Chapter 2 - Financial Accounting Flashcards
Useful information derived from financial accounts
- Debtors terms
- What kind of profit is being made
- Allows for comparison between firms
Role of accountants
- meet statutory reporting requirements
- ensure adequate money is available to continue operation
- contribute to the decision-making process of management
Going-concern principle
assume that the economic system is ongoing, i.e. the firm is not about to close. For example they assume that remaining inventory is of value to be used later
matching principle
— match transactions in the same period of time, e.g. matching sales with the costs of manufacturing the goods sold
— Accountants try to maintain consistency within and between accounting periods of time
Objectivity principle
require supporting evidence (usually written such as receipts for wages, invoices for material, bank statements, physical validation of inventory etc.) called source documents for their initial entries
cost principle
add costs when they occur. For example they value work-in-progress or finished goods are at cost.
revenue recognition principle
They exclude any profit until the sale takes place; recognizing revenue when sales are transacted. The accountant takes profit when sales are made (all previous transactions are made on a cost basis).
Income
— Revenue
— extraordinary gains
Expenses
— ordinary disembersements
— extraordinary disembersements
Assets
controlled resources from which future econome benefits are expected to flow
Liabilities
A measure of obligations from which future econome benefits are expected to leave the system
Equity
Obligations the firm has to shareholders
Accounting depreciation
— The reduction in the value of an asset over time
— generally accepted to depreciate over the lifetime of the asset
What causes an asset to depreciate?
- Wear and tear. As an asset is used moving parts wear. In addition weathering leads to rust and rot.
- Higher running costs. With age, efficiency drops and output may reduce; and labour and other costs may rise.
- Higher maintenance cost.
With usage more parts become defective and maintenance costs
nIse. - Obsolescence of the asset. Technological advances lead to new machines, which produce better goods, are cheaper to operate, or cost less to maintain. This makes existing machinery inadequate.
- Obsolescence of products. Changes in demand may lead to a drop in or elimination of the line produced by a particular asset
Straight line depreciation
Equal instalments written off each year
