Chapter 01.1 - The accounting Cycle Flashcards
What’s the accounting cycle?
The recurring sequence of activities and procedures which are used to record financial information.
What are the key elements in an accounting Cycle?
- Receive source documents
- Record details from source documents in the books of prime entry.
- Post details from the books of prime entry to ledger accounts, following the rules of double entry.
- Verify the accuracy of the double entry records with a trial balance, etc.
- Prepare end of year financial statements applying accounting concepts and then start the cycle again.
What are source documents?
Supporting records that provide evidence of all the transactions to be recorded in an accounting system.
What are books of prime entry?
These books list the relevant information taken from source documents in date order and provide the information required to prepare the double entry records.
Whats a purchase invoice?
Purchase of goods on credit for resale.
Book of prime entry - Purchases Journal
Whats a sales invoice?
For sale of goods on credit.
Book of prime entry - Sales journal
What’s a debit note/ Credit note received?
Received from a supplier when goods are returned, eg; Returns outwards
Book of prime entry -Returns outwards Journal
What’s a credit note issued?
Sent to a customer when goods are returned, eg; returns inwards.
Book of prime entry - Returns inwards Journal
Whats a cheque counterfoil?
A cheque counterfoil outlines Details of payments made by cheque.
Book of prime entry - Cash Book
What’s a bank statement?
Details of bank charges, dishonoured cheques, etc.
Book of prime entry - Cash Book
What’s a petty cash voucher?
Details of small cash payments.
Book of prime entry - Petty Cash Book
What’s an invoice?
For purchase and sale of non - current assets on credit.
Book of prime entry - General Journal
What’s the accounting equation?
Assets = Capital + Liabilities
What is book keeping ?
All financial transactions need to be recorded in a systematic way, so that the owner of the business and other stake holders can be provided with the information they need to make the right decisions. This record keeping aspect of accounting is often called book keeping.
What is accounting ?
It is the process of selecting, summarising and classifying financial data in ways that provide the owners and other stakeholders of the business with useful information to help them assess performance and plan future
activities of the business.
Describe a sole trader business.
It is a business run by an individual. The individual controls the business. If successful all profits earned will belong to the individual, however if unsuccessful, the individual can lose whatever has been invested and private possessions due to unlimited liability.
Describe a partnership.
It is where several individuals own and run the business. Partners jointly control business and share profits. They are also jointly responsible for debts and can lose their private resources if unsuccessful.
Describe a Limited Liability company.
These are owned by shareholders who have each contributed funds to establish and run the company.Most shareholders do not take part in day to day management and control of the company but have elected directors to undertake these responsibilities on their behalf. Shareholders are rewarded by some of the profits earned by the company, if successful. Shareholders responsibility for debt is limited to the amount they invest due to limited liability.
Describe none profit organisations.
They include clubs and societies, which are formed by members so they can meet for social activities. These organisations do not aim to make profit. But they do have to be financially viable in order to survive.
What’s the function of an income statement?
The income statement is the chief source of information about profit or losses for sole traders, partnerships and limited companies.
What’s the function of the SOFP ?
The statement of financial position provides details of the resources ( cash and bank balance) owned by the business which can be used to meet commitments.
What’s a liability?
Businesses often owe money to other businesses. Amounts owed to other businesses are called liabilities.
What’s capital?
Investments made by the owner(s) of the business. it equates to the net value of the business.
What’s a delivery note ?
Is a document detailing the goods that have been delivered by a supplier.
What’s a remittance advice note ?
A remittance advice note is sent with a payment advising the recipient the invoices are being paid.
