1. (Q1) Define income and describe its three important characteristics.
Income is an increase in an entity’s net assets resulting from its operations over a period of time. Its three important characteristics are:
a) Increase in net assets; which are the excess of the entity’s economic resources (assets) over its obligations (liabilities).
b) Resulting from an entity’s operations.
c) Over a period of time: to see whether net assets increased over a period, all we need is two balance sheets, one at the beginning of the period and another at the end of the period.
2. (Q3) Define revenues and give three examples of revenue.
Revenues are increases in assets or decreases in liabilities resulting from operations. Example: dividends, interest and royalty paid to a company by another entity.
3. (Q4) Define expenses and give four examples of expenses.
Expenses are the assets used or liabilities incurred in the process of carrying out operations. For example, when a consulting company serves its clients, it incurs different expenses such as: with employee’s salaries, transportation, office supplies and electricity.
4. (Q5) Are the expenses in a period the cash outflows in that period? Explain.
No, the expenses in a period are not always the cash outflows in that period. Recognition is the act of formally entering an item into the accounting records. A transaction shall be recognized when it has taken place, when the amount involved can be measured with some accuracy and the entity is reasonably sure of incurrence; which may or may not coincide with the money transaction.
5. (Q6) Are expenses always outflows of cash? Explain.
As mentioned above, expenses are not always outflows of cash. The most co ...