CHAP 1 Flashcards
Box 1
Book keeping
process of recording financial transactions in accounting records of an entity
Accounts
all transacions are analysed into different types and then recorded in individual records called accounts.
double entry book keeping
it is used to record the dual aspect of the transaction in the systems designed to allow the management of business, to monitor progress and produce periodical financial statement and performance report.
or
any transaction that affects assets, liabilities, capital,income or expense must have an offsetting effect to maintain accounting equation.
or
the process of recording every transaction in at least two places.
accounting
it is the process of recording, classsiying, summarising the information of financial nature and interpreting the results to end users
there are two types of accounting 1. financial accounting and reporting and 2.cost and management accounting
financial accounting and reporting
maintaing a system of accounting records for business transactions and other items of financial nature and reporting the financial position and performance of an entity in a set of financial statements to the stakeholders
cost and management accounting
it is the recording and communication of economic information to management for planning, control and decision making
accounting cycle
1.transactions 2.books of prime entry 3.ledgers 4.trial balance 5. financial statement
transaction
dealing between 2 people or parties that effect or influence each other
business/financial transaction
an economic event that has monetary impact and has to be recorded in books of accounts of the business
simple transaction
simple like buying and selling items on cash
complex transaction
involves long time and various parties
one off transaction
transactions that occur on single occasion. e.g buying land
ongoing transaction
transaction that occur on regular basis.e.g.monthly bills
capitalisation
it means recognizing a cost as an asset
financial statement
are reports of an entity to provide its stakeholder with neceesary information for their decision making needs.
entity
any type of organisation for which we do accounting
business entity concept
business entity and its owners are seperated or financial reports are constructed as if the business entity is seperate from its owners
companies(business entity concept)
a company by law is a legal person seperate from its owners
accounting period also called
accounnting session/financial year/accounting period/reporting period=12 months or 1 year
set of financial statements comprises
1.statement of final position
2. statement of comprehensive income
3. statement of changes in equity
4. statement of cash flows
5. notes to financial statements
statement of financial position(balance sheet)
-reports financial position of an entity usually at the end of financial year. financial position is shown by assets,liabilities and equity(capital)
-it shows equity of businesss at a point in time
asset
defined as a present economic resource controlled by entity as a result of past event.
simply an asset is something a business owns or controls and is available or will be available for use in business.
Or
Asset is an economic resource and the owner has a right on it and it has the potential to produce economic benefits bit these Benefits need not to be expected to flow to the entity. Like it must be in control and must have the potential to give benefits whether it is used to get benefits or not.
current assets
assets that provide economic benefits in short term(one year).e.g.cash, trade receivables
non current assets
assets that have long useful life and provide future economic benefits for an entity over a period of several years.e.g.buildings, machinery
liabilities
a present obligation of an entity to transfer an economic resource as a result of past events.
simply a liability is something owed by the business to someone else.
current liabilities
amounts payable within one year.e.g.trade payables, utility bills
non-current liabilities
amounts payable more than 12 months after the reporting date,e.g. long term bank loan
equity/capital/net assets
the residual interest in the assets of entity after deducting all its liabilities
-in sole trader business it is the owners capital
-increase in income or further capital investment increases equity
-increase in expense and drawing decreases equity
accounting equation
assets=capital+liabilities
total debit and credit entries must be equal , this maintains accounting equation
income
arise from increase in assets or decrease in liability other than contribution from owner(more capital invested in business)
revenue
income arising in the course of ordinary activities of entity.e.g income from sales of goods
other income
income arising other than in the course of ordinary activity.e.g.disposal of non-current assets
expenses
arise from decrease in asset or increase in liability other than distributions to owners.
drawing
any thing taken away from the business for personal use
debit
shortened as ‘dr’
it is debit if assset,expense,drawing increases or liabilities, income, capital decreases
credit
shortend as ‘cr’
it is credit if asset, expense,drawing decreases or liabilities, income, capital increases
single entry system
consists of a cash book which contains only the personal accounts of creditors and debtors
recognition
refers to putting an item into the book keeping system(performing double entry on it)
cost
the amount of cash or cash equivalents paid, or the value of the other consideration given to acquire an asset at the time of acquisition or construction.
Gross amount
presenting an asset,liability,income or expense without deducting any related amount.
net amount
this is the result of adding a positive or negative number together. the result might be a net asset, net liability, net income or net expense.
financial reporting
the objective is to provide financial information about the reporting entity that is useful to existing and potential investors,lenders and other creditors in making decisions about providing resources to the entity.
responsibility of preparing financial statements in sole trader and partnership business
-there is no obligation to prepare a financial statement
-but financial statement might be required for tax purposes or for obtaining loan from a bank for which the owner or the partners are resposnsible.
-a person might be employed to maintain accounting records and prepare financial statements.
responsibility of preparing financial statements in companies
-financial statements must be prepared for shareholders and for filing with relevant regulatory bodies.
-it is the responsibility of the directors to ensure that this is done.
regulation for preparing financial statements for sole trade or partnership business
-financial statements are private and do not have to be disclosed, except for tax authorities or lending bank.
-must be prepared according to the accepted accounting principles and practices but need not to conform to all the requirements of accounting standard
regulation for preparing the financial statement for companies
-financial statements of a company are usually subject to audit
-company law requires that financial statements are filed with a government agency where they can be accessed and read by any member of the general pulic
-listed companies are even required to make their financial statements availabale on their websites
audit
it is the examination of financial statements by an independant expert who expresses an opinion as to whether they are fairly presented
GAAP(Generally Accepted Accounting Principles)
the concepts,principles,conventions, laws, rules and regulations that are used to preapre and present financial statements are known as GAAP.
main sources of GAAP in pakistani jurisdiction
-companies act 2017
-INternational financial reporting standards(IFRSs) this is used by companies whose shares are traded on the worlds stock markets.
IFRSs is issued by
International Accounting Standards Board (IASB)
Equity claims
These are the claims against the entity that do not meet the definition of a liability.
