Chapter -2
Discussion Questions
Page-41

1. What is the fundamental accounting equation?
Fundamental accounting equation is the relationship between assets and liabilities plus owner’s equity i.e. Assets = Liabilities + Owner’s Equity

2. What are expenses?
An expense is an outflow of cash, use of other assets, or the incurring of a liability. Expenses cause a decrease in owner’s equity.

3. What is revenue?
Revenue is the inflow of money or other assets that results from the sales of goods or services or from the use of money or property.

4. Describe the effects of each of the following business transactions on assets, liabilities, and owner’s equity. a. Sold services on credit
It means revenue account on owner’s equity increases and account receivable on assets increases.

b. Bought furniture for cash
It means furniture account on assets increases and the cash account on assets decreases.

c. Paid cash to a creditor
It means cash account on asset decreases and account payable on liabilities decreases.

d. Sold services for cash
It means cash account on assets increases and revenue account on owner’s equity increases.

e. Paid salaries to employees.
It means cash account on assets decreases and expenses account on owner’s equity increases.

f. Bought equipment on credit.
It means equipment account on assets increases and account payable on liabilities increases.

5. What information does the income statement contain?
The income statement contain the information of the revenue earned and the expenses of doing business, and it also shows the business operations for a specific period of time such as a quarter, a month, or a year.

6. How is net income determined?
When the revenue is greater than the expenses for the period, then it is determined as net income.

7. What information is