intro to accounting Flashcards
types of businesses
trading: sells and buys goods to customers
service : provide services to customers
role of accounting
provide accounting and non-accounting information for skateholders for them to make informed decisions on the management of resources and performance of business
role of accountants
- Decision making : provide both a and na info for decision-making
- Stewardship : managing business resources on behalf of owner
skateholders
- owner : whether to sell or invest in business
- manager : gauge the performance of the business and take measures to improve it
- suppliers : sell goods to business on credit
- government : evaluate if business abides to the tax regulations and decides on the amount of tax
two professional ethics
- integrity : straightforward and honest in the communication of all financial information
- objectivity : information must be unbiased and based on facts
why are professional ethics important
to ensure FS is fairly prepared by accountants as it is used by skateholders
accounting and non accounting info
accounting : cost of goods, storage cost
non : customer’s preference, type of storage
the steps in accounting
source doc, journal, ledger, trial balance, FS
purpose of source document
prove that transaction has taken place
journal
it is like a diary, daily record of transactions organised by transaction dates
ledger
** consolidation ** of all transactions relating to a specific asset, liability, equity, income or expense item
trial balance
provides a summary of ending balances of each ledger account at a specified date
financial performance
provides report on income,expense and profit/loss over a period of time
financial position
provides information on asset,liabilities and equity at a specified date
four stages of accounting cycle
identify and record, adjust, report, close
assets
resources owned or controlled by a business that are expected to provide future benefits
nca and ca
nca : provides benefit for over a year
ca : provides benefit within a year
nca : cannot be converted into cash easily
ca : converted into cash easily
liability
obligations owed by the business to others that are expected to be settled in the future
ncl vs cl
ncl : repaid over one financial year
cl : paid within one financial year
equity
owner’s claims on the net assets of the business
basic accounting eqn
assets = liabilities + equity
income
amount earned through the activities of the business
s
sales revenue
money earned from selling goods
expenses
costs incurred in the operation of the business to earn income in the same accounting period
cost of sales
total goods sold in trading business
discount allowed vs discount received
da : cash discount given by business to credit customers
dr ：trade discount received from other businesses/supplier
difference of trade disc and cash disc
TD : reduction to the invoice amount of goods owed by customer
TD: recorded as discount allowed and discount received in ledger accounts
CD : reduction to list price of goods
CD : not recorded in ledger account and only invoiced amount recorded
double entry system recording
transactions will affect two accounts, one dr and one cr, both amounts must be the same
cash sales vs credit sales
cash sale : immediate payment during the purchase or cash sale
credit sale : delayed payment during a credit sale or purchase
why do customers return goods
sales returns :
* faulty goods
* wrong specifications
* damaged goods
* defects
purpose of a business giving trade discount?
to encourage customer to buy in bulk
purpose of giving cash discount to credit customer
to encourage credit customers for early payment within a specified time
purpose of trial balance
- facilitate in the preparation of FS
- check for arithmetic accuracy in recording
limitations of TB
- not an absolute proof of accuracy
- there are errors not revealed by TB
income recieved in advance
money received in advanced for goods/services to be provided in the next financial year but have not earned income yet.
income receivables
provided goods/services to customer but have not received payment from customer , but have earned the income
prepaid expenses
already paid for the service beforehand but have not benefitted from service yet
expense payables
have not paid for the services yet but already benefitted from service
reasons why cheque are dishonoured
- expired
- post-dated
- info inconsistent
- info incomplete
purpose of internal controls
- safeguard net assets of a business
- deter or detect fraud
- reduce theft possibilities over cash
- comply with law and regulations
reasons for different balances in business and bank statement
- deposits in transit
- cheques not yet presented
- direct deposits
- dishonoured cheques
examples of internal controls
- bank recon
- authorisation
- segregation of duties
- custody of cash
purpose of bank rec
- check the bank account balance of business against the bank’s record as shown on bank statement
- deter fraud
- check for errors made by bank or business
inventory
goods bought by customers
why do businesses keep inventory?
to prevent out-of-stock situations
what if a business buys too much inventory?
incur higher storage costs and increase risk of goods becoming obselete
perpetual inventory system
quantity and availability of inventories are updated on a continuous basis
how do businesses manage inventories
- keep proper records to track inventory
- keep physical inventory in warehouse
- buying insurance to insure inevntory
cost of invetory purchased includes :
- purchased price
- delievery
- installation costs
- custom duties
- insurance to bring in goods
- packing materials
- wages for employees to pack inventory
trade receivables
amount owed by credit customers to business on credit
why do businesses grant credit
to encourage customers to buy goods and services so they can receive the goods first and pay later
what is impairment loss on TR
when customers do not pay up amount owed, the business suffers a loss
what is allowance for impairment of TR
estimated amount of debts likely to be uncollectible
capital vs revenue expenditure
capital : expenditure incurred to ** buy and bring** in NCA to its intended use
revenue ： expenditure inccured to repair,maintain and operate NCA in working condition
capital vs revenue
capital : recorded as NCA
rev : recorded as expense
capital : provides benefit for more than a year
rev : provides benefit within a year
revue exp examples
- petrol
- annual insurance/tax
- servicing/repair
depreciation
allocation of cost of NCA over its estimated useful life
causes of depreciation
- wear and tear
- legal limits
- usage
- obsolescence
suitability of depreciation methods
SL : if NCA used uniformly throughout its useful life
RB : if NCA used more in its earlier years and gets used lesser in the older days as it becomes less efficient
why do businesses borrow from banks?
insufficient cash to fund their activities
LTB vs STB
ltb : repaid more than a year
stb : repaid within a year
bank loan vs bank overdraft
bank loan : fixed sum of money borrowed from bank
bank overdraft : amount not fixed but cannot exceed agreed limit
bank loan : repaid more than a year
bank overdraft : repaid within a year
bank loan : equal installment repayments made over the loan period
bank overdraft : any cash deposit into the cash at bank account
interest expense on bank loan
paid regularly and reported as an expense
sole proprietorship
only one owner
capital
personal assets contributed by owner to the business
drawings
assets taken by owner for personal use
profit or loss
difference between total income and totla expenses
errors not revealed by trial balance
- transaction not recorded at all
- transaction recorded on the wrong sides of account
- transaction recorded in wrong account of same accounting element
- amount recorded wrongly
expanded accounting eqn
assets=liabilities + capital + (income-expense) - draiwngs
purpose of source document
- provide evidence to capture the occurence of transaction
- provide detail of business transaction needed for recording
- ensure transaction recorded at original cost that it occured
