Q

How many elements of accounting are used to represent the financial effects of

business transactions? What are they?

A
Five. They are:

1. Assets

2. Liabilities

3. Equity

4. Income

5. Expenses

Q
What are ‘assets’? Which financial report are assets recorded / found in?

A
Assets are resources usually owned or controlled by the business to carry out its

business activities.

or

Assets are resources / items of value owned by (i.e. belonging to) a business.

or

Assets: Things of value owned by a business entity.

or

Assets are the things that a company owns, that can be sold to pay debts.

All assets are recorded / found in the Balance Sheet.

A
Generate future benefits.

Q
Give examples of non-current assets (i.e. capital expenditures).

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A
Non-Current Assets (i.e. Capital Expenditures) refer to:
1. Land
2. Property (comprises land and building)
3. Office Equipment (comprises computers, printers, machines and other
equipment)
4. Fixtures and fittings (comprises furniture, shelves and lighting)
5. Motor vehicles (comprises trucks, vans, cars and motor cycles)
6. Plant and equipment (only plant machinery and plant equipment)

Q
Give examples of current assets.

1. Inventory (goods held for resale)

2. Trade receivables (amounts owed by debtors to whom the business sells

goods and services on credit)

3. Other receivables (amounts owed by debtors for reasons other than the

sale of goods and services on credit)

4. Income receivables (income earned that is not collected by the business

yet)
 5. Prepaid expenses (expenses paid by the business before they are

incurred)

6. Cash at bank (money deposited with the bank)

7. Cash in hand (physical cash held on hand)

Q
Define ‘Goods’.

A
‘Goods’ is the general term for things that the business is buying and selling, as part

of its main business activity.

Q
Define ‘Receivable’.

A
A ‘receivable’ means an amount owed to the business. The people who owe money

to the business are called debtors.

Q
Defne ‘owe’.

A
Dictionary Definition: HAVE DEBTS. To need to pay or give something to someone

because they have lent money to you, or in exchange for something they have done

for you.

E.g. We still owe $1000 on our car = We still need to pay $1000 before we own our

car.

Q
Define ‘own’.

A
Dictionary Definition: BELONGING. Belonging to or done by a particular person or

thing; or to have something that legally belongs to you: We own our house.

Q
Is it important that the correct asset is recorded?

A
Yes. Whether an item is an inventory or not will depend on what the business is

selling and buying.

Q
A furniture business owns a delivery truck. Should the furniture business record the

delivery truck as as a non-current asset (i.e. capital expenditure and / or under

motor vehicles) or as a current asset (under inventory, i.e. goods for resale)?

A
As a non-current asset. As the furniture business uses the delivery truck to

transport goods to customers, the delivery truck should be recorded as an asset

(non-current) called motor vehicle in the Balance Sheet; or

The delivery truck has been bought for use by the business and is not purchased

for resale purposes. As such, it should be classified as a non-current asset.

Q
A used vehicle (i.e. second hand vehicle) business owns a delivery truck. Should the

used vehicle business record the delivery truck as as a non-current asset (i.e. capital
expenditure and / or under motor vehicles) or as a current asset (under inventory,

i.e. goods for resale)?

A
Depends:

If the delivery truck is used to transport goods and other materials (i.e. purchased

for use by the business), it should be recorded as a non-current asset called motor

vehicle in the Balance Sheet.

If the used vehicle business will be selling the delivery truck just as it sells other

used vehicles (i.e. the delivery truck is bought for resale purposes), the delivery

truck should be recorded in the Balance Sheet as a current asset called Inventory.

Q
What are ‘liabilities’? Which financial report are liabilities recorded / found in?

A
Liabilities are amounts that the business owes to other businesses or people.

All liabilities are recorded / found in the Balance Sheet.

Q
Give examples of non-current liabilities (i.e. Capital Receipts).

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1. Mortgage loan

2. Long Term Borrowings

Q
What is a ‘mortgage loan’?

A
Money borrowed to be repaid over more than a year, and an asset is used as

collateral.

Q
What is ‘collateral’?

A
Dictionary meaning: valuable property owned by someone who wants to borrow

money which they agree will become the property of the company or person who

lends the money if the debt is not paid back.

Q
What is a ‘long-term borrowing’?

A
Money borrowed to be repaid over more than a year.

Q
Give examples of current liabilities.

1. Current portion of Long Term Borrowing

2. Short term borrowings (e.g. bank overdraft)

3. Trade payables

4. Other Payables / Accrued Expense / Expenses Payable

5. Income received in advance

A
Trade payables are amounts owed to creditors (i.e. people to whom money is

owed) by the business for buying goods and services on credit. It is a current

liability recorded in the Balance Sheet.

Q
What are ‘other payables’?

A
Amounts owed to creditors for reasons other than buying goods and services on

credit. It is a current liability recorded in the Balance Sheet.

Q
What is a ‘bank overdraft’?

