FAC CHP1

CHAPTER 1
INTRODUCTION TO ACCOUNTING

THEORY QUESTIONS

1.
Characteristics Sole Partnership Limited Companies
Proprietor
Capital Contributed by Contributed by Contributed by
the owner partners according to shareholders through
the agreement buying of shares
Ownership Owned by one Owned by 2 - 20 A private company must
person partners. However for have a minimum of 2 and a
professional maximum of 50
partnership, it is own shareholders. A public
by 2 50 partners. company must have a
minimum of 2 shareholders
and the maximum amount
must not exceed the
authorised capital
Liability Unlimited Unlimited liability Limited liability
liability If the business fails If the business fails and the
If the business and the assets are companys assets are not
fails and the not enough to cover enough to cover the debt,
assets are not the debt, the creditors the creditors do not have a
enough to have a right against right against the
cover the debt, the partners personal shareholders personal
the creditors properties properties
have a right
against the
owners
personal
properties

2. Accounting can be defined as the art of classifying, recording and summarising of

transactions and business events in monetary terms and interpreting the results to
interested parties to enable them to make decision. Bookkeeping is different from
accounting as it is only a part of accounting. It refers to the mechanical aspects of
accounting such as classifying, recording and summarising of transactions
systematically.

3. Accounting involves these four stages: classifying, recording, summarising and

interpreting. Classifying means sorting accounting data into orderly and meaningful
categories, for example receipts, payment, purchases, sales, etc. Transactions are
then recorded in the books of the business such as the journals and ledgers.
Periodically accounting data are summarised in the form of financial statements that
are the Income Statement and Balance Sheet. Finally, the financial statements are
analysed and the result of the analysis is used as a guide to make decisions.

4. Internal Users

Owners
As the owners of the businesses, they are interested in the profits earned from their
investment in the business and the financial stability and growth of the business.

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Managers
Management needs information to guide them in planning, organising and controlling
the organisation and analysing the operations of the business.

Employees
Employees are interested in the business ability to progress and expand. They look
for steady employment, earning capacity and other monetary benefits that are to be
gained from a financially stable business.

External Users

Creditors/Bankers
Creditors or bankers are interested to know the ability of the business in repaying the
amount owing to them.

Current and Potential Investors

Investors require information regarding the solvency and financial strength of the
business, its present and future earning capacity and the ability of the management.

Government
The government is interested in the financial statements and reports of a business for
tax purposes.

Consumers of products/services
Consumers are interested in the establishment of good accounting controls as a
means of reducing cost of production, selling and distribution and hence the
reduction of the prices of the goods they purchase.

5. Journals can be classified into General Journal, Purchases Journal, Sales Journal,
Return Inwards Journal, Return Outwards Journal and Cash Payments and
Receipts Journal. Ledgers can be classified into General Ledger, Sales/Debtors
Ledger and Purchases/Creditors Ledger.

TRUE/ FALSE QUESTIONS

1. False
2. False
3. False
4. True
5. False

MULTIPLE-CHOICE QUESTIONS

1. B
2. D
3. D
4. B
5. A