Chapter 1 (Week 1) Flashcards
What is Accounting
Identifying, Recording and Communicating economic events
What is Bookkeeping
It is the part of Recording in the Accounting process
Internal users of accounting data
Managers who plan, organise and run the business
They perform managerial accounting
External users of accounting data
Investors (owners) and creditors (suppliers and bankers)
They perform financial accounting
Managerial accounting
Provides internal reports to help users make decisions about their companies
Financial accounting
Provides economic and financial information for external users use
Historical cost principle
Dictates companies record assets at their cost, including over the time the asset is held
Fair value principle
States that assets and liabilities should be reported at the price received to sell an asset or settle a liability
Monetary unit assumption
Requires that companies only record the transactions which can be expressed in money terms
Economic entity assumption
Requires that companies keep owner and entity activity separate
Entity
Any organisation or unit in society
Proprietorship
1 sole owner
Personally liable
Partnership
2/more owners
Personally liable
Corporation
Separate entity under jurisdiction corporation law
Ownership divided into transferable shares - shareholders enjoy limited liability
Basic accounting equation
Assets = Liabilities + Equity
Assets
Resources a business owns –> normal debit balances
The capacity to provide future services or benefits
Example: cash, machinery
Liabilities
Claims by third parties –> normal credit balances
This means that for every asset the business owns, the business owes a claim to someone –> debt or obligation
Example: accounts payable, loans
Equity
Ownership claim on a company’s total assets
- What the company owes to the owners
Example: share capital, retained earnings
Expanded accounting Equation
Asset = Liabilities + Equity
WHERE EQUITY = Share Capital Ordinary and Retained Earnings
WHERE RETAINED EARNINGS = Revenue - Expenses - Dividends
Share Capital Ordinary
The amounts paid in by shareholders for the ordinary shares they buy
Retained earnings
Revenue - Expenses - Dividends
Cumulative amount of net income a company has earned and kept in the business over time, rather than distributing it to shareholders as dividends
Revenue
Gross increases in equity resulting from business activities which have taken place in the purpose of earning income
Normal credit balances
Result in an increase in an asset + decrease liabilities
Expenses
Cost of assets consumed or services used in the process of earning income
Normal debit balances
Decreases in equity, increases in liabilities
Dividends
Distribution of cash or other assets to shareholders
Decrease retained earnings
NOT AN EXPENSE
Transactions
Business’s economic events recorded by accountants
Internal transactions
Economic events that occur entirely within one company
External transaction
Involve economic events between the company and some outside enterprise
Income statement
Presents the revenues and expenses and resulting net income or net loss for a specific period of time
“End of”
Retained earnings Statement
Summarises the changes in retained earnings for a specific period of time
“For period ending”
The ending balance will flow over to the balance sheet
Balance sheet or Statement of financial position
Reports assets, liabilities and equity of a company
“As of DATE”
Includes retained earnings
Statement of cash flows
Summarises information about the cash inflows (receipts) and outflows (payments) for a specific period of time
“For period ending”
Operating cash flows are the most important indicator
