1. Intro to Accounting Flashcards
Discuss the role of accounting information
Providing economic information to assist in -
Decision making
Planning
Control
Describe the types of business ownership available and when each may be used
Sole traders (sole proprietors) - A one-person business, where the owner is responsible for the debts of the business and takes all the profits and bears all the losses. Partnerships - Two or more people (usually no more than 20) join to operate a business. The partners are jointly liable for the debts and like sole traders are liable for the debts of the business. Public Companies - Usually ownership of these companies is widespread. A public company can invite the public to subscribe to its shares. A public company can be listed, which means that its shares are traded on the Stock Exchange. Proprietary Limited Companies - A popular form of ownership in Australia. A proprietary company must have the word 'Proprietary' or 'Pty' before the word 'Limited' or 'Ltd' as part of its name. These companies have fewer legal formalities than public companies, but they are unable to approach the general public to raise money. Trusts - A form of ownership where a trustee must deal with the trust property for the benefit of beneficiaries in accordance with the terms of the trust deed. A trust, unlike a company, is not recognised in law as a separate legal entity.
Why do accounting concepts/principles exist and why they are important?
They narrow the methods for recording and reporting transactions which gives greater consistency and comparability during assessment.
Provide an overview of the main financial reports
- Statement of cash flows for the period - what cash movement took place during a specified period.
- Statement of financial performance (income statement) - provides profit and loss statement for a specified period.
- Statement of financial position (balance sheet) - a financial statement at the end of a specified period.
- Statement of changes in equity - summarises the change in the ownership interest over the period.
Understandability is a key characteristic of accounting information, by whom should the financial reports be readily understood?
Understood by their intended recipients.
What is the purpose of accounting information?
To provide useful information that is essential for making decisions. Accounting information is used to communicate financial results to external users, such as investors or creditors
Define accounting
Collection, analysis and communication of economic information. This information can be used as a decision making tool.
Identify the similarities and differences between the major external financial reports.
The statement of financial performance and statement of cash flows are concerned with measuring flow of wealth over time. The statement of financial position is concerned with the stock of wealth at a particular moment in time. The statement of changes in equity relates to the change in the owners interest over time.
Distinguish the difference between legal entities and accounting entities.
Legal entities - there is no distinction between the business and the owner(s) of the business.
Accounting entities - The business is separate from the owners, the business may be in the form of a sole proprietorship, partnership or other system. This is necessary to facilitate transaction recording and reporting depending on what system the business incorporates.
What are the advantages of the partnership business structure compared to the sole proprietorship structure?
Diversity of skills (further range of services) Greater access to capital (more owners) Taxation advantages (income splitting)
What is an accounting convention?
Principles, assumptions or accepted ideas on which accounting rules, records and reports were or are based.
Define non-current and current assets.
Current Assets are things that are likely to be converted into cash within 12 months of the statement of financial position date. Examples:
Accounts receivable
Prepayments - paying insurance, rental costs. Things that business has already paid for in advance.
Non-Current Assets are acquired and held for longer than 12 months or have an expected usage of longer than 12 months.These assets are generally shown at the original cost price to the business. Examples:
Intangible assets - Goodwill
Long term investments
Buildings and land
Plant and equipment
Define non-current and current liabilities.
Current liabilities generally fall due for payment within one year of the Balance Sheet date. Current liabilities may include:
Accounts payable
Accrued expenses - such as the receipt of a power bill, the power bill will not be paid until the next reporting period, as its for power used already it is expensed and shown as a current liability.
Unearned Revenue. It is possible for customers of a business to pay for services or products before the service or product is delivered. The payment may be received in one reporting period but the revenue will not be recognised until the product is delivered or the service is performed. As the revenue has been received the business has a liability to deliver.
Non-current liabilities are financial liabilities which are not classified as current and include long term borrowings. Generally these are not due to be repaid in full within 12 months.
Define owners equity.
Equity is the residual interest in the assets of the entity after deducting all its liabilities.
The equity account of a sole trader will consist of:
Capital Contributed (Cash or assets contributed to the business by the owner/s).
Drawings (Cash or assets withdrawn by the owner).
Profits or losses earned in the current reporting period.
The equity account of a company will consist of:
The shares issued (Similar to the capital account of a sole trader).
Retained earnings (Profits retained in the company to fund expansion or future operations).
Reserves.
What is a net figure called?
Carrying amount, book value or written down value.
What does depreciation represent?
Depreciation represents the cost of the economic benefits of a tangible asset used up during the period.
What are the two types of claims against business assets?
Internal claims - Equity
External claims - Liabilities
What are some limitations regarding the statement of financial position?
The Statement of Financial Position represents the position of an entity at one point in time and is relevant only at that point in time. It does not provide the answers needed when figuring out the real worth and success of a business, some of these things that it will not provide are: The type of business Customer relationships Commercial history Past performance Market positioning The number of employees Staff loyalty and morale The condition of assets and their value (Not their historic cost)
