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Business > Accounting > Flashcards

Accounting Flashcards

1
Q

What is Accounting?

A

Accounting is a process of recording and summarising financial information so that the informed decisions can be made.

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2
Q

What are the Users of Accounting Information?

A

Business Owners, Shareholders/Potential investors, Government, Bank

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3
Q

What do Business Owners do?

A

Business Owners make accurate future decisions for their business.

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4
Q

What do Shareholders/Potential Investors do?

A

Shareholders/Potential Investors see the possible returns on investments.

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5
Q

What does the Government do?

A

The Government makes sure the business is paying the correct tax.

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6
Q

What does the Bank do?

A

The Bank sees if the business is making enough profit to cover the interest payments.

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7
Q

What decisions would owners make?

A

Owners would ask : Should I open another store in …..?
Should I add a new menu in the restaurant?
How much should I sell the business for?

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8
Q

What decisions would potential investors make?

A

Potential Investors would ask : Should I invest extra money or not?
How much should I invest?

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9
Q

What decisions would the bank make?

A

The bank would ask : Should I accept the loan application?
How much interest to charge on borrowing.

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10
Q

What are the types of businesses?

A

Trading Businesses and Service Businesses.

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11
Q

Examples of Trading Businesses

A

Book stores, The Warehouse and the Supermarket.

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12
Q

Examples of a Service Business

A

Law firms, Dental Clinic and Physio.

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13
Q

Define Income

A

Income refers to an inflow of assets from a business activity or investments.

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14
Q

What types of Income can a business earn?

A

Revenue and Other Income.

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15
Q

Define Revenue

A

Revenue is the income generated from the normal business operations. This is their primary source of income.

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16
Q

What do Service Businesses do?

A

Service Businesses mainly provide services to the consumers to generate income.

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17
Q

What do Trading Businesses do?

A

Trading Businesses mainly provide goods to the consumers to generate income.

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18
Q

How to identify Service Business’s Revenue?

A

You can identify that it is a Service Business’s Revenue when it shows up as ‘Fees Received’ or (name of service) Fees.

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19
Q

What Other Income can be earned?

A

Dividends received, Interest received and Rents Received.

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20
Q

How are dividends received?

A

Dividends are earned by returns on investments in other company’s shares.

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21
Q

How is interest received?

A

Interest is earned by investing in term investments. eg. Term Deposit, Savings Account

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22
Q

How is rent received?

A

Rent is earned by investing in rental properties such as houses and buildings.

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23
Q

Define Expense

A

Expense refers to an outflow of assets incurred by a business whilst it generates revenue.

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24
Q

What are the three types of expenses spent by the business?

A

Group-one Expense, Administrative Expense, Finance Cost.

25
Q

What is the Group-one Expense?

A

Group-one Expenses refers to the expenses that are directly related to the promotion, distribution and provision of the businesses’ Goods and Services.

26
Q

What is the Group-one Expense called for a Trading Business?

A

The Group-one Expense is called Distribution Cost. These are the expenses related to the promotion and distribution of the goods.

27
Q

What is the Group-one Expense called for a Service Business?

A

For a Service Business the Group-one expense is called …..Service Cost.

28
Q

What is the Administrative Expense?

A

The Administrative Expense refers to the expenses that are related to the daily running of a business. Expenses that are not directly related to the business’s provision, promotion of the goods and services.

29
Q

Examples of Administrative Expenses

A

Accountancy Fees, Office workers’ wages, Office rent

30
Q

Where should shop related expenses be classified in?

A

Shop related expenses are always classified as Group-one expenses. eg shop electricity, shop wages, shop insurance

31
Q

Where should Office related expenses be classified in?

A

Office related expenses are always classified as Administrative Expenses. eg Office electricity, Office wages, Office rent

32
Q

Where should Advertising be classified in?

A

Advertising is always classified as a Group-one Expense. This is because it is the cost of promoting goods and services.

33
Q

Where should unspecified expenses be classified?

