Applying Principles Flashcards
Cost benefit principle
Benoit derived from putting fourth an effort or expenditure should exceed cost
Depreciation in a small waste basket would violate this
Consistency
Ability to validly say whether a company good or worse (compare among year)
Used one year to the next to accounting methods
Changes can be made if justified but it still violates
Faithful representation
Financial information is complete neutral and free from material error
- complete - all info necc. For reliable decision
- neutral - free from bias
- free from material error- minimum level of accuracy
Relevance
Info should have direct bearing on decision.
To be relevant it must have predictive value or comfirmitive value A
* if info wasn’t available a different decision would be made*
Predictive value
Helps capital providers make decc about future.
-such as statement of cash flows whether company has suff. Funds to provide for future or needs invest
Confirmatory value
Determines if expectations have been met
- ex ) income statement meets whether company met earning expectations
Confirmative and predictive
Statement of cash flows not only helps to project future cash flows but also confirms expectations bout prior actions
Conservatism
When faced with choosing between two equally acceptable procedures or estimates accountants should choose the one that’s least likely to overstate assets and income
- most common - used in lower-of-cost-or-market method
Purpose - to not produce lowest net income and lowest asset value
Compatibility (qualities characters)
Equality that enables users to identify similarities and differences between two sets of financial data
Qualitative characteristic
By which to judge the information
to facilitate interpretation of accounting information
Materiality
Refers to relative importance of an item or event.
- it is material if there is reasonable expectation that knowing about it would influence decisions of users of financial statements.
- when item is worth 5% or more of net income, act must treat as material.
Accrual accounting
Revenues and expenses are recorded in the periods in which they occur rather than in periods in which they are received or paid.
- recognizing revenues when they are earned*
- -recognizing expenses when they are incurred*
- -adjusting the accounts*
Depreciation
Allocate the cost of the asset over its estimated useful life
- incurred during the acc period which is long term asset to bring back revenues.
- must be estimated *
Related in with depreciation
BOOK VALUE
Amount cost in asset less the accumulated depreciation applicable to the asset.
Amount of owners or stock hikers equity
The amount that you’d have when you sell your assets
BV=A-L
Matching principle
Expenses are recorded when incurred not when cash is paid
Match expenses when times period to generate revenues
Real accounts
Reported in balance sheet that is the summary of assets, liabilities, and s/e.
-active from first day of business to last
Usually doesn’t carry a zero balance
Nominal accounts
Reported in the income statement
Summary of revenues and expenses of a period of time
Become cumulative
It determines net profit or net loss
Become closed
To make way for sales and exp for next year
Everything a company owns and owes
Perpetual inventory system
Continuous records are kept of the quantity and usually the cost of individual items as they are brought and sold.
Cost of item is recorded in merchandise inventory —when purchased when sold transfer to cost of goods sold
Accounted for when sold
Used with companies with high vol
Not required to close entries
Periodic inventory system
Inventory sold or on hand not yet recorded
- physical account is taken at end of accounting period.
Not detailed on hand during period
Accurate only on balance sheet
When purchases or sales made inventory figure becomes historical.
It is cheap
Used by smaller companies
Used by compan w/ high unit value (car)
Must determine final cost of good
Adjusting entries
Office supplies consumed
Dr- Office supplies expense
Cr-Office supplies
Adjusting entries
Depreciation
Dr- Depreciation expense
Cr- accumulated depreciation, equip-
Is a contra asset
Contra account
Separate account that’s paired with related account
Adjusting entries
Prepayment expired
Rent, insurance etc..)
Insurance expense -
Cr- prepaid insurance
Adjusting entries: Accrued taxes (income, income prop tax)
Dr- Property tax expense
Cr-Property tax payable
