Introduction to Accounting Flashcards
Students will be able to: 1. Define book-keeping 2. Define accounting 3. Distinguish between book-keeping and accounting 4. State the roles of accounting 5. Explain how the stewardship role leads to the creation of the accounting system 6. Explain how accounting information is used for decision-making 7. State the stakeholders who are interested in the affairs of the business 8. State the accounting information needed by the stakeholders 9. Explain why stakeholders are interested in acc
What is accounting? / Define accounting.
Accounting is a language used in businesses. It is the process of recording, summarising, analysing, interpreting and reporting the financial information of an organisation.
What are some examples of financial information?
- The amount earned from selling goods.
2. The amount of cash the business has and the expenses paid.
Why is accounting / the reporting of financial information important?
Accounting / The reporting of financial information is important for making business decisions.
What is book-keeping? / Define book-keeping.
Book-keeping involves only the recording of business transactions. It is only one part of the accounting process.
Distinguish between book-keeping and accounting.
What is the difference between book-keeping and accounting?
Accounting involves more than just the recording of business transactions. It also includes summarising, analysing, interpreting and reporting financial information in the form of financial reports.
(Book-keeping is only a part of the entire accounting process.)
How is financial information reported to business stakeholders / interested parties?
In the form of financial reports / financial statements such as Income Statement and Balance Sheet.
What are financial reports used for?
Financial reports are used to communicate to the stakeholders / interested parties of a business the financial results of the business and the use of its resources.
State the roles of accounting. / What role does accounting play in businesses?
Accounting plays two major roles in businesses: stewardship and decision making.
Define ‘Stewardship’.
Stewardship is the careful and responsible management of something that has been entrusted to one’s care.
What are accountants and book-keepers regarded as in the business world?
They are regarded as stewards (i.e. caretakers) of the financial affairs of businesses.
Does the accountant / book-keeper (i.e. the steward) own the business?
No. He is given the responsibility to manage the business’ resources. Other stewards of a business could be the sales manager or anyone who is involved in managing the resources of the business on the owner’s behalf.
What does a business owner expect from his / her accountant?
The business owner expects the accountant to provide him / her with financial information to help him / her make decisions on how to manage and operate / run the business.
What information does the business owner need from his accountant? / What does the owner want to know from the accountant?
Examples:
- The business owner will want to know how his / her business is performing, i.e. whether the business is making a profit or loss.
- Whether the business should reduce / cut cost or increase the selling price.
How does the accountant go about providing a business owner with the financial / accounting information that he / she needs?
By setting up an accounting information system to collect, record and report the financial information of the business.
What do business stakeholders (i.e. interested parties such as business owner, managers, employees, shareholders, investors, banks, etc) do with the information presented in the financial reports prepared by the accountant?
They rely / use the information presented in the financial reports to make their decisions.
What are the people who are interested in the financial information of a business called / known as?
What are the users of accounting information called / known as?
Stakeholders or interested parties.
Do all business stakeholders require the same type of information?
No. Different stakeholders require / need different types of information to make decisions.
How can stakeholders be categorized / grouped?
2 categories: Internal and External
Define ‘internal stakeholders’.
Internal stakeholders are people who are responsible for the day-to-day running of the business and they may have detailed financial information. (Internal stakeholders work in the business.)
Give some examples of internal stakeholders.
- Sole proprietors / owners (they run their own business)
- Managers
- Employees
What kind of financial information might the sole proprietor and managers of a business be interested in?
All financial information because they need all types of financial information to make decisions on how to plan, control, monitor and operate the business. E.g. whether to open another store next year; whether to buy more inventory (i.e. stock / goods), whether to hire / fire, cut costs, expand or downsize the business, etc.
What kind of financial information might the employees of a business be interested in?
The business’ profit and cash.
What is the main decision employees make?
Whether to continue working for the business or not.
Why do employees want to know if the business they are working for is profitable or not?
To evaluate their career prospects with the business and whether to expect any bonuses.
