Chap 1-The role of Accounting Flashcards
(25 cards)
What is the purpose of accounting?
To provide financial information and advice to assist in decision-making
What is accounting?
The process of collecting and recording financial data, reporting, analysing and interpreting financial information, and advising users about possible courses of action to assist decision-making.
What is non-financial information
Any info not found in financial statements and not expressed in dollars and cents/not reliant on dollars and cents for calculation
Ethical considerations
Social & enviro consequences of a financial decision.
Diff b/w financial data and financial info?
- Financial data: raw facts and figures upon which financial information is based
- Financial info: Financial data that has been sorted, classified and summarised into a more usable and understandable form
Users of financial info
Parties with an interest in the business’ financial info (eg. Bank, ATO, A/R etc.)
The accounting process?
1. Source Documents: Docs that provide both the evidence that a transaction (an exchange of goods or services with another party) has occurred and the details of the transaction itself, including: receipts, cheque butts, invoices and memos
2. Recording: Sorting, classifying and summarising the data contained in the source documents so that it is more useable, including: journals, ledgers and inventory cards
3. Reporting: The preparation of financial statements that communicate financial information to the owner, including: income statement, balance sheet and cash flow statement
4. Advice: The provision to the owners of a range of options appropriate to their objectives- this is the stage where Ethical Considerations are accounted for
Accounting Assumptions?
- Accounting entity
- Going concern
- Accrual basis
- Period
Accounting entity
Requires the assets, liabilities and business activities of the entity are kept completely separate from those of the owner as well as from those of other entities, with financial statements prepared with info of only the relevant entity
Going concern
The business will continue to operate in the future, and its records are kept on that basis.
Accrual basis
Revenues are recognised when earned and expenses are recognised when incurred (not when cash balance is received/paid).
Expenses are recognised when consumption of goods and services can be measured. Accrual basis profit is determined by subtracting expenses incurred from revenues during the same period.
Period assumption
Reports are prepared for a particular period of time, such as a month or year, in order to obtain comparability of results. (has to be less than a year to meet tax requirements)
Qualitative characteristics?
- Timeliness
- Understandability
- Relevance
- Faithful rep
- Comparability
- Verifiability
Timeliness
Information is available to decision-makers in time to be capable of influence on decisions. If available sooner it can enhance its capacity to influence decisions, while a lack of timeliness can rob information of its potential usefulness.
Understandability
Financial information to be comprehensible to users with reasonable knowledge of business and economic activities and should be presented clearly and concisely.
Relevance
Information which directly assists users in making economic decisions and forming predictions about outcomes of past, present or future events. It may also confirm or change previous evaluations through provision of suitable feedback
Faithful rep
Must be accurate to the real-world economic event it represents and is complete, free from material error and free from bias (not subjective).
Comparability
Enables the user to identify and understand similarities and differences between items.
Information about an entity is more useful if it can be compared with similar information about other entities, and with similar information about the same entity for another date or period.
Verifiability
The ability to ensure that different knowledgeable and independent observers can reach a consensus that a particular depiction of an event is faithfully represented.
Maintained by retaining source documents as proof
Assets
A present economic resource controlled by the entity (as a result of past events) that has the potential to produce future economic benefits
Liabilities
A present obligation of an entity to transfer an economic resource in the future as a result of past events.
Owner’s equity
The residual interest in the assets of an entity after the deduction of its liabilities.
Equities
Claims on the assets of the business consisting of both liabilities and owner’s equity.
Revenue
Increases in assets or decreases in liabilities that result in an increase to owner’s equity, other than those relating to contributions from the owner
