accounting booklet 1 Flashcards
Define Accounting
Accounting is a management information system that involves the collecting, sorting, classifying and recording of financial data to produce and report financial information to assist business owners in decision making.
Define Financial data
Is the facts and figures that financial information is based.
Define Financial information
Is financial data that has been sorted, classified and summarized into a more usable and understandable form
Define what may influence an owners’ decision in a business
Financial considerations including those which are social and environmental in nature
Define Ethical conditions
In all consultations and communications, accountants are required to maintain their integrity, objectivity and confidentiality
Define the 4 stages of the accounting process
Source documents, records, reports and advice
Define source documents
documents that provide both the EVIDENCE that a transaction has occurred and the DETAILS of the transaction itself.
Define recording
Sorting, classifying and summarizing the data contained in the source documents so that it is more useable
Define reporting
the preparations of financial statements that communicates financial information to the owner
Define Advice
the provision to the owners of a range of options available to their aims/objectives, together with recommendations as to the suitability of those aims/objectives
Define the accounting process
The process of taking financial data and converting it into financial information in order to be able to make decisions
What makes a source document a receipt?
receipt number
receive from…
What makes a source document a cheque butt
Usually for internal business only
looks like a note pad that records the most basic information
What makes a source document a invoice
invoice number
terms and conditions suppliers has given to the customer
What makes a source document a memo (memorandum)
memo number
(note this is internal/ moving from one part of the business to another)
Define the documents that are not a source document but are helpful
Bank statements
Cheque
What is the accounting equation?
The fundamental concept in accounting, the equation is always right.
Assets = Liability + Owner’s Equity
Definition of Current Asset
A present economic resource controlled by the entity (as a result of past events) that is reasonably expected to be converted to cash, sold or consumed within the next 12 months after the end of the reporting period
Define Non Current Assets
A present economic resource controlled by the entity (as a result of past events) that is not held for resale and is reasonably expected to be used for more that the next 12 months
Define Current Liability
A present obligation of the entity (arising from past events) that are reasonably expected to be settled with a transfer of an economic resource within the next 12 months after the end of the reporting period
Define Non-Current liability
A present obligation of the entity (arising from past events) that are not expected to be settled with a transfer of an economic resource within the next 12 months after the end of the reporting period
Define owners equity
Residual interest in the asset of the entity after the liabilities are deducted
(represents what the business owes to external parties)
Define current
less than 12 months
Define non-current
more than 12 months
Give examples of assets
A physical resource E.g. a vehicle
A intangible resource E.g. a trade mark
Give examples of liabilities
To repay a loan, the business will transfer cash to the bank
An obligation is usually a contractual arrangement
E.g. when a business borrows money from a bank (loan) they will sign a contract when they will pay back money (PRESENT OBLIGATION)
Give example of owners equity
E.g withdrawal
capital
or if you own a car worth $20,000 but you owe $5,000 against it, your owner’s equity is $15,000
Define Balance sheet
An accounting report that detail’s a firms financial position at a particular point in time by reporting it’s assets, liabilities and owner’s equity
State the items that appear in the Balance sheet
ASSETS:
bank, accounts receivable, inventory of supplies
LIABILITIES:
accounts payable, mortgage, bank
Define a transaction
An exchange of a good or service with another party
What occurs when a transaction has been made?
it changes the “financial position” if the business by making adjustments to items in assets and/or liabilities or owners equity
What must remain true after a transaction has occurred?
Every transaction will affects at least two “items” in the accounting equation
After recording these changes, the accounting equation must still balance
Define liquidity
Is the ability of the business to meet its short term debts as they fall due
Define Stability
Is the abilities of a business to meet its debts and continue operations in the long term
What is the formula for working capital ratio
WCR= current assets/ current liabilities
written as a ratio x:1
What does Working capital ratio (WCR) measure
it measures liquidity
What are the 2 types of sources of finances
internal and external
Define the internal and external sources of finance
INTERNAL:
Capital contribution
Retained profits
EXTERNAL:
Trade credit
Bank overdraft
Term Loan
What are advantages and disadvantages of internal sources of finance
Capital advantages
no set repayment structure
no interest
owner(s) willing to wait for a profit before expecting a dividend
Disadvantages
limited to the resource of the owner(s)
What are the advantages and disadvantages of external sources of finance trade credit
+ve of trade credit (accounts payable)
immediate access to goods and services, can generate sales before payments are required
-ve can only be used with that supplier, late fees may be incurred if pay too late
What are the advantages and disadvantages of external sources of finance Bank overdrafts
+VE OF BANK OVERDRAFT
available immediately faciltiy is established, it’s flexible/can be used ofr seasonal variations in bus
-VE OF BANK OVERDRAFT
high interest, can be recalled at short notice
What are the advantages and disadvantages of external sources of finance term loans
+VE of TERM LOANS
can purchase more expensive assets, if secured, lower interest rates
-VE OF TERM LOAN
interest is charged, must be paid back in line with contractual terms
What is the formula for Debt ratio?
DR= total liabilities/total assets x 100
What does debt ration measure?
it measures the stability of a business
represented as a percentage
