Accounting General Knowledge
Name a type of Investment
Money in the bank
Stocks and ETFs
Cryptocurrency
Property (Real estate)
Managed Funds
Superannuation
Business
What is an Asset?
An asset is a resource controlled by a business as a result of past events that is expected to provide future economic benefits.
What is a revenue?
Revenue is the income earned by a business from its normal operating activities and an inflow of economic benefits
State the accounting equation.
Assets = Liabilities + Owner’s Equity.
What is a business entity?
A business entity is an organisation or individual that carries out economic activities and is separate from the owner for accounting purposes.
How many types of Business Entities and name them.
3 types
Sole Trader, Partnership, Company
Which of the following is an asset for a business?
a) Bank loan
b) Accounts payable
c) Delivery van
d) Owner’s drawings
c) Delivery van.
How is a profit generated?
Revenues are greater than Expenses.
If a business has $50,000 in assets and $20,000 in liabilities, what is the owner’s equity?
Owner’s equity = $30,000.
(Assets – Liabilities)
What is the main difference between a sole trader and a partnership?
A sole trader is owned and run by one person, while a partnership is owned and run by two or more people who share profits and responsibilities.
When investing, where does the initial capital come from?
Income from a job
Inheritance
Windfall
Borrowing from a bank or other source
Classify the following as either an asset or a liability:
• Accounts receivable
• Accounts payable
• Vehicles
• Wages owing
Assets: Accounts receivable, Vehicles
Liabilities: Accounts payable, Wages owing
What key indicator does profit/loss show a stakeholder?
Shows the performance of the business. (both positive or negative)
Identify which part of the accounting equation each of the following belongs to:
• Bank loan
• Cash
• Capital contributed by owner
• Equipment
Liabilities: Bank loan
Assets: Cash, Equipment
Owner’s Equity: Capital contributed by owner
A student starts a small online clothing business by themselves while still at school.
Identify the most likely type of business entity and explain one reason why this structure would suit them.
The most likely entity is a sole trader.
This structure suits them because it is simple, low cost to set up, and allows the owner to make all decisions.
What is the core role of an accountant?
Record and report financial information
Prepare financial statements
Ensure compliance (tax law, accounting standards, lodgements)
Explain what the numbers mean (historical + current position)
A business has a high level of inventory but very low cash.
Analyse one risk this may create for the business and explain why.
The business may face liquidity problems.
Even though inventory is an asset, it cannot be easily used to pay short-term debts. If the business cannot sell inventory quickly, it may struggle to pay expenses or Accounts Payable accounts.
Cash received from customers: $10,000
Credit sales (not yet received): $4,000
Cash paid for expenses: $6,000
Expenses owing (not yet paid): $3,000
Calculate total revenue.
Calculate total expenses.
Calculate profit or loss.
Calculate total revenue - $14,000
Calculate total expenses - $9,000
Calculate profit or loss - $5,000 profit
The owner invests $10,000 cash into the business.
Explain how this affects the accounting equation.
Assets increase (cash increases).
Owner’s equity also increases (capital increases).
The equation remains balanced.
Two friends start a gym together and share profits and responsibilities.
Identify the type of business entity and explain one advantage of this structure.
It is a partnership.
One advantage is that the owners can share skills, workload, and decision-making.
What is the difference between limited and unlimited liability.
*Something along these lines*
Limited liability protects owners' personal assets, restricting losses to their investment. Unlimited liability holds owners personally responsible for all business debts, risking personal assets.
A business takes out a loan to purchase new machinery.
Explain one benefit and one risk of this decision.
*something along these lines*
Benefit: The machinery is an asset that may increase productivity, efficiency, and future income.
Risk: The loan is a liability that must be repaid, which may increase financial pressure and reduce cash flow.
A business has high revenue but still makes a loss.
Analyse how this situation could occur.
This can happen if the business has very high expenses. Even though revenue is strong, excessive costs such as wages, rent, or interest may reduce profit. Poor cost control or inefficient operations could lead to losses despite high sales.
A business purchases equipment using a bank loan.
Analyse why the accounting equation still balances even though no cash is used.
Equipment (asset) increases.
Bank loan (liability) increases.
Because both sides of the equation increase by the same amount, the equation remains balanced.
A growing business is considering changing from a sole trader to a company.
Analyse one benefit and one challenge of this decision.
Benefit: A company has limited liability, which protects the owner’s personal assets. It may also make it easier to raise capital.
Challenge: A company has more legal requirements, higher costs, and increased reporting responsibilities.