Accounting Flashcards
What is the accounting equation
Assets = Liabilities + Owner’s Equity
Assets
- A resource controlled by the entity
- (as a result of past events)
- From which future economic benefits are expected
Examples of an Asset
Cash at bank, Debtors, Stock(inventory), buildings, vehicles, computers, stationery, fixtures and fittings(things inside a business)
Liabilities
- A present obligation of the entity
- (as a result of past events)
- The settlement of which is expected to result in an outflow of economic benefits
Examples of liabilities
Loans, electricity bill, rent, Creditors, bank overdraft(when one’s account goes into the negative)
Owner’s Equity
The residual interest in the assets of the entity after the liabilities are deducted
The amount the business owes the owner
Examples of Owner’s Equity
Net profit(loss), capital contribution, Drawings (negative owner’s equity)
Revenue
- An inflow of economic benefits
- In the form of an increase in assets (or decrease in liabilities)
- That increases owner’s equity. (except for capital contributions)
Revenue is what is earned by the business
Revenue examples
The main form of revenue is sales.
Other examples: Interest revenue, stock gain.
Expenses
- An outflow or consumption of an economic benefit (money)
- in the form of a decrease in assets (or increase in liabilities)
- that reduces owner’s equity (except for drawings)
Examples of expenses
Wages, advertising, electricity, interest expense
The balance sheet
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”
Golden rules of an income statement
- No GST
- No purchase of non current assets
- No loans(received or paid)
- No capital contribution or drawings
5.Interest always included (received and paid)
3 characteristics that distinguish a business as small
-A sole proprietor or partnership(2-20 owners)
-A relatively small turnover (less than 10 million)
-Less than 20 employees
Why would an individual want to start their own small business
A sole proprietor has the right to all profits
Greater control over business
To fulfill a market need
Personal qualities shared by successful small business owners
Determined
Strong sense of leadership
Expertise
How does a trading firm earn profit
Earns revenue by purchasing stock and selling them at a higher price
What is a service firm
A business that earns its revenue from providing a service to their customers for which they charge a fee
Features of a sole proprietor
Operates in the private sector
One owner
Unlimited liability(owner is responsible for debts of the business)
Define the term small business
Any business in which the owner and manager is the same person (or people) which employs fewer than 20 people
Define the term accounting
Accounting can be defined as the collection, recording and reporting of financial information to assist business owners in decision making.
Purpose of accounting
Is to provide owners of a business financial information that will assist them in making decisions about the activities of their firm
Define ethical considerations
The social and environmental consequences of a financial decision
Why did a business need to be aware of its ethical decisions
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.
4 stages of the accounting process
- Collect financial data
- Record financial data
- Report financial data
- Analyse financial data and make decisions for the future
State and describe 2 types of accounting records
- Journals - record daily transactions
- Inventory cards - movements of inventory in and out of a business
Two types of accounting reports
- Statement of receipts and payments.
- Balance sheet
Define unlimited liability
The owner(s) are responsible for the debts of the business
Define limited liability
The business is a separate entity from the owner; financial institutions cannot come after the Owner’s personal assets
Define goodwill
An intangible asset representing the value of the firm’s reputation, clientele, viability and future growth prospects
Indicator
A measure that expresses profitability, liquidity or stability in terms of the relationship between two different elements of performance.
What are the four Accounting Assumptions
- Accounting entity assumption
- Going concern assumption
- Period assumption
- Accrual basis assumption
What is the role of the Accounting Assumptions
Accounting assumptions govern the way accounting information is recorded
State the purpose of the Qualitative characteristics
Qualitative characteristics inform the way accounting reports are prepared
What are the six qualitative characteristics
- Relevance
- Faithful representation
- Comparability
- Verifiability
5.Timeliness - Understandability
Equities
Claims on the assets of the firm, consisting of both liabilities and owner’s equity
Define Relevance
Requires all information that could influence decision makers to be included in accounting reports.
Define Faithful representation
Requires information being reported to be complete, without bias and free from error.
Define comparability
Useful information is provided when the financial reports of a business can be compared over time and compared with similar information of other businesses
Define Verifiability
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
Timeliness
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.
Define Understandability
Financial information should be comprehensible to users with a reasonable knowledge of business and economic activities, and presented clearly and concisely
Define Accounting entity assumption
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
Liquidity
The ability of the business to meet its short-term debts as they fall due
What is the working capital ratio (WCR)
Current Assets/Current Liabilities
Stability
Stability concentrates on the firm’s ability to meet its debts and continue its operations in the long term
What is the equation for Debt Ratio
Debt Ratio =
Total liabilities/Total Assets X100
Explain how the working capital ratio can be used to assess whether liquidity is satisfactory or not
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)
Explain how a high Debt Ratio can have negative consequences for liquidity
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
Period Assumption
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
Accrual basis assumption
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.
Going concern assumption
The assumption that the business will continue to operate in the future, and its records are kept on that basis
Financial data
raw facts and figures upon which financial information is based
Financial information
Financial data that has been sorted, classified and summarised into a more usable and understandable form
Non-financial information
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
examples of non-financial information
employee absentee rates
Quantity of wastage in production
market share
What is non-financial information an indicator of
It is seen as an indicator of a business’ future financial performance.
examples of nature of business operations
-Retail/trading
-Service
-Manufacturing
-Mixed businesses
