Accounting Flashcards
Accounting Period Concept
Assumes the life of a business is divided into arbitrary time periods. The business decides on the accounting period, for instance: yearly, six-monthly, quarterly and monthly. The aim within every accounting period is to determine on accurate profit. If the same period is used, this enables the business to make comparisons
Method Of accounting most commonly used
The accrual accounting system is most commonly used. This system recognises transactions and events when they have an economic impact on the business, rather when the associated cash flows occur.
Accrual VS Cash Accounting
Accrual- recognises transactions and events when they have an economic impact on the entity, rather when associated with cash flows.
Cash- the effects of transactions are only recognised when cash is received or paid out
Net Profit VS Return on Owner’s Equity
Net Profit- The numbers of cents of profit in every dollar of service fees revenue the business makes, high ration means high profits, low ratio equals low profits. Changes made form low ratio is control expenses, pricing and selling techniques
Return on Owner’s Equity- measures the rate of return on the owner’s investment into the business
Revenue VS Expense Recognised
Revenue- recognised when earned, service business when service is performed, not when cash is received
Expenses- recognised when they’re incurred is performed, not when there is a cash payment
Both are the same
Statement of Profit or Loss
Determines net profit or loss
NP= R-E
Is a report, so prepared outside the ledger account, but uses account balances
Statement of Financial Position
A-L=OE
Uses those accounts to prove net assets by using net profit
Statement of Cash Flows
Highlights operating, investing and financing activities of business during a period of time.
Indicates cash in and out flows
Make better management decisions
Prepared from business cash at back account
