Financial Accounting Flashcards
What is accounting defined as?
Process of identifying, measuring & communicating economic information about and entity t a variety of users for decision-making purposes
What is a business transaction?
An event that affects the financial position of an entity & can be reliably measured & recorded
What are the four stages of the accounting process?
Identifying, measuring, communication & decision making
What occurs during the Identifying stage of the accounting process
Identify transactions that affect the entity’s financial position. Must be able to reliably measure & record.
What occurs during the measuring stage of the accounting process
Analysis, recording & classification of business transactions
What occurs during the communication stage of the accounting process
information is communicated through various reports such as a statement of profit & loss, statement of financial position & cash flow
What occurs during the decision making stage of the accounting process
information used by external & internal users to make a decision
Define Asset
A resource controlled by an entity as a result of past events & from which future economic benefits are expected to flow to the entity
What are the 3 essential characteristics of an asset?
- It is a present economic resource
- The resource is controlled by the entity
- The resource is a result of a past event
How do entities get assets?
Funded by owners money, or through loan funds
Define current assets
Cash & other assets that are expected to be converted to cash or be used in an entity within 12 months or one operation cycle.
What are the 3 categories of current assets?
- Inventory
- Bank/cash
- Accounts Receiveable
Define Accounts receivable
Balance of money owed to the business by customers for purchase on credit
What are the two subcategories of inventory?
- Stock, being things that we will sell
- Consumable stores, things that will be used within the company, such as coffee
Define non-current assets
Assets that are not expected to be consumed or sold within one year or one operating cycle.
What are the three categories of Non-current assets?
- Tangible asset
- Intangible asset
- Natural resources
What are common examples of non-current assets?
Property, plant, equipment, vehicles, furniture & fixtures
Define Tangible assets
Assets with a physical form. Usually depreciated over a period of planned use. Land Buildings, machinery etc
Define intangible assets
Assets that lack a physical form but offer economic value. e.g intellectual property such as trademarks
Define Liabilities
A present obligation of an entity arising from past events, the settlement of which is expected to result in an outflow from the entity resources
What are the three essential characteristics of a liability?
- It is a present obligation
- The obligation is to transfer an economic resource
- The obligation is a result of past events
Define “present obligation” in reference to liability
The entity has no realistic alternative to settling the obligation.
E.g involved in a court case to settle a dispute, no liability exists until a judgement is handed down
Define “transfer” in reference to liability
Must have the potential to require an entity to transfer economic resources to another party
e.g accounts payable require a future sacrifice of economic benefits
Define current liability
Obligations that can reasonably be expected to be paid within 12 months or an operating cycle
What are examples of a current liability?
- Accounts payable
- Interest payable
- Income taxes payable
- Bills payable
- Bank account overdrafts
- Accrued expenses
- Short term loans
What are accounts payable a form of?
Current liability
What is a short term loan a form of?
Current liability
Define non-current liabilities
Obligations expected to be paid after 12 months or one operating cycle
What are examples of non-current liabilities?
Long term loans Deferred tax liabilities mortgage payable capital leases deferred revenue provisions
Define Owners equity
Residual interest in the asset of an entity after all its liabilities have been deducted.
What are the three components of equity
- Capital in the form of the contributed equity
- Retained earnings through income
- reserves
What typically makes up owners equity in relation to the accounting equation
Owners contribution +I ncome - expenses
Define expenses
Decreases in economic benefits during an accounting period in the form of outflows.
Common expense examples
Sales & marketing expense rent expense finance costs salaries depreciation stationary
What typically occurs as the result of an expense?
Debit Owners equity (expense) & Credit Bank (asset)
Define Income
Increases in economic benefits during an accounting period in the form of inflows.
What typically occurs as the result of income
Increase an asset (debit bank) & increase in equity (credit OE)
What are common examples of income
Revenue through sales, Interest on money in the bank
Define “Arm’s length distance”
Parties deal from equal bargaining positions & neither party is subject to the other’s control or dominant influence.
Define the entity concept
It is the separation of the business transactions from any personal transactions of the owner.
What is a statement of financial position ?
A statement that reports on the assets, liabilities & equity of an entity at a particular point in time. Used to reflect the position of the business
What is a statement of profit & loss?
A statement that reports on the income and expenses of an entity for a period and the resulting profit and loss
Define Drawings
Withdrawals (credit) of assets from an entity by the owners that are recorded as decreases (debits) in equity
Define source documents
Original dot weighing a business transaction
What are 3 examples of source documents
- Sales invoice
- Purchase orders
- ATM receipts
Define cash transactions
The exchange of cash for goods or services
Define credit transactions
exchange of goods or services on the proviso that cash will be received at a later date
Define personal transactions
transactions of the owner unrelated to the operations of a business
Define business events
Events that will probably affect an entity without any immediate exchange of goods or services between an entity & another entity. E.g negotiation of a bang loan
What is the accounting equation used for
Expressing the relationship between assets controlled by an entity and the claims on those assets
What is the accounting equation?
Asset= Liabilities +Equity
Define the concept of duality
Describes how every business transaction has at least two effects on the accounting equation.
What financial statement is based on the accounting equation?
Statement of financial position
What does a statement of profit or loss add to the accounting equation?
