Accounting Theories
State two professional ethics that an accountant must have
Integrity and Objectivity
A debit entry represent an increase or decrease in asset
Increase
Explain why internal controls are needed to protect cash
Internal controls are important in a business as it serves to:
Define inventory
Inventory are goods bought by a business with the intention of re-selling them at a profit
Name two stakeholders who are interested in the business accounting information
Investors, competitors, managers,
State whether a debit or credit entry is needed to increase in utilities
Debit
Name and explain two types of internal controls over cash
One type of internal controls for cash is segregation of duties. It involves the separation of cash handling and cash recording duties among different employees so that no single person has control over the entire cash process. For example, businesses can ensure different employees receive and deposit cash, authorise invoices for payment and process payment to suppliers and write and sign cheques.
State the valuation rule for inventory
Inventory is valued at lower of cost or net realisable value
Explain the monetary theory
Only transactions that can be measured in dollars and cents are recorded in the books of business
State whether a debit or credit entry is needed to decrease in owner's equity
Debit
State two reasons for dishonoured cheque
Expired cheque
Post dated cheque
Explain the accounting theory applicable to the valuation of inventory
According to prudence concept, assets should not be overstated
Explain the importance of an accountant's professional ethics.
As accountants provide information to stakeholders for decision-making purposes, the information needs to be truthful and accurate. Accountants who do not have integrity and is not objective may provide information that mislead users to make poor decisions. Thus, it is important for accountants to have integrity and is objective
The business withdrew $2000 from the bank to be used as cash in the office. State the double entry for this transaction.
Dr Cash in hand; Cr Cash at bank
Explain what a credit balance in the cash at bank account represents
Bank overdraft: Business is owing the bank money
$400 worth of inventory was destroyed in a fire. State the double entry to record the transaction
Dr Impairment loss on inventory $400
Cr Inventory $400
Explain, using a suitable accounting theory, why source documents are important.
The business sold goods for $4500 and received a cheque as payment. The cost price of the goods was $1500. State the double entry for the business transaction.
Dr Cash at bank $4500 Cr Sales revenue $4500
Dr Cost of sales $1500 Cr Inventory $1500
Explain two differences between trade discount and cash discount
Trade discount is a reduction to the list price (original price). It is given to encourage bulk purchase, patronage, loyalty while cash discount is a reduction to the invoiced price and is given to encourage credit customer to repay early.
State the effect on profit and assets if impairment loss on inventory was not adjusted
Both profit and assets will be overstated