A

Unspecified expenses are always classified as Administrative Expenses. eg electricity, rent, insurance

34
Q

What is the Finance Cost?

A

Finance Cost refers to the expenses that are related to the Interest Payments. eg. Interest on a Loan and Interest on a Mortgage

35
Q

If interest is being received by a business how classified?

A

If Interest is being received it will be classified as Other Income.

36
Q

If interest is being paid how is it classified?

A

If interest is being paid is will be classified as a Finance Cost.

37
Q

What is Interest on Term Deposit?

A

Interest on Term Deposit is return on saving your money in a Term Deposit account. You are receiving interest, therefore it is an income. Other Income.

38
Q

What is Interest on Loan?

A

Interest on loan is the cost of borrowing money. You are Paying the interest to the lender for borrowing money, therefore it is an expense. Finance Cost.

39
Q

What is the purpose of Income Statement?

A

Income Statement is a Financial Statement used to calculate the total income and the total expense of a business, which then will be used to calculate the business’s Profit or Loss for the year.

40
Q

Equation for the Profit or Loss of the year

A

Profit or Loss for the year = Total Income - Total Expense

41
Q

Income Statement Title

A

You need a full title that contains the name of the business, the year and income statement. eg Amy’s Bakery Income Statement for the year ended 31 March 2022

42
Q

Income Statement Structure

A

The Income Statement has three main body parts the Income Part, Expense part, Profit/Loss part. Has to be in this exact order.

43
Q

What are the rules for the income statement?

A

You need the correct full title, correct headings and account names, correct calculations and no abreviations.

44
Q

What should the Income Statement look like?

A

Revenue, Other Income, Total Income, Less Expenses, Group one Expenses, Administrative Expense, Finance Cost, Total Expenses, Profit or loss for the year.

45
Q

What is Profitability?

A

One of the main purposes of preparing an Income Statement is to show the business’s profitability ( as measurement of a business’s income relative to its expenses ) during a reporting period. With the given financial information, more accurate decision can be made to improve the business’s future profitability.

46
Q

What is the Profit Equation?

A

Profit = Total Income - Total Expense

47
Q

What happens when the income is increased?

A

When there is an increase in income the business’s total income will increase which cause the profit to be increased given that the total expense stays the same.

48
Q

What happens when the expense is decreased?

A

When there is a decrease in expense the business’s total expense will decrease which cause the profits to be increased given that the total income stays the same.

49
Q

What are someways to improve the profitability in relation to the business’ income?

A

Some ways are promotion and advertising. Effective advertisement means more customers and more revenue which leads to an increase in profit. You can also have an increase in the sales price. Increasing the sales price means higher income per unit of sale and this will lead to an increase in profit.

50
Q

What are some ways to improve the profitability in relation to the business’ expenses?

A

You could reduce wasteful spending for example buying an energy saving light bulb. You could find a cheaper supplier. You could find alternative methods for example using cheaper promotional services.

51
Q

What are the possible consequences of reducing advertising costs?

A

When reducing advertising costs it would be harder to get new customers, less people know about the business and this could lead to the revenue to decrease.

52
Q

What are the possible consequences of reducing wages?

A

When reducing wages there would be unhappy employees which mean less productivity, bad reputation from the customers, and legal issues.

53
Q

What are the possible consequences of reducing cost of inventory?

A

The possible consequences of cost of inventory are that cheaper inventory normally means poorer quality inventory and because this a higher chance of bad reviews and unsatisfied customers.

54
Q

Define Inventory

A

Inventory are the items which will be sold to the consumers to generate income.

55
Q

Define Sales

A

Sales are the revenue generated by the trading business for selling inventory to the customers.

56
Q

Define Dividends

A

Divedends are return on investements in other company’s shares.

57
Q

Define Term Deposit

A

Term deposit is the amount of money locked in a savings account for an agreed period. In retun, interest will be recieved.

58
Q

Define Fees Received

A

Fees Received are the revenue generated by the service business for selling inventory to the customer.

Business (4 decks)

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