1. Introduction Flashcards
What is bookkeeping?
A method of recording business transactions.
Why have accounting standards been developed?
Accounting standards ensure consistency, clarity and accuracy across reports:
- To ensure that financial reports are not modified to appear better than they actually are (prevent fraud).
- So investors can compare the performance of firms.
- To facilitate international investment, multinational firms with subsidaries in many countries and global financial markets.
What are the two most popular accounting standards used across the world?
International Financial Reporting Standards (IFRS)
US Generally Accepted Accounting Principles (US GAAP)
What are the primary characteristics of useful financial information?
- Relevant
- Material (changes significant enough to create new report)
- Free from error
- Faithful representation (complete and neutral)
What is the entity concept?
The business is a separate legal entity from its owners/shareholders. Business transactions for the firm, its tax, assets, and liabilities are separate from those of its owners. The financial statements represent the affairs of the firm and not of its owners.
What is the going concern principle?
Financial statements are prepared under the assumption that the company will continue to operate for the foreseeable future (that it is a “going concern”). Hence, it is assumed that the management has neither the intention to liquidate the entity nor to cease operations (which would have a significant effect on financial statements).
What is the historical cost convention?
The value of an asset is recorded on the balance sheet at the total cost that has been expended on it, rather than its liquidation value or replacement cost.
This is a consequence of the going concern principle.
What is the principle of prudence?
Use caution and avoid overestimation in uncertain situations when accounting.
What are the notes to the account?
Additional information provided to explain the numbers in a company’s financial statements.
