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to accompany

Accounting: Business Reporting for Decision Making 4e

Jacqueline Birt, Keryn Chalmers, Suzanne Byrne, Albie Brooks & Judy Oliver

Prepared by

Jacqueline Birt

John Wiley & Sons Australia, Ltd 2012
Chapter 1: Introduction to accounting

Comprehension Questions

1.1 What is a business transaction and how does it relate to the accounting process? Illustrate the concept of a business transaction with five examples relating to a mobile phone distributor.

A business transaction can be defined as external exchanges of resources between the entity and another entity or individual that affects the assets, liabilities and owners’ equity items in an entity. The accounting process is the identifying, measuring and communicating of economic information about an entity to a variety of users for decision-making purposes. The first component of the process is the identification of business transactions which are then measured and communicated to the different users of financial reports.

Business transactions for a mobile phone distributor include the following:
1. The contribution of capital by the owner to commence the business. This transaction would increase cash (asset) and increase capital (equity).
2. The purchase of inventory (mobile phones) on credit. This transaction would increase inventory (asset) and increase creditor (liability).
3. The payment of office rent. This transaction would decrease cash (asset) and decrease profit (equity).
4. The purchase of office equipment for cash. This transaction would increase office equipment (asset) and decrease cash (asset).
5. Withdrawal of business funds by owner. This transaction would decrease cash (asset) and increase drawings/decrease capital (equity).

1.2 Differentiate between financial and management accounting. Give an example of how management…...

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