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Accounting Units 1 and 2 > Accounting > Flashcards

Accounting Flashcards

1
Q

What is the accounting equation

A

Assets = Liabilities + Owner’s Equity

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2
Q

Assets

A
  1. A resource controlled by the entity
  2. (as a result of past events)
  3. From which future economic benefits are expected
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3
Q

Examples of an Asset

A

Cash at bank, Debtors, Stock(inventory), buildings, vehicles, computers, stationery, fixtures and fittings(things inside a business)

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4
Q

Liabilities

A
  1. A present obligation of the entity
  2. (as a result of past events)
  3. The settlement of which is expected to result in an outflow of economic benefits
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5
Q

Examples of liabilities

A

Loans, electricity bill, rent, Creditors, bank overdraft(when one’s account goes into the negative)

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6
Q

Owner’s Equity

A

The residual interest in the assets of the entity after the liabilities are deducted

The amount the business owes the owner

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7
Q

Examples of Owner’s Equity

A

Net profit(loss), capital contribution, Drawings (negative owner’s equity)

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8
Q

Revenue

A
  1. An inflow of economic benefits
  2. In the form of an increase in assets (or decrease in liabilities)
  3. That increases owner’s equity. (except for capital contributions)

Revenue is what is earned by the business

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9
Q

Revenue examples

A

The main form of revenue is sales.
Other examples: Interest revenue, stock gain.

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10
Q

Expenses

A
  1. An outflow or consumption of an economic benefit (money)
  2. in the form of a decrease in assets (or increase in liabilities)
  3. that reduces owner’s equity (except for drawings)
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11
Q

Examples of expenses

A

Wages, advertising, electricity, interest expense

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12
Q

The balance sheet

A

An accounting report that details a firm’s financial position at a particular point in time by reporting its assets, liabilities and the owner’s equity.

As these balances can change overnight, The Balance Sheet is only valid on the day it has been created

Hence why it is titled “as at”

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13
Q

Golden rules of an income statement

A
  1. No GST
  2. No purchase of non current assets
  3. No loans(received or paid)
  4. No capital contribution or drawings
    5.Interest always included (received and paid)
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14
Q

3 characteristics that distinguish a business as small

A

-A sole proprietor or partnership(2-20 owners)

-A relatively small turnover (less than 10 million)

-Less than 20 employees

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15
Q

Why would an individual want to start their own small business

A

A sole proprietor has the right to all profits

Greater control over business

To fulfill a market need

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16
Q

Personal qualities shared by successful small business owners

A

Determined

Strong sense of leadership

Expertise

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17
Q

How does a trading firm earn profit

A

Earns revenue by purchasing stock and selling them at a higher price

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18
Q

What is a service firm

A

A business that earns its revenue from providing a service to their customers for which they charge a fee

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19
Q

Features of a sole proprietor

A

Operates in the private sector

One owner

Unlimited liability(owner is responsible for debts of the business)

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20
Q

Define the term small business

A

Any business in which the owner and manager is the same person (or people) which employs fewer than 20 people

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21
Q

Define the term accounting

A

Accounting can be defined as the collection, recording and reporting of financial information to assist business owners in decision making.

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22
Q

Purpose of accounting

A

Is to provide owners of a business financial information that will assist them in making decisions about the activities of their firm

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23
Q

Define ethical considerations

A

The social and environmental consequences of a financial decision

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24
Q

Why did a business need to be aware of its ethical decisions

A

Those who do not act in a socially responsible manner, may result in the community boycotting the business. The public looks favourably upon ethical businesses.

25
Q

4 stages of the accounting process

A
  1. Collect financial data
  2. Record financial data
  3. Report financial data
  4. Analyse financial data and make decisions for the future
26
Q

State and describe 2 types of accounting records

A
  1. Journals - record daily transactions
  2. Inventory cards - movements of inventory in and out of a business
27
Q

Two types of accounting reports

A
  1. Statement of receipts and payments.
  2. Balance sheet
28
Q

Define unlimited liability

A

The owner(s) are responsible for the debts of the business

29
Q

Define limited liability

A

The business is a separate entity from the owner; financial institutions cannot come after the Owner’s personal assets

30
Q

Define goodwill

A

An intangible asset representing the value of the firm’s reputation, clientele, viability and future growth prospects

31
Q

Indicator

A

A measure that expresses profitability, liquidity or stability in terms of the relationship between two different elements of performance.

