BDA THEORY Flashcards
What is the accrual basis of accounting?
Recognizes transactions when they have an economic impact, not when cash flows.
How does cash accounting differ from accrual accounting?
Cash accounting records transactions when cash is received or paid; accrual records when transactions occur.
Define an asset under the Conceptual Framework.
An asset is a present economic resource controlled due to past events, with potential benefits.
Define a liability.
A present obligation to transfer an economic resource due to past events.
What are the recognition criteria for an asset?
Relevant and a faithful representation.
What is equity?
The residual interest in assets after deducting liabilities.
Define income in accounting.
Increases in assets or decreases in liabilities, leading to increased equity (excluding owner contributions).
What is an expense?
Decreases in assets or increases in liabilities that reduce equity (excluding distributions to owners).
When is an item recognized in financial statements?
If it provides relevant information and faithful representation.
What is “relevance” in the Conceptual Framework?
nformation that can influence users’ decisions.
Define “faithful representation.”
Information that is complete, neutral, and free from error.
What is a reporting entity?
An entity required or choosing to prepare financial statements, not necessarily a legal entity.
Explain “Weighted Average Cost” in inventory.
Costs are averaged over all items to calculate inventory and sales cost.
What does FIFO mean?
First-In, First-Out; assumes first items bought are first sold.
Why are balance day adjustments made?
To ensure income and expenses are reported in the correct period (matching principle).
