GROUP 9 Flashcards
“The art of recording, classifying and summarizing in a significant manner in terms of money transactions and events which in part, at least of a financial character and interpreting the results thereof” AICPA (1941)
ACCOUNTING
6 COMPONENTS OF
THE PROCESS OF ACCOUNTING
- Economic events
- Identification of transactions
- Measuring of transactions
- Classifying of transactions
- Summarizing
- Analysis and Interpretation
An __________________ has been defined as ‘a happening of consequence’ to a business entity.
economic event
2 TYPES OF ECONOMIC EVENT
- EXTERNAL TYPES
- INTERNAL TYPES
event which involves the transfer or exchange of something of value between two or more entities
EXTERNAL EVENT
an economic event that occurs entirely within one enterprise.
INTERNAL EVENT
A
ENUMERATE AT LEAST 2 EXAMPLES OF EXTERNAL EVENTS
- Sale of goods to customers.
- Payment of monthly rent to the landlord.
- Purchase of raw materials by an enterprise from some other business enterprise..
- Rendering of services to customers, etc
AN EXAMPLE OF INTERNAL EVENT
Supply of raw materials or equipment by the stores department to the manufacturing department.
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It means determining what to record. It involves observing activities and selecting those events that are considered to be evidence of economic activity.
Identification of Transactions
2 TRANSACTION ACTIVITY TYPES
- MONETARY
- NON MONETARY
It means quantification, including estimates of business transactions into financial terms. If an event cannot be quantified in monetary terms, it is not a considered for recording in financial accounts.
Measuring of Transactions
After recording transactions in journal or subsidiary book, the transactions are classified by grouping similar transactions at one place. (Ledger)
Classifying of Transactions
It is art of presentation of classified data in a manner which is understandable and useful to management and other users. It involves preparation of Trial Balance, Income statement and Balance Sheet
Summarizing
The recorded transaction is analyzed to make useful interpretations. This process provides meaningful conclusion from information
Analysis and Interpretation
is concerned with recording previous financial transactions and maintaining compliance, whereas financial analysis is the dynamic process of understanding and using financial data to inform strategic decisions.
Financial accounting
5 ACCOUNTING PRINCIPLES
- ACCRUAL BASIS VS CASH BASIS
- REVENUE RECOGNITION
- EXPENSE RECOGNITION
- MATERIALITY
- ENTITY CONCEPT
___________ accounting records transactions when they occur, regardless of when cash is exchanged, providing a more accurate picture of a company’s financial health over time.
Basic Accounting Principles and Financial Statements
Accrual Basis
__________ accounting records transactions only when cash is exchanged.
Basic Accounting Principles and Financial Statements
Cash Basis
when it is earned, regardless of when cash is received. This principle ensures that revenue is matched with the expenses incurred to generate it.
Basic Accounting Principles and Financial Statements
Revenue Recognition
: Expenses should be recognized in the period they are incurred, matching them with the related revenues to accurately reflect profitability.
Basic Accounting Principles and Financial Statements
Expense Recognition
Only significant transactions need to be recorded to avoid overwhelming financial statements with immaterial details.
Basic Accounting Principles and Financial Statements
Materiality
Business transactions should be recorded separately from personal transactions of owners or stakeholders.
Basic Accounting Principles and Financial Statements
Entity Concept
Also known as the statement of financial position, the provides a snapshot of a company’s financial condition at a specific point in time. It lists assets, liabilities, and equity, with assets equaling liabilities plus equity.
Financial Statements
Balance Sheet
Also known as the profit and loss statement, the income statement shows a company’s revenues, expenses, and net income (or loss) over a specific period. It reflects the company’s profitability.
Financial Statements
Income Statement