A
Money owed to the bank when the bank account is overdrawn. It refers to an

overdrawn cash at bank. It is a current liability recorded in the Balance Sheet.

Q
What is ‘income received in advance’?

A
Income not earned yet but has already been collected by the business. It is a

current liability recorded in the Balance Sheet.

A
Expenses incurred but not invoiced / billed by the suppliers and / or no paid by the

business yet. It is a current liability recorded in the Balance Sheet.

Q
What is ‘equity’?

A
The amount contributed (i.e. capital) by the owners and the profit generated by the

business.

Q
What is ‘capital’?

A
Capital is any resources contributed by the owner to the business.

Q
What is equity known as in a sole proprietorship?

A
Owner’s equity.

Q
What is the equity of a sole proprietorship made up of?

A
Capital, drawings and profit for the period.

Q
Recap: What are ‘drawings’?

A
Drawings are assets taken from a business by its owner for personal / own / private

use.

Q
Formula #1:
What is the formula to remember for equity (sole proprietorship)?

A
Very important. Please memorise accurately!!!

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Equity (sole proprietorship) = Capital + Profit - Drawings or

Equity (sole proprietorship) = Capital - Loss - Drawings

or

Owner’s equity = Total Assets - Total Liabilities

Q
What is equity known as in a company?

A
Equity in a company is known as shareholders’ equity.

Q
List the equity items found in a company.

A
 1. Issued share capital

2. Retained earnings

3. Dividends

Q
What is issued share capital?

A
Issued share capital is the resources contributed by the shareholders.

Q
What are retained earnings?

A
Profits that are not distributed to the company’s shareholders.

Retained earnings = Profit - Dividends

Q
What are dividends?

A
Profits that are distributed to the company’s shareholders.

Q
Formula #2:
What is the formula to remember for equity (company)?
A
Very important. Please memorise accurately!!!

HOM: Striving for accuracy.

Equity (company) = Issued share capital + Profit - Dividends

A
Income consists of revenue, other income and other gains. Incomes are revenue

receipts.

Q
How many types of revenue are there?

A
1 Sales revenue

2. Service fee revenue

3. Other income

Q
What is sales revenue?

A
Sales revenue is the amount a trading business earns from selling goods. For

example, when a candy shop sells candies to customers, the selling price is the

sales revenue.

Q
What is service fee revenue?

A
Service fee revenue is the amount a service business earns from providing services.

Q
Give examples of service fee revenue.

A
 1. Hairstyling fee revenue earned by a hairdressing salon

2. Fare revenue by a business company

3. Legal fee revenue earned by a law firm

4. Dental fee revenue earned by a dental clinic

Q
How do I distinguish sales revenue and service fee revenue from other income?

A
Sales revenue and service fee revenue are earned from the main activities of a

business. Other income are incomes not earned from normal sale of goods and

services.

Q
What is ‘other income’?

A
Income not earned from normal sale of goods and services. For example, a candy

shop may have deposited excess cash with the bank which earns interest income.

This interest income is treated as other income of the business.

Q
What are ‘other gains’?

A
Other gains refer to gains that arise when the business sells its assets. For example,

a business can sell its used equipment and has a gain on sale of equipment.

Q
Why does a business incur expenses?

A
So as to generate income.

Q
Do the benefits generated from expenses last into the future?

A
No.

Q
What are expenses?

A
Resources used up by the business operations of a business in a given period to

earn income. Expenses are revenue expenditures.

Q
Give some examples of common expenses.

(To memorise at least 32 types of expenses.)

1. Cost of sales (value of goods sold in a trading business)

2. Salaries or wages (amount incurred to employ staff)

3. Rental expense (amount incurred to rent a shop or office space)

4. Utilities (amount incurred for water and electricity used by the business)

5. etc (at least another 27 types of expenses that you must know and

commit to your memory.)

Q
Does any reduction in the value of an asset become an expense?
A
Yes.

Q
Give some more examples of expenses.

1. Impairment loss on trade receivables (reduction in value of current asset:

trade receivables.)

2. Depreciation (reduction in value of non-current assets such as property,

plant and equipment, etc.)

3. Impairment loss on inventory (reduction in value of current asset:

inventory.)

Q
Can the expenditure incurred by a business be classified as either an asset or as an
expense?
A
Yes. This classification will depend on the benefits that can be enjoyed by the

business. Benefits from assets last longer than benefits from expenses.

Q
Is the following to be classified as an asset or as an expense?

Candy business owns a shop which is sited on a piece of land with a lease term of

99 years. It can operate its business from the shop for as long as it wants, up to 99

years.

A
Non-current asset.
Q
Is the following to be classified as an asset or as an expense?

Candy business rents a shop from the landlord. It can operate its business from the

shop as long as it pays rent to the landlord. If the shop is rented for a month, then

the candy business can only stay for a month.

A
Expense.