Chap 1 Role of Accounting and accounting principles Flashcards
What is Bookkeeping?
It refers only to the recording process of business transactions
What is accounting?
It involves recording, summarising, analysing, interpreting and communciation of the financial information
What is the roles of accounting and the accounting information system?
Stewardship and Decision making
What is stewardship?
To be responsible to provide financial information to help owners make decisions on how to manage the business
What is decision making?
Accounting provides financial information to interested parties to help them make decisions relating to business
What is the accounting information system?
A system to collect, record and report the financial information
Who are the internal stakeholders?
Owners and managers
Employees
Who are the external stakeholders?
Shareholders and investors Banks, suppliers and lenders Competitors Customers Government Public
How is accounting information used by Owners and managers for decision making?
They need all information to monitor, analyse, control and plan the performance of the company
How is accounting information used by employees for decision making?
They want to know the profits and cash to consider the company’s prospects and ability of the company to pay their salaries promptly
How is accounting information used by Shareholders and Investors for decision making?
They want to know the profit, assets, liabilities and potential returns on investments to decide on their investment plans
How is accounting information used by Banks, suppliers and lenders for decision making?
They want to know the profit, cash and liabilities to evaluate if the business is able to pay the debts and service the interest
How is accounting information used by Competitors for decision making?
They want to know the income and profit to compare their performance
How is accounting information used by Customers for decision making?
They want to know the profit to evaluate the stability and continuity of the business
How is accounting information used by Government for decision making?
They want to know the income and profit for tax purpose
How is accounting information used by Public for decision making?
They want to know the income and profit to assess the economic situation
What is a cash transaction?
it is for which immediate payment is made
What is a credit transaction?
It is for which payment is postponed to a future date
What is the difference between a trading business and a service business
A trading business is like a retail shop whilst a service business is like a hair slaoon
The main difference is in financial statements, as a trading business would include records of inventory and the trading portion of the income statement
What are the types of business entities that can be registered?
Sole-proprietorship
Partnership
Limited Company
Between a sole proprietorship and limited company, which is easier to set up and why?
Sole proprietorship, as it is less expensive and one owner makes all the decisions
Between a sole proprietorship and limited company, which is easier to raise funds and why?
Limited Company as it’s easier to borrow from banks and can issue shares to raise funds
Between a sole proprietorship and limited company, what is the rewards and risk?
Sole proprietorship takes all profits and all losses
Limited partnership shares profits but only loses amount invested
Between a sole proprietorship and limited company, which is easier to transfer ownership up and why?
Limited company as its easier for shareholders to sell their share ownership
Between a sole proprietorship and limited company, which is easier to prepare financial statements and why?
Sole proprietorship as limited companies have to follow strict regulations for audit purpose
To ensure professional ethic, you must have what 2 important principles
Integrity, as you must be straightforward and honest in recording and reporting all information.
Objectivity, as you must unbiased and rely only on facts instead of being influenced by gains or interests of other parties
What are the 11 key accounting theories
Accounting entity Going concern Accounting period Monetary assumption of money measurement Historical cost Objectivity Materiality Accural Matching Consistency Prudence or conservatism
What is the significance of accounting entity?
The business and it’s owners are treated as separate and different entities
What is the significance of Going concern?
Business is assumed to operate for an indefinite period of time
What is the significance of Accounting period?
Life span of business divided into fixed periods of time
What is the significance of Monetary assumption?
Only transactions that can be measured in monetary terms are included in the accounting records
What is the significance of Historical cost?
Transactions are recorded at the original cost to the business
What is the significance of Objectivity?
Transactions are based on verifiable evidence
What is the significance of Materiality?
Amount which is immaterial is treated as an expence
What is the significance of Accural?
Income recognised when earned, not received;
expenses recognised when incurred, not paid
Accural Basis : Profit = Revenue earned - Expenses incurred
Cash Basis : Profit = Revenue received - Expenses paid
What is the significance of Matching?
Expenses incurred are matched against income earned during the same period to determine profit
What is the significance of Consistency?
The same accounting method should be applied to an item for all the accounting periods
What is the significance of Prudence?
When reporting an item, select the option which gives a lower profit or asset value
Loss is usually recognised but not gain
Identify the accounting theory
The assests of a business are expected to be used in the business and not to be sold in the near future
Going concern
Identify the accounting theory
Every business transactions must have supporting documents before they can be recorded in the books
Objectivity
Identify the accounting theory
Skills and good performance of the staff cannot be recorded in the accounting books
Monetary assumption
Identify the accounting theory
When figures cannot be accurately determined, the method that will report a lower profit will be used
Prudence
Identify the accounting theory
When preparing teh accounts of a firm, one should normally use the same accounting methods for similar items from one accounting period to the next
Consistency
Identify the accounting theory
Profit is the difference between income earned and expense incurred during the same period
Matching
State the accounting theory and whether it is followed or violated?
The owner of a business used a business cheque to pay for a sofa for his home
Accounting theory - violated
State the accounting theory and whether it is followed or violated?
In preparing financial reports, the life of the business is divided into specific periods of time
Accounting period - followed
State the accounting theory and whether it is followed or violated?
Market values rather than historical costs are used to record non current assets in accounts
Historical cost - violated
State the accounting theory and whether it is followed or violated?
A company records all income received in cash without considering if they belong to the relevant accounting period
Accural - violated
State the accounting theory and whether it is followed or violated?
The accountant feels that the money spent on computer software is not significant enough to be considered as a non-current asset
Materiality - followed
