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Flashcards in Accounting Deck (81)
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What is accounting about?

Tax calculation and planning,
book-keeping for business,
saving money,
preparing accounts,
running a business,
Consultancy, and


What is a possible definition for accounting?

The provision of financial information for planning
and control decision making purposes.

Information is required to show:
What has happened in the past,
What the position is now, and
What may happen in the future


What is another possible definition for accounting?

“Accounting is the process of identifying,
measuring and communicating financial
information about an entity to permit informed
judgements and decisions by users of
accounting information” (AAA, 1966)


What is an entity?

“A thing with distinct and independent existence”


What are different types of entities which produce accounting information?

Unincorporated businesses
Sole Traders

Incorporated businesses
Limited Liability Partnerships (LLP)
Private Limited Companies (Ltd)
Public Limited Companies (Plc)

Public sector bodies, charities


What accounting information are entities going to produce?

External World:
information and data,
financial reports for external use

The Business:
information about transactions and events,
the accounting recording system,
analysis of information,
management accounting reports


Who is going to make use of accounting information?

Suppliers (business contacts)
Government and their agencies
The public


What is a third possible definition for accounting?

“Accounting is the art of recording, classifying and summarising in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof.”


How may financial accounting be defined?

“ the process of designing and operating an
information system for collecting, measuring and
recording an enterprise’s transactions, and
summarising and communicating the results of
these transactions to users to facilitate making
financial/economic decisions.”


What are Financial Statements and how is it done?

ONE set of accounts is produced to satisfy the
needs of ALL user groups.

How is this done?
- conceptual framework
- accounting conventions (also known as concepts and assumptions)
- the audit report
- regulation of the profession


What are sources of accounting regulation?

- UK Accounting Standards
- International Accounting Standards

Company Law/EU Directives
- Companies Act
- The Stock Exchange (the listing rules)


What is the purpose of the IASB Conceptual Framework
for Financial Reporting (2010)?

“sets out the concepts that underlie the preparation and presentation of financial statements for external users”
(Conceptual Framework, 2010)


What is the scope of the IASB Conceptual Framework
for Financial Reporting (2010)?

the objective of financial reporting

- the qualitative characteristics of useful financial information

- the definition, recognition and measurement of the elements from which financial statements are constructed

- concepts of capital and capital maintenance


Who are users of financial statements in terms of the IASB Conceptual Framework?

- existing & potential investors
- lenders
- other creditors

They make informed decisions


What is a possible definition for financial statements?

“the need to reflect……….the effects of transactions and other events on the reporting entity’s financial performance and financial position”

(Statement of Principles, ASB, 1999)


What is meant by Financial Performance and Financial position in relation to Financial Statements?

Financial Performance

Income Statement (IS) or Profit & Loss Account (P&L)

Financial Position

Statement of Financial Position (SFP) or
Balance Sheet (BS)


How do we prepare financial statements and what must we ask ourselves?

How do we identify, measure and communicate financial information?

Conceptual Framework

Companies Act

Accounting concepts/assumptions/conventions


What makes a financial statement useful?

Fundamental Characteristics
- Relevance
- Faithful Representation

Enhancing Characteristics
- Comparable
- Verifiable
- Understandable


What can accounting concepts/conventions can be categorised into?

Boundary Rules
limit the amount and type of data to be included in
financial statements

Measurement Rules
state how data should be recorded in the financial statements

Ethical Rules
stipulate a code of conduct on the interpretation of all accounting concepts


What is the balance sheet/ statement of financial position?

a list of assets, liabilities and capital of a business entity on any one particular day

provides information about resources and claims on resources

allows users to evaluate the financial position


What's the definition of an asset?

“a resource controlled by the entity as a result of past
events and from which future economic benefits are
expected to flow to the entity”

(Resources controlled by an entity)


What are Fixed/ Non Current Assets?

assets acquired by the entity that will be used over a long period of time (usually greater than 1 year).

Land, Property,
Furniture & Fittings,
Motor Vehicles,
Office Equipment,
Computer Equipment


What are Current Assets?

assets which frequently change and are held in the business for a short period of time (less than 1 year).

Debtors/Trade Receivables,
Cash Prepayments


What are liabilities?

“a present obligation of the entity arising from past
events, the settlement of which is expected to result in
an outflow from the entity of resources”

(amounts owed to outside parties)


What are current liabilities?

amounts that are payable within 1 year of the balance sheet date

Creditors/Trade Payables,
Bank Overdraft,
Accruals/Accrued Expenses


What are long-term liabilities/Non-current liabilities?

amounts that are payable after more than 1 year of the balance sheet date

bank loans debentures lease liabilities


What is Capital/Equity/Ownership Interest?

“the residual interest in the assets of the entity after deducting all its liabilities”

the amount(s) invested by the owner(s) of the entity

(amounts owed to owners)


What is the Accounting Equation?

Assets - Liabilities = Capital

Liabilities + Capital = Assets


What is The Statement of Profit or Loss / Income Statement?

a summary of trading activities (income and expenses) over a period of time (usually a year)

shows the profit or loss for that period (not cash)

enables users to evaluate performance


Define Income / Revenue / Gains?

“increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants”