Chapter 1: Accounting in business Flashcards
What is the importance of Accounting?
Accounting is a system that identifies, records and communicates information that is relevant, reliable and comparable to help users make better decisions.
Accounting is a language of business.
What is identifying, recording and communicating?
Identifying: Select transactions and events. [Record, not all transactions]
Recording: Input, measure and classify. [Double entry rules]
Communicating: Prepare, analyze and interpret. [Summarize & analyze in report & communicate with end users]
Who are the users of accounting information?
Internal users
[Within organisation]
- Manager
- Officers/Directors
- Internal Auditors
- Sales Staff
- Employees
- Owners of business
External user
[Limited access]
- Lenders
- Shareholders
- Governments
- Tax authorities
- External Auditors
- Suppliers
What are ethics in accounting?
What are the guidelines for ethical decision making?
- Beliefs that distinguish right from wrong.
- Accepted standards of good & bad behaviour
Guidelines:
1) Identify ethical concerns
[Use personal ethics to recognize ethical concerns]
2) Analyze options
[Consider all good & bad consequences]
3) Make ethical decision
[Choose best choice after weighing all consequences]
Financial Accounting practice is governed by concepts and rules known as?
Generally accepted accounting principles. [GAAP]
Relevant information -> Affects the decision of its users
Reliable Information -> Trusted by users
Comparable Information -> Helpful in contrasting organizations
[Standardized]
What are the accounting concepts?
- Business Entity Concept
- Monetary Concept
- Going-Concern Concept
- Historical Cost Concept
- Accounting Period Concept
- Revenue Recognition Principle [Chapter 3]
- Matching Principle [Chapter 3]
What is Business Entity Concept?
- Owner & business considered as SEPERATE entity
- Owner’s personal transaction are kept separate.
- Only business transactions are recorded.
What is Monetary Concept?
- Record transactions if it can be measured in monetary terms
- Non-financial transactions not recorded. [Customer loyalty, quality of workforce]
What is Going-Concern Concept?
- Reflects assumption that the business will continue operating instead of being closed or sold.
- Assets valued at historical cost [market price/actual cost] and not at disposal value.
What is Historical Cost Concept?
- Record transaction for based on actual cost.
- Actual cost is considered objective.
- Amount recorded from source documents.
What is Accounting Period Concept?
- Presumes that the life of a company can be divided into time periods, generally a month, quarter or a year.
- Financial statements are prepared at the end of each accounting period.
What are the forms of Business Entities?
- Sole Proprietorship [1 person]
- Partnership [2 people]
- Company
What is a company?
Owners of a company are called shareholders. Shareholders are not personally liable for the debts of the business. When a company issues only one class of shares, it is called ordinary shares.
What is the Basic Accounting Equation?
Assets = Liabilities + Shareholders’ Equity
**Accounting equation MUST remain in balance after each transaction!
What are Assets?
Assets are resources owned by the company that have measurable value and are expected to provide future benefits to the company.
- Cash
- Accounts receivable
- Inventory
- Supplies
What are Liabilities?
Amounts owed by the business to creditors.
[Anything with payable in the name is considered a liability]
Example:
- Loan Payable
- Accounts Payable [amt owed to suppliers]
- Unearned revenues
- Wages Payable
What are Shareholders’ Equity?
Owners’ claim to the business resources.
How it works?
Contributed capital → Share Certificate → Retained Earnings
- Ordinary share capital
- Retained earnings
- Sales revenue
What are Inventory?
Goods that a trading business buys for resale.
What is Revenue?
Amount earned from selling goods or providing a service.
[Amount earned from selling inventory: Sales Revenue]
What are Expenses?
Cost used to earn the revenue.
(e.g. Rent revenue)
[Cost of inventory sold: Cost of sales] → categorized under expense
What does “bought inventory on credit” mean?
To pay later. [Liability is created due to owing]
What does “sold inventory on credit” mean?
To receive cash later. [Asset is created]
What is the purpose of Statement of Profit or Loss?
To show a company’s revenues and expenses with the resulting net profit or loss over a period of time.
Format:
[Company]
Statement of Profit or Loss
For the Month Ended [dd mm yy]
Sales revenue
Less: Sales returns [if have]
Net sales revenue
Less: Cost of sales
Gross profit
Less: Operating expenses
[expenses]
Total operating expense
Net profit/loss
What is the purpose of statement of Financial Position?
To show a company’s financial position at a point in time.
Format:
[Company]
Statement of Financial Position
as at [dd mm yy]
Assets
Non-current assets
Current assets
Liabilities
Non-current liabilities
Current liabilities
Shareholders’ Equity
