CHAPTER 1

CHECK YOUR LEARNING

1 What is accounting? – a service providing information about financial performance and

financial position of an entity for decision making.

2 What is meant by the word ‘account’? – Derives from counting but refers to assets,
liabilities, equity, income and expenses

3 What is meant by an ‘entity’? - Used by accountants to describe any type of organisation /

business.

4 What name is given to the system that accountants use to record information? - double-entry
bookkeeping

5 What are the three basic questions that the owner of a business might ask? - ● What profit
has the business made? ● How much does the business owe? ● What does the business have
and how much is owed to it?

6 What is an asset? - a resource acquired by an entity as a result of a past event (owed), that
will result in a future economic benefit.

7 What economic event happened in the United Kingdom during the eighteenth century? –
Industrial Revolution (moving away from growing things to making or manufacturing)

8 What happened to the ownership and management of businesses during the nineteenth
century? Seperate accounting systems were developed because managers needed different,
more detailed information than owners (cost accounting & financial accounting)

9 Why did managers in nineteenth-century industrial entities require more detailed

information? – for decision making on a shorter time frame

10 List three user groups of accounting information. – lenders, government, investors,

employees, tax office

11 What are the six main branches of accounting? Financial Accounting, Bookkeeping,
Management Accounting, Auditing, Taxation, Financial Management

12 Of which main branch of accounting does cost accounting form a part? – Management
Accounting

13 What is the difference between ‘bookkeeping’ and ‘cost bookkeeping’? Both are
mechanical tasks involving the collection of basic financial data. The information of
bookkeeping is extracted in the form of a trial balance, the information of cost bookkeeping
is used to ascertain the cost of a specified thing or activity.
14 Explain the difference between ‘bankruptcy’ and ‘liquidation’. bankruptcy – a form of
legal protection from creditors in case of serious financial affairs; liquidation – affairs of a
company have to be „wound up“

15 List the six major UK professional accountancy bodies. ICAEW, ICAI, ICAS, ACCA,
CIMA, CIPFA

16 What function does the Association of Accounting Technicians fill? They assist qualified
accountants in preparing accounting informaion.

17 Name three subdivisions of the profit-making sector of the United Kingdom.

Manufacturing sector, trading sector, service sector

18 Name real businesses which belong to these different subdivisions. Airbus, Amazon,
Channel 4

19 What is meant by ‘limited liability’? The owners of such companies can only be held liable
for their share held in the company – even if the company gets in financial difficulties.

20 Name one quasi-governmental body. - BBC

21 Complete the following sentences:

1 The word _______ in everyday language means an explanation or a report.
2 Traders in the fifteenth century began to adopt a system of double-entry bookkeeping to
record information.
3 The owners of a business want to know how much profit a business has made.
4 An entity is a term used to describe any type of organisation.

22 State whether each of the following statements is true or false:

1 An auditor’s job is to find out whether a fraud has taken place. True/false
2 Management accounts are required by law. True/false
3 Tax avoidance is lawful. True/false
4 A statement of financial position is a list of assets and liabilities. True/false
5 Companies have to go into liquidation if they get into financial difficulties. True/ false

TUTORIAL Q UESTIONS

1.1
Accountants provide a service, they do not make decisions like managers, and not all of a
managers decisions are based on financial information.

1.2
They are considering whether the accounts represent a true and fair view. Doing that, they
would be faced with much higher litigation and therefore costs.


1.3
Accountants are thought to be ‘good’ at mathematics, taxation, they can assess the
profitability of business enterprises, their education and training is long and hard and they are
thought to be dependable, reliable and absolutely trustworthy -> all that creates admiration
and respect, but at the end they only provide a service. 


1.7
(a) To keep a record of the company’s day-to-day progress. 

(b) To prepare the company’s annual financial statements. 

(c) To supply information to the management for decision making and control. 

(d) To operate a system of internal auditing. 

(e) To minimise the company’s tax liabilities.

1.9
It is required by law (not for small companies). External auditors report to the shareholders on
whether the accounts represent a true and fair view.

1.10
Tax avoidance involves operating within the letter, but not the spirit, of the law” = bending
the rules or using gaps (HMRC HM Revenue and Custom tries to close these gaps). Tax
evasion is simply the avoidance of paying tax which is legally due.

1.11 Josef Sykes

It is a service function - to collect information and then to store, extract, summarise and report
it to those parties who have to make decisions, fulfill statutory requirements. Once a manager
or director Joseph will be responsible for the company’s accounting records and systems, and
reporting procedures.




1.12 Clare Wong

• Purpose of accounting: planning, control and decision making. 

• Essential that funds go to the main work of the charity and are not lost in
administration. 

• If properly implemented and operated, accounting can help in the efficient use of
resources. 

• Not administration for administration’s sake. 

• Provides assurance that voluntary contributions go where they are meant to go.