofit organization?

<p>Transfer to income and expenditure account (D)</p> Signup and view all the answers

What defines total cost in manufacturing accounting?

<p>Prime cost plus total overheads (C)</p> Signup and view all the answers

How is income received in advance categorized?

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

When a stock has been sent on a sale or return basis, what must be done in the accounts?

<p>Remove from sales entry if not sold (C)</p> Signup and view all the answers

What is required to be disclosed as per the disclosure concept?

<p>All accounting practices used (C)</p> Signup and view all the answers

Which method of inventory valuation must adhere to the historical cost concept?

<p>Lower of cost or net realizable value (A)</p> Signup and view all the answers

What is the total allocated price for the performance obligation of supplying the machine?

<p>20 million (A)</p> Signup and view all the answers

Which of the following best describes a provision as per LKAS 37?

<p>A liability with uncertain timing or amount (D)</p> Signup and view all the answers

What entry is made when the machine is delivered to recognize sales revenue?

<p>Unearned revenue Dr 20 million, Sales revenue Cr 20 million (B)</p> Signup and view all the answers

How is total discount amount derived in the transaction price calculation?

<p>Standalone selling price - Transaction price (D)</p> Signup and view all the answers

Which of the following statements accurately describes legal obligations?

<p>Arise from laws and contracts (A)</p> Signup and view all the answers

What is the amount recorded as unearned revenue when services provided as of 31.03.2020 are recognized?

<p>2.5 million (A)</p> Signup and view all the answers

Which of the following is NOT a characteristic of a provision?

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

What would lead to the creation of a constructive obligation?

<p>An established pattern of past practice or policy (D)</p> Signup and view all the answers

What does the Economic Order Quantity (EOQ) formula help determine?

<p>The optimal order quantity to minimize inventory costs (D)</p> Signup and view all the answers

Which of the following accurately describes the difference between a Bin Card and a Stores Ledger?

<p>A Bin Card provides only the quantity of items, while the Stores Ledger includes value and quantity (D)</p> Signup and view all the answers

Which journal entry correctly represents the deduction from salaries or wages?

<p>Salaries and wages control Dr / Relevant deduction account Cr (B)</p> Signup and view all the answers

What is represented by the Break-Even Point (BEP) in marginal costing?

<p>The point where total revenue equals total costs (A)</p> Signup and view all the answers

How is the Average Stock Level calculated using the Economic Order Quantity?

<p>Average stock level = Minimum stock level + Maximum stock level (C)</p> Signup and view all the answers

What defines the calculation of Absorbed Overhead?

<p>Total budgeted Overhead multiplied by actual hours (C)</p> Signup and view all the answers

Which statement accurately describes the structure of variable costs at BEP?

<p>Variable costs vary with quantity but remain constant per unit at BEP (A)</p> Signup and view all the answers

What does the Minimum Stock Level formula account for?

<p>Re order level - (Average consumption x Average lead time) (A)</p> Signup and view all the answers

What do the assumptions of constant technology imply for Break-Even Point analysis?

<p>There are no variations in cost structure due to technological advancements (C)</p> Signup and view all the answers

Flashcards

Revaluation of PPE

Adjusting the value of Property, Plant, and Equipment (PPE) assets based on current market values.

Acquisition Cost (BCD)

Initial cost of acquiring a new piece of PPE.

Provision for PPE

Account that tracks depreciation and other adjustments to PPE value (at cost).

Depreciation on Revaluation

Calculated depreciation based on revalued worth, following a revaluation of the PPE.

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Disposal

Selling or removing an asset from use.

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Accounting Policy

Specific principles, rules and methods a company consistently uses in preparing its financial statements.

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Accounting Standard

A set of rules or guidelines given to accounting that governs how certain transactions should be accounted for.

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Change of Accounting Policies

Changes how a company records, measures, or presents financial information.

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Accounting Estimate

Approximation of financial values due to uncertainties or inability to measure precisely.