32
Q

What are the four Accounting Assumptions

A
  1. Accounting entity assumption
  2. Going concern assumption
  3. Period assumption
  4. Accrual basis assumption
33
Q

What is the role of the Accounting Assumptions

A

Accounting assumptions govern the way accounting information is recorded

34
Q

State the purpose of the Qualitative characteristics

A

Qualitative characteristics inform the way accounting reports are prepared

35
Q

What are the six qualitative characteristics

A
  1. Relevance
  2. Faithful representation
  3. Comparability
  4. Verifiability
    5.Timeliness
  5. Understandability
36
Q

Equities

A

Claims on the assets of the firm, consisting of both liabilities and owner’s equity

37
Q

Define Relevance

A

Requires all information that could influence decision makers to be included in accounting reports.

38
Q

Define Faithful representation

A

Requires information being reported to be complete, without bias and free from error.

39
Q

Define comparability

A

Useful information is provided when the financial reports of a business can be compared over time and compared with similar information of other businesses

40
Q

Define Verifiability

A

The ability to ensure that different knowledgeable and independent observers can reach a consensus (arrive at the same conclusion) that a particular depiction of an event is faithfully represented

Verfiability is maintained by retention of source documents used to record the transaction and checked through auditing

41
Q

Timeliness

A

Financial information should be available to decision makers in time to be capable of influencing their decisions.

Having information due sooner, rather than later, can enhance its capacity to influence decisions.

42
Q

Define Understandability

A

Financial information should be comprehensible to users with a reasonable knowledge of business and economic activities, and presented clearly and concisely

43
Q

Define Accounting entity assumption

A

The assumption that the records of the assets, liabilities and business acivities of the entity are kept separate from those of the owner, as well as from those of other entities

44
Q

Liquidity

A

The ability of the business to meet its short-term debts as they fall due

45
Q

What is the working capital ratio (WCR)

A

Current Assets/Current Liabilities

46
Q

Stability

A

Stability concentrates on the firm’s ability to meet its debts and continue its operations in the long term

47
Q

What is the equation for Debt Ratio

A

Debt Ratio =
Total liabilities/Total Assets X100

48
Q

Explain how the working capital ratio can be used to assess whether liquidity is satisfactory or not

A

This compares a firm’s current assets and current liabilities to determine whether the business has sufficient economic resources to cover its present obligations. (short term debts as they fall due)

49
Q

Explain how a high Debt Ratio can have negative consequences for liquidity

A

A high debt ratio means that a high proportion of the firm’s assets are funded by external sources. This therefore adds more pressure on the firm’s cash flow to meet principal and interest repayment and therefore leaving less money available to meet their other short term debts as they fall due

50
Q

Period Assumption

A

Financial events are recorded and reported for a specific period of time (such as a month or year), allowing valid comparisons of performance to be made

51
Q

Accrual basis assumption

A

Under the accrual basis of accounting, revenue is recognised in the period in which the expected inflow of economic benefits can be measured, that is, revenue is recognised when it is earned.

52
Q

Going concern assumption

A

The assumption that the business will continue to operate in the future, and its records are kept on that basis

53
Q

Financial data

A

raw facts and figures upon which financial information is based

54
Q

Financial information

A

Financial data that has been sorted, classified and summarised into a more usable and understandable form

55
Q

Non-financial information

A

Any information that cannot be found in the financial statements, and is not expressed in dollars and cents, or reliant on dollars and cents for its calculation

56
Q

examples of non-financial information

A

employee absentee rates

Quantity of wastage in production

market share

57
Q

What is non-financial information an indicator of

A

It is seen as an indicator of a business’ future financial performance.

58
Q

examples of nature of business operations

A

-Retail/trading
-Service
-Manufacturing
-Mixed businesses

Accounting Units 1 and 2 (15 decks)

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