Introduction to accounting Flashcards
What are the 2 elements of accounting and explain what they are?
Recording - transactions must be recorded as they occur in order to keep up to date information for management
Summarising - The transactions for a period are summarised in order to provide information about the company to interested parties
How are transactions presented and explain the 2 types?
Financial statements:
Statement of Profit or loss - reflects the performance of the company over a period of time
Statement of financial position - reflects the position of a business at a point in time
What are the different types of business entities and explain them?
Sole trader - a business owned and operated by a single person
Partnership - a business owned and operated by 2 or more people
Company - a business owned by any number of shareholders and operated by directors
What is a sole trader?
simplest form of business
owned and managed by one person
fully and personally liable for any losses that the business might make
What is a partnership?
a business owned jointly by a number of partners
each partner is jointly and severally liable to any losses the business might make
What is a company?
a business owned by any number of shareholders
the shareholders elect the directors to run the business
almost always have limited liability
means shareholders will not be personally liable with any losses the business might make
their liability is limited to the nominal value of the shares that they own
the company is a completely separate legal entity from its owners (shareholders)
What are examples of not for profit organisations?
charities
clubs and societies
government or public sector organisations
According to the IAS 1 Presentation of Financial Statements, what is presented in a financial statement?
statements of financial position
statement of profit or loss
statement of changes in equity
statement of cash flows
notes of the financial statements
What is a statement of financial position? Explain the difference between asset and liability?
a statement of financial position is a list of the assets and liabilities of the business. It is a snapshot of the business at a particular time. An asset is an item the business owns or controls whereas a liability is an item the business owes.
What is the purpose of the statement of financial position?
The purpose of the statement of financial position is to show the total value of the net assets (assets - liabilities) at the end of each accounting period (usually at the end of a 12 month accounting period set by the business)
What is the statement of profit or loss?
The statement of profit or loss shows the revenue and expenses for the accounting period (often 12 months long). It shows the business performance over this time.
What is the purpose of the statement of profit or loss?
the purpose of the statement of profit or loss is to show how much profit or loss that the business has made during the accounting period.
When is capital expenditure used? and where is it displayed in the FS?
Capital expenditure is incurred either to acquire long term assets (those which will be kept for longer than a year) or to enhance or improve the earning capacity of long term assets
It is displayed in the non-current asset section of the FS
When is revenue expenditure used? and where is it displayed in the FS?
Revenue expenditure is incurred either for trade purposes including purchases of raw materials or items for resale, expenditure on wages and salaries, selling and distribution expenses, administrative expenses and finance costs or to maintain the existing earning capacity of long term assets.
It is displayed in the statement of profit or loss.
What are FS regulated by?
legislation
application of judgement using established accounting concepts
accounting and financial reporting standards
generally accepted accounting practice (GAAP)
the need for fair presentation
Which companies are the FS most closely regulated?
Limited liability companies and the most closely regulated
What are some areas where the judgement of different people may vary?
valuation of buildings in times of changing property prices
determining whether the expenditure is revenue or capital
As the exercise of judgement should be underpinned by ethical principles, who have produced the codes of ethics?
the ICAEW and the International Ethics Standards Board of Accountants (IESBA)
What is the ICAEW code of ethics based on?
The ICAEW code of ethics is based on the IESBA code of ethics
What are the 5 fundamental principles of professional ethics that accountants must adhere to?
Integrity
Objectivity
Professional competence and due care
Confidentiality
Professional behaviour
Integrity
A professional Accountant must be straightforward and honest in all professional and business relationships
Objectivity
A professional accountant should not allow bias, conflict of interest or undue influence of others to override professional or business judgements
Professional competence and due care
A professional accountant has a continuing duty to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional service based on current developments in practice, legislation and techniques. A professional accountant should act diligently and in accordance with applicable technical and professional standards when providing professional services. The principle of professional competence and due care is of particular relevance to prepare of FS.
Confidentiality
A professional accountant should respect the confidentiality of information acquired as a result of professional and business relationships and should not disclose any such information to third parties without proper and specific authority unless there is a legal or professional right or duty to disclose. Confidential information acquired as a result of professional and business relationships should not be used for the personal advantage of the professional accountant or third parties.
Professional behaviour
A professional accountant should comply with relevant laws and regulations and should avoid any action that discredits the profession
