Introduction to accounting Flashcards
What is accounting?
Recording, analysing and summarising transactions of an entity.
What are the types of business entity?
Sole traders and Limited liability companies like Ltd or plc.
What is the objective of a financial statement?
To provide information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity.
Primary users and their need for information
Investors - assess performance of management, profitability and whether to buy or sell shareholdings.
Lenders - ability to pay interest, level of debt held by entity.
Suppliers/ creditors - supply to entity and what credit terms to offer.
Secondary users and their need for information
Employees - job security or career opportunities
Customers - assess to buy
Government - economic data and tax revenues
Public - ethical and social disclosures
What is included in the statement of financial position?
Assets controlled and liabilities owed
What is the SFP used for?
Snapshot of business’ financial position at a point in time.
Assets =
Liabilities + Equity ( net assets)
What is the statement of profit or loss?
Displays income and expenses in a reporting period to show performance for a period.
What is included in GAAP?
Generally accepted accounting principles:
Companies act 2006
Reporting standards
Statutory requirements abroad
Stock exchange listings
Financial statements are required to give….
a true and fair view of an entity’s accounts
What are the 5 codes of ethics?
Integrity, Objectivity, Professional competence and due care, Confidentiality and Professional behaviour
What is integrity?
Straightforward and honest in all business relationships
What is objectivity?
Not allowing bias, conflict of interest or undue influence to override professional judgements
What is Professional competence and due care?
Duty to maintain professional knowledge and skills, acting diligently and within standards
What is confidentiality?
Not disclosing company information without proper permissions
What is professional behaviour?
Complying with laws and regulations and avoiding actions that are discrediting
What is the ISSB?
International Sustainability Standards Board - builds on work of IFRS and first standards will focus on climate related disclosures.
What are the fundamental qualitative characteristics?
Relevance
Faithful representation
What is relevance?
Can make a difference to user’s decisions if it has:
Predictive value
Confirmatory value
Affected by nature and materiality
What is faithful representation?
Complete, unbiased, free from error
What are the enhancing qualitative characteristics?
Comparability, verifiability, timeliness and understandability
What is going concern?
If the entity will continue for the next 12 months
What is materiality?
A discrepancy in the accounts that could influence the economic decisions of users
What is a separate entity?
A business is deemed separate to its owners/ managers.
What is capital expenditure?
The acquisition of long term assets or an enhancement of their earning capacity - creates a non-current asset on SFP
What is revenue expenditure?
Incurred for trade purpose or to maintain the existing earning capacity - creates an expense on SPL
What is capital income?
Sale of non-current assets
What is revenue income?
Trading assets, provision of service, interest and dividends received
