Question

Independent Research Accounting

1. What does it mean to say that accounting is a transformative process?

2. What makes an asset a current asset as opposed to a long-term asset? Why is this classification useful?

3. Some events that occur within a business do not have an impact on any of the elements of the balance sheet. Why?

4. What are the two main sources of equity reported on a balance sheet and how do they differ?

5. Explain how both liabilities and equities can be thought of as claims against assets.

6. When is a revenue earned and therefore should be recognized?

7. When a company pays $10,000 for insurance that will cover it for two years, the transaction is not immediately recognized as an expense. Explain why. 8. Distinguish between cash flows resulting from operating activities, financing activities, and investing activities.

Answer 1

1. What does it mean to say that accounting is a transformative process?

Accounting is a method to record, classify, process, record business information into some meaningful way that helps stakeholders to take various decisions of the business. It provides information in the form of Ledgers, Trial Balance, Balance Sheet, Profit, and loss A/C & other reports can be generated which can be used to take various decision in business. For Example-By checking the status of the stock, we can place an order for the purchase of stock. It is right to say that Accounting is a Transformative process as it converts Raw Data i.e. Information into meaning reports that are generated during a particular period and can be used by management for taking various business decisions.

2. What makes an asset a current asset as opposed to a long-term asset? Why is this classification useful?

company’s Assets can be broadly classified under 2 major categories-:

A-Current Asset-: These assets are those assets which are expected to be with a period of 1 year. Example-stock, cash, bank, Prepaid Expenses, Accounts Receivable.

B-Non current Asset-: These are those assets which benefits are going to realize over a period of more than one year also known as long term asset. Example-Land, Property, trademarks, Long term Investments.

Asset classification is a system of Accounting which classifies assets into groups based on numbers to factors like characteristics, Its use. Asset classification is required for taking various decisions like depreciation can’t be charged on current Assets it is to be charged on long term assets and classification is done on the basis of the useful life of the asset.

3. Some events that occur within a business do not have an impact on any of the elements of the balance sheet. Why?

Such events are called contingency event which comes into existence on happening of a certain event. Contingency is a situation or condition, the outcome of which is gain or loss can only be decided only after happening of a certain event.

For Example-: Any Supplier has filed a suit against the company for law quality product this event is a contingency event as the outcome of the suit is uncertain. Liability to pay damaged will occur only after finalization of suit and loss for damages will be recorded after the decision of suit. Until Lawsuit is decided expected damages can be shown under notes to Accounts to balance sheet as contingent liability pending Lawsuit Liability.

4. What are the two main sources of equity reported on a balance sheet and how do they differ?

The two main source of equity in the company balance sheet is-

1. Paid up capital -: Paid up capital is the money brought into the business by issuing shares to the shareholder for a consideration. These are the primary source for a company to raise capital for business. The company can further issue share capital for the further fund in such case capital base of the company will be expanded.   
2. Retained Earnings-: Retained earnings is other main source of funding for equity shareholder. Retained earnings are just Accumulated part of past profit which has been saved for use in future. If a company has large retained earnings than company don’t have to borrow money from the market and bear interest expenses or don’t have to issue further share capital for the fresh fund. The company may Accumulate small portion of their profit to be used for any future projects. This Method is zero cost method for finance any project.