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Change in Accounting estimates

Adjustment to the carrying amount of assets/liabilities or period consumption of assets, resulting from assessing current status + future obligations.

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Error in Financial Statements

Incorrect recording, measurement, presentation or communication of financial information in the financial statements.

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Property, Plant, and Equipment (PPE) Account (NBV)

Account recording the Net Book Value (NBV) of PPE assets.

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Credit Purchase of Goods

Buying goods on credit, meaning payment is made later.

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VAT

Value Added Tax - a tax on goods and services.

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Purchase Return Journal

A journal used to record items returned by a customer that were previously bought.

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Sales Journal

Records sales of goods on credit.

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Sales Return Journal

A journal used to record items returned by a customer that were previously sold.

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Bank Reconciliation

Matching the bank statement with the company's records to find discrepancies.

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Error of Omission

An error in which a transaction is not recorded.

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Trial Balance

A statement that shows that debits equal credits.

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General Ledger

A comprehensive record of all transactions.

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Profit Correction Statement

Adjusts the net profit to account for errors.

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Control Accounts

Summary accounts used to monitor subsidiary accounts.

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Debtors Control Account

A summary account that tracks the balances of all customers (debtors).

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Assets

Resources owned by a business with future economic benefit.

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Liabilities

Obligations of a business to others from past transactions.

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Equity

The owners' stake in the business after deducting liabilities from assets.

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SLFRS 16

Standard for lease accounting in the books of the lessee.

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Short-term lease

Lease with a term of 12 months or less at commencement date.

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Right-of-use asset

Asset representing the lessee's right to control an asset under a lease.

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Lease liability

Present value of lease payments not paid at commencement date.

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Lease payments

Fixed payments less incentives, variable payments tied to rates/indices, and residual value guarantees.

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Lessor

Party transferring use of asset in a lease contract.

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Lessee

Party obtaining use of asset under lease contract.

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Initial Recognition

Process of recording assets and liabilities on the books.

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Cost of the right of use asset

Includes initial lease liability; lease payments before commencement; less incentives; and direct costs.

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Transaction Price

The amount of money a company expects to receive in exchange for transferring goods or services.

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Standalone Selling Price

The price at which a good or service is sold independently of other goods or services.

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Performance Obligation

A promise to transfer a good or service to a customer.

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Allocated Price

The portion of the transaction price allocated to a specific performance obligation.

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Unearned Revenue

Revenue recognized when a company has a contract with a customer but hasn't yet performed the promised service.

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Sales Revenue

Revenue recognized when a company has performed the promised service and transferred control of goods or services to the customer.

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Provision

Liability of uncertain timing or amount; arises from past event and is confirmed by future events.

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Legal Obligation

An obligation created by law.

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Constructive Obligation

Obligation implicitly created by a company's actions or past behavior.

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Contingent Liability

Possible obligation that may arise in future.

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Consistency Concept

Maintaining the same accounting policies in financial reporting, like using the same inventory method (e.g., FIFO) each year.

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Materiality Concept

An accounting concept determining whether an item is significant enough to warrant separate reporting in financial statements. Items below a certain threshold of importance are grouped together.

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Historical Cost Concept

Assets are recorded at their original purchase price, ignoring market value changes.

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Realization Concept

Revenue is recognized when a sale is made, regardless of when cash is received from the customer.

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Disclosure Concept

All accounting methods and practices used must be clearly explained in financial statements.

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Accrued Expenses

Expenses incurred but not yet paid.

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Prepaid Expenses

Expenses paid in advance of when they are used.

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Income Receivable

Money owed to a business that has been earned but not yet collected.

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Income Received in Advance

Money received for goods or services that have not yet been performed.

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Closing Stock (Inventory)

The unsold goods at the end of an accounting period.

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Cost of Sales

The direct costs associated with producing or acquiring products sold during a period.

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Prime Cost

Direct Material + Direct Labour + Direct Overheads.

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Manufacturing Cost

Prime cost + Production Overhead.

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Increase in Inventories

The inventory of a company has increased due to higher stock.

