Introduction to Accounting Flashcards
What is accounting?
Accounting is the management of information system that involves the collecting, sorting, classifying and recording of financial data to produce and report financial information to assist business owners in decision making
What is financial data?
Financial data is the facts and figures that financial information is based.
What is financial information?
Financial information is the financial data that has been sorted, classified and summarised into a more usable and understandable form
What are ethical considerations?
Business decisions made by the owner will not only be influenced by financial considerations including those which are social and environmental in nature
What is the accounting process?
outline aswell
The process of taking financial data and converting it into financial information in order to be able to make decisions.
Source documents -> records -> reports -> advice
What are source documents?
Documents that provide both the evidence that a transaction has occurred and the details of the transaction itself.
What is the recording stage?
Sorting, classifying and summarising the data contained in the source documents so that it is more usable
What is the reporting stage?
The preparation of financial statements that communicate financial information to the owner.
What is the advice stage?
The provision to the owners of a range of options available to their aims/objectives together with recommendations as to the suitability of those aims/objectives
What is an asset?
A present economic resource controlled by the entity (as a result of past events) that has the potential to produce future economic benefits.
What is a liability?
A present obligation of the entity (as a result of past events) to transfer an economic resource.
What is owner’s equity?
The residual interest in the assets of the entity after all its liabilities are deducted.
What is the accounting entity assumption?
The assumption that the accounting records of asset, liabilities and business activities of the entity are kept completely separate from those of the owner of the entity as well as from those of other entities.
What is a current asset?
A present economic resource controlled by the entity (as a result of past events) that is reasonably expected to be converted to cash, sold or consumed within the next 12 months after the end of the reporting period
What is a non-current asset?
A present economic recourse that is controlled by the entity (as a result of past events) that is not held dor resale and is reasonably expected to be used for more than the next 12 months after the end of the reporting period.
What is a non-current liability?
A present obligation of the entity (as a result of past events) that are not expected to be settled with a transfer of economic resource within the next 12 months after the end of the reporting period
What is a current liability?
A present obligation of the entity (as a result of past events) that are reasonably expected to be settled with a transfer of economic resource withing the next 12 months after the end of the reporting period.
What is a balance sheet?
An accounting report that details a firm’s financial position at a particular point in time by reporting its assets, liabilities and owner’s equity.
What is a transaction?
An exchange of a good or a service with another party.
What is liquidity?
The ability of the business to meet its short term debts as they fall due.
What is a working capital ratio and its formula?
Is a liquidity indicator that measures the ratio of current liabilities to current assets to asses the firm’s ability to meet short-term debts
Current assets/current liabilities
What is stability?
The ability of a business to meet its debt and continue operation in the long term.
What is debt ratio and its formula?
Mesures the porpotion of the firm’s assets that are funded by external sources of finance, a measure on the stability of a business
total liabilities/total assets x100`
What are the internal sources of finanance?
Retained profits and capital contribution
What are the advantages and disadvantages of capital contribution?
Adv: no set repayment + no interest + owner is willing to wait for profit before expecting a dividend
Dis: limited to the resources of the owner
What are the external sources of finance?
Term loan
Trade credit
Bank overdraft
What are the advantages and disadvantages of a term loan?
Adv: Can purchase more expensive assets + if secured there is a low interest rate
Dis: Interest is charges + must be paid back in line with contractual terms
What are the advantages and disadvantages of trade credit?
Adv: immediate access to goods and sevices + can generate sales before payment required
Dis: can only be used with that supplier + late fees may incur if paying late
