chapter 10 - accouning rules Flashcards
definition of:
accounting principles
referred to as concept (a rule which sets down how financial activities of a business are recorded) and convention (an acceptable method by which the rule is applied to a given situation)
definition of:
business entity
business is treated as being completely separate from owner of business
definition of:
consistency
accounting methods must be used consistently from one accounting period to the next
definition of:
duality
every transaction is recorded twice - once on the debit side and once on the credit side
definition of:
going concern
accounting records are maintained on the basis that the business will continue for an indefinite period of time
continuity:
nca will be shown at book value - original cost less depreciation; inventory appear at lower cost or net realisable value
closing down in future:
assets will be shown at expected sales values
definition of:
historic cost
all assets and expenses are initially recorded at their actual cost
-this principle difficult to make comparison bcs of the effect of inflation
definition of:
matching
revenue of accounting period is matched against cost of the same period
definition of:
materiality
the individual items which will not significantly affect either profit or assets of business don’t need to be recorded separately
-low value items
definition of:
money measurement
only information which can be expressed in terms of money can be recorded in accounting records
definition of:
prudence
profits and assets shouldn’t be overstated and losses and liabilities shouldn’t be understated
definition of:
realisation
revenue is only regarded as being earned when legal titles to goods passes from seller to buyer
objective of accounting standard
ensure users of financial statements are protected and not misled
definition of:
comparability
info contained in financial statements can be useful if it can be compared with similar info abt the same business for another accounting period
-same policies must be used to compare
definition of:
relevance
- info can be used to confirm, or correct, prior expectations abt past events
- help forming, revising or confirming expectations abt future
definition of:
reliability
- free from bias
- free from significant errors
- capable of being independently verified
- prepared with suitable caution being applied to any judgements and estimated which are necessary
- capable of being depended upon by users as being a true representation of the underlying transactions and events which it is representing
definition of:
understandability
can be understood by users of those statements; depends on clarity of info provided; info shouldn’t be omitted as it might be too difficult for users to understand
definition of:
capital expenditure
examples?
money spent on purchasing, improving or extending nca
- all legal costs involved in purchase of nca
- delivery costs
definition of:
revenue expenditure
examples?
money spent on running a business on a day-to-day basis
- administration expenses
- selling expenses
- financial expenses
- costs of goods purchased for resale
definition of:
capital receipt
examples?
money received by a business from a source other than normal trading activities
- receipt of loans
- proceeds of sale of nca
- receipt of capital from owner
definition of:
revenue receipt
examples?
money received by business from Norma, trading activities
- sale of goods
- fees from clients
- rent received, commission received, discount received
inventory valuation
inventory always valued at lower of cost or net realisable value (principle of prudence)
definition of:
net realisable value
the estimated receipts from sale of inventory, less any costs of completing the goods or costs of selling the goods
definition of:
cost of inventory
he actual purchase price plus any additional costs (carriage inwards) incurred in bringing the inventory to its present position and condition
effect on financial statements:
recording capital expenditure as revenue expenditure in income statement
expense overstated, profit for the year understated
effect on financial statement:
recording capital expenditure as revenue expenditure in balance sheet
nca understated, owner’s capital (profit) understated