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Decrease in Inventories

The inventory of a business has decreased, due to higher selling.

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Partnership (Section 24)

Partners share profits equally with no salaries or interest on capital; 5% interest on additional loans.

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EOQ

Economic Order Quantity; the optimal quantity of inventory to order to minimize total inventory costs.

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Annual Ordering Cost

Total cost of placing orders during a year.

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Annual Holding Cost

Total cost of storing inventory for a year.

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Re-order Level

Inventory level that triggers a new order.

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Minimum Stock Level

Lowest inventory level that should be maintained.

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Maximum Stock Level

Highest inventory level that should be maintained.

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Average Stock Level

Average inventory level over a given period.

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Bin Card

Inventory record focusing on quantity.

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Stores Ledger

Inventory record focusing on quantity and value.

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Labour Records

Documents tracking employee work hours and activities.

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Active Time

Work time spent in actual task accomplishment.

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Retaining Time

Time spent on other tasks besides the core work.

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Job Ticket

Document used to record activity and time spent on a job.

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Job Cost Sheet

Document used to track costs of a particular job.

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Daily Time Sheet

Daily record of work hours and activities.

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BEP

Break-even point; the level of sales where revenue equals total costs.

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Variable Cost

Cost that varies with the quantity of goods or services produced.

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Fixed Cost

Cost that does not vary with the quantity of goods or services produced.

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Contribution Per Unit

Difference between selling price and variable cost per unit.

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Total Contribution

Difference between the total revenue and total variable costs.

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Marginal Costing

Cost accounting method that focuses on variable costs.

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Study Notes

Unit 01 - Accounting & it's importance

  • Accounting provides financial statements for stakeholders and specific managerial information for managers.
  • Financial statements are for existing and potential investors, lenders, and other creditors.
  • Managerial information is for managers' decision-making.
  • Accounting follows a sequential order: transactions, source documents, prime entry books, posting to ledger accounts, preparation of trial balance, and financial statements.

Differences between Financial and Management Accounting

  • Financial Accounting: general purpose, internal and external users, compulsory reporting, annually, historical.
  • Management Accounting: specific purpose, internal users, not compulsory reporting, on demand, present and forecasted.

Accounting Elements

  • Assets: resources controlled by the entity.
  • Liabilities: present obligations of the entity.
  • Equity: residual interest in the assets of the entity after deducting liabilities.
  • Expenses: decreases in economic benefits.
  • Income: increases in economic benefits.

Measurement Basis of Accounting Elements

  • Historical cost: the original cost of acquiring an asset.
  • Current cost: the current market value of an asset.
  • Fair value: the price that would be received to sell an asset or paid to transfer a liability in an arm's length transaction.
  • Value in use: the benefit that an entity expects to receive from an asset as it is used in its present condition.

Qualitative Characteristics of Accounting Information

  • Fundamental: relevance, faithful representation, materiality.
  • Enhancing: comparability, verifiability, timeliness and understandability.

Main Underlying Assumptions

  • Going concern: assumes the entity will continue to operate for the foreseeable future.
  • Computerized Accounting: using computers for accounting tasks.
  • Human Resource Accounting: considering human resources as assets.
  • Environmental Accounting: evaluating the environmental impact of business operations.
  • Inflationary Accounting: considering inflation when valuing assets.
  • Social Responsibility Accounting: recognizing social and environmental considerations.

Unit 02 - Accounting Equation

  • Basic Accounting Equation: Assets = Liabilities + Equity
  • Accounting Equation: Adds Capital/Income + Drawings/Expenses = Final Accounting equation
  • Net Asset Approach: Profit + Loss = Net Approach
  • Net Assets are the assets that are left after deducting liabilities
  • VAT and EPF recording are explained with examples.

Unit 03 - Double Entry System

  • Double-entry bookkeeping: every transaction affects at least two accounts.
  • All transactions are in debit and credit, hence all transactions have opposite effects on two sides.
  • Recording examples of various transactions (credit sales, credit purchases, return sales, discount received...)