Why do employees want to know if the business they are work for is / is not cash rich?
So that they know whether the business has sufficient cash to pay their salaries promptly / on time.
Who are the external stakeholders of the business?
External stakeholders are people / interested parties of the business who are not involved in the day-to-day running of the business. (External stakeholders do not work in the business.)
Are internal stakeholders involved in the daily operations of the business?
Do they need detailed financial information of the business?
Yes.
Yes.
Are external stakeholders involved in the daily operations / day-to-day running of the business?
Do they need detailed financial information of the business?
No.
No, they do not need detailed financial information of the business. They have only the summarised financial information found in financial reports.
Give some examples of external stakeholders.
- Shareholders
- Investors
- Banks and other lenders / creditors
- Suppliers
- Customers
- Government
- Public
- Competitors
Who are ‘shareholders’?
They are the owners of a company.
Why are shareholders of a company considered external stakeholders?
They only have access to the summarised financial information. If these owners also manage the company, they will have access to the detailed financial information.
What kind of financial information might shareholders and investors be interested in?
The financial information they might be interested in are: profit, assets, liabilities and the amount they received in return for the investment made.
Why might existing shareholders and investors be interested in the profit, assets, liabilities and other financial information of the business? What decisions do they make?
They need the financial information in order they could evaluate whether they should maintain, increase or decrease their investment. Potential investors decide if they should invest in the business.
What kind of financial information might banks and other lenders be interested in?
Banks and other lends might be interested in the profits, assets and liabilities of the business.
Why might banks and other lenders be interested in the profit, assets, liabilities and other financial information of the business?
Banks / Lenders need to decide whether to grant the business loans or not. Based on the business profit, assets and existing / current debt amount, the lender evaluates whether the business will be able to repay the loan principal and pay interest.
What kind of financial information might suppliers be interested in?
Suppliers might be interested in the profit, cash and liabilities of the business.
Why might suppliers be interested in the profit, cash and liabilities of a business?
Suppliers decide whether to grant the business credit or not, i.e. enter into credit transactions with the business. Based on the business profit, cash and existing debts owed to suppliers, the supplier evaluates whether the business will be able to pay for its credit purchases.
What kind of financial information might customers be interested in?
Customers might be interested in the profit made by the business.
Why might customers be interested in the profit making ability of the business?
In deciding whether to buy from the business, customers evaluate whether the business will be able to provide after-sales support. A profitable business is likely to continue operating in the future and hence provide support.
What kind of financial information might the government be interested in?
The government might be interested in the income and profit of the business.
Why might the government be interested in the income and profit of a business?
The government decides how much tax to collect from the business.
What kind of information might the public be interested in?
The public might be interested in the income and profit of the business.
Why might the public be interested in the income and profit of a business?
The performance of a business is an indication of how well the economy is doing.The better the business performance, the more confident the public is. This affects the public’s decisions on how their assets will be invested, whether to change job, whether to take up a loan, etc.
What kind of information might the competitors of a business be interested in?
The competitors of a business might be interested in the income and profit of a business.
Why might the competitors of a business be interested in the income and profit of a business?
Although the business might not like to supply / provide information to its competitors, the competitors can still access the financial reports of the business. Competitors may compare their performance against the business and decide how to improve their performance.
Define ‘ethics’.
Ethics refer to the study of what is morally right and what is not.
Why are professional ethics important in accounting?
Stakeholders rely / depend on financial reports to make business decisions. If they are given false or inaccurate information about the business, they are likely to make poor decisions.
It can also be said that stakeholders are wrongly led into making poor decisions because they rely / depend on financial reports which have not been properly prepared.
Is it important that financial reports are fairly prepared?
How would erroneous or incomplete financial information affect stakeholders?
Yes, otherwise the stakeholders would be wrongly led into making poor decisions because they rely / depend on financial reports which have not been properly prepared.
What are the people involved in the accounting process expected to possess?
High standards of professional ethics. Accountants are required to follow a code of conduct that upholds the good reputation of the accounting profession.
