Introduction to Accounting Flashcards
What is accounting?
Recording, classifying, summarizing, and communicating financial data regarding a business.
What is book keeping?
The process with the actual recording of business transactions systematically.
Purpose of accounts…
Accounting provides economic information that will enable users of such information to make informed judgments and decisions.
Possible Users of accounting information…
- Banks
- Business Owners
- Prospective Buyers
- Government/ Tax collecting agencies
- Prospective partners
Various Types of Business Organisations…
- Sole Trader
- Partnership
- Companies
- Cooperative society\ies
- State enterprises
- Non-profit
- Statutory corporations
State the two most important accounting statements.
- Income statement
- Trading and profit and loss statement - Balance sheet
- The statement of financial position
Steps in accounting…
- Bookkeeping (recording financial data)
- Accounting (Classifying data)
- Summarising data
- Communicating information
Financial statements and reports produced by the accounting process are used by owners and managers to monitor the continuing viability of the business. ‘Groups that may be interested in the activities of the business are:
- Inland Revenue collects employees’ and business tax.
- Investors - these may be private individuals, companies, or banks, any or all of which will want to monitor the performance of the business to ensure that they will get a return on their investment.
Suppliers - this group will need to be sure of the financial stability of the business before accepting orders.
Customers - they will need to be sure of the financial stability of the business before placing orders.
Employees - a sound business with a good working environment will help to keep employees’ morale high and will be able to attract high-calibre new staff.
State the importance of good financial control.
Financial control ensures that the business sales are greater than the cost incurred by the business so that there is profit.
How does a business succeed?
The basis of business is trading with others and good financial control is essential if the organization is to succeed.
The owner of the business will have invested their own money into the venture with the intention of making profits and having a sustainable and successful business. The money they have invested, in accountancy terms, is called ‘_______’ and its is used to provide funds to enable the business to start trading. To ensure that the capital is not put at risk, a good financial control system is vital.
Capital
These are resources owned by a business.
Asset
These are amounts owed by the business.
Liabilities
What is Capital?
This refers to the resources used to start a business. It is also known as owner’s equity or net worth.
What does this equation mean?
A = C + L
Asset equal Capital plus Liability
A&B Minimart has $42, 000 of assets and $18, 600 worth of liabilities. What is the capital?
Answer: $23, 800
List some assets of a school
- Land
- Chairs
- Computers
- Office supplies
Disadvantages of not keeping accounting records…
No evidence of credibility
No knowledge of how much business is improving
Lose track of amounts they owe
No evidence of inventory
You won’t have the documents to be audited
Another name for capital is -
Shareholder’s equity
Another name for the journals are -
Books of Prime Entry
If a trial balance adds up and is equal it is said to be -
Balanced
State the steps in the Accounting Cycle.
Source document Original Entry Double Entry Trial Balance Trading, Profit and Loss Balance Sheet
What are accounting concepts…
Set of accounting rules which ensure that users of financial records have confidence in the information that they are provided with.
Which accounting concept states that assets should be valued at cost?
Historical concept
Which accounting concept will have an accountant understating profit rather than overstating it?
Prudence concept
Which accounting concept is also called the matching concept?
Accruals Concept
Which accounting concept assumes that the business will continue operating into the foreseeing future?
Going concern concept
Which accounting convention allows times to record printing paper as an expense in this period though it may last years?
Materialism
True or false
The accruals concept states that expenses and revenue belonging to a period should be recorded in that period.
True
Why would you NOT change evaluation methods from year to year?
Consistency
True or false
The realization principle means the business has earned profit when customers order goods.
False
Identify the concept being violated: Students are recorded on Hampton’s Balance Sheet as assets.
Monetary Measurement
Identify the concept being violated: A transaction is recorded in only one account
Dual Aspect
Identify the concept being violated: A building is recorded at its market value through management got a discounted rate.
Historical Cost
Identify the concept being violated: Management doesn’t write $900 that a debtor won’t be able to pay as a bad debt.
Prudence
Identify the concept being violated: Change from the straight-line method of depreciation to the reducing balance method each year.
Consistency
What are the two types of assets?
Current assets
Fixed assets
What are current assets
Assets that are easily convertible into cash eg. prepaid expenses, bank balances, accrued incomes.
What are fixed assets?
Assets that are not readily convertible into cash. eg. land, building, machinery.
State the accounting equation.
Assets = Capital + Liabilities
What is capital?
Anything that increases your ability to generate value. Cash and capital are not the same, but capital can be cash.
Which concept concludes that “The owner’s business should be separate from the business? “
Separate entity/ Business Concept
Which concept concludes that “The original cost of an asset is to be recorded?”
Historical Concept
What are accounting concepts?
They are principles that a business uses to make sure they have some amount of confidence in the information that they give to the persons interested in our financials.
What are assets?
Resources of the company that have future economic value.
State the current liabilities.
Accounts payable (Creditor) Accounts receivables (Debtor) Accrued expenses (Creditor) Bank overdraft Outstanding expenses
What is a Bank overdraft?
a line of credit that covers your transactions if your bank account balance drops below zero.
Define accrued.
Accumulated over time
A person who owes the business
Debtor
A person who the business owes
Creditor
Give examples of Long-term liabilities
Bank loans
Mortgages
What is a balance sheet?
A financial statement that reports a company’s assets, liabilities and shareholder’s equity at a specific point in time.
OR
The balance sheet is a financial statement that provides a snapshot of what a company owns and owes aa well as the amount invested by shareholders.
What are the types of assets?
Tangible and Intangible
What are current assets?
These are assets that are continually changing, they are constantly being converted into another. Eg. cash is converted into stock when goods are bought.
Types of liabilities.
Short-term and Long-term
What are stocks?
Stock refers to the list of goods a business bought primarily for resale.
For goods returned to me by a customer
I must open a return inwards a/c
For goods returned by me to suppliers
I must open a return outwards a/c
