Financial concepts Flashcards
(15 cards)
Business entity
Company separate from its owners (personal and business transactions reported separately)
Dual aspect
Every transaction has two effects, debit and credit
Time interval
Financial statements are created for a specific time period
Historical cost
assets and liabilities recorded for their original purchase cost
Money measurement
Only transactions that can be measured in money are included in accounting
Accrual basis
Income and expenses are recorded when they are incurred and not when the cash is exchanged.
*This gives a more accurate reflection of the company’s financial position.
Going concern assumption
Assumes that businesses will continue to operate in the foreseeable future with no need to liquidate
Prudence
potential expenses and liabilities should be recorded when they are about to occur.
Realization
Revenue is recorded when occurred not when payment is received.
Consistency
Financial methods should constantly be used from one period to the next
Materiality
only info that could influence decision of users should be included in financial statements
Relevance
Financial info is relevant if it can influence the decisions of users by helping them form evaluations about the past, present or future.
*Predictive value – helps users make predictions about future outcomes
*Confirmatory value – confirms or changes past evaluations or expectations
Faithful representation
Info should represent what it purports to represent – should be complete, neutral and free from error
*Completeness – all necessary info included
*Neutrality – info is unbiased and not manipulated to influence decisions in a particular direction
*Free from error – there are no material errors or omissions in the information
Verifiability
independent observers should be able to reach consensus that the info is faithfully represented
Timeliness
info should be available in time to influence decisions
