Introduction to Financial Accounting Flashcards
What is accounting?
The process of identifying, measuring and communicating financial information about a business entity
3 types of business entity
- Sole trader = a person who is the exclusive owner of a business, entitled to keep all profits after tax has been paid but liable for all losses.
- Company
- Partnership
Matching
To calculate financial performance in a period…
To calculate financial performance in a period, all income due must be matched with all expense incurred to generate the income
The financial statement which shows ___________ ___________ over a ________ of _____ is called an ________ _____________ or ________ and _____ account
The financial statement which shows financial performance over a period of time is called an Income Statement or Profit and loss account
Gross profit equation
Gross profit = sales revenue - purchase cost
Net profit equation
Net profit = Sales revenue - total cost
Income Statement
Summarises all income and expenditure over a period of time (usually 12 months)
= Its purpose is to show amount of
profit (where income > expenses) or
loss (where income < expenses)
Title Convention examples
“for the year ending 2023”
“Balance sheet as at November 25 2023”
What do brackets mean?
Means a minus
Income Statement can also be known as (2)
- Trading and profit and loss account or
- Profit and loss account
Financial Position of the Business
- Cash?
- Amounts owed to him?
- Amounts owed by him?
- Profit or loss?
Separate Entity Concept
The activities of the business should be kept separate from the owner’s business
Separate Entity Concept - why?
- To understand how the business is operating in its own right
- The Government - HMRC
- Customers
- Finance providers - Banks, Venture capitalists
Balance Sheet
The financial statement which shows financial position at a specific point in time
A snapshot of assets, liabilities and capital at a single moment
The Accounting Equation
Assets = Liabilities+ Capital
Asset definition
Resources owned/controlled by the business to give future economic benefit
- Cash in bank, stock, machinery
Liability
What the business owes to third parties (debts, obligations)
- Bank overdraft, money owed to supplier
Capital (owed to the owner/s)
- Investment by the owner
- Money introduced, retained profit
If a sole trader pays himself a wage it is called ________ and it will count as ________ but if it is a company then it is an _________
If a sole trader pays himself a wage it is called drawings and it will count as capital but if it is a company then it is an expense
What are non-current assets and current assets?
Non-current assets = things that bring income in more than 12 months
Current assets = things that bring income in less than 12 months
Income/ Revenue/ Turnover
- Transaction or event which causes an increase in the ownership interest
Expenditure (Revenue or Capital)
Transaction or event which causes a decrease in the ownership interest
Revenue expenditure
Expense used in period or matched with revenue for the period
Capital Expenditure
Expenditure on items used in this and future periods
Where will revenue expenditure be and where will be capital expenditure be?
Revenue expenditure will be on the income statement whereas capital expenditure will be on the balance sheet
Balance Sheet
Shows the financial position of a business at a specific point in time
Income Statement
Summarises the income and expenditure of a business = profit or loss
