Chapter 1 - Qualities, kind of businesses Flashcards
What is Accounting?
Collecting, analysing and communicating financial information to help making decisions
What are accounting qualities?
Relevance, Faithfulness, Comparability, Verifiability, Timeliness and Understanbility.
Relevance Quality
Accounting information should make a difference.
Relevance characteristics
It must have predictive value and confirmatory value (interrelated).
It can be:
-Material: Info whose omission would change users,
decisions.
-Not Material: Not useful info.
Faithfulness Quality
Accounting info should represent what it is meant to represent.
Faithfulness requirements
Info should be:
-Neutral
-Complete: Should incorporate everything needed to
understand what is being portrayed.
-Error-free
Comparability Quality
Users must be able to detect similarities and differences of the items compared.
Verifiability Quality
Info is verifiable when different experts agree it is provides faithful info.
Timeliness Quality
Info should be provided in time for users to make decisions.
Understanbility Quality
Info should be clear and concise.
When should accounting information be provided?
When Costs of providing it < Benefits from using it
What is Optimal Quantity? What is its connection with providing information?
The point when the gap between costs and benefits is at its greatest.
It represents the optimal level of info provided.
What happens when additional piece of info are provided?
Costs rise and benefits decline.
What kind of business are there?
Solo Proprietorship, Partnership, Limited Company (Ltd) and Limited Liability Partnership (LLP).
Solo Proprietorship Characteristics
Solo owner, small, easy to setup, business ceases at the death of the owner, unlimited liability.
