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Alternative To CT

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17 views

Alternative To CT

Uploaded by

joemoreau786
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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1. Explain the purpose of accounting.

What are the main objectives of recording


transactions in accounting?
Answer:
The purpose of accounting is to provide financial information about a business's performance
and position.
Objectives:

• To track financial performance and resources.


• To provide accurate information for decision-making.
• To meet legal and tax requirements.

2. Who are the external users of accounting data? How is accounting data helpful to these
users?
Answer:
External users include investors, creditors, and regulatory authorities.

• Investors assess profitability and make investment decisions.


• Creditors evaluate creditworthiness before lending.
• Regulators ensure compliance with financial laws.

Accounting provides transparent information that supports these users' decision-making.

3. What are the accounting principles of consistency and conservatism?


Answer:

• Consistency: Businesses should use the same accounting methods over time to allow
comparison across periods.
• Conservatism: Accountants should report expenses and liabilities as soon as they are
anticipated, but only recognize revenue when it’s assured, to avoid overstating financial
health.

4. Differentiate between assets and liabilities with examples.


Answer:

• Assets are resources owned by a business (e.g., cash, equipment, inventory) that provide
future benefits.
• Liabilities are obligations the business owes (e.g., loans, accounts payable) that require
future payments.
5. How do financial statements help in making business decisions?
Answer:
Financial statements provide insight into profitability, cash flow, and financial position.

• Income Statement: Shows revenue and expenses, aiding profit analysis.


• Balance Sheet: Shows assets, liabilities, and equity, indicating stability.
• Cash Flow Statement: Tracks cash movement, helping in liquidity management.

6. What are some limitations of financial statements?


Answer:

• They may not include qualitative factors, like employee skills or brand value.
• They rely on estimates, which can introduce inaccuracies.
• They reflect past performance, not future potential.
• They follow specific accounting standards, which may not capture the full economic
reality.

7. What is double-entry accounting? Why is it important?


Answer:
Double-entry accounting means every transaction affects at least two accounts, keeping the
accounting equation balanced (Assets = Liabilities + Equity).
Importance:

• Ensures accuracy and completeness.


• Helps detect errors.
• Provides a clear financial picture by tracking both sides of transactions.

8. Give an example of an adjusting entry and explain why it is needed.


Answer:
An adjusting entry updates account balances before financial statements are prepared.
Example: Recording depreciation for equipment. This entry allocates the cost of equipment over
its useful life, aligning expenses with the revenue it helps generate, providing a realistic view of
asset value.

9. Explain the purpose of the trial balance.


Answer:
The trial balance is a list of all accounts and their balances at a specific time. Its purpose is to
verify that total debits equal total credits, indicating accuracy in the recording of transactions and
helping detect errors before preparing financial statements.

10. What is the difference between cash accounting and accrual accounting?
Answer:

• Cash Accounting: Records transactions only when cash is exchanged.


• Accrual Accounting: Records revenues and expenses when they are incurred, regardless
of cash movement.
Example: In accrual accounting, revenue is recorded when a service is provided, even if
payment is received later.

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