Accounting Characteristics/Assumptions Flashcards
Timeliness
Having info avail. to decision-makers in time to influence decs
Sooner than later = enhances cap to inf dec
Generally, older = less useful
Understandability
Fin info should be comprehensible to users w/ rsbl knowledge of bus/eco activities
Presented clearly + concisely
Relevance
Capable of making a diff to dec made by users
Info should be related to economic dec
Rel if it helps users to form predictions about outcomes of past/pres/fut events and/or confirms or changes prev eval by providing suitable feedback
Faithful representation
Info reported must be faithful rep of eco event it represents
Info is complete, free from material error and without bias
Comparability
Enables users to ident and understand sim/diff among items
Info about entity is more useful if comparable w/ similar info from other entities and same entity for another period/date
Verifiability
Ability to ensure that diff knowledgable and indep observers can reach a consensus that a particular depiction of an event is faithfully represented.
Maintained thru retention of src docs
Holds acc prof accountable for their work
Period assumption
Reports are prepared for a period of time for comparability of results
Recognising rev earned and deducting expenses incurred for a period allow for profit determination
Distinction can be made between assets, which will provide benefit to future periods, and expenses that are totally consumed within one period
Accrual basis assumption
Rev recognised when it is earned, expenses recognised when they are incurred.
Accrual basis profit for a period -> subtracting expenses from revenue earned in that same period.
Going concern assumption
Reports prepared on the assumption that entity will continue to operate into the future
Assumed that the entity will not be wound up in the near future but will continue its activities.
Entity assumption
Records of A, L and business activities of the entity kept completely separate from owner’s and from those of other entities
Separate set of records is maintained for each entity, which provide information on that entity only
Asset
A present economic resource controlled by the entity, as a result of past events, that has a potential to produce economic benefits
Liability
A present obligation of the entity, to transfer an economic resource, as a result of past events
Owner’s equity
The residual interest in the assets of the entity after deducting all its liabilities
Revenues
Increases in assets or decreases in liabilities, that result in increases in owner’s equity, other than those relating to contributions from the owner.
Expense
Decreases in assets or increases in liabilities, that result in a decrease in owner’s equity, other than those relating to distributions to the owner
Describe an allowance for doubtful debts with respect to an accounting element
Definition of an asset, then reverse it and show how it satisfies this
i.e. -> “An allowance for doubtful accounts is considered a negative asset, because it reduces the amount of an asset, in this case the accounts receivable.”
PROCESS: When a check is given after bankruptcy
Take full amount owing (incl. GST) and subtract all money received
Then split amount remaining into Allowance and GST clearing credits
PROCESS: Disposal of a non-current asset
- Move asset orig cost to Disposal acc
- Move acc dep’n of asset to Disposal acc
- Recognise cash/trade in received with a credit to Disposal acc
- Rebalance the Disposal acc w/ a debit (profit) or credit (loss) as required
- [in case of trade in] Report loan amount (calculated by cost incl GST less trade-in val) then payment for remainder
Explain your treatment of the unearned sales with reference to an accounting element
This is a current liability, as Helen’s Hats has a present obligation to provide goods to their customer, Sandy Sports, since they received money for their future provision of goods but have not supplied these goods yet (1 mark)
This results from the past event of receiving the order from Sandy Sports [receipt/eft xxx] (1 mark)
She will transfer an eco resource, being inventory to Sandy Sports (1 mark)
Question -> relating to the closure of rev/exp accounts
Looking for “to determine profit” and “to return accounts to zero”
Question -> relating to the treatment of a product cost (i.e. for a van’s spray paint)
(for two marks) To get it into a rev-earning cap. and that it is expected to provide future eco benefit over the life of the asset
Explain the effect on the income statement if xyz used the reducing balance method of dep’n as opposed to the straight line method
If Dufficy’s Desks used the reducing balance method instead of the straight method of depreciation the profit would be lower [1 mark] as depreciation expense for the period ended 30 June 2020 would be higher [1 mark]. This is because under the straight-line method the depreciation expense would be $7 550 [1 mark] as opposed to using the reducing balance method depreciation expense would be $11 200for the year ended 30 June 2020 [1 mark].
When is an accrued expense reported in the business’ reports?
When an expense has occurred during the period but there are still outstanding accounts on balance day
Its purpose is to recognise the expense while also recognising the business’ liability for the near future in the balance sheet
