Booklet 1 - Accounting Theory Flashcards
For learning Accounting concepts and definitions from Booklet 1 - Accounting Theory. (27 cards)
Define Internal User
Internal Users are people involved within the business and make decisions to benefit the running of the business.
Define External User
External Users are people from outside of the business and make decisions to benefit themselves.
Give 2 examples of internal users
- Owners/partners
- Board of directors
- Managers
Give 2 examples of external users
- Current or Potential Investors
- Current or Potential Creditors
- Banks / finance companies
- Employees
- Trade Unions
- Stock exchange
- Taxation authorities
Are Accountants internal or external users of accounting information?
Accountants are neither Internal or External users because they do not make decisions for the business. They collect, process and present information to help the owners and mangers make decisions.
What is the Accounting Equation?
The accounting equation A (Assets) = L (Liabilities) + OE (Owner’s Equity) represents the financial position of the firm or business.
What is an Asset?
An asset is something that is owned and used by the business.
Give 2 examples of assets.
Motor Vehicle, Bank account, Buildings, Machinery, Stock and Debtors.
What is a Liability?
A liability is a debt that the business owes to external parties (people outside of the business).
Give 2 examples of liabilities.
Loans, Mortgage and Creditors.
Define Equity.
Equity is the owner’s financial interest in the business.
What is the Duality convention
‘Accountants see total assets as equal to total equities’
Every transaction has at least two impacts on the accounting equation.
What is the Monetary assumption
The dollar is the basic unit of accounting. Accountants only record those aspects of the business that can be written down in dollar terms.
What are two advantages of the Monetary assumption?
- it can be added, subtracted, multiplied and divided
- it can summarise what is owned and owed by the business
- it is a unit of measure
- it has equal value wherever you are in Australia
- it allows comparisons between different firms and years
What are two disadvantages of the Monetary assumption?
- Over time the value of the $ is not constant.
- The value of currency and its name is different between many
countries - There are many aspects of a business that cannot be recorded in
dollar terms.
What is the Going Concern assumption
Assumes that the business has an unlimited life and will continue on indefinitely.
Where can the Going Concern assumption be seen in the Balance Sheet of a business?
This can be seen in the existence of Non-Current Assets and Non-Current Liabilities in the Balance Sheet
What is the Accounting Period Assumption?
The life of the business needs to be divided up into equal reporting periods so the business can determine whether it has made a profit or loss through its operations.
What is the Prudence Assumption?
Implies using care and caution when valuing assets and measuring the profit of a business.
Where can the Prudence Assumption be seen in the Balance Sheet of a business?
In the calculation of inventory and the Allowance for Doubtful Debts.
What is the Consistency Assumption?
Accountants will apply and record using the same accounting procedures from one period to the next. A business will clearly report and inform when they have changed their procedures.
What is a disadvantage of the Consistency Assumption?
This may hinder the adoption of new accounting methods which could provide a more accurate picture of the financial situation of the business.
What is the Historic Cost Assumption?
‘Accountants normally value assets at the price paid to acquire them’
Why is the Historic Cost Assumption used to value assets?
This is an objective measure, verifiable by evidence such as an invoice
