Accrual Accounting 101 Flashcards
Accounting is known as “the language of _____.”
Business.
Because it communicates a range of business information to different users. This is usually done through financial statements.
Accounting expresses business transactions in terms of _____.
Money
Accounting is concerned with transactions and events having a financial character.
The main purposes of accounting are: (6)
- systematic recording
- communicating financial status
- assisting decision making
- ensuring control of assets
- planning future activities
- complying with the law
Users of a business’s financial statements include: (4)
- owners
- investors
- management
- lenders
Three main groups of stakeholders that want to know the story of your business are: (3)
- internal stakeholders
- external stakeholders
- government (IRD)
The different ‘languages’ of accounting are: (3)
- financial accounting
- managerial accounting
- tax accounting
What is the Accounting Cycle?
The accounting cycle is a step-by-step process of recording, classifying and summarising transactions of a business to generate financial information in the form of financial statements.
What are the steps in the accounting cycle? (9)
- Transactions and events
- Journal entries
- Ledgers
- Unadjusted trial balance
- Adjusting entries
- Adjusted trial balance
- Financial statements
- Closing entries
- Closing trial balance
Step one of the accounting cycle is _____.
Transactions and events.
Data from transactions and source documents are analysed.
Step two of the accounting cycle is _____.
Journal entries.
Transactions are recorded into the first book of accounts. Accuracy is essential at this stage.
Step three of the accounting cycle is _____.
Ledgers.
After journalising all of the transactions, the information is recorded in the general ledger in preparation for a trial balance.
Step four of the accounting cycle is _____.
Unadjusted trial balance.
The unadjusted balance does not include accrual adjustments.
Step five of the accounting cycle is _____. (4 types)
Adjusting entries.
The adjusted entries can include prepaid expenses, accrued expenses, revenue received in advance or accrued income.
Step six of the accounting cycle is _____.
Adjusting trial balance.
A fresh trial balance is created once the adjustments are made,
Step seven of the accounting cycle is _____.
Financial statements.
Financial statements are created from the adjusted trial balance.
Step eight of the accounting cycle is _____.
Closing entries.
At this step, all of the financial statements have been prepared, and all transactions have been recorded analysed, and summarised.
Step nine of the accounting cycle is _____.
Closing trial balance.
To ensure that all transactions have been properly recorded, analysed, and summarised, the different accounts have the closing balance recorded. Debit and credit sides should be matched.
What is the business cycle?
The business or operating cycle is the business transaction process in which business inventories are purchased, processed, and eventually sold to customers.
What is the cash bases of accounting?
The cash basis of accounting recognises and records revenues when cash is received, and expenses when they are paid.
What is accrual accounting?
Accrual accounting is where income and expenses are recorded when they are earned, not when the money is actually received.
What are two pros of cash accounting?
- It’s simple and shows how much money a business has on hand.
- It is an easier option for calculating GST.
What are two cons of cash accounting?
- It’s not 100% accurate as it may show a business as profitable just because the bills have not been paid.
- Is not reliable information for making business decisions as it only provides a day-to-day view of finances.
What are two pros of accrual accounting?
- A much more accurate picture of the business.
2. Financial decisions can be made with more confidence.
What are two cons of accrual accounting?
- It is more work as invoices need to be monitored and recorded.
- Tax may need to be paid on income before payment has been received
