Definitions Flashcards
Assets
An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity
Liability
A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of resources from the entity embodying economic benefits
Equity
Equity is the residual interest in the assets of the entity after deducting all its liabilities
Income
Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants
Expenses
Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletion of assets or occurrences of liabilities that result in decreases in equity, rather than those relating to distributions to equity participants
Profit / Loss
Profits are increases in equity not resulting from contributions from equity participants
Losses are decreases in equity not resulting from distributions to equity participants
Relevance (fundamental characteristic)
Be able of making a difference in the decision made by users
Have predictive value, which helps users to predict outcome
Have confirmative value, which helps to confirm previous evaluations
Faithful representation (fundamental characteristic)
As far as possible be complete, neutral and free from errors
Verifiability (enhancing characteristic)
Helps assure users that information is faithfully represented
Timeliness (enhancing characteristic)
Means having information available to decision-makers in time to be capable to influence their decisions
Understandability (enhancing characteristic)
Means that information is classified, characterised and presented clearly and concisely
Comparability (enhancing characteristic)
Enables users to identify & understand similarities in, and differences among, items for other years and other companies - a comparison relates to at least to items
Materiality
Information is material if omitting it or misstating it could influence the decisions that users make on the basis of financial information about a specific reporting entity
Business entity
This refers to the fact that financial statements record and report on the activities of one particular entity. They do not include the personal assets and liabilities of those who play part in owning or running the entity
Going concern
Statements are prepared on assumption that the entity will continue in business for the foreseeable future. There is no intend to liquidate or reduce the size of the business
Accrual Accounting
Using the accrual basis to recognise the effect of the transactions when they occur. Income & expenses are matched so they concern the same goods/services & the same time period
Current cost
What it would cost to replace assets and liabilities at today’s prices
Present value
Assets & liabilities are valued at the present discounted value of their future cash inflows and outflows
Realisable (settlement) value
What the assets could be sold for, and the amount required to settle the liabilities today
Historical cost
Assets are recorded at the amount paid, or the fair value at the time of acquisition. Liabilities are recorded at the amount expected to be paid
Statement of profit or loss and other comprehensive income
Measures financial performance for a particular time period
Statement of financial positions
Lists assets, liabilities and equity at the end of the accounting period
Statement of cash flows
Links profit with changes in assets and liabilities, and the effect on the cash of the company
Authorised share capital
Authorised share capital is the maximum share capital that the company is allowed to issue (only applies for the companies formed before the Companies Act 2006). The maximum amount can be increased by passing a resolution at a general meeting of stakeholders. Authorised share capital can be included in the equity section of the statement of financial position for information only but is not added to the total of the statement
Issued share capital
Issued share capital shows the number & classes of shares that have been issued. It is included in the equity section of the statement of financial position & is added to the total of equity & liability
Loans
Loans are monies borrowed by companies from lenders (such as banks) on medium to long term basis. Repayments are made throughout the term of the loan. Often loans are secured against company’s assets so that, if the loan is not repaid, the lender has an asset that can be sold. Loans are examples of long term liabilities. They are shown on the SOFP as non current liability. Loans carry fixed rates of interest that must be paid. The interest is shown in the SOPL as finance costs
Debenture
Debentures are certificates issued by companies raising long term finance from lenders & investors. Debentures are usually repaid on a fixed date at the end of the agreement. They are secured against companies’ assets.
Capital reserves
Capital reserves, i.e. revaluation or share premium account, arise as a result of non-trading activities are not distributable. As they represent an increase in the value of the of the stakeholders’ investment in the entity they cannot be used to fund dividends
Revenue reserves
Revenue reserves are profits generated from trading activities. They include the balance of retained earnings from the statement of change in equity. Revenue reserves are distributable and, therefore, can be used to pay dividends
Dividents
Dividends are distribution of profits to the shareholders as a return on their investment. A company may make interim and/or final dividends. The final dividends are proposed by the director and have to be agreed by shareholders at the annual general meeting
Bonus issue
Bonus issue is a free issue of shares to the existing shareholders. It is done by using reserves. With the bonus issue no cash flows in or out of the company