Ch 2 - Accounting for a small business Flashcards
What makes something a small business (not strict definition)
- Sole proprietor or partnership
- Owner manages and contributes to business
- Small market share and turnover
Roles of accounting
- Evaluating business proposals
- Designing an accounting system
- Taxation
- Buying and selling on credit
- Sources of finance
What is the accounting process
- Business documents (source data)
- Data input (sorting data)
- Business reports (summary)
- Decision making (based on reports)
What are the qualitative characteristics?
- Timeliness
- Understandability
- Relevance
- Faithful representation
- Comparability
- Verifiability
Timeliness definition
Information is only valuable if it can be provided in a timely manner
Understandability
Information must be present in a way that people with a reasonable knowledge of business can understand it
Relevance
Information is relevant if it has the potential to affect the decision making users of the report
Faithful representation
Information must faithfully represent the economic events being reported
Comparability
Information about an entity is able to be compared with information about other entities or the same entities or the same entity over time
Verifiability
Financial information is supported by evidence (source documents) which individuals can check to verify the information is faithfully represented
What are the accounting assumptions?
- Period assumption
- Accrual accounting assumption
- Going concern assumption
- Entity assumption
Period assumption
The life of the business is divided into periods of time known as reporting period. This is done to measure performance
Accrual accounting assumption
Is a method of determining profit whereby profit = revenues eared less expenses incurred during a particular period
Going concern assumption
The business will continue to operate and not be wound up in the foreseeable future
