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Introduction to Financial Accounting > Accounting Definitions > Flashcards

Accounting Definitions Flashcards

1
Q

Define Accounting

A

the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by the users f the information

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2
Q

Users of Financial accounting and their requirements

A

Investors = risk of investment and return
Lenders = assets, company’s cash position
Suppliers/Customers. = assets, cash position and long-term prospects
Employees = job security and collective bargaining
Government Agencies = info enables gov. planning, profits used for tax
Public = social + environmental impact of corporate activities
Management = info for costing, decision making, planning and control

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3
Q

Main Branches of Accounting

A

Financial Accounting - info. for external users

Management Accounting - info. for internal users

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4
Q

Define Financial Accounting

A

the provision of financial information (e.g. financial position, performance and change) to users for decision making

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5
Q

Define Income

A

Revenue earned by a business ( different from cash received)

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6
Q

Define Expenses

A

costs incurred in running a business

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7
Q

Define Assets

A
  • items owned (or leased) by the business which will bring economic benefits
  • an economics resource: a right that has the potential to produce economic benefits
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8
Q

Define Liabilities

A
  • amounts the businesses owed to the third party

- a present obligation of the business

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9
Q

Define Capital (Equity)

A
  • the residual interest of the owners of the business in the assets of the business after deducting all its liabilities
  • the assets of a business
    n. b. is a liability as it’s owed to the owner by the business
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10
Q

Define Profit and Loss Account i.e. Income statement under IFRS

A

Records the income and expenses of a business over time i.e. how much profit has been made (I-E)
e.g. sales, dividends receivable and expenses

Profit = Income - Expenses

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11
Q

Define Balance Sheet

A
  • prepared from trial balance
  • records the assets, liabilities and capital of a business at a certain point in time
  • measures and organisations net assets at a particular point in time
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12
Q

Define Cash Flow Statement

A

shows the cash inflows and outflows of the business and therefore how much cash has been generated

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13
Q

Why is financial info. important?

A

Helps to measure the performance of a business

Enables sole traders and partnerships to provide accounting info. to tax authorities or bank.

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14
Q

Accounting Conventions

A

Entity
- business has a distinct and separate identity from its owners

Monetary Measurement
- items that are measured in financial terms are included in accounts

Historical Cost
-the amount recorded in the accounts will be the original amount paid for a good or service

Periodicity

  • accounts are prepared for a set period of time
  • audited financial statements are usually prepared for a year
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15
Q

Accounting Concepts/Assumptions

A

Going Concern
- assumes business will continue into the foreseeable future

Matching

  • recognises income and expenses when they are accrued
  • (i.e. earned or incurred rather than when money is received or paid)

Consistency

  • similar items will be treated similarly from year to year
  • stops company’s choosing different accounting policies in different years

Prudence

  • introduces an element of caution into accounting
  • income and profits only recorded when certain to result in an inflow of cash
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16
Q

Business Entity Concept

A

the dividing line between personal and the business itself

i.e. Sole Traders

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17
Q

Define Statement of Financial Position aka Balance Sheet

A

Summarises the financial state of affairs of the business enterprise
focuses on assets, liabilities and owner’s capital

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18
Q

Stewardship Function

A

Reporting to the investors on how their investment has fared using financial information

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19
Q

Types of Accounting Theories

A 
Positive = describes, explains or predicts accounting practice as it is
Normative = prescribes how accounting should be practised.
20
Q

Why are financial statements produced

A

to summarise information in a helpful and understandable form

21
Q

Define Balance Sheet + Interpretation

A

a collection of organisations net assets and liabilities at a particular point in time

  • prepared from the trial balance
  • not values at a real-world market value
  • used to assess short-term liquidity (i.e. short-term cash position)
  • records the long-term capital structure of a business
    i. e. how dependent they are on external borrowings
22
Q

What standards does a UK listed company comply with?

