Summary. Introduction to Accounting. Chapter

Transcription

1 1 Chapter Introduction to Accounting Summary 1. Accounting consists of five stages: (1) recording (bookkeeping), (2) summarizing, (3) analyzing, (4) interpreting and (5) reporting the financial information of an organization. 2. Accounting has two important functions in businesses: (1) stewardship and (2) decision-making. 3. Financial information of a business has value to people known as the stakeholders of the business. 4. Stakeholders are people who are interested in the financial information of a business. Stakeholders can be categorized into internal and external stakeholders. (a) Internal stakeholders include sole proprietors & managers as well as employees. (b) External stakeholders include shareholders & investors, banks & other lenders, suppliers, customers, government, public and competitors. 5. Two key professional ethics principles are (1) integrity and (2) objectivity. 6. Integrity - To be straightforward and honest in all professional and business aspects. 7. Objective - To maintain neutrality when making a professional judgment in accounting decisions. 8. Accounting is essential in both business (main categories: trading, service and manufacturing) and non-business entities. 9. The following factors distinguish between the different types of business entities: (1) Number of owners (2) The way the businesses are managed (3) Amount of reward (4) Level of investment risk faced by the owners. 1

2 10. The following are the advantages and disadvantages between setting up a sole proprietorship and a company: Features Sole Proprietorship Company The ease to set up and maintain the business. The owners level of investment and amount of reward received. The ease to raise funds Ease of owner to transfer his ownership in the business. Easier and less expensive. Owner owns the entire business but may lose more than what he invested. Owner usually has to use his own funds, as banks are less willing to lend. More difficult to transfer ownership. More complex and expensive. Shareholders only receive a part of the company s profits. Shareholders can only lose up to the maximum of what they invested. Company is able to raise funds through the issuance of its shares. Easier for shareholders to transfer ownership to others. 11. The six accounting theories: Accounting entity concept states that the business is considered a separate entity from the owner and all business activities are conducted from the perspective of the business. Historical cost concept states that transactions should be recorded at their initial cost. The objectivity concept states that transactions are recorded according to reliable and verifiable information. Going concern concept assumes that the entity carries on business indefinitely. Accounting period concept states that financial statements of businesses are to be organized at regular intervals. Prudence concept states that it is important that assets and income are not overstated and liabilities and expenses are not understated. Examples would include writing off bad debt, not including profits or income in the financial statements unless they are probable. Monetary concept states that only transactions that can be valued in monetary terms are recorded. 2 O Level Principles of Accounts

3 Practice Questions Part 1: Multiple Choice Questions 1. Which of the following is not an example of an external stakeholder? (a) Suppliers (b) Customers Employees (d) Government ( ) 2. Which are the two main principles of professional ethics in accounting? (a) Integrity and Subjectivity (b) Objectivity and Reliability Timeliness and Reliability (d) Integrity and Objectivity ( ) 3. Which of the following is an advantage of a sole proprietorship compared to a company? (a) Easier to borrow funds from the bank (b) Easier to set up and maintain business Easier to transfer ownership in the business (d) Will not lose more than his investment ( ) 4. Amanda wishes to set up a flower shop in her neighborhood. She has identified a good location near her house to start her business. She has also concluded that she has sufficient fund in her savings to finance her business. Furthermore, none of her sisters are interested in the flower shop. Which of the following factors is not one of the factors she should consider in selecting the legal form of business for her flower shop? (a) The number of owners (b) The way the business is managed The types of flowers she intends to sell (d) The amount of reward and the level of investment risk faced by her ( ) 5. A business uses the owner s private house as an office and pays a monthly rental of $4,500. Which of the following conventions is being applied? (a) Accounting Entity Concept (b) Objectivity Concept Prudence Concept (d) Accrual Concept ( ) 6. The owner and the business are regarded as separate bodies. Which accounting concept applies in this case? (a) Accrual Concept (b) Accounting Entity Concept Prudence Concept (d) Objectivity Concept ( ) 7. Writing off debts which are considered irrecoverable complies with. (a) Consistency concept (b) Money measurement concept Prudence concept (d) Accounting period concept ( ) Topic 1 Introduction to Accounting 3

