Chapter 2&3 Definitions Flashcards
Assets
An asset is a present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce future economic benefits.
Current assets are cash and other types of assets held primarily for the purpose of sale or trading, or are reasonably expected to be converted to cash, sold, or consumed by a business within 12 months after the end of the reporting period.
Non-current assets are expected to be used by the business entity for a number of years and are not held for resale.
Liabilities
A liability is a present obligation of the entity to transfer an economic resource as a result of past events.
Current liabilities are obligations of the entity that are reasonably expected to be settled within 12 months after the end of the reporting period.
Non-current liabilities are not expected to be settled within 12 months.
Owner’s Equity
Owner’s equity is the residual interest in the assets of the entity after deducting all its liabilities.
Revenues
Revenues are increases in assets or decreases in liabilities that result in increases in owner’s equity, other than those relating to contributions from the owner. Revenue arises in the course of the ordinary activities of a business and includes items such as sales, fees, interest, dividends, royalties and rent.
Expenses
Expenses are decreases in assets or increases in liabilities that result in a decrease in owner’s equity, other than those relating to distributions to the owner. Expenses encompass losses as well as those expenses that arise in the course of the ordinary activities of the business. Including; cost of sales, wages, and depreciation.
Period Assumption
Reports are prepared for a particular period of time, such as a month or a year, in order to obtain comparability of results. Profit determination involves a process of recognising the revenue for a period and deducting the expenses incurred for that same period. A distinction can be made between assets, which will provide benefit to future reporting periods, and expenses that are totally consumed within one reporting period.
Accrual Basis Assumption
Under the accrual basis, revenue is recognised in the period in which the expected inflow of economic benefits can be measured in a faithful and verifiable manner, that is revenue is recognised when it is earned. Expenses are recognised when the consumption of goods and services can be measured, that is, expenses are recognised when they are incurred. Accrual basis profit for an accounting period is determined by subtracting expenses incurred for a period from revenue earned in that same period.
Going Concern Assumption
Financial reports are prepared on the assumption that the existing entity will continue to operate into the future. It is assumed that the entity will not be wound up in the near future but will continue its activities.
Entity Assumption
The records of assets, liabilities, and business activities of the entity are kept completely separate from those of the owner of the entity, as well as from those of other entities. A separate set of accounting records is maintained for each entity, and the financial statements prepared provide information on that entity only.
Understandability
Understandability requires financial information to be comprehensible to users with reasonable knowledge of business and economic activities. To be understandable, information should be presented clearly and concisely.
Relevance
Relevant information is capable of making a difference to the decisions made by users. Relevance requires financial information to be related to an economic decision. Information is relevant to a decision if it helps users to form predictions about the outcomes of past, present or future events, and/or confirms or changes their previous evaluations by providing suitable feedback.
Faithful Representation
The information reported must be a faithful representation of the real-world economic event it represents. The user is assured that the information presented is complete, free from error, and unbiased.
Verifiability
Verifiability means the ability to ensure that different knowledgeable and independent observers can reach a consensus (arrive at the same conclusion) that a particular depiction of an event is faithfully represented. Verifiability is maintained by retention of source documents used to record the transaction and checked through auditing. The purpose of verifiability is to hold the accounting professional accountable for their work.
Comparability
Comparability is qualitative characteristic that enables users to identify and understand similarities in, and difference among, items. Information about an entity is more useful if it can be compared with similar information about other entities and with similar information about the same entity for another period or date.
Timeliness
Timeliness means having information available to decision-makers in time to be capable of influencing their decisions. Having information available sooner, rather than later, can enhance its capacity to influence decision, and a lack of timeliness can rob information of its potential usefulness. Generally, the older the information, the less useful it is.