A

International Financial Reporting Standards (IFRS);

UK Companies Act 2006

23
Q

Define Trial Balance

A

a listing fo debit and credit balances to check the correctness of the double-entry system
-prepared after bookkeeping process i.e. checks the double-entry process

24
Q

Define Accruals

A

amounts we owe to the suppliers of services
e.g. telephone or light and heat
IS A LIABILITIY

appears twice:

  1. amounts owing in P&FL account under Expenses
  2. Under Liabilities (current) in Balance Sheet
25
Q

Define Prepayments

A

Amount paid in advance to suppliers of services
e.g. rent
IS AN ASSET

opposite of accruals:

  • accruals are added to financial accounts (matching concept)
  • prepayments are deducted
26
Q

Define Depreciation

A
  • an attempt to measure the portion of a non-current asset that has been used up in generating revenues in a financial period
  • a proportion of the original cot is spread over the life of the fixed asset and treated as an annual expense
  • how to transfer capital expenditure to revenue

recorded twice:

  1. original cost allocated as an expense in the PandL account
  2. equivalent amount deducted from Fixed Assets in Balance Sheet
27
Q

Define Doubtful Debt

A

Debts that may not be collected

a provision for DD is set up, always deducted from debtors in Balance Sheet

n.b. recorded in P&L account
Increase = expense
Decrease = income

28
Q

Define Bad Debt

A

Debts that will definitely not be collected

In P&L - recorded as Expense
In BS - recorded as a reduction in debtors

29
Q

Define Profit

A

-a measure of financial performance- based on the accruals concept
I.e. reflects underlying transactions of the business
note: measured against sales or capital employed

gross profit= cost of sales (organisations profit from trading)
net profit= cost of expenses (profit after expenses taken into account)

30
Q

Define Gross Profit

A

Cost of Sales

an organisations profit from trading

31
Q

Define Net Profit

A

Cost of Expenses

profit after expenses are taken into account

32
Q

Define Overhead Expenses

A

expenses deducted from gross profit are regular, ongoing costs of a business
e.g. salaries, rent, heat and light, insurance

33
Q

Matching Concept

A

Matching of income earned and expenses incurred
n.b. not like cash paid and received

Estimating - often have uncertain information
Changing Prices- a price of fixed assets may rise ∴ gain from holding
Wearing out of assets- depreciation is an assumption

34
Q

Define Capital Expenditure

A

associated with balance sheet items e.g. fixed assets (>1 year)
e.g. land and buildings, plant & machinery, motor vehicles, fixtures and fittings)

35
Q

Define Revenue Expenditure

A

associated with P&L account items

e.g. telephone, heat & light, purchases

36
Q

Define Net Book Value

A

the amount left in the books after writing off depreciation

37
Q

define carriage inwards

A

cost of purchasing raw materials

in P&L account

38
Q

define carriage outwards

A

cost incurred when selling goods

in P&L account

39
Q

define drawings

A

money a sole trader owner takes out for their own expenses
e.g. withdrawal of capital

in balance sheet

40
Q

define statement of profit or loss

A

shows the profit or loss made by a business over a period of time

41
Q

define revaluation

A

value of fixed assets as determined at a point in time

42
Q

Define Arrears

A

e. g. subscription or rental income

- income must be matched to the appropriate time period

43
Q

define useful life

A

the estimate of how long the fixed asset will continue to provide economic benefits to the entity

44
Q

define physical life

A

wear out/ passage of time

45
Q

define economic life

A

technological progress and/or changes in demand

46
Q

define net realisable value

A

amount the entity is expected to realise if an item is sold in the normal course of business

47
Q

Financial Information required by users

A

Investors

  • Return from investment
  • Ability to pay amounts to investors
  • Value of investment
  • Performance of management
  • Risk in investment

Lenders

  • Ability to repay loans when due
  • Ability to pay interest when due
  • Security for loans

Employees

  • Long-term future and stability of business
  • Ability to provide appropriate level of remuneration
  • Retirement and other benefits
  • Employment opportunities

Government

  • Business profits
  • Employee details
  • Various reports and statistics

Introduction to Financial Accounting (13 decks)

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