accounting in action

What are the three activities of accounting?

Answer explanation

identification, recording, communication

What is the internal users?

• investors

• bank

• creditors

• finance

What are the external users?

• investors

• finance

• marketing

• human resources

What are the generally accepted accounting principles?

Answer explanation

Financial Accounting Standards Board(FASB) and International Accounting Standards Board(IASB)

What are the two measurement principles?

Answer explanation

Historical Cost Principle and Fair Value Principle

What are the three forms of business ownership?

Answer explanation

proprietorship, partnership and corporation

What is the meaning of proprietorship?

• owned by two or more persons

• ownership divided into shares

• owned by one person

The accounting equation can be written as

• Assets+ profits-drawings-liabilities=closing capital

• Assets-liabilities-drawings=opening capital+ profit

• Assets-liabilities-opening capital+ drawings= profit

• Opening capital+ profit- drawings-liabilities=assets

The capital of a sole trader would change as a result of

• a credit customer paying by cheque

• raw materials being purchased on credit

• non-current assets being purchased on credit

• personal petrol being paid for out of the business's pretty cash

Answer explanation

Petrol being paid in cash means assets decrease and drawings increase, which decreases capital. Option A is a switch between assets, while options B and C increase assets and increase liabilities.

A business can make a profit and yet have a decreased bank balance. which of the following might cause this to happen?

• The sale of non-current assets at a loss

• The charging of depreciation in the statement of profit or loss

• The lengthening of period of credit given to customers

• The lengthening of the period of credit taken from suppliers

Answer explanation

The lengthening of the period of credit given to customers, since this means that while there are increased profits as the level of sales increases, it takes longer to collect cash from those customers