Financial Accounting

Some Basic Accounting Questions You Should Be Aware of

If you are an accounting student, these questions must be helpful in ensuring that you know basic accounting concepts.

1. In business terminology, what does the term assets mean?

Assets are resources. They are things that a business can put to good use. Cash, commodities, and even entire buildings are some examples.

2. What does the term liabilities mean?

Liabilities are sources of borrowed resources. Accounts payable is an example of a liability.

3. What does the term stockholders’ equity mean?

Sources of resources invested by owners and generated by management and retained in the company are called stockholders’ equity. Examples of stockholders’ equity are common stock and retained earnings.

4. Identify the two separate parts of stockholders’ equity.

Common stock symbolises the monetary investment made by owners. Held earnings are the monetary resources generated by management operations and retained by the company. 

5. Why is it important that financial statements are logical?

Illogical financial statements do not link to one another. (1) Net income on the income statement also shows on the statement of retained earnings. (2) Retained earnings on the statement of retained earnings also appear on the balance sheet. In financial statements that lack rationality, the balance sheet is not balanced. This indicates that the income statement, statement of retained earnings, and balance sheet include at least one and perhaps more errors. These financial statements cannot be relied upon for company information. 

6. What contribution did Fra Luca Pacioli make to accounting?

Fra Luca Pacioli developed the double-entry record keeping system that makes use of the debits = credits rule. 

7. What is the left side of a T account called?

Debit. 

8. What is the right side of a T account called?

Credit. 

9. How does the debits = credits rule affect the accounting equation?

If debits = credits, assets must equal liabilities + stockholders’ equity. 

10. What term is used to identify the increase in resources through the process of providing service to customers?

Revenues are increases in resources through providing service to customers. 

11. What affect do revenues have on retained earnings?

Revenues increase retained earnings. Retained earnings is part of stockholders’ equity. Owners (stockholders) have rights to resources generated through management operations.
 

12. What term is used to identify the decrease in resources through the process of providing service to customers?

Expenses are decreases in resources through providing service to customers. 

13. What effect do expenses have on retained earnings?

Expenses decrease retained earnings. 

14. What term is used to identify the decrease in resources through payments made to owners?

Dividends reduce resources by distributing to owners some of the resources generated through management operations. 

15. What effect do dividends have on retained earnings?

Dividends reduce retained earnings. 

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