Income & expenses therefore A= L + OE+ I -E
What impact does a $20,000 contribution of equity have on the accounting equations?
Debit asset & credit Owners equity
A $20,000= L+ OE $20,000
What does the purchase of a new iPad from $500 have on an accounting equation of A $20,000= L+ OE $20,000?
credit bank (asset) by $500 debit asset by $500 A 20,000 - $500 + $500 = A 20,000 + L + OE $20,000
What does the issuing of an invoice of $3,000 have on an accounting equation of A $20,000= L+ E $20,000?
Debit Asset $3000
Credit OE $3000
A 23,000 = L + OE 23,000
What does the payment of an invoice of $3,000 have on an accounting equation of A $23,000= L+ OE $23,000?
Debit Asset
Credit Asset
A $23,000= L+ OE $23,000?
What is the accounting worksheet used for?
Summaries the duality associated with all business transactions. Used to prepare the basis of the financial statements.
What are the 4 steps involved in the accounting worksheet?
- Understand the effect of each business transaction
- Enter the transactions into the worksheet
- sum each of the columns
- use the information to prepare P&L or statement of financial position
Does transactions have to affect both sides of the accounting equation?
No. But they do have to equal each other
What is a journal?
Accounting record in which transactions are initially recorded in chronological order
What are the 7 types of journals?
Subsidiary General Sales Purchase Sales Return Cash receipt cash payment
What are the titles needed for a journal?
- Date
- Details/ Name of account
- DR & CR
What is a ledger used for?
An account that accumulates all of the information about changes in specific account balances
What is a chart of accounts?
Detailed listing/ index that guides how transactions will be classified in the financial reporting system
Whats do Debits increase?
Assets & Expenses
What do Debits decrease
- Liabilities
- Equity
- Income
What do Credits increase?
- Liabilities
- Equity
- Income
What do Credits decrease?
Assets & Expenses
What side of a t account is a debit?
Left
What side of a T-account is a credit
Right
What effect would a loan deposit have?
Debit Bank (A) credit loans (Liability)
What effect would a loan payment have?
Debits loans (L) Credit Bank (A)
What is the effect of purchasing stationery with cash?
Debit stationery expense (OE) credit bank (A)
What is the effect of making a sale of $500 cash
Debit bank (A) Credit Sales (OE)
What is the effect of making a sale of $500 on credit?
Debit accounts receivable (under purchasers name) (A)
Credit sales
What is the effect of receiving payment for a sale of $500 on credit?
Debit Bank (A) Credit Accounts receivable (A)
What is the effect of purchasing $1000 of new office equipment?
Debit office equipment (A) Credit Bank (A)
What is a trial balance?
List of ledger account balances prepared at the end of the period.
What are the assumptions of a trial balance
That Credits and Debits will equal each other
What are the three errors that can cause a trial balance to not match?
Double-entry errors
Transposition error
single-entry error
What is the difference between a journal and a ledger in terms of columns?
Ledger has a running total ‘balance’
What causes a single entry error?
When only one part of a transaction is entered. This will cause the two sides of the accounting equation to be out of balance.
What causes a transposition error?
Created by switching digits when recording transactions. e.g make a payment of 8,700 and record it as 7,800
What is a typical way of identifying a transposition error?
If the difference is able to be divided by 9
What causes incorrect entry
Recording of a transaction as two increases/ decreases
What does OE = if A = 200,000 & L = 40,000?
OE = $160,000
What does Non current Assets equal if current-asset - 34,000 , CLn= 8,000 NCL = 80,000 & equity = 160,000
NCA = 214,000
What does expense equal if capital is 200,000 , L 160,00 income 180,000 & total asset is 500,000
Expense = 40,000
Where does capital go in the accounting equation?
OE
What is the objective of financial reporting?
Reports entities financial information in a way that is of use to existing & potential investors lenders & creditors
What is a profit & loss statement?
Reports revenue less expense in an easy to understand format
How do you determine profit
Revenue - expenses
What does time-lag mean in reference to financial reports?
Represents a significant delay from the end of the financial year and the time the information the form of a report.
What are some problems of time lag?
- Increase in the market competition can dramatically change future demand.
- Unsettled legal disputes can be resolved in the months following the end of the financial year
- Natural disaster damage
What does historical information mean in reference to financial reports?
Information is based on past transactions and does not provide a forecast.
Define sole trader
An individual who controls & managers a business and is solely liable for all the business debts
What are the three main characteristics of a sole trader?
- Not a separate legal entity
- Owner fully liable for all debits
- Sole trader is the individual who controls/ managers the business
What are the tax implications for a sole trader?
The income of the sole trader is treated as the owner’s individual income & the owner must pay the tax
What are the advantages of being a sole trader?
- Quick & inexpensive to establish
- Not subject to company regulation
- Does not pay separate income tax
- Owner claims all profit
- Owner has full decision-making power
What are the disadvantages of being a sole trader?
- The owner has unlimited liability
- Personal tax rate typically higher than business rates
- Limited by skill and time of the owner
- Only exists because of the owner
What are the debit & credit entries for a business attaining a 200,000 bank loan?
Debit Bank (A) Credit Loans (L)