4 8. The business expects that it will make a large profit from the disposal of its non-current assets. However, this is not disclosed in the current financial statement. Which of the following conventions is being applied? (a) Prudence (b) Consistency Historical cost (d) Objectivity ( ) 9. In order to reduce losses, the directors of a company proposed that all expenses incurred but not paid in the current accounting year to be carried forward as expenses of the following financial year. Such suggestion violates the concept. (a) Accrual (b) Monetary Objectivity (d) Prudence ( ) 10. Source documents are used as evidence to show that transactions had taken place. Which of the following concept is being applied here? (a) Accounting Entity (b) Objectivity Historical Cost (d) Accounting Period ( ) 11. The concept regards the business as a separate unit from its owner. (a) Prudence (b) Going-Concern Accounting Entity (d) Objectivity ( ) 12. Xiang, a sole proprietor, paid his house rent from the company s bank account. This transaction was recorded in the Rent Expense Account. State the accounting concept that was not adhered to. (a) Accounting entity (b) Going concern Accounting period (d) Matching principle ( ) 13. Each transaction is recorded only when there is a source document to prove that the transaction has taken place. State the accounting concept that is being applied. (a) Matching principle (b) Historical cost concept Objectivity concept (d) Accrual concept ( ) 14. What is the meaning of the monetary concept? (a) Accounts are kept on the double entry basis (b) Assets are normally shown at cost price Only items with monetary value are included in the accounts (d) Profits are calculated on the basis of cash received less cash paid ( ) 4 O Level Principles of Accounts

5 Part 2: Fill in the blanks. 1. ACCOUNTING is process of (a) (b) (d) (e) of financial information of an organization. 2. Match the questions that may be asked with the appropriate user of the accounting information. Stakeholders Question (a) Managers (i) Is the company able to service the loan? (b) Customers (ii) Shall I close the Toa Payoh branch? Investors (iii) Will the company provide after-sales support? (d) Banks (iv) Shall I increase the contribution to the company? (e) Suppliers (v) Will the company be able to pay for its credit purchases? 3. Categories of business organisation (a) (b) 4. Types of business entities (a) (b) Topic 1 Introduction to Accounting 5

6 Part 3: Structured Questions 1. Many people often mistaken accounting for bookkeeping. What is the difference between bookkeeping and accounting? 2. What are the roles of accounting? 3. Why are professional ethics important in accounting? 6 O Level Principles of Accounts

7 2 Chapter The Accounting Information System Summary 1. A business transaction is an act performed by the business entity to provide goods and services in return for money. 2. Two key categories of transactions are (1) cash transactions and (2) credit transactions. 3. Cash transactions refer to activities where cash received or paid are simultaneous to the occurrence of the sale and purchase. 4. Credit transactions refer to activities where cash received or paid occurs at a date later than the purchase or sale. 5. Accounting information system is used to record, summarise and organize these transactions into financial reports. 6. (MCQ 9) The accounting information system is organized into the following parts: (1) Source documents (2) Journals (3) Ledgers (4) Trial Balance (5) Income Statements (6) Balance Sheet. 7. (MCQ 3, 10, 11, 12, 13, 15, 17) Source documents: (a) Invoice Issued when a seller sells things to a buyer on credit. (b) Credit note Issued when a buyer returns goods after buying on credit. Debit note Issued when the seller undercharges the buyer. (d) Receipt Issued when cash is immediately received upon the sale of goods. (e) Remittance advice/payment voucher/receipt Issued when the buyer pays for the goods purchased on credit. (f) Bank statement Issued by the bank, which states the deposits and payments to the bank account. 8. (MCQ 14, 16) The following are different books of original entry: (a) Purchases journal Record all goods bought on credit. (b) Purchases return journal Record all goods bought on credit that were returned. 7