Basics Flashcards
(16 cards)
Period Assumption
The life of the business must be broken up into periods of time to allow profit to be calculated and reports to be prepared.
Accrual Basis Assumption
Revenue must be recorded when it is earned and expenses when they are incurred.
Going Concern Assumption
The life of the business is assumed to continue indefinitely.
Entity Assumption
The business is assumed to be separate from its owner, so business records must be kept separate.
Timeliness
Reports should be prepared as quickly as possible so decisions can be made.
Understandibility
Reports should be presented in a manner that is simple to understand so that it is useful for decision making.
Relevance
Reports should include ALL information that is useful for decision making and exclude information that is not.
Faithful Representation
Reports should contain information that is complete, accurate and free from bias.
Comparability
Reports should be able to be compared from one period to the next and between one business and another.
Verifiability
Reports should be supported by evidence to prove accuracy – i.e. source documents.
Assets
- Economic resources controlled by an entity
- as a result of past events
- expected to result in an inflow of economic benefit
Liabilities
- Present obligation of the entity
- as a result of past events
- expected to result in an outflow of economic benefits
Revenues
- Increases in assets or decreases in liabilities
- result in an increase in owner’s equity
- not capital contributions by the owner
Expenses
- Decreases in assets or increases in liabilities
- result in a decrease in owner’s equity
- not drawings
Owner’s Equity
Residual Interest
When liabilities are subtracted from assets
Accounting Equation
A = L+OE (R-E)
