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Accounting 3/4 > Chapter 1 - The Role of Accounting > Flashcards

Chapter 1 - The Role of Accounting Flashcards

1
Q

What is the purpose of accounting?

A

To provide financial information to assist decision-making.

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2
Q

What is Financial Data?

A

Raw facts and figures upon which financial information is based

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3
Q

What is Financial Information?

A

Financial data that has been sorted, classified and summarised into a more useable and understandable form

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4
Q

What is a Transaction?

A

An exchange of goods or services with another party

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5
Q

What are Source Documents?

A

Paper or electronic documents that provide both the evidence that a transaction has occurred and the details of the transaction itself.

  • the first stage of the accounting process
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6
Q

What is Recording?

A

Sorting, classifying and summarising the data contained in the source documents so that it is more useable

  • the second stage of the accounting process
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7
Q

What is Reporting?

A

The preparation of financial statements that communicate financial information to the owner.

  • the third stage of the accounting process
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8
Q

What is Advice?

A

The provision to the owners of a range of options appropriate to their aims/objectives, together with recommendations as to the suitability of those aims/objectives

  • The fourth and final stage of the accounting process
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9
Q

What are Accounting Principles?

A

The generally accepted rules that govern the way accounting information is generated

The 7 accounting principles are:

  • entity
  • going concern
  • reporting period
  • historical cost
  • conservatism
  • consistency
  • monetary unit
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10
Q

What is Entity?

Accounting Principle 1

A

The business is assumed to be separate from the owner and other businesses, and its records should be kept on this basis.
Eg) even when a business owner owns a beach house and a four-wheel drive - unless it is being used by the business it MUST NOT be included as a asset

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11
Q

What is agreed value?

A

The accepted value of the non-cash asset at the time of its contribution by the owner

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12
Q

What is Going Concern?

Accounting Principle 2

A

The life of the business is assumed to be continuous, and it’s records are kept on that basis.

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13
Q

What is Reporting Period?

Accounting Principle 3

A

The life of the business must be divided into periods of time to allow reports to be prepared; these accounting reports should reflect the reporting period in which a transaction occurs.

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14
Q

What is accrual Accounting?

A

It is calculating profit by comparing revenues earned against expenses incurred in a particular reporting period.

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15
Q

What is Historical Cost?

Accounting Principle 4

A

The recording of a transaction at its original cost or value, as this value is verifiable by reference to the source document.

Eg) if I bought land at 300,000 and later down the line is valued at 320,000 on the balance sheet I still write it as 300,000 as the 320,000 isn’t verifiable

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16
Q

What is Conservatism?

Accounting Principle 5

A

States that losses should be recorded when probable but gains should only be recorded when certain, so that liabilities and expenses are not understated and assets and revenues are not overstated

  • the use of the most cautious or conservative assessment of data used when there are differing valuations
  • better to be cautious than overly optimistic
17
Q

What is Consistency?

Accounting Principle 6

A

Accounting methods should be applied in a consistent matter to ensure that reports are comparable between periods.

  • easier to compare if kept consistent, amounts don’t have to be same but method of calculation does
18
Q

What is Monetary Unit?

Accounting Principle 7

A

States that all items must be recorded and reported in a common unit of measurement; that is, Australian Dollars

19
Q

What is Qualitative Characteristics?

A

The qualities of the information in accounting reports.

The four characteristics are

  • relevance
  • reliability
  • comparability
  • understandability
20
Q

Difference between accounting principles and qualitative characteristics?

A

Accounting principles apply mainly to records WHEREAS qualitative characteristics apply to reports.

Accounting principles govern the way accounting information is recorded and qualitative characteristics, inform, the way in which accounting reports are prepared.

21
Q

What is relevance?

Qualitative Characteristic 1

A

That accounting reports should include all information that is useful for decision making.

22
Q

What is materiality?

A

The size of significance of something.

23
Q

What is reliability?

Qualitative Characteristic 2

A

Accounting reports should contain information that is accurate, and free from bias or error.

24
Q

What is comparability?

Qualitative Characteristic 3

A

It states that accounting reports should be able to be compared over time, and between different companies, through the use of consistent accounting procedures.

25
Q

What is Understandability?

Qualitative Characteristic 4

A

States that reports should be presented in a manner that makes it easy for them to be understood by the user.

26
Q

What are the Elements of Financial Statements?

- what items should be included in accounting reports

A
  • Assets
  • Liabilities
  • Owner’s Equity
  • Revenue
  • Expenses
27
Q

What is an Asset?

No. 1 of elements of financial statements

A

A resource controlled by an entity, as a result of past events, from which economic benefits are expected to flow to the entity

  • capable of generating economic gain for a business
  • only items under the firms control can be determined as an asset
  • items not under business control cannot be deemed an asset
  • must be capable of generating future economic benefits
28
Q

What is Liability?

No. 2 of elements of financial statements

A

A present obligation of the entity as a result of past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits

  • present obligations (legal responsibilities such as debt)
  • expected to result in an outflow if economic benefits (economic sacrifice)
29
Q

What is Owner’s Equity?

No. 3 of elements of financial statements

A

The residual interest in the assets of an entity after the deduction of its liabilities.

30
Q

What is Revenue?

No. 4 of elements of financial statements

A

Is an inflow of economic benefits (or saving in outflows) in the form of an increase in assets (or decrease in liabilities) that increase owner’s equity, except for capital contributions by the owner

revenue must increase owner’s equity but not as consequence of owner making a contribution

31
Q

What is Expenses?

No. 5 of elements of financial statements

A

Is an outflow or consumption of economic benefits (or reduction in inflows) in the form of a decrease in assets (or increase in liabilities) that reduces owner’s equity, except for drawings by the owner

expenses must decrease the owner’s equity, but not as a consequence of the owner making a withdrawal from the business

32
Q

What are the 3 general purpose reports that all businesses should prepare?

A
  • Balance Sheet (reports on the firm’s assets and liabilities at a particular point in time)
  • Cash Flow Statement (reports the firm’s cash inflows and outflows, and the change in its cash balance over a period)
  • Income Statement (reports on firms ability to earn profit from its trading activities over a period of time)
33
Q

What does a balance sheet report?

A

The firm’s assets and liabilities at a particular point in time

34
Q

What does a cash flow statement report?

A

Reports on cash inflows and outflows and the change in its cash balance over a period

35
Q

What does an income statement report on?

A

Reports on the firm’s ability to earn a profit from its trading activities over a period of time

36
Q

What does the accounting process involve?

A

1) collecting source documents
2) recording the financial data
3) reporting the financial information
4) advising the owner on appropriate course of action

Accounting 3/4 (3 decks)

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