What are professional ethics?
Professional ethics refer to the standards of conduct for people in a specific profession.
What are the two important professional ethics principles that accountants, book-keepers and all staff who prepare and communicate financial information must uphold / follow?
- Integrity
2. Objectivity
What does it mean to have ‘integrity’?
To have integrity is to be straightforward and honest in all professional and business relationships.
What are some examples of actions with integrity?
- Not deliberately or purposely omit / miss out important information that may affect how stakeholders make their decisions.
- Not falsify, overstate / understate accounting records such as recording $100,000 of fictitious or false sales revenue.
What does it mean to be ‘objective’?
To be objective is to be unbiased when making a professional judgement in the accounting process. It involves focusing on facts and not being influenced by personal feelings, personal gains or other people when deciding on what financial information is to be recorded and how it is reported.
What are some examples of actions with objectivity?
- An accountant reporting a loss even when such a loss affects his bonus for that year.
- An accountant reporting the profit accurately despite threats and pressure from his boss.
Is it difficult to differentiate an action that violates the principle of integrity from an action that violates the principle of objectivity?
Yes. Very often, the same action violates both. For example, an accountant who submits to threats and pressure from his boss to report false sales revenue would have violated both principles.
How can organisations be grouped?
Business (i.e. profit-making) and non-business (i.e. non-profit) organisations.
How may business organisations be grouped / categorized?
Three main categories: trading, service and manufacturing.
Note: Syllabus focuses on accounting for trading and service businesses.
What do all business organisations do?
Exchange goods and services for money.
What do trading businesses do? Give some examples of trading businesses.
Trading businesses buy and sell goods.
Examples: supermarket, furniture shop
What do service businesses do? Give some examples of service businesses.
Service businesses provide services.
Examples: Hairdressing salon, bus company
What do manufacturing businesses do? Give some examples of manufacturing businesses.
Manufacturing businesses manufacture goods.
Examples: Car manufacturer, toy manufacturer
Give some examples of non-business organisations.
Government, community or religious organisations, charities.
What is a business known as?
Entity
Are the activities of a business entity separate from the personal activities of its owner(s)?
Yes
Business Entity / Accounting Entity Concept… Textbook Page 14
How are different forms of business entities classified?
They are classified according to the:
- Number of owners
- Way the businesses are managed
- Amount of reward
- Level of investment risk faced by the owners.
What are the three different forms of business entities that I must know?
- Sole Proprietorship
- Partnership
- Company
How many owners can there be in a sole proprietorship and what is this owner called?
One owner only and he is called the sole proprietor.
How many owners can there be in a partnership and what is these owners called?
A minimum of two owners, who are called called partners.
How many owners can there be in a company and what is these owners called?
A minimum of one owner. The owners own shares in a company and are known as shareholders.
Name the two main types of companies.
- Private
2. Public
What is the maximum number of shareholders a private company can have?
50
Is there a limit on the number of shareholders a public company can have?
No
Describe the way a business is managed by a sole proprietor.
The sole proprietor usually manages the business himself and has full control over the running of the business. He may hire / employ professionals to help him.
Describe the way a partnership is managed by its owners.
At least one partner is heavily involved in managing the business. The partners may hire professionals to help them.
Describe the way a company is managed by its shareholders.
The shareholders are usually not involved in managing the business. The company hires professionals to manage the business.
What are the amount of reward and the level of investment risk faced by sole proprietors like?
The sole proprietor assumes all the profits and losses of the business. If the business fails, the sole proprietor has to pay all its debts.
What are the amount of reward and the level of investment risk faced by the partners of a partnership like?
Since there is more than one owner, the partners share the profits and losses of the business. If the business fails, some partners may have to pay all the debts.
What are the amount of reward and the level of investment risk faced by the shareholders of a company like?
The shareholders are given a portion of the profits called dividends. If the business fails, the shareholders will lose everything they have invested but do not have to pay any of the debts of the business.
Give some examples of a sole proprietorship.
