Chpt 5 Flashcards
Define trial balance
A trial balance is a list of all the ledger accounts and their ending balances at a point in time.
A trial balance is usually prepared at the end of the financial period after all the business transactions have been recorded and posted to the ledger accounts.
Purpose of a trial balance
To facilitate the preparation of the financial statements as this is a list of all account balances at a particular date.
To ensure arithmetic accuracy in recording.
Limitation of a trial balance
A balanced trial balance is not an absolute proof of accuracy of transactions recorded in ledger accounts because there may be errors which would not affect the balancing of the trial balance and thus would not be revealed by a trial balance.
Accounting theory for financial statements
Going concern theory.
Accounting period theory.
Purpose of the statement of financial performance
A Statement of financial performance shows the income earned and expenses incurred for a period of time. It informs the stakeholders of the profitability of the business.
Purpose of trading portion
The trading portion shows the gross profit or loss from buying and selling goods.
Purpose of the profit and loss portion of the statement of financial performance
The profit and loss portion reports the overall profit earned from operating the business. Profit or loss for the period is the final profit after including other income and deducting other expenses.
Diff between gross profit and profit
gross profit is the amount by which net sales revenue exceeds the cost of sales. It is the profit earned by selling goods. While profit is the amount by which the total income is greater than total expenses. It is the overall profit earned after all expenses have been deducted.
Why it is important to prepare the statement of financial performance at regular time period of time
Statement of financial performance is prepared at regular periods of time to provide timely financial information on the profitability of the business which is important for stakeholders when they make decisions.
Why it is important for a business to be profitable
Continue operating and to sustain in the long term.
Attract other investors
Purpose of the statement of financial position
The statement of financial position lists the assets, liabilities and equity of a business as at a specific date.
It provides information on how resources are obtained and used in a business and the claim by the owner(s) on the net assets of the business at a point in time. It is a representation of the accounting equation.
Define equity
Equity refers to the claim by the owner(s) on the net assets of the business.
