Semester 1 Flashcards
What is accounting?
- Collect and record data
- Process data to produce information
- communicate or report information to interested parties
Why do entities undertake the accounting?
- record money in and out
- support decision making
- report activities and performance
- report financial state
- Help assess benefit to society
- control the company
- help plan future activities
- basis for taxation
What types of businesses aim to profit maximise?
- sole trader
- partnerships
- limited companies
What businesses aim to improve public service/value?
- public sector bodies
- clubs/societies
- not for profit organisations
What is financial accounting?
- regulated and in a standardised format
- historical orientation
- high degree of precision expected
- not normally produced quickly
- formal, legal communication to outsiders
- externally verified by audit/review
- infrequent
What is management accounting?
- no prescribed format: management decides
- I tented first internal users and often commercially confidential; more detailed
- contains estimates and approximations because information is needed quickly
- often covers segmental details as well as whole organisation
- produced much more regularly - weekly m, daily, real time
limitations of accounting?
- only financial
- reflects past
- Inexact science
- non-quantifiable items
- unstable currency
- input quality affects output
Income statement
- records income and expenses of a business over time
- income - expenses = profit or loss
what is a SOFP?
- records assets/liabilities and capital at a point
What is income?
What the business earns from sales of good/services
What is expense?
What it costs the business to earn the income
What is a asset?
Resources available to the businesss
What is a liability?
Amounts owed by a business
What is capital?
Amount invested in a business by a owner
What is a non current asset?
An asset that will bring a firm economic benefit for more than one accounting period e.g vehicle
What is a current asset?
- an asset while benefit will be used up in the current accounting period e.g stock
What is a non current liability?
Amounts due to third parties that are not liable for repayment within the year
What is current liability?
Debts owed by the organisation that will be paid back within a year
What does going concern mean?
- business will continue operation for foreseeable future
- no need/intention to liquidate
What does prudence mean?
- an attitude/mindset
- exercise caution, don’t be over optimistic
- profits should not be recorded until realised
- record actual/anticipated losses in full, now
What is consistency?
- consistent treatment in accounts for:
• like items within each accounting period
• treat items the same overtime - any change must be stated and effect quantified
- inconsistency: reduces utility of info
What is business entity?
For accounting purposes business and owner are treated as separate and distinct
What’s double entry book keeping?
- double = two
- for every transaction made there will be two equal accounting entries made - dual aspect convention
- one debt entry and one credit entry
What is DEBK rule?
For every credit there just me a debit
What is the process of double entry book keeping?
Once all transactions for a period have been entered into T accounts
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The balance on each account is entered into a trail balance
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Entries in trail balance are used to prepare financial statements
What is the accounting equation?
Assets - liabilities = capital + revenue - expenses
What is the trail balance equation?
Assets + expenses = capital + revenue + liabilities
What does debit or credit means?
Debit - to receive, value recieved
Credit - to give, value give
What does bank mean?
- Records the money kept at bank by the entity.
- shows receipts and payments includes cheques, standing orders and direct credit and debits
What does cash mean?
Similar to the bank accounts, except that it exclusively refers to notes and coins being transferred into and out of the business
What does capital mean?
- Also referred to as owners equity
- record the contribution made by the proprietor(owner) to the entity. A special type of liability arising from the business entity principle
What does trade receivables mean?
Arises when the entity sells good/renders services to customers and grants them credit. The customer later pays the entity, but until this occurs, the amount owed is treated as an asset ( i.e as the payment represents a future benefit)
What does discount mean?
An account used to show any reduction from the price charged/demanded as a result of prompt payment
What does drawings mean?
An account used to record cash, cheques and goods withdrawn from the business by the owner for personal use
What does purchases mean?
Refers to goods bought with the intention of later resale. It is an expense account. However, notes that the purchases of NCA do not represent purchases - they are recorded in a separate asset
What does sales/turnover/revenue mean?
Record the value of goods and serves sold by the entity. Whether the goods have been paid for does not effect their entry in the sales T account - it is the other T account will record the method of settlement
What does trade payable mean?
A person whom the entity being accounted for has purchased goods from on credit. For example, suppliers. It is a liability account - I.e amounts the business still owes suppliers in respect of goods but not yet paid
What does inventory mean?
A current asset (I.e purchases made that remain unsold, I.e future benefit, by the end of the accounting period)