CAMS Level II
Foundation of Accounting flashcards
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What is the accounting equation, and when must it balance?
Assets = Liabilities + Equity, so Equity = Assets - Liabilities. It must balance after every single transaction. Recording each transaction as an equal debit and credit is what keeps it in balance.
Which side increases each type of account under double entry?
Assets and expenses: debit to increase, credit to decrease. Liabilities, equity and income: credit to increase, debit to decrease. Example: a credit sale is debit Trade receivables, credit Sales.
What does the matching principle require?
An expense is recognised in the same period as the revenue it helped generate, rather than in the period it happened to be paid.
What does a bank reconciliation statement do, and which items explain the difference?
It reconciles the cash book balance with the bank statement balance. Timing differences: unpresented cheques and uncredited deposits, adjusted on the bank statement side. Bank-only items not yet in the cash book: charges and standing orders, adjusted on the cash book side. Both adjusted balances must agree.
How is property, plant and equipment recorded, carried and disposed of?
Recorded at cost, including every directly attributable cost of bringing it to working condition: purchase price, delivery, installation. Depreciated over its useful life, spreading its cost as an expense. On disposal, sale proceeds less remaining book value is a profit or loss on disposal.
At what amount is inventory carried, and why?
At the lower of cost and net realisable value. So the asset is never overstated above what it can actually be sold for. Example: cost KES 80,000, net realisable value KES 65,000, carried at KES 65,000.
How are accruals and prepayments treated at the period end?
Accrual (incurred or earned, not yet paid or received): added to the period's expense or income, and shown as a liability or asset. Prepayment (paid or received in advance): deducted from the period's expense or income, and shown as an asset or liability. Both keep each period matched to the accrual principle, not to when cash moved.
Which errors leave the trial balance still balancing?
Complete omission: neither side posted. Original entry: the wrong figure posted on both sides. Transposition: digits reversed, a kind of original entry error. Compensating errors: two equal and opposite errors cancel out. Errors of principle: posted to the wrong class of account.
How does a partnership appropriation account divide profit for the year?
Partners' salaries and interest on capital come off first; they are an appropriation of profit, not an expense in arriving at it. The residual is then shared in the profit-sharing ratio in the deed. Example: profit 500,000 - salary 120,000 - interest 35,000 = residual 345,000, shared 2:1 as 230,000 and 115,000.
What makes up a company's equity?
Share capital: the nominal value of shares issued. Reserves: share premium, a revaluation surplus and a general reserve among them. Retained profits: accumulated profits not yet distributed as dividends.
What is accounting?
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What are the five elements of financial statements?
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How are an asset and a liability defined?
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How are revenues and expenses defined, and what is excluded from each?
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What does the accrual principle say?
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What does the conservatism principle require where there is genuine uncertainty?
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What does the consistency principle require, and when may a policy change?
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What does the cost principle say?
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What is the economic entity principle, and does it apply to a sole trader?
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What is the going concern principle?
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What are real, personal and nominal accounts?
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What happens when the books are closed at the end of a period?
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What do creditors and investors each look for in financial statements?
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Who are the users of accounting information inside the entity?
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In what order does a transaction move through the bookkeeping cycle?
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Name five source documents.
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Why are transactions recorded in a book of prime entry before the ledger?
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What does each of the five journals record?
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How do single, double and triple column cash books differ?
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How does the imprest system work for petty cash?
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What does each type of ledger hold?
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What is a trial balance, and what does it prove when it agrees?
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How do the statement of profit or loss and the statement of financial position differ?
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Name three ways a computerised accounting system differs from a manual one.
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How is net book value carried forward worked out in a fixed asset schedule?
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How are software and licences accounted for as intangible assets?
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At what amount are trade receivables carried?
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What do the debtors and creditors control accounts do?
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Rent of KES 180,000 paid in the year covers 15 months from the start of the year. What are the rent expense and the prepayment?
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Which errors throw the trial balance out of balance?
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How does an accounting error differ from fraud?
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What is a suspense account, and how is it cleared?
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How does an error of principle differ from an error of original entry?
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What is the adjusted trial balance used for?
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How is a sole trader's closing capital worked out?
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What does a partnership deed set out, and what applies if there is none?
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How do a partner's capital account and current account differ?
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How do ordinary shares and preference shares differ?
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What does the statement of changes in equity show?
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How does a company's published statement of profit or loss differ from its internal one?
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