Introduction to basic Accounting Flashcards
(27 cards)
accounting
Accounting can be described as a way to communicate
the financial health of a business or an organization to any
and all interested parties.
bookkeeping
Bookkeeping on the other hand is the activity or occupation
of keeping records of the financial affairs of a business. This
includes writing down all the transactions that takes place
within a business such as money spent, money received etc.
purpose of accounting
The purpose of accounting is to accumulate and report on financial information about the performance, financial position, and cash flows of a business. This information is then used to reach decisions about how to manage the business, or invest in it, or lend money to
it. This information is accumulated in accounting records with accounting transactions, which are recorded either through such
standardized business transactions as customer invoicing or supplier invoices, or through more specialized transactions, known
as journal entries.
main users of accounting info
Owners/Investors
Employees
Customers
Government
The Public/Local Community
Lenders
Suppliers and other creditors
Investors
in a business entity are the providers of risk capital. Unless they are
managers as well as owners, they invest in order to obtain a financial return on their
investment. They need information that will help them to make investment decisions.
shareholders
In the case of shareholders in a company, these decisions will often involve whether
to buy, hold or sell shares in the company. Their decision might be based on an analysis of the past financial performance
of the company and its financial position.
Employees
Employees need information
about the financial stability
and profitably of their
employer. An assessment of
profitability can help
employees to reach a view on
the ability of the employer to
pay higher wages, or provide
more job opportunities in the
future.
Lenders
Lenders, such as banks,
are interested in
financial information
about business that
borrow from them.Financial statements can
help lenders to assess the
continuing ability of the
borrower to pay interest,
and its ability to repay the
loan principal at maturity.
Suppliers and other creditors
Financial information about an entity is also useful for suppliers
who provide goods on credit to a business entity, and ‘other trade
creditors’ who are owed money by the entity as a result of debts
incurred in its business operations (such as money owned for rent
or electricity or telephone charges). They can use the financial
statements to assess how much credit they might safely allow to
the entity.
Customers
Customers might be interested in the financial strength of an entity, especially if
they rely on that entity for the long-term
supply of key goods or services
Government
The government and government agencies are
interested in the financial statements of business entities. They might use this
information for the purpose of business regulation or deciding taxation policies.
The Public/Local Community
In some cases, members of the
general public might have an
interest in the financial statements of a company. For example, entities
may make a substantial
contribution to the local economy in many ways including the number
of people they employ and their
patronage of local suppliers.
ASSETS
Are sometimes defined as resources or things of value that are owned or controlled by a company. Example of assets are: Cash in the business, Cheques, Motor Vehicles, Land, Building, Machineries, Stock/Goods/Inventory.
There are two (2) types of Assets: Current Assets, Non-current/Fixed Assets
Current/Short-term Assets These are short-term assets used up within the business in a year. These are assets that are easily converted into cash. E.g cash, inventory, debtors, bank
Non-Current/Fixed Assets These are assets that are used for long-term purposes within the business. Long term means these assets are used for longer than one year. Examples are: Land, Building, Motor Vehicles, Chairs, Desk, Tables etc.
Accounting Terms
LIABILITY
Is anything that is owing by the business to other persons or businesses outside. E.g. Creditors and loans borrowed from banks. There are two (2) types of liabilities: Current Liabilities, Non-Current/Long Term liabilities.
Current Liabilities These are liabilities that are due to be paid within a year by the business to others outside such as your creditors or suppliers. E.g are creditors, (these are persons who the business purchases goods from on credit and they have less than 1 year to pay them) and short-term loans borrowed from banks that must be paid within 1 year.
Long-term or Non-Current Liabilities These are liabilities that are due to be paid over one year. E.g. Loan-term loans borrowed from banks.
CAPITAL
Can refer to funds raised to support a particular business or project. Capital can also represent the accumulated wealth of a business, represented by its assets less liabilities. Capital can also mean stock or ownership in a company. Capital can be increased by profits.
INCOME/REVENUE
Is the amount earned from a company’s main activities such as selling merchandise or providing services.
DRAWINGS
Is money or goods taken by the owner for his own personal use.
EXPENSE (IN ACCOUNTING)
An expense in accounting is the money spent or cost incurred in an entity’s efforts to generate revenue. Expenses represent the cost of doing business where doing business is the sum total of the activities directed towards making a profit.
Accounting Terms
Balance sheet
The Balance Sheet of a company shows its Assets, Capital and Liabilities.
The assets, liabilities and capital must be listed in the order shown in the following example. This is what we call the order of liquidity. Liquidity means that the items are listed in the order of least liquid (takes a longer time to receive cash from it) and most liquid (gives cash the quickest time possible compare to other items). Therefore, Stock also called Inventory would take a longer time to be sold for cash so we say its least liquid hence the reason it is listed first above. Cash now would be most liquid as it’s the actual funds you already have hence the reason it is listed last under current assets.
The statement of profit or loss
The Statement of Profit or Loss shows the Income and Expenses of a firm. It shows the profit or loss a
business has made during the period.
source documents
Source document is the first document that exists relating to a transaction.
Source Documents are the physical copies that are kept of everything that
happens in a company.
Types of Source Documents
Invoices - An invoice is a document sent to a buyer that specifies the
amount and cost of products or services that have been provided by a
seller.
Receipt - A receipt is a written acknowledgment that something of value
has been transferred from one party to another.
Cheques - A cheque is a written document instructing a bank or building
society to debit your account and pay someone.
invoice
Invoices - An invoice is a document sent to a buyer that specifies the
amount and cost of products or services that have been provided by a
seller.
Receipt
A receipt is a written acknowledgment that something of value
has been transferred from one party to another.
Cheques
A cheque is a written document instructing a bank or building
society to debit your account and pay someone.
