Financial accounting

(summer exam)

An asset is

Anything a business owns / is owed to

A liability is

Anything a business owes

Which one of these is an asset;

1. Premises

2. Bank overdraft

3. Capital

4. Purchases

Premises

What are the 2 types of assets

1. Current assets

2. Non - current assets

Difference between “Current assets” and “Non - current assets”

• Current → Short term assets that might require regular payments (rent)

• Non - current → Long term assets that don’t need regular payments / changes (eg. Building, car)

Which one of the following is a liability;

1. Account receivable

2. Account payable

3. Repairs

4. Wages

Account payable

What accounting concept requires a degree of caution when preparing accounts to ensure that assets and income are not overstated, and liabilities and expenses are not understated?

The realisation concept

Which accounting concept assumes that items will only be recorded in the accounts if they can be quantified in monetary terms

Money measurement

(8) Name the accounting concepts available

1. Historical cost

2. Business entity

3. Money measurement

4. Going concern

5. Accounting period

6. Dual aspect

7. Realisation

8. Accruals

Define “Historical costs”

The concepts states that assets are recorded in the books of account at their purchase price and not their market price

Business Entity

The concept that assumes business and it’s owner are two separate entities

Money measurement

This concept assumes items can only be recorded if they’re quantified in monetary terms

Going concern

This concepts assumes businesses will continue to operate for the foreseeable future (at least 12 months after the end of its reporting period)

Accounting period

This concept requires that an entity prepares financial statements at regular intervals - usually once a year

What accounting principle is considered the “basic principle of accounting”

Dual aspect

Dual aspect

This concept believes every transaction must impact the business in two ways which must be equal and opposite

Realisation concept

This concept requires a degree of caution when preparing accounts to ensure that assets and incomes are not overstated and expenses are not understated

Accruals concept

This concept states that the effects of a transaction are recognised when they occur and are recorded in the books and reported in the financial statements of the period to which they relate.

(5) What are the books of first entry

1. Sales day book

2. Sales return (or returns inwards) day book

3. Purchases day book

4. Purchases returns (or returns outwards) day book

5. Cash book

6. General journal

What is the “sales day book” used for

Used to record sales invoices issued by the business when selling goods on credit

What is the “sales return” day book used for

Used to record sales returns where a credit note was issued

What is the “purchases day book” used for

Used to record purchases invoices received by the business suppliers, when buying goods on credit

What is the “purchases return” day book used for

Used to record purchases returns where a credit note was received

What was the “Cash book” day book used for

Used to record all movement to cash or bank balances

What was the “General journey” day book used for

Used to record the transactions not recorded in the other day books

Describe “Revenue transactions”

Incurred in the ordinary course of the business and relate to day to day income and expenses

Describe “Capital transactions”

Long term in nature and relate to the investment of long term funds in the business, the disposal of long term assets, or spending on long term assets

Define “Revenue receipts”

Income from the sale of goods in ordinary course of business, interest, rent, commission and discount received

Which book of first entry is used to record “sales of good on credit”

Sales day book

Purchases day book is best described as

The book of first entry

What is the “General journal” used for

Recording the write off of bad debts

Capital expenditure is best described as

Money spent on acquisition of non - current assets