1. Fundamental Accounting Concepts and Recording Financial Information Flashcards
What does accounting mean?
Accounting is the process of recording financial data in a system (the accounting system).
What are the main financial statements?
1) Statement of Financial position (BS)
2) Statement of Financial Performance (P&L)
What is an entity?
The entity is the business for which accounting records are being recorded.
What is financial reporting?
This is the reporting of financial data to the stakeholders of the business. It can also be called ‘financial accountin
What is the process for preparing financial statements?
(5 steps)
Step 1) Recording financial data using invoices/cash etc
Step 2) Journal entries - carry out the double entry for the transaction
Step 3) Nominal ledger (General Ledger) - Post the journal entry to the general ledger
Step 4) Trial balance - List of the nominal/general ledger accounts
Step 5) Financial statements - use the TB to produce the statements for the entity.
What are the advantages of computerised accounting systems?
1) Easily automate various accounting processes, = faster and efficient and less human error.
2) Maintains an audit trail of all financial transactions. Making it easier to track and verify changes and corrections.
3) The ability to generate a wide range of financial reports quickly and accurately which can be customised to meet specific business needs.
4) Cloud based accounting systems provide a real time access to financial data. Enabling businesses to make timely and informed decisions. Updates and changes are reflected immediately.The systems enable remote access to financial data, allowing for work from anywhere with an internet connection
What are the dis-advantages of computerised accounting systems?
1) Computerised accounting systems can be expensive to implement and maintain. There would be initial and ongoing training and support costs and software licensing costs.
2) Employees may require training to use software effectively. The learning curve can temporarily reduce productivity. Software updates may also cause potential disruptions.
3) Most systems are off the shelf packages, and therefore not tailored to the business. Adapting pre-packaged accounting software to meet specific business needs can be challenging and costly.
4) Businesses become heavily dependent on the reliability of the software and hardware. System failures or malfunctions can disrupt operations. While most systems have backup options, there is still a risk of data loss in the event of a catastrophic event, system crash, or inadequate backup procedures.
How is financial data recorded initially?
(4 steps)
1) Identifying - An entity must identify the economic events relevant to its business
2) Measuring - The economic events must be quantified (given a monetary value) in order to record them as transactions
3) Recording - Invoice is used to record e.g. These documents provide a historical record, as well as evidence of each transaction.
4) Communicating - the communication of the collected information to users of the financial information. (aka prep of financial statements)
What is a sole trader?
A business run by an individual (the sole trader) who is liable for any debts incurred by the business. It is not a separate legal entity. A sole trader may have employees.
What is a Partnership?
A business run by two or more individuals in partnership. It is not a separate legal entity, and all partners are jointly and severally liable for any debt
What is a Limited liability company?
This is a separate legal entity owned by shareholders who have limited liability, which means that they are not responsible for company debts.
What is a Limited liability partnership?
This is a partnership, but a separate legal entity, so the liability of the partners is limited.
What is a Community Interest company (CIC)?
A CIC is a special type of limited company that exists to benefit the community.
State all the headings of the SoPL for limited companies.
Revenue - income generated from the operating activities of the company, ie selling goods or services.
Cost of sales - cost/expense relating to the goods or services that have generated revenue. It might include purchase costs of goods or staff costs. Gross profit
Gross profit - subtotal. It is the profit from selling goods/services and is calculated as revenue less cost of sales.
Other income - A business might generate income from other sources, eg interest or dividends from investments, or gains.
Distribution costs - Expenses relating to the transport or distribution of goods and services. (Delivering to customers)
Administrative expenses - This heading can include lots of different expenses, eg office stationery expenses, heat and light expenses, staff costs.
Finance costs - These are the costs relating to financing the business, eg bank interest.
Profit before tax - This is another subtotal and is required by accounting regulations.
Taxation - Corporation tax estimate for the year based on PBT.
Profit for the year - Overall profit made by the company in a year. If the company was loss making, this would be a loss for the year
State all the headings of the SoFP for limited companies.
Title - The date for the statement of financial position is a point in time, the last day of the reporting period covered by the statement of profit or loss, in this case 31 December 20X8.
Assets - The top half of the statement shows all the different assets of the company.
Non-current assets - These are assets that are controlled and used by the business over a number of years.
Current assets - These are more short-term assets, including inventories (stock) and cash.
Total assets This is the total of the current and non-current assets and completes the top half of the financial statement.
Non-current liabilities - These are long-term debts of the company. In this case, there is a loan and also some bonds.
Current liabilities - These are the short-term debts of the company.
Total liabilities - This is the total of the current and non-current liabilities.
Total equity and liabilities - This total should always be equal to total assets.
Equity - The first section of the bottom half is equity, which represents the shareholders’ investment in the company.
