Accounting Definitions Flashcards
Define Accounting
the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by the users f the information
Users of Financial accounting and their requirements
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
Main Branches of Accounting
Financial Accounting - info. for external users
Management Accounting - info. for internal users
Define Financial Accounting
the provision of financial information (e.g. financial position, performance and change) to users for decision making
Define Income
Revenue earned by a business ( different from cash received)
Define Expenses
costs incurred in running a business
Define Assets
- 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
Define Liabilities
- amounts the businesses owed to the third party
- a present obligation of the business
Define Capital (Equity)
- 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
Define Profit and Loss Account i.e. Income statement under IFRS
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
Define Balance Sheet
- 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
Define Cash Flow Statement
shows the cash inflows and outflows of the business and therefore how much cash has been generated
Why is financial info. important?
Helps to measure the performance of a business
Enables sole traders and partnerships to provide accounting info. to tax authorities or bank.
Accounting Conventions
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
Accounting Concepts/Assumptions
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
Business Entity Concept
the dividing line between personal and the business itself
i.e. Sole Traders
Define Statement of Financial Position aka Balance Sheet
Summarises the financial state of affairs of the business enterprise
focuses on assets, liabilities and owner’s capital
Stewardship Function
Reporting to the investors on how their investment has fared using financial information
Types of Accounting Theories
Positive = describes, explains or predicts accounting practice as it is Normative = prescribes how accounting should be practised.
Why are financial statements produced
to summarise information in a helpful and understandable form
Define Balance Sheet + Interpretation
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
What standards does a UK listed company comply with?
International Financial Reporting Standards (IFRS);
UK Companies Act 2006
Define Trial Balance
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
Define Accruals
amounts we owe to the suppliers of services
e.g. telephone or light and heat
IS A LIABILITIY
appears twice:
- amounts owing in P&FL account under Expenses
- Under Liabilities (current) in Balance Sheet
Define Prepayments
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
Define Depreciation
- 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:
- original cost allocated as an expense in the PandL account
- equivalent amount deducted from Fixed Assets in Balance Sheet
Define Doubtful Debt
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
Define Bad Debt
Debts that will definitely not be collected
In P&L - recorded as Expense
In BS - recorded as a reduction in debtors
Define Profit
-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)
Define Gross Profit
Cost of Sales
an organisations profit from trading
Define Net Profit
Cost of Expenses
profit after expenses are taken into account
Define Overhead Expenses
expenses deducted from gross profit are regular, ongoing costs of a business
e.g. salaries, rent, heat and light, insurance
Matching Concept
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
Define Capital Expenditure
associated with balance sheet items e.g. fixed assets (>1 year)
e.g. land and buildings, plant & machinery, motor vehicles, fixtures and fittings)
Define Revenue Expenditure
associated with P&L account items
e.g. telephone, heat & light, purchases
Define Net Book Value
the amount left in the books after writing off depreciation
define carriage inwards
cost of purchasing raw materials
in P&L account
define carriage outwards
cost incurred when selling goods
in P&L account
define drawings
money a sole trader owner takes out for their own expenses
e.g. withdrawal of capital
in balance sheet
define statement of profit or loss
shows the profit or loss made by a business over a period of time
define revaluation
value of fixed assets as determined at a point in time
Define Arrears
e. g. subscription or rental income
- income must be matched to the appropriate time period
define useful life
the estimate of how long the fixed asset will continue to provide economic benefits to the entity
define physical life
wear out/ passage of time
define economic life
technological progress and/or changes in demand
define net realisable value
amount the entity is expected to realise if an item is sold in the normal course of business
Financial Information required by users
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
