Chapter 1 Introduction to accounting Flashcards
Give example of a trading and service business
trading: bookshops, supermarkets, furniture shop and bakery
service: tuition centre, law firm, barber shop, cleaning company
Explain the difference between trading and service businesses?
a trading business buy goods from suppliers and sell goods to customers while a service business provides services to its customer
Explain the role of accounting
The role of accounting is to provide accounting information for stakeholders to make informed decisions on the management of resources and performance of business
State the roles of accountants
- Accountants act as stewards of businesses who are responsible for managing the resources of the business on behalf of the owner
-They set up an accounting information system (AIS) to collate, record and organise and report accounting information so that owners and other stakeholders can make decisions regarding the management of resources and the performance of businesses.
Explain integrity
Integrity is being straightforward and honest in all professional and business relationship
Explain objectivity
Objectivity is not letting bias, conflict of interest or undue influence of others to override professional judgement
.Explain the importance of having integrity and objectivity in preparing and presenting accounting information
-As accountants provide information to stakeholders for decision-making purposes, the information needs to be truthful and accurate. Accountants who do not have integrity and is not objective may provide inaccurate or false information that mislead users to make poor decisions. Thus, it is important for accountants to have integrity and is objective.
Ownership and capital contribution of sole proprietorship
owned by run by one person who contributes capital to set up the business
ownership and capital contribution of limited liability partnership
owned by two or more partners who contribute capital to set up the business
ownership and capital contribution of private limited company
owned by 50 or less shareholders who invest in the business by buying shares in the business
access to funds of sole proprietorship
sole proprietorship is set up by using owner personal funds. Bank and other lenders are less willing to lend money to the business due to the lack of personal assets to serve as collaterals
access to funds of limited liability partnership
LLP has access to a larger pool of funds due to contribution from the partners. Banks and other lenders are more willing to lend money to LLP due to more sources of personal assets available to serve as collaterals
access to funds of private limited company
PLC may issue shares to raise funds. Banks and other lenders are more willing to lend money to PLC as there are more business assets to serve as collaterals
risks of sole proprietorship
owner is personally liable for all debts and losses incurred by the business. he is obliged to pay them using his personal assets
risks of limited liability partnership
partners are not personally liable for the debts and losses incurred by the business unless it is due to the wrongful action of the partner
risks of private limited company
shareholders have limited liability and are not personally liable for the debts and losses incurred by the business. They will only lose the amount they invested
level of control over business in sole proprietorship
owner has total control and full decision making power over the running of the business. Owner may hire professionals to help in the business
level of control over business in limited liability partnership
control over the running of the business is shared among the partners, partners may hire professional to help in the business
level of control over business in PLC
shareholder have no control over the running of the business unless they are part of the management team, company hire professionals to manage the business on behalf of the shareholders
lifespan of SP
business exists as long owner is alive and want to continue operation
lifespan of LLP
Partnership continue to exist until it is wound up or struck off
lifespan of PLC
company continues to exist until it is wound up or struck off
transferability of ownership of SP
ownership of the SP can be transferred to any willing party after notifying the relevant authorities
transferability of ownership of LLP
any addition or withdrawal of partners will have to be agreed upon by all partners and with the authorities informed
transferability of ownership of PLC
ownership of the PLC can be transferred through shares transfers with stamp duties payable to authorities
Advantages of SP
-owner has total control and full decision making power over the running of the business
-relatively quick and easy to set up as there are minimal administrative duties to adhere to
-ownership of the SP can be transferred to any willing party after notifying the relevant authorities
Disadvantages of SP
-owner has to use personal funds as banks and other lenders are less willing to lend money to the business due to the lack of personal assets to serve as collaterals
-owner is personally liable for all debts and losses incurred by the business. He is obliged to pay them using his personal assets
Advantages of PLC
-PLC may issue shares to raise funds. Banks and other lenders are more willing to lend money to PLC as there are more business assets to serve as collaterals
-shareholders have limited liability and are not personally liable for the debts and losses incurred by the business. They will only lose the amount they invested
Disadvantages of PLC
-More complicated and costly to start a company. It has to comply with more rules and regulations
-Sometimes disputes will arise between directors and shareholders as their ideas of what is best for the company vary
-There is also a risk (since companies can buy shares) that a takeover might occur this way
Why owner and stakeholders want accounting information?
-Contributes capital to the business and expect profit distribution in return
-Whether to continue to invest in the business or sell the business, depending on the risks and returns related to the business
Why employees want accounting information?
-Whether to continue working at the business based on the stability and future prospect of the business
Why government want accounting information?
-to decide the amount of tax payable by the business and whether the business complies with the tax regulations
Why bank/lenders want accounting information?
-to decide whether to grant loans to the business, depending on the business ability to repay the loan principal and pay interest
Why managers want accounting information?
-to decide on ways to improve the performance of the business
Why suppliers want accounting information?
-to decide whether to sell to the business on credit, depending on its ability to pay
Why customers want accounting information?
-to decide whether to continue buying from the business, depending on the ability of the business to provide goods after sales service and if it would continue operating in the future
Why competitors want accounting information?
-to decide whether they are comparable to the business and how to improve their own performance
Define accounting entity
-Business and owner are treated as two distinct and separate entities. All transactions are recorded from the point of view of the business. Only business transactions affecting the business are recorded in the business books.
Define Monetary
-Only business transactions that can be measured in monetary terms are recorded.
Define Going Concern
-A business is assumed to have an indefinite economic life unless there is credible evidence that it may close down
Define Accounting Period
-The life of a business is divided into regular time intervals to allow financial statements to be prepared at fixed periods eg.monthly, quarterly, yearly
Define Historical Cost
-Transactions should be recorded at their original cost
Define Objectivity
-Accounting information recorded must be supported by reliable and verifiable evidence so that financial statements will be free from opinions and biases
Define Consistency
-Once an accounting method is chosen, business should use this same accounting method for all the current and future financial periods to enable meaningful comparison across periods.
Define Matching
-Expenses incurred must be matched against income earned in the same period to determine the profit for that period
Define Revenue Recognition
-Revenue is recorded as earned when goods have been delivered or services have been provided
Define Accrual basis of accounting
-Business activities that have occurred, regardless of whether cash is paid or received, should be recorded in the relevant accounting period.
Define Prudence
-Assets and profits should not be overstated while liabilities and losses should be not understated.
Define Materiality
-If a transaction or an item is not material. It does not make a difference to decision-making, then the business need not record it in accordance with the accounting principles and guidelines.
