General Theory: Concepts, Double Entry Flashcards
What are the two roles of accounting?
Decision-Making and Stewardship
What are the two principles of ethics in accounting?
Integrity and Objectivity
What is the accounting equation?
Assets = Liabilities + Equity
What is accounting?
The process of recording, summarising, analysing , interpreting and reporting financial information of a business.
What is bookkeeping?
Bookkeeping refers to the recording of financial information.
Name some internal stakeholders.
Owners, Employees, Managers
Name some external stakeholders.
Public, Competitors, Customers, Suppliers, Investors / Shareholders, Government.
Explain the accounting entity theory
The business and the owner are separate legal persons. Hence, the accounting records of the owner must be kept separately from those of the business.
Explain the accounting period theory
Accounting information should be organised into fixed time periods to allow for fair comparison between periods.
Explain the historical cost theory
All transactions should be recorded at their original cost price.
Explain the objectivity theory
Transactions should be recorded based on reliable and verifiable evidence (i.e. supported by source documents)
Explain the going concern theory
A business is assumed to have an indefinite economic life.
Explain the monetary theory
Only business transactions that can be measured in monetary terms (dollars and cents) can be recorded in the accounts.
Explain the prudence theory
Assets and profit should not be overstated. Liabilities and losses should not be understated.
Explain the materiality theory
Transactions that make a difference to decision-making of a business (i.e. material) should be recorded according to accounting principles and rules.
Transactions with a value that is too small to affect decision-making do not need to be recorded according to accounting principles and rules.
Explain the consistency theory.
The accounting methods used must be the same from period to period so that a businesses’ financial information can be meaningfully compared from period to period.
Explain the matching theory.
Expenses incurred should be matched to income earned for the period.
Explain the accrual theory.
Income should be recorded in the period it is earned, and expenses should be recorded in the period when it is incurred (i.e. when the benefits of the expense are used) regardless of when cash is actually received or paid.
Define a trading business.
A trading business is a business which buys and sells tangible (can see and touch) goods.
Define a service business.
A service business is a business which provides intangible (cannot see and touch) services.
Define current assets.
Resources owned or controlled by a business which provide future benefits within one year.
Define non-current assets
Resources owned or controlled by a business which provide future benefits for more than one year.
Define current liabilities
Amounts owed to other businesses or people which are due to be repaid within one year.
Define non-current liabilities
Amounts owed to other businesses or people which are due to be repaid after one year.
Define equity
Equity is the amount contributed by the owners of the business and profit generated by the business over time.
Define capital
Capital refers to the resources contributed by the owners to the business.
Define drawings
Drawings refer to resources taken out from the business by the owners for personal use.
Define income
Income is the amount that a business earns from business activities, including revenue, other income and other gains.
Define expenses
Expenses are costs incurred by the business to generate income. The benefits generated by expenses do not last into the future.
State the double entry recording rules
A) All transactions must have at least one debit entry to one account, and one credit entry to another account.
B) The total debit value must equal to the total credit value for each transaction.
State the four steps of the accounting cycle (in order).
Identifying & Recording > Adjusting > Reporting > Closing
State the six steps of the flow of information in an accounting information system.
Source Documents > Journals > Ledgers > Trial Balance > Income Statement > Balance Sheet
Identify the element (AED=LIC) and nature (Dr or Cr) of this account:
Motor vehicles
NCA, Dr
Identify the element (AED=LIC) and nature (Dr or Cr) of this account:
Bank loan
NCL, Cr
Identify the element (AED=LIC) and nature (Dr or Cr) of this account:
Allowance for impairment of trade receivables
negative CA, Cr
Identify the element (AED=LIC) and nature (Dr or Cr) of this account:
Cost of sales
Expense, Dr
Identify the element (AED=LIC) and nature (Dr or Cr) of this account:
Sales returns
Expense, Dr
Identify the element (AED=LIC) and nature (Dr or Cr) of this account:
Stationery
Expense, Dr
Identify the element (AED=LIC) and nature (Dr or Cr) of this account:
Rent income received in advance
CL, Cr
Identify the element (AED=LIC) and nature (Dr or Cr) of this account:
Prepaid general expenses
CA, Dr
Identify the element (AED=LIC) and nature (Dr or Cr) of this account:
Depreciation - Fixtures and fittings
Expense, Dr
Identify the element (AED=LIC) and nature (Dr or Cr) of this account:
Accumulated depreciation - office equipment
negative NCA, Cr
Identify the element (AED=LIC) and nature (Dr or Cr) of this account:
Trade receivables
CA, Dr
Identify the element (AED=LIC) and nature (Dr or Cr) of this account:
Trade payables
CL, Cr
Identify the element (AED=LIC) and nature (Dr or Cr) of this account:
Discount allowed
Expense, Dr
Identify the element (AED=LIC) and nature (Dr or Cr) of this account:
Discount received
Income, Cr
Identify the element (AED=LIC) and nature (Dr or Cr) of this account:
Interest on bank loan
Expense, Dr
Identify the element (AED=LIC) and nature (Dr or Cr) of this account:
Interest on bank deposit
Income, Cr
Identify the element (AED=LIC) and nature (Dr or Cr) of this account:
Accrued interest
Liability, Cr
