Week 2 Flashcards
(24 cards)
What are accounting concepts/conventions?
The basic assumptions that underlie the accounts
Accounting concepts provide the foundation for preparing financial statements.
What are accounting standards?
Technical rules which give guidance on specific transactions
These standards ensure consistency and transparency in financial reporting.
Define accounting policies.
Detailed methods of measurement and valuation adopted by specific entities
These policies can vary between entities based on their operations and transactions.
What is the going concern concept?
The assumption that the business will continue operating into the foreseeable future
This concept is crucial for the preparation of financial statements.
Explain the accruals concept.
Income, expenses, assets and liabilities are recognised when the transaction takes place
Revenue is recorded when earned and expenses are recorded when incurred and matched with revenue.
What is the matching concept?
All expenses incurred must be matched with the revenue earned in that period
This ensures that financial statements reflect the true profitability of a business.
What type of profits do the income statement and balance sheet use?
Accrual-based profits
This method provides a more realistic view of a company’s financial position.
Define historical cost in accounting.
Record items in accounts at the original cost when the transaction took place
This method reflects the actual cost incurred, not current market value.
What is the money measurement concept?
Only items which can be measured in monetary terms are included in the accounts
This excludes non-monetary items from financial statements.
Explain the entity concept.
The business can be separated from the owner
This concept is fundamental for distinguishing personal and business finances.
What is the time (periodicity) concept?
Life of business can be split into different time periods so information can be recorded
This allows for periodic reporting of financial performance.
List the fundamental characteristics of accounting information.
- Relevance
- Faithful representation
These characteristics ensure that financial information is useful for decision-making.
What are the enhancing characteristics of financial information?
- Comparability
- Verifiability
- Timeliness
- Understandability
These characteristics improve the quality of financial information.
What does it mean for financial information to be relevant?
It should have predictive value and/or confirmatory value
Relevant information helps users make informed decisions.
What does faithfully represented information entail?
- Completeness
- Neutrality
- Freedom from error
These elements ensure that the information accurately reflects the economic events.
What is timeliness in accounting information?
Information is available to users in time to be of use for decisions
Timely information enhances its relevance.
Define comparability in financial reporting.
Information enables users to identify and understand similarities and differences between items
Consistency of reporting assists with comparability.
What is verifiability in the context of financial information?
Different users would agree that the economic event is faithfully represented
Auditors play a key role in verifying information for stakeholders.
Why is understandability important in financial information?
Information should be clearly and concisely presented
Complex transactions need clear explanations for better comprehension.
What are non-current assets?
Assets which will be used for more than one year from the date of the financial statements
These assets are essential for running the business long-term.
Define current assets.
Assets which are expected to turn into cash by sale or use within a year
Examples include inventory and accounts receivable.
Differentiate between current liabilities and non-current liabilities.
Current liabilities are due within a year; non-current liabilities are not required to be paid within a year
This classification helps in assessing short-term and long-term financial obligations.
What is equity in accounting?
The owner’s claim on the business, including contributions and retained profits
In sole proprietorships, equity is referred to as capital.
What does the accounting equation represent?
Every transaction has two aspects, which ensures that the equation always balances
The equation is Assets = Liabilities + Equity.
