Accounting questions
Discuss the nature of accounting.
The nature of accounting: accounting is a specialised means of communication which is used to convey a
specialised message about an entity’s finances. The recipient of this specialised message (the user of financial
information) must understand it otherwise the information that is conveyed has no value. Accounting is
therefore a language.
What is the common unit of measurement in accounting?
The common unit of measurement in accounting is money.
Name the four main forms of ownership.
Sole trader, Partnership, Close Corporation, Company
Discuss the different users of financial information.
- Investors: these are the providers of capital. They are concerned with the risk involved in their
investment and the return (interest or dividends) they will receive on their investment. They need
information to decide whether they should invest (buy), hold or withdraw (sell) share.
- Employees: employees are interested in information about the stability and profitability of the
business. They also want to know if the entity will be able to pay remuneration and retirement
benefits, and whether there are any employment opportunities.
- Lenders: lenders need information to determine whether their loans and the interest on the loan will
be paid on due dates.
- Suppliers and other trade creditors: these users need information that will assure them that amounts
owed to them will be paid when due.
- Customers: they want to know if the business will continue to exist, especially when they are involved
for a long time or when they are dependent on the entity.
- Government and their agencies: they are interested in the allocation of resources and therefore in
the activities of the entity. They also need information in order to regulate the activities of entities,
determine taxation policies and use the information as a basis for national income and similar
statistics.
- Public: members of the public are affected in several ways. Entities often contribute to the local
economy by employing people and supporting local suppliers.
Differentiate between financial accounting and management accounting.
- Financial accounting
o Financial accounting deals primarily with the external users of financial information. External
users are people and institutions who exist outside the entity and who are not directly
involved in the management and day-to-day operations of the entity. Specific set of
standards governing how transactions are recorded and reported for users.
, - Management accounting
o Management accounting caters mainly for the internal users of financial information of the
entity. These users may include the internal management and operational personnel of the
entity, who requires a wide variety of financial information in order to manage the entity on
a day-to-day basis. Less rule-based.
Explain the following 2 accounting principles.
Consistency and materiality
The consistency principles states that, once you adopt an accounting principle or method, continue
to follow it consistently in the future accounting periods. Only change an accounting principle or
method if the new version in some way improves reported financial results.
The materiality principle states that an accounting standard can be ignored if the net impact of doing
so has such a small impact on the financial statements that a reader of the financial statements
would not be misled.
Define the concept of accounting policy.
An accounting policy is a set of decisions about how the entity will handle the same type of
transaction in order to achieve a consistent result.
What is meant by disclosure of accounting policy?
Since an accounting policy represents an entity’s decisions about situations which could deal with in various
ways, it has to disclose its accounting policy in its financial statements. For example, an entity has to indicate
what basis it has used to deal with the depreciation of property, plant and equipment.
Describe the concept of international financial reporting standards.
This foundation is a general framework and encompasses in broad terms, accounting concepts,
principles, methods and procedures collectively.
The objective of creating accounting standards for particular issues is to limit the variety of available
accounting practices, but without striving for strict uniformity or creating a set of rigid rules for all
circumstances. The ultimate aim of accounting standards is to encourage widespread use of
particular standards in financial reporting and to eliminate undesirable alternative.
Discuss the underlying assumption of financial statements.
The underlying assumptions, namely that financial statements are prepared on the accrual basis and that the
entity is a going concern.
Using the accrual basis means that the effects of transactions and other events are recorded when they occur,
not when cash is received or paid (unless all the transactions of an entity are cash transactions).
Discuss the nature of accounting.
The nature of accounting: accounting is a specialised means of communication which is used to convey a
specialised message about an entity’s finances. The recipient of this specialised message (the user of financial
information) must understand it otherwise the information that is conveyed has no value. Accounting is
therefore a language.
What is the common unit of measurement in accounting?
The common unit of measurement in accounting is money.
Name the four main forms of ownership.
Sole trader, Partnership, Close Corporation, Company
Discuss the different users of financial information.
- Investors: these are the providers of capital. They are concerned with the risk involved in their
investment and the return (interest or dividends) they will receive on their investment. They need
information to decide whether they should invest (buy), hold or withdraw (sell) share.
- Employees: employees are interested in information about the stability and profitability of the
business. They also want to know if the entity will be able to pay remuneration and retirement
benefits, and whether there are any employment opportunities.
- Lenders: lenders need information to determine whether their loans and the interest on the loan will
be paid on due dates.
- Suppliers and other trade creditors: these users need information that will assure them that amounts
owed to them will be paid when due.
- Customers: they want to know if the business will continue to exist, especially when they are involved
for a long time or when they are dependent on the entity.
- Government and their agencies: they are interested in the allocation of resources and therefore in
the activities of the entity. They also need information in order to regulate the activities of entities,
determine taxation policies and use the information as a basis for national income and similar
statistics.
- Public: members of the public are affected in several ways. Entities often contribute to the local
economy by employing people and supporting local suppliers.
Differentiate between financial accounting and management accounting.
- Financial accounting
o Financial accounting deals primarily with the external users of financial information. External
users are people and institutions who exist outside the entity and who are not directly
involved in the management and day-to-day operations of the entity. Specific set of
standards governing how transactions are recorded and reported for users.
, - Management accounting
o Management accounting caters mainly for the internal users of financial information of the
entity. These users may include the internal management and operational personnel of the
entity, who requires a wide variety of financial information in order to manage the entity on
a day-to-day basis. Less rule-based.
Explain the following 2 accounting principles.
Consistency and materiality
The consistency principles states that, once you adopt an accounting principle or method, continue
to follow it consistently in the future accounting periods. Only change an accounting principle or
method if the new version in some way improves reported financial results.
The materiality principle states that an accounting standard can be ignored if the net impact of doing
so has such a small impact on the financial statements that a reader of the financial statements
would not be misled.
Define the concept of accounting policy.
An accounting policy is a set of decisions about how the entity will handle the same type of
transaction in order to achieve a consistent result.
What is meant by disclosure of accounting policy?
Since an accounting policy represents an entity’s decisions about situations which could deal with in various
ways, it has to disclose its accounting policy in its financial statements. For example, an entity has to indicate
what basis it has used to deal with the depreciation of property, plant and equipment.
Describe the concept of international financial reporting standards.
This foundation is a general framework and encompasses in broad terms, accounting concepts,
principles, methods and procedures collectively.
The objective of creating accounting standards for particular issues is to limit the variety of available
accounting practices, but without striving for strict uniformity or creating a set of rigid rules for all
circumstances. The ultimate aim of accounting standards is to encourage widespread use of
particular standards in financial reporting and to eliminate undesirable alternative.
Discuss the underlying assumption of financial statements.
The underlying assumptions, namely that financial statements are prepared on the accrual basis and that the
entity is a going concern.
Using the accrual basis means that the effects of transactions and other events are recorded when they occur,
not when cash is received or paid (unless all the transactions of an entity are cash transactions).
