Accounting Definitions

Question 1

Define Accounting

Answer 1

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

Question 2

Users of Financial accounting and their requirements

Answer 2

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

Question 3

Main Branches of Accounting

Answer 3

Financial Accounting - info. for external users

Management Accounting - info. for internal users

Question 4

Define Financial Accounting

Answer 4

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

Question 5

Define Income

Answer 5

Revenue earned by a business ( different from cash received)

Question 6

Define Expenses

Answer 6

costs incurred in running a business

Question 7

Define Assets

Answer 7

• 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

Question 8

Define Liabilities

Answer 8

• amounts the businesses owed to the third party

- a present obligation of the business

Question 9

Define Capital (Equity)

Answer 9

• 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

Question 10

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

Answer 10

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

Question 11

Define Balance Sheet

Answer 11

• 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

Question 12

Define Cash Flow Statement

Answer 12

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

Question 13

Why is financial info. important?

Answer 13

Helps to measure the performance of a business

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

Question 14

Accounting Conventions

Answer 14

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

Question 15

Accounting Concepts/Assumptions

Answer 15

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

Question 16

Business Entity Concept

Answer 16

the dividing line between personal and the business itself

i.e. Sole Traders

Question 17

Define Statement of Financial Position aka Balance Sheet

Answer 17

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

Question 18

Stewardship Function

Answer 18

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

Question 19

Types of Accounting Theories

Answer 19

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

Question 20

Why are financial statements produced

Answer 20

to summarise information in a helpful and understandable form

Question 21

Define Balance Sheet + Interpretation

Answer 21

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

Question 22

What standards does a UK listed company comply with?

Answer 22

International Financial Reporting Standards (IFRS);

UK Companies Act 2006

Question 23

Define Trial Balance

Answer 23

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

Question 24

Define Accruals

Answer 24

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

Question 25

Define Prepayments

Answer 25

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

Question 26

Define Depreciation

Answer 26

- 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

Question 27

Define Doubtful Debt

Answer 27

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

Question 28

Define Bad Debt

Answer 28

Debts that will definitely not be collected In P&L - recorded as Expense In BS - recorded as a reduction in debtors

Question 29

Define Profit

Answer 29

-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)

Question 30

Define Gross Profit

Answer 30

Cost of Sales | an organisations profit from trading

Question 31

Define Net Profit

Answer 31

Cost of Expenses | profit after expenses are taken into account

Question 32

Define Overhead Expenses

Answer 32

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

Question 33

Matching Concept

Answer 33

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

Question 34

Define Capital Expenditure

Answer 34

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

Question 35

Define Revenue Expenditure

Answer 35

associated with P&L account items | e.g. telephone, heat & light, purchases

Question 36

Define Net Book Value

Answer 36

the amount left in the books after writing off depreciation

Question 37

define carriage inwards

Answer 37

cost of purchasing raw materials | in P&L account

Question 38

define carriage outwards

Answer 38

cost incurred when selling goods | in P&L account

Question 39

define drawings

Answer 39

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

Question 40

define statement of profit or loss

Answer 40

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

Question 41

define revaluation

Answer 41

value of fixed assets as determined at a point in time

Question 42

Define Arrears

Answer 42

e. g. subscription or rental income | - income must be matched to the appropriate time period

Question 43

define useful life

Answer 43

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

Question 44

define physical life

Answer 44

wear out/ passage of time

Question 45

define economic life

Answer 45

technological progress and/or changes in demand

Question 46

define net realisable value

Answer 46

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

Question 47

Financial Information required by users

Answer 47

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