Summary: Accounting 101

Read the summary and the most important questions on Accounting 101

• LO 1: Outline the importance of accounting information and its role in decision making

• What is the role of accounting information in business?

  
  Accounting information helps decision-makers. It aids managers by providing
  quantitative information about the business to help them in planning, operating, and
  evaluating the business’
  activities (management accounting).
  
  Accounting information
  helps external decision
  makers by providing them with financial statements containing
  economic information about the performance and state of the businesses (financial
  accounting).

• LO 2: Explain the differences between financial accounting and management accounting

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• Under an accrual accounting system, what is unearned revenue reported as?

  a liability in the balance sheet

• Identify whether goodwill will be classified under in the balance sheet?

  
  Goodwill will NOT be recognised as an asset unless the goodwill has been purchased. If
  purchased it will be recognised as an
  intangible asset
  .

• What is an example of a transaction that would result in an outcome of one asset account increased and one liability account increased?

  
  Purchase inventory on credit, so both inventory and accounts payable increased.

• What is an example of a transaction that would result in an outcome of one liability account decreased and one equity account increased?

  Unearned revenue has been earned, unearned revenue decreased while sales revenue
  increased.

• Explain in your own words why using diminishing value depreciationwill result in a lower profit in the first year compared to using the straight-line depreciation method.

  
  Diminishing value method of depreciation
  recognises that most of the economic value
  (i.e. cost)
  of an asset is used up at the beginning of the useful life. There is a larger depreciation expense
  at the beginning of the useful life and less each accounting period after that. The straight-line
  method of depreciation allocates the cost of an asset equally over the useful life. Therefore,
  the diminishing value method will recognise larger depreciation expense than the
  straight-line method and the larger the depreciation expenses the lower the reported profit.

• Cash received in payment of an account receivable will

  have no effect on total assets but will increase total owner's equity.

• Discuss the advantages and disadvantages ofoperating a business asa company.

  
  The main advantages of companies are the limited liability of shareholders (NOT the
  company) for business debts and access to additional capital from the shareholders
  for business expansion. Their main disadvantages are the time and money needed to establish a company and the complex regulatory requirements (compliance) imposed on companies.

• Calculate the depreciation expense for the first year ending 31 December 2018using the straight-line method.

  
  Depreciation expenses under the straight line method:
  
  
  Depreciable amount = Cost – residual value
  =50,000 – 10,000 = $40,000
  
  
  Depreciation = depreciable amount ÷ useful life = 40,000 ÷ 5 = $8,000

• Calculate the depreciation expense for the first year ending 31 December 2018 using the diminishing balance method. Assume a rate of 27.5% is used for the diminishing balance method.

  
  Depreciation expenses under diminishing balance method:
  Depreciation = carrying value × depreciation rate = 50,000×27.5%= $13,750