Chapter 1: Introduction to Business Flashcards
What is a service business?
A service business which provide services to its customer
What is a trading business?
A trading business buys from suppliers and sells goods to customers
SP: Ownership
It is owned by one person who contributes capital to set up the SP
SP: Access to funds
It is less likely for banks and other lenders to lend money to the SP due to the lack of personal assets that can serve as collaterals. Hence, access to funds is usually limited to the personal funds of the owner.
SP: Risk
When the SP incurs debts and losses, the sole owner is obliged to lay them using his or her personal asset
SP: Level of control
The only owner usually runs the business by himself or herself and has absolute control over it
SP: Lifespan
The SP exists as long as the owner is alive and desires to continue operation
SP: Transferability of ownership
The sole owner can easily update the particulars of the new owner to notify the corporate regulatory authority of the transfer of ownership
Stakeholders: Owners and manager
Need to make decisions on how to plan, control, monitor and operate the business
Stakeholders: Employees
To evaluate their career prospects with the company
Stakeholders: Investors
To evaluate if they should maintain, increase or decrease their investment. Potential investors decide if they should invest in the business
Stakeholders: Bankers and lenders
To decide whether to grant the business credit or not.
Stakeholders: Suppliers
To evaluate whether the business will be able to provide after-sale support
Stakeholders: Government
To decide how much tax to collect from the business
Stakeholders: Managers
To evaluate how the business is doing and how to improve the business performance
Stakeholders: Competitors
Competitors may compare their performance against the business and decide how to improve their performance
Role of accounting
Accounting is an information system that provides accounting information for stakeholders to make informed decisions regarding the management of resources and performance of business
Role of accountant
Accountants prepare and provide accounting information for decision-making
Professional Ethics
Integrity - Being straightforward and honest in all professional relationships
Objective - Will not let bias, conflict of interest or the undue influence of others override his or her professional judgment
Accounting entity theory
The activities of a business are separate from the actions of the owner. All transactions are recorded from the point of view of the business
Accounting period
The life of a business is divided into regular time intervals
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
Consistency
Once an accounting method is chosen, this method should be applied to all future accounting periods to enable meaningful comparison
Going concern
A business is assumed to have an indefinite economic life unless there is credible evidence that it may close down
Historical cost
Transactions should be recorded at their original cost
Matching
Expenses incurred must be matched against income earned in the same period to determine the profit for that period
Materiality
Relevant information should be reported in the financial statements if it is likely to make a difference to the decision-making process
Monetary
Only business transactions that can be measured in monetary terms are recorded
Objectivity
Accounting information recorded must be supported by reliable and verifiable evidence so that financial statements will be free from opinions and biases
Prudence
The accounting treatment chosen should be the one that least overstates assets and profits and least understates liabilities and losses
Revenge recognition
Revenue is earned when goods have been delivered or services have been provided