School canteen stall holders, hawkers, etc.
Give some examples of a partnership.
Medical clinics, law firms, audit firms, etc.
What are public companies?
These are companies that are listed on the Singapore Stock Exchange (SGX). Their business names usually end with ‘limited’.
What are private companies?
These are companies that are not listed on the SGX and their business names usually end with ‘private limited’.
What are shares?
Shares are units of ownership in a company.
How does a company raise capital?
Through issuing shares.
Define ‘shareholders’.
Shareholders are people who buy shares from a company. They are the owners of the company.
How can the advantages and disadvantages of different business entities be summarized?
By comparing the following four features:
- How easy it is to set up and maintain the business
- How much reward the owner receives and his level of investment
- How easy it is to raise funds
- How easy it is for the owner to transwer his ownership in the business
How easy is it to set up and maintain a sole proprietorship? / What is the advantage of setting up a sole proprietorship?
It is easier and less expensive to set up and maintain a sole proprietorship.
How easy is it to set up and maintain a company? / What is the disadvantage of setting up and maintaining a company?
It is more complicated and expensive to start a company. A company also has to comply with more rules and regulations.
How much reward does a sole proprietor receive from his investment?
The entire profit of the business belongs to the sole proprietor. Note however that he may lose more than his investment in the business if he were to make a loss.
How much reward does a shareholder receive from his investment?
The shareholder receives only portions of the company’s profits as dividends. Note that the maximum amount he / she will lose will be his / her investment.
How easy is it for a sole proprietorship to raise funds?
Not that easy as banks may be unwilling to lend to a sole proprietorship. Thus, the owner / sole proprietor has to use his / her personal funds / money.
How easy is it for a company to raise funds?
Easier as banks are more willing to lend to a company. A company is also able to issue its shares to raise funds.
How easy is it for the sole proprietor to transfer his ownership in the business?
It is more difficult for the sole proprietor to transfer his ownership.
How easy is it for a shareholder in a company to transfer his ownership to another?
It is easier. It is especially easy for a listed company where the shares are traded on the stock exchange as there are many people willing to buy over his ownership of the company.
What would someone choose to start a sole proprietorship instead of a company?
A sole proprietorship is easier and less expensive to set up. The sole proprietor also has few rules and regulations to follow / comply with. In addition, the sole proprietor has full control of his business and enjoys the flexibility to withdraw his capital and profits from the business.
What is ‘objectivity’?
Objectivity is not letting bias, conflict of interest or undue influence of others to override professional judgement.
Possible Exam Question:
What are the advantages of a sole proprietorship? or
Explain the advantages of a sole proprietorship.
or
Why would someone choose to start a sole proprietorship instead of a company?
- Easier and less expensive to set up and maintain.
2. Entire / 100% of the profit of the business belongs to the sole proprietor.
Possible Exam Question:
What are the disadvantages of a sole proprietorship? or
Explain the disadvantages of a sole proprietorship.
or
Why would someone choose to not start a sole proprietorship?
- The sole proprietor may lose more than his investment in the business.
- Banks may be less willing to lend to a sole proprietorship. Thus the owner usually has to use his personal funds.
- More difficult for the sole proprietor to transfer his ownership.
Possible Exam Question:
What are the advantages of a limited company? or
Explain the advantages of a limited company.
or
Why would someone choose to start a company instead of a sole proprietorship?
- The maximum amount that the shareholders lose is their investment.
- Banks are more willing to lend to a company.
- A company is also able to issue its shares to raise funds.
- Easier for a shareholder in a company to transfer his ownership to another. It is especially easy for a listed company where the shares are traded on the stock exchange as there are many people willing to buy over his ownership of the company.
Possible Exam Question:
What are the disadvantages of a limited company? or
Explain the disadvantages of a limited company.
or
Why would someone choose to not start a company?
- More complicated and expensive to start a business.
- Has to comply with more rules and regulations.
- Shareholders receive only portions of the company’s profits as dividends (i.e. portion of the profits given to the shareholders).
