2.4 Intro to accounting Flashcards
What is accounting?
The collecting and recording of financial data to produce and report financial information
What is financial data?
The raw facts and figures (source documents) upon which financial information is based
What is financial information?
the financial data that has been sorted, classified and summarised into a more useable and understandable form (reports)
What is the purpose of accounting?
To assist business owners and other users of it with planning and decision-making
What is revenue?
What the business has earned from its customers for performing a service or selling a good
What is expense?
What it has cost the business to provide those services or sell that good
What is a cash receipt?
Cash coming in to the business
What is a cash payment?
Cash going out the business
What parties may be interested in a businesses financial information?
- Accounts Receivable and other customers, who may wish to know about the firm’s continuing ability to provide them with inventory.
- Accounts Payable and other suppliers, who may wish to know about the firm’s ability to repay what it owes them.
- Banks and other financial institutions, which will certainly want to know about the firm’s current levels of debt and their ability to repay before providing them with any additional finance.
- Employees, who may wish to know about the firm’s long-term viability, and their own long-term employment prospects, or its ability to afford improvements in wages and conditions.
- Prospective owners, who may wish to know about the firm’s financial structure and earnings performance, and its assets and liabilities to determine the firm’s worth.
- The Australian Tax Office (ATO), which will require financial information for taxation purposes.
What is a stakeholder?
A person or organisation that has an interest in the performance of the business and can affect operations or be affected by them
What are the 4 types of business operations?
- Trading (aka merchandising or retail)
- Service
- Manufacturing
- Mixed business
What is a trading business?
A business that purchases finished goods for the sole purpose of resale. Inventory is purchased at a cost price, and then sold to consumers at a marked-up selling price
What is a service business?
A business that performs a service for the customer so in fact what is being sold is the time, labour and expertise of the business. There is no physical exchange of goods
What is a manufacturing business?
A business that actually produces the goods it sells, using a production process (which could be on an assembly line) to transform raw materials into a finished product
What is a mixed business?
In certain cases, a business will combine one or more types of operation. For example, hairdressers not only perform a service (cutting your hair) but also sell a variety of haircare products
What is the accounting process?
The process of turning financial data into financial information.
- Source documents
- Records
- Reports
- Advice
What is a profit?
When a business earns greater profit than revenue
What is a cash surplus?
An excess of cash receipts over cash payments, leading to an increase in a positive bank balance or decrease in a bank overdraft
What is a cash deficit?
An excess of cash payments over cash receipts, leading to a decrease in a positive bank balance or an increase in a bank overdraft
What is a cash flow statement?
To report on cash inflows (cash received) and cash outflows (cash paid), separately identifying cash flows relating to Operating activities, Investing activities and Financing activities
What is an asset?
a present economic resource controlled by the business as a result of past events that has the potential to produce future economic benefits.
What is a liability?
a present obligation of a business to transfer an economic resource as a result of past events.
What are non-current and current assets?
- reasonably expected provide an inflow of future economic benefits within 12 months.
- not held for resale and is expected to provide an inflow of future economic benefits for more than 12 months
What are current and non-current liabilities?
- expected to be settled within 12 months.
- not required to be settled within 12 months.
What is owners equity?
the residual interest in the assets of the entity after deducting all its liabilities.
What is the accounting equation?
Assets = Liabilities + Owners Equity
What is a balance sheet?
details the firm’s financial position at a particular point in time by reporting assets, liabilities, and owner’s equity
- only ever accurate on the day it is prepared.
