Financial Accounting Important 2 Marks Theory Question and Answer

 

1. Accounting: It's not just about recording transactions—it also involves interpreting financial information to make informed decisions. It includes financial reporting, auditing, and analyzing economic events.

2. Journal: It's the initial book of entry where transactions are recorded in chronological order. Each entry includes details like date, accounts involved, amounts, and a brief description.

3. Ledger: A ledger contains individual accounts summarizing transactions related to a specific asset, liability, equity, revenue, or expense. It's organized by account type and provides a detailed record of financial activities.

4. Legacy: It refers to outdated systems, processes, or technologies that persist because they were previously used and are still functional. However, they might not be as efficient or effective as newer alternatives.

5. Compensating Errors: These are mistakes that occur in accounting but counterbalance each other, ultimately resulting in a balanced ledger or financial statement despite the errors.

6. Assets = Equities: This equation reflects the fundamental principle of accounting where the total assets of a company must equal the total of its liabilities and shareholders' equity, ensuring a balance in financial statements.

7. Objectives of Trial Balance: It aims to check the mathematical accuracy of ledger accounts by verifying that total debits equal total credits. It's also essential for preparing accurate financial statements.

8. Types of Errors: Errors in accounting can include omission (missing a transaction), commission (wrongly recording a transaction), principle (violating accounting principles), and compensating errors (which offset each other).

9. Causes of Depreciation: Factors leading to depreciation include wear and tear, obsolescence, usage, passage of time, or technological advancements.

10. Single Entry: It's a basic bookkeeping system that records only one aspect of a transaction, usually used in smaller businesses. It lacks the comprehensive tracking and double-entry detail found in the double-entry system.

11. Cost Concept: This principle in accounting states that assets should be recorded at their original cost, rather than the current market value, to maintain objectivity and avoid subjective valuation.

12. Balance Sheet: A financial statement that displays a company's financial position at a specific point in time, showing assets, liabilities, and shareholders' equity.

13. Entrance Fees: These are payments made by new members to join an organization, club, or association.

14. Annuity Method: A financial calculation method used to determine periodic payments or receipts at regular intervals, often associated with investments or loans.

15. Accounting Equation: The equation Assets = Liabilities + Shareholders' Equity represents the balance between a company's resources and claims against those resources.

16. Average Clause in Fire Insurance Claims: It's a clause that proportionally reduces the claim payout if the insured amount is less than the property's actual value, ensuring fair compensation.

17. Advantages of Bank Reconciliation Statement: It helps identify errors, discrepancies, and fraudulent activities in financial records, ensuring accuracy in financial statements and maintaining control over cash flow.

18. Errors of Omission: These errors occur when a transaction is either partially or entirely not recorded in the accounting records, leading to imbalance or inaccuracies in the books.

19. Capital Expenditure: It includes expenses incurred for acquiring or improving long-term assets that benefit the company beyond the current accounting period.

20. Final Accounts: These are the ultimate financial statements summarizing a company's performance, including the trading and profit and loss account, culminating in the balance sheet.

21. Revenue Expenditure: These are day-to-day expenses incurred in running a business to maintain operations and generate revenue in the current accounting period.

22. Calculation of Claim under Average Clause: It's computed by multiplying the insurance amount by the loss ratio to determine the claim amount.

23. Limitations of Single Entry System: These include the absence of checks and balances, reduced accuracy due to lack of double-entry recording, and difficulty in presenting a complete financial picture.

24. Sundry Debtors: Individuals or entities who owe money to a business or company for goods or services provided on credit.

25. Purchase Book: A subsidiary book where all purchases of goods for resale are recorded systematically, containing details like date, supplier name, items purchased, and amounts.

26. Sinking Fund: It's a fund set aside to cover future expenses like debt repayment or asset replacement, accumulating over time through regular contributions or investments.

27. Bank Overdraft: It's a financial facility where a bank allows an account holder to withdraw more money than available in the account, up to a predetermined limit, often used for short-term financing needs.

28. Written Down Value Method: This depreciation method reduces an asset's value gradually based on its decreased book value, reflecting its wear and tear or obsolescence.

29. Salvage Value of Stock: It refers to the estimated value of unsold or remaining stock at the end of its useful life or at the time of disposal.

30. Cash Transaction: It involves the immediate exchange of cash for goods or services without any credit involvement, ensuring instant payment and receipt of the item.

31. Interest on Drawings: It's the interest charged on the amount of money withdrawn by an owner or partner for personal use from a business.

32. Error: In accounting, an error refers to a mistake made in recording financial transactions that can affect the accuracy of financial statements and subsequent decision-making.

33. Double Entry System: An accounting system where each transaction is recorded with at least one debit and one credit entry, ensuring accuracy and maintaining the accounting equation's balance.

34. Compensating Error: These errors counterbalance each other, resulting in apparent accuracy in the accounts even though mistakes have been made.

35. Trial Balance: It's a statement that lists all ledger accounts with their debit and credit balances, verifying the equality of total debits and total credits to ensure the accuracy of the ledger.

36. Provision for Bad and Doubtful Debts: It's an estimated amount set aside by a business to cover potential losses from customers who might default on their payments or have uncollectible debts.

37. Error of Commission: An error where an incorrect entry is made in the accounting records, affecting the accuracy of financial statements.

38. Bank Reconciliation Statement: It's a document that compares a company's bank statement with its own accounting records, identifying discrepancies such as outstanding checks or deposits, bank fees, errors, etc.

39. Claim: It refers to a request made by an insured party to an insurance company for compensation or coverage for a loss or damage as per the terms of the insurance policy.

40. Error of Principle: This occurs when a transaction is recorded in violation of accounting principles, resulting in inaccurate financial statements.

41. Trading Account (A/c): It's an account that shows the gross profit or loss derived from buying and selling goods during a particular period.

42. Depreciation: It's the gradual decrease in the value of tangible assets over time due to usage, wear and tear, or obsolescence, recorded as an expense in accounting.

43. Average Clause: A provision in insurance policies that determines the insurer's liability in cases where the insured amount is less than the property's value, proportionally reducing the claim payout.

44. Bank Reconciliation Statement: It's a detailed statement reconciling the differences between a company's bank statement and its own accounting records, ensuring accuracy in financial reporting.