Accounting Flashcards
Accounting Period Concept
Assumes that the life of a business is divided into arbitrary time periods.
Arbitrary
Owner decides their reporting time periods
Accounting Periods
Generally a month, a quarter, six months or a year/
Stakeholders in financial results of a business
Owners, Accounts Payable, and the Australian Taxation Office
Why is Accounting Period Concept Essential?
Because the aim of the business is to calculate a profit figure that is as accurate as possible for that period of time.
What is Profit
Is the main measure of performance for most businesses. It is determined by deducting expenses from income.
Income
Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity.
Income (GAINS)
Income that does not arise from the ordinary operations of the entity. A gain occurs when the cash amount received is greater than the asset’s carrying amount. For example, if the company receives $3,000 for the old delivery truck, and the truck’s carry amount at the time of the sale was $300, the company will have gain of $2,400.
Realized gains take place when the transaction is completed and the asset is sold, the buyer takes ownership and the seller takes the payment, including the gain.
Unrealised gains occur when the market value of the asset rise, but the asset hasn’t been sold yet. Thus, it remains on the hands of the current owner. There is a gain but is hasn’t been realized yet.
Carrying Amount
The original cost of an asset as reflected in a company’s books or balance sheet, minus the accumulated depreciation of the asset.
Revenue
increases in economic benefits arising in the course of the ordinary activities of an entity. Examples of revenue items are service fees revenue, dividends, interest and rent revenue.
Revenue Recognition
The process of knowing when revenue is to be recorded in the accounts.
When is revenue recognised?
When it has been earned. For a service business, it means when the service has been performed.
When are expenses recognised?
An expense is recognized when the business pays for a good or service. Expense occur at the same time as the recognition of any revenue. For example, the expense recognition for the cost of goods sold associated with the sale of a product should be in the same period in which the sale was recognized.
Accrual basis
The basis of accounting commonly used by most businesses is the accrual basis. The accrual basis of accounting recognises transactions and events when they have an economic impact on the entity rather than when the associated cash flows occur.
What is Statement Of Profit or Loss and purpose?
The profit and loss statement is a financial statement that summarizes the revenue, costs and expenses incurred during a specified period. Its purpose is to calculate the NET PROFIT or LOSS by the business which is added to the capital.
