Chapter 1 - The Role of Accounting Flashcards
What is the purpose of accounting?
To provide financial information to assist decision-making.
What is Financial Data?
Raw facts and figures upon which financial information is based
What is Financial Information?
Financial data that has been sorted, classified and summarised into a more useable and understandable form
What is a Transaction?
An exchange of goods or services with another party
What are Source Documents?
Paper or electronic documents that provide both the evidence that a transaction has occurred and the details of the transaction itself.
- the first stage of the accounting process
What is Recording?
Sorting, classifying and summarising the data contained in the source documents so that it is more useable
- the second stage of the accounting process
What is Reporting?
The preparation of financial statements that communicate financial information to the owner.
- the third stage of the accounting process
What is Advice?
The provision to the owners of a range of options appropriate to their aims/objectives, together with recommendations as to the suitability of those aims/objectives
- The fourth and final stage of the accounting process
What are Accounting Principles?
The generally accepted rules that govern the way accounting information is generated
The 7 accounting principles are:
- entity
- going concern
- reporting period
- historical cost
- conservatism
- consistency
- monetary unit
What is Entity?
Accounting Principle 1
The business is assumed to be separate from the owner and other businesses, and its records should be kept on this basis.
Eg) even when a business owner owns a beach house and a four-wheel drive - unless it is being used by the business it MUST NOT be included as a asset
What is agreed value?
The accepted value of the non-cash asset at the time of its contribution by the owner
What is Going Concern?
Accounting Principle 2
The life of the business is assumed to be continuous, and it’s records are kept on that basis.
What is Reporting Period?
Accounting Principle 3
The life of the business must be divided into periods of time to allow reports to be prepared; these accounting reports should reflect the reporting period in which a transaction occurs.
What is accrual Accounting?
It is calculating profit by comparing revenues earned against expenses incurred in a particular reporting period.
What is Historical Cost?
Accounting Principle 4
The recording of a transaction at its original cost or value, as this value is verifiable by reference to the source document.
Eg) if I bought land at 300,000 and later down the line is valued at 320,000 on the balance sheet I still write it as 300,000 as the 320,000 isn’t verifiable
What is Conservatism?
Accounting Principle 5
States that losses should be recorded when probable but gains should only be recorded when certain, so that liabilities and expenses are not understated and assets and revenues are not overstated
- the use of the most cautious or conservative assessment of data used when there are differing valuations
- better to be cautious than overly optimistic
What is Consistency?
Accounting Principle 6
Accounting methods should be applied in a consistent matter to ensure that reports are comparable between periods.
- easier to compare if kept consistent, amounts don’t have to be same but method of calculation does
What is Monetary Unit?
Accounting Principle 7
States that all items must be recorded and reported in a common unit of measurement; that is, Australian Dollars
What is Qualitative Characteristics?
The qualities of the information in accounting reports.
The four characteristics are
- relevance
- reliability
- comparability
- understandability
Difference between accounting principles and qualitative characteristics?
Accounting principles apply mainly to records WHEREAS qualitative characteristics apply to reports.
Accounting principles govern the way accounting information is recorded and qualitative characteristics, inform, the way in which accounting reports are prepared.
What is relevance?
Qualitative Characteristic 1
That accounting reports should include all information that is useful for decision making.
What is materiality?
The size of significance of something.
What is reliability?
Qualitative Characteristic 2
Accounting reports should contain information that is accurate, and free from bias or error.
What is comparability?
Qualitative Characteristic 3
It states that accounting reports should be able to be compared over time, and between different companies, through the use of consistent accounting procedures.
