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Accounting Principles Revision questions and answers(verified for accuracy)
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Accounting Principles Revisionquestions and answers(verified for
accuracy)
Accounting - answer an information system that measures business activities, processes
information, and communicates financial information.
External Users - answer make decisions ABOUT the entity (i.e. investors, bankers).
Internal Users - answer make decisions FOR the entity (i.e. managers).
Financial Accounting - answer focuses on the preparation of Financial Statements (often useful
for those external to the firm)
Management Accounting - answer focuses on the preparation of internal reports (e.g.
performance reports, budgets and variance analyses) (this is often useful for internal members).
Types of business structures: Sole Trader - answer is a business owned by one person, not a
separate legal entity, owner is entitled to all profits and responsible for all debts.
Types of business structures: Partnership - answer is a business owned by two or more people,
partners responsible for all debts, agreement between two or more people to do business, not
a separate legal entity.
Types of business structures: Company - answer is owned by shareholders, is formed by
Australian Corporations Law, shareholder's liability is limited to amount unpaid on shares.
The Accounting Equation - answer Liabilities + Owner's Equity = Assets.
, Assets - answer are resources that are owned (usually purchased) and/or controlled by the
entity. examples: cash, accounts receivable, inventory, vehicles, machinery, land and buildings.
Liabilities - answer can be viewed as the opposite of assets, reflect the financial obligations of
the entity. examples: wages and salaries payable, accounts payable and bank loans.
Owner's/Shareholder's Equity - answer reflect the financial investment of the owner(s) in the
organisation, it includes investment plus all profits not paid out to the owner(s) (aka retained
profits).
Entity - answer a thing with a distinct and independent existence.
Things that increase owner's equity - answer owner investments in the business, revenues etc.
Things that decrease owner's equity - answer owner withdrawals from the business, expenses
etc.
Revenues - answer amounts received (or to be received) from customers for sales of
products/services. examples: sales, service fees, rent received, interest received etc.
Expenses - answer amounts that have been paid (or will be paid later). examples: cost of goods
sold, salaries and wages expense, advertising expense etc.
Financial statements - answer tell how the firm is performing and where it stands.
The reliability (objectivity) principle - answer information must be reasonably accurate,
information must be free from bias, information must report what actually happened.
The matching principle - answer relates the inputs and outputs of goods and services to one
another
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