Unit 04 - Prime Entry Books

  • Chronological records of business transactions.
  • Different prime entry books (Cash Receipt Journal, Cash Payment Journal, Sales Journal, Purchase Journal, Sales return Journal, Purchase return Journal, Petty Cash journal, General Journal).
  • Recording various transactions related to cash and non-cash receipts.

Unit 05 - Accounting Concepts

  • Assets: Results from past transactions, controlled by the entity, have the potential for future economic benefits.
  • Liabilities: Results from past transactions, represent present obligations of the entity.
  • Equity: Residual interest in assets after deducting liabilities.
  • Income: increases its assets, decreases liabilities that result.
  • Expenses: decrease assets, increase liabilities, and reduce equity.
  • Recognition criteria (relevant information, faithful representation, economic benefits, compliance with definitions, etc).
  • Business entity: independent from owners and others.
  • Going concern: assumed to operate indefinitely
  • Periodicity: revenue and expenses are recognized on a regular basis.
  • Money measurement: financial statements recorded in a currency.

Unit 06 - Sole Trader Adjustments

  • Accrued expenses (relevant expense DR, accrued expense CR).
  • Prepaid expenses (prepaid expense DR, relevant expense CR).
  • Income receivable (income receivable DR, relevant income CR).
  • Income received in advance (relevant income DR, income received in advance CR).
  • Stock in transit (closing stock DR, cost of sales CR).
  • Closing stock adjustment (closing stock DR, cost of sales CR).
  • Stock written off (stock written off DR, cost of sales CR)-
  • Stock damages (stock Loss DR, insurance receivable DR).
  • Stock sent on Sale or Return (eliminate entry from books).

Unit 07 - Manufacturing Accounts

  • DM + DL + DO = PRIME COST
  • DM + DL + DO + POH + Non-production overheads = TOTAL COST
  • Prime Cost + Total Overheads-Non Manufacturing Cost = Manufacturing Cost
  • Cost of Sales = DM + DL + DO + POH + Finished Goods
  • Explanation and calculations of the increase and decrease of stock.

Unit 08 - Nonprofit Organizations

  • Receipts & Payments: focused on cash inflows and outflows.
  • Income & Expenditure: recognizes revenue and expenses according to when they are earned or incurred.
  • Accounting treatment for life memberships, special funds (Building, R&P funds).

Unit 10 - Partnership

  • Calculating goodwill when a partner is admitted or retires.

Unit 11 - Accounting Standards

  • Sri Lanka Accounting Standards Committee & Sri Lanka Auditing Standards Committee.
  • Responsibilities regarding the preparation of accounting practices according to Sri Lanka Accounting and Auditing Standards.
  • Conceptual framework's functions.
  • Objectives of financial statements.
  • Accounting Standards rules.

Unit 12 - Limited Company

  • Differences between bonus issues and right issues on their impact on cash and equity.
  • Explanations and journal entries for cash, share capital, share issue expenses.
  • Comprehensive income calculation (total income - total expenses).
  • First time revaluation and subsequent revaluation loss explanations and journal entries.

Unit 13 - Accounting Ratios

  • Explanation of profitability ratios, gross profit, net profit ratios.
  • Explanation of liquidity ratios, current and quick ratios.
  • Explain about leverage ratios, debt, equity ratios.
  • Explanation of relationships between turnover ratios and collection periods

Unit 14 - Cost Accounting

  • Explanation of cost units.
  • Diagrams showing the material purchasing process and related documents.

Unit 15 - Marginal Costing

  • BEP Assumptions.
  • Break Even Point calculations, using the total fixed cost and contribution per unit.

Unit 16 - Investment Appraisal

  • Calculations of the average rate of return, payback period, and net present value (NPV).
  • Explanation of assumptions, advantages, and disadvantages of payback period.

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Description

Explore the foundational concepts of accounting, including its significance for stakeholders and the distinction between financial and management accounting. This quiz also covers key accounting elements such as assets, liabilities, and equity, enhancing your understanding of financial statements and managerial information.

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