Accounting Flashcards
What is accounting?
Accounting is the process of keeping financial accounts (Oxford Dictionary)
What are some processes of accounting?
Recording business transactions in an accurate and systematic manner
Reporting to interested parties on the financial situation of the business - usually investors and owners
Analysing and interpreting business transactions and reports to help management/owners plan
Budgetary control, setting targets for the business to ensure monetary targets are attained
What is the importance of accounting for different stakeholders?
Owners interested in how successful their business is
Bankers, lenders and creditors wanting to know if an investment is good and if they will gain interest/get their money back
Potential investors are interested in how much profit they will make from an investment
Employees and their unions interested in whether or not workers are getting paid well but also if the employee has enough to pay extra to the union
Government departments interested in how much money you get to get the proper amount of tax out of you.
What are the steps to the basic accounting process?
Collection - collecting financial data such as receipts and invoices
Processing - collating this data into tables and documents etc.
Reporting - informing interested parties on the financial situation
Analysing - taking the data and interpreting it
What is an asset?
An asset is something that is of value that is owned by a business, e.g., land/building, machinery, stock
What is a liability?
Liabilities are amounts owed by the business to external parties (people other than the owner or the business), e.g., debts such as mortgages and loans
What is Owner’s Equity?
The business is seen as separate from the owner.
Owner’s Equity is what the business owes the owner once all the liabilities have been paid off.
Owner’s Equity = Assets - Liabilities
What is the role of the balance sheet?
The balance sheet is an accounting report which shows the financial position of a business.
Businesses create balance sheets as they can provide more information on their financial position/situation.
What is the T-form balance sheet
The most common form of balance sheet.
It expresses the rearranged equation of Assets = Liabilities + Owner’s Equity
What are debtors?
Debtors are businesses/people that owe you money
Can help to remember by thinking “I am in forever your debt,” they owe you.
What are creditors?
Creditors are businesses/people you owe
Can help to remember by thinking “Credits to him,” as in it goes to him.
What is a classified balance sheet?
A balance sheet that classifies the items to provide more info about a business.
They also help you find relevant information without having to sort through lines of items
What is liquidity?
Liquidity is the ease which the assets of a company can be turned to cash
How are assets classified?
Assets are classified according to how liquid they are.
Assets expected to be turned to cash or used up within the next 12 months are current assets, e.g., stocks, cash, debtors.
Assets expected to be owned for a greater period than 12 months are non-current assets, e.g., store equipment.
How are liabilities classified?
Liabilities are usually classified on the basis of urgency, how soon the obligation has to be met.
Current liabilities are those debts that are due within the next 12 months
Non-current liabilities are debts that are not due until after 12 months.
Creditors are usually classified as current liabilities, and if a date is not specified on a loan, it is current.
