Week 1 Flashcards
(22 cards)
Describe a sole trader
- Personal Assets can pay for the debts of the business
- One person in business
- No formal set-up, owner simple introduces money to start the business
- separate accounting entity but not separate legal entity
- Unlimited liability
- Personal tax
- Private
Describe a Partnership
- Private
- Maximum 20 partners
- joint & several liability, not just liable for yourself
- No for a set-up
Describe a public limited company
- Owner has limited liability (separate legal entity)
- Personal Assets are safe
- Harder to get money out of a company
- Accounts are public
- Management undertaken by directors (who can also be shareholders)
What is the definition of accounting?
Accounting is the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of that information.
What is the conceptual framework?
Its a practical tool that assist:
- The board, to develop standards
- Preparers, to develop consistent accounting policies
- All, to understand and interpret standards
What is a reporting entity?
A reporting entity is an entity that is required, or chosen, to prepare financial statements. A reporting entity can be a single entity or a portion of an entity or can comprise more than one entity. A reporting entity is not necessarily a legal entity.
Who is interested in the accounts?
Management, as they are internal to the organization they will have free access to all information they receive covered by MA
What is the objective of general purpose financial reporting?
The objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to exciting and potential investors, lendors and other creditors in making decisions relating to providing resources to the entity.
What other groups may also be interested in accounts information?
Employees- job security, salary claims
Customers- whether to buy, continuity of supply
Government- tax, environment, employability, industry policy, statistics
What are the qualities characteristics?
It is relevant if it is capable of making a difference to users decision. It is faithful representation if the information faithfully represents the substance it purports to represent.
What are the enchanting characteristics?
- Comparability
- Verifiability
- Timeliness
- Understandability
What is an asset?
An asset is a present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits. Examples are land & buildings, and raw materials.
What is a liability?
A liability is a present obligation of the entity to transfer an economic resource as a result of past events. Examples include loans, overdrafts, trade payables
What does recognition of an asset or liability depend on?
Relevance
-if it is uncertain whether an asset or liability exists
- an asset or liability exists, but the probability of an inflow or outflow of economic benefits is low
Faithful Representation
-recognition inconsistency
-measurement uncertainty
-presentation and disclosure of resulting income, expenses and changes in equity
What is derecognition?
Derecognition is the removal of all or part of a recognized asset or liability from an entity’s statement of financial position. Derecognition normally occurs when that item no longer meets the definition of an asset or liability.
What is equity (ownership interest)?
Equity is the residual interest in the assets of the entity after deducting all its liabilities. Changes in equity results when assets increase or decrease (e.g. profits and losses being generated)
What is the definition of Income?
Income is increased in assets, or decreases in liabilities, that result in an increase in equity, other than those relating to contribution from holders of equity claim.
What is the definition of expenses?
Expenses are decreases in assets, or increases in liabilities, that results in decreases in equity, other than those relating to distributions to holders of equity claim.
What is the statement of financial position accounting equation?
Assets-liabilities=Ownership Interest
What is the Income Statement Accounting Equation?
Revenue-Expenses=Profit/Loss
What does the duality of transactions mean?
Duality of transactions means there must be a debit and credit for every transactions
TOTAL DEBITS=TOTAL CREDITS
What is the effect of debits and credits?
Asset (debit) causes increases in debit entries and decreases in credit entries.
Liabilities (credit) causes decreases in debit entries and increases in credit entries.
Equity (credit) causes capital withdrawn in debit entries and capital introduced in credit entries.
Impact of Profit + losses causes expenses (reduction) in the debit entries and revenue (increase) in the credit entries.
