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
