Chapter 1 Introduction to accounting

_______________________________________________________________________________
Bookkeeping:
The detailed recording of all the financial transactions of business is known as bookkeeping.
Accounting:
Accounting makes use of these records to prepare periodic financial statements, which can be used to
assess the performance of the business.
Double entry bookkeeping:
Every business is different, so the records maintained will very because of the different information which
is required, but the basis of all the accounting systems is double entry bookkeeping.
Trading and profit and loss account:
The aim of the business is to make a profit. A Trading and Profit and loss Account is prepared which
shows the calculation of the profit or loss earned by the business.
Balance sheet:
The owner of a business needs to know the financial position of the business, so a Balance sheet is
prepared. This summarizes the position of a business, in monetary terms on a certain date.
Assets and liabilities:
The balance sheet shows what the business owns, known as assets, and what the business owes, known
as liabilities.
1.1 Introduction
Double entry bookkeeping is a system developed by the accounting profession to meet the demands of
management and proprietors.
Management need information on a regular basis (daily, weekly, monthly) in order to manage the
business.
Proprietors (owners) need information on a periodic basis in order to assess the performance
(profitability) and financial position of their business.
1.2 Three assumptions
Double entry bookkeeping has three underlying assumptions.
Every transaction has two effects (the duality concept).
A business is a distinct entity separate from its owner (the business entity convention).
The net assets of a business represent the proprietor.s funds. This third assumption can be
summarised in the following equation.
Assets . liabilities = capital + profits . losses . drawings

2.7 The accounting equation: final form

The equation in its final form is stated as follows.
Assets = original capital + new capital + profit . loss . drawings + liabilities
or
Assets . liabilities = original capital + new capital + profit . loss . drawings
This at first glance may appear long and complicated, but merely summarises the sections you have
already worked through. The assets and liabilities remain unchanged. The only part analysed is capital,
and this only confirms the work you have already completed. We have stated that the capital owed by a
business at any one time must be equal to the capital originally put into the business, plus any additional
capital input adjusted for profit (loss) and drawings.
2.5 Movements on capital
The final development to be made to the accounting equation relates to the fact that capital can
be further altered (+/.) by one of two things.
Additional capital. The accounting records for this type of transaction are exactly those
which we used to record the opening of a business: assets are received (cash, or other
resources (+)) and capital (the debt owed by the business to the owner) is increased (+).
Drawings. This term refers to a transaction in which the owner withdraws resources (eg
goods or money) from the business. The accounting records for this type of transaction
are: account losing resources (.) (inventory or cash) and the capital is reduced (.).
The following illustration shows how the second item affects the accounting equation.
(Examples of the first are shown in the opening statements on the previous examples.)

2.8 The accounting equation and the balance sheet

You should now be able to recognize that a balance sheet is doing no more than stating the accounting
equation at the balance sheet date. The assets (on the top half of the balance sheet) equal the capital
plus liabilities (on the bottom half of the balance sheet).
Home MCQs Financial Accounting Multiple Choice Questions#6
1) Which of the following is non- profit organization?

A) Sole proprietorship
B) Partnership
C) Limited company
D) Trust
2) Commercial Accounting is based on:

A) Single entry book keeping

B) Double entry book keeping
C) Both single and double entry book keeping
D) Cash basis of book keeping
3) An Asset that is NOT physical in nature is called
A) Intangible Asset
B) Liquid Asset
C) Current Asset
D) Fixed Asset
4) In cost of goods sold statement, the cost of material consumed is equal to:
A) Opening raw material stock+ Purchases
Ending raw material stock
B) Opening raw material stock- Purchases
+ Ending raw material stock
C) Ending raw material stock+ Opening stock
- Purchases
D) Ending raw material stock+ Opening stock
+ Purchases
5) What would be the value of total factory cost, if the cost of material consumed during the month is
$6,000, labor cost incurred is $2,000 and the factory over head cost is $2,500?

A) $10,500
B) $6,000
C) $8,000
D) $4,500
6) In cost of goods sold statement the cost of goods manufactured is equal to:

A) Total factory cost + Opening work in process

Ending work in process
B) Total factory cost + Opening work in process
+ Ending work in process
C) Total factory cost - Opening work in process
+ Ending work in process
D) Ending work in process +Total factory cost
Opening work in process
7) Which of the following entry is passed to record discount allowed in control account?
A) Discount Allowed (Dr) and Debtors Control A/c (Cr)
B) Discount Allowed (Dr) and Debtors A/c (Cr)
C) Debtors Control A/c (Dr) and Discount Allowed (Cr)
D) Debtors A/c (Dr) and Discount Allowed (Cr)
8) Which of the following entry will be recorded, if a cheque deposited is dishonored by bank?

A) Bank Account (Dr.) and Debtor's Account (Cr.)

B) Debtor's Account (Dr.) and Bank Account (Cr.)
C) Creditor Account (Dr.) and Bank Account (Cr.)
D) Creditor's Account (Dr.) and Bank Account (Cr.)
9) In which of the following auditors remuneration payable is shown?

A) In balance sheet under the head of current liabilities

B) In income statement under the administrative expense
C) In the statement of changes in equity
D) In Cash flow statement under investing activities
10) In which of the following interim dividend is treated?
A) In profit and Loss account
B) In profit and Loss appropriation account RIGHT ANSWER!!!
C) On the asset side of the Balance Sheet
D) In trading account
1. Bookkeeping is used to record the transactions of which entity ?
Owner
Business
Shareholder
2. What do we call the exchange of goods and services?
A transaction
An entry
A debit
3. What is to term used to describe the recording of a transaction in the accounting
records using debits and credits?
A transaction
An entry
A credit
4. What is the left side of a transaction which records something coming into the
business called?
Credit
Debit
5. What is the right side of a transaction which records something going out of the
business called?
Debit
Credit
6. Accounting records are made up of individual what?
Accounts
Debits
Statements
7. Which of these is not a Financial Statement?
Balance Sheet
Cash Book
Income Statement
8. The length of time over which a set of financial statements is produced is called
what?
An Accounting Period
A Balance Sheet date
A Year