Introduction to principles of accounts Flashcards
Historical Cost Concept
this states that assets are normally shown at cost price and this should be the basis for valuation of the assets.
The Money Measurement Concept
this states that accounting is only concerned if something can be measured in money and the monetary value of the transaction can be agreed to by most. It means that accounting can never tell you everything about a business.
Consistency Concept
requires accountants to be consistent from one accounting period to another in applying the same accounting principles, methods, practices and procedures.
Accrual Concept
is also known as the matching concept - this states that expenses and revenues are to be recorded in the period in which they are earned or incurred NOT when paid or received. Revenues must be matched against expenses in the same accounting period earned and incurred.
Realization Concept
revenue can only be recognized once the underlying goods or services associated with the revenue have been delivered or rendered, respectively. Revenue is only recognized when it has been earned not when it is received.
Prudence Concept
this concept does not overestimate the amount of revenues recognized or underestimate the amount of expenses. The result should be conservatively stated in the financial statements.
Business entity concept
this is also known as the separate entity concept and it states that the affairs of a business are to be treated as being different, distinct and separate from the personal activities of its owners.
Dual Aspect Concept
this states that there are two aspects of accounting. Double entry is the name given to the method of recording the transaction for dual aspects. It suggests that each and every transaction must have a debit and credit of equal amounts.
Going Concern Concept
this implies that the business will continue to operate for the foreseeable future. It means that the business will continue for a long period of time.
Materiality
The materiality concept states that if an item is relatively small in value, the item does not need separate recording e.g., a box of paper clips for the office. These small items are not regarded as materials and would be recorded in a general or sundry expense.
Sole trader
a person or individual trading his or her own business. This person owns and operates their own business.
Partnership
two or more people, not exceeding 20 that joins together with the view of making a profit.
Cooperatives
this is a legal constituted business entity formed for the purpose of furthering the economic welfare of its members.
Limited companies
Similar to a limited partnership, an LLC provides owners with limited liability while providing some of the income advantages of a partnership. Essentially, the advantages of partnerships and corporations are combined in an LLC, mitigating some of the disadvantages of each.
(Limited companies) Private
this is a legal entity with at least two shareholders. The liabilities of the shareholders is limited to the amount that they have agreed to invest. These are usually family owned businesses and shares are not sold to the public.
(Limited companies) Public
this is also a legal entity with limited shareholders liability. Shares are sold to the general public to raise capital.
Non-trading organizations
these are clubs and associations that do not operate for profit. Normally they run for the benefit of their members.
Advantages of sole proprietorship
*All profits are subject to the owner
*There is very little regulation for proprietorships
*Owners have total flexibility when running the business
*Very few requirements for starting—often only a business license
Disadvantages of sole proprietorship
*Owner is 100% liable for business debts
*Equity is limited to the owner’s personal resources
*Ownership of proprietorship is difficult to transfer
*No distinction between personal and business income
Advantages of partnerships
*Shared resources provides more capital for the business
*Each partner shares the total profits of the company
*Similar flexibility and simple design of a proprietorship
*Inexpensive to establish a business partnership, formal or informal
Disadvantages of partnerships
*Each partner is 100% responsible for debts and losses
*Selling the business is difficult—requires finding new partner
*Partnership ends when any partner decides to end it
Advantages of a corporation
*Limits liability of the owner to debts or losses
*Profits and losses belong to the corporation
*Can be transferred to new owners fairly easily
*Personal assets cannot be seized to pay for business debts
Disadvantages of a corporation
*Corporate operations are costly
*Establishing a corporation is costly
*Start a corporate business requires complex paperwork
*With some exceptions, corporate income is taxed twice
Advantages of an LLC
*Limits liability to the company owners for debts or losses
*The profits of the LLC are shared by the owners without double-taxation
Disadvantages of an LLC
*Ownership is limited by certain state laws
*Agreements must be comprehensive and complex
*Beginning an LLC has high costs due to legal and filing fees
Advantages of a Non-Profit
*Employee commitment
*Intrinsic rewards
Disadvantages of a Non-Profit
*Limited funding
*Public scrutiny
Your Major Business Organization Forms of the company will affect
*How you are taxed
*Your legal liability
*Costs of formation
*Operational costs
What is basic concept of accounting
Accounting is a system protest of identifying, recording, measuring, classifying, verifying, summarizing, interpreting and communicating financial information
the purpose of accounting
It provided information that is needed for some economic decision-making. This is accomplished through the financial report that provided information about a firm performance to the users of its financial performance (such as managers, investors, creditors etc)
What is book keeping
Book keeping is the first part of accounting process that refers to the keeping of records
identify the two types of users of accounting information
Internal users and External users
External users
This refers to those parties outside the business who need the financial information.
Examples
Inline revenue- they need to calculate the employee and firm taxes
Investors- To be sure that they will get a return on their investment
suppliers- To be sure that that the firm will pay their debts to them
costumers- they want to ensure they are getting a fair sale and the business will be there to supply them
Internal users
This refers to those parties inside the business who need the financial information.
Examples
Managers/ Owners- To know the profitability of the business so they are able to make wise decisions
Employees- They want to know if the employees can pay them and if their job is secure
The accounting cycle in order
Source documents- Documents where information is originally found
Books of original entry- Where the transaction is first entered.
The 7 books of original entry are the sales journal, purchases journal, return inwards journal, return outwards journal, cash book, the general ledger and the petty cash book is also considered one.
Ledgers- A book used to record the double entry of a transaction. The three types of ledgers are sales ledger, purchases ledger and general ledger.
Trial balance- The trial balance is a statement that checks the arithmetic accuracy of the ledgers. It is prepared at the end of the month
Trading and profit and loss- (Income statement) This shows the profitability of a firm
Balance sheet- This shows the assets, capital and liabilities of a firm
Accounting equation
Assets = Liabilities + Capital
Capital = Assets - Liabilities
Liabilities = Assets - Capital
Role of Technology in Accounting
Computers are used to enter data which will then be processed and converted to prepare financial statements
Accounting actions performed by a computer
Payroll
Stock/Inventory
Maintenance of Journals and Ledgers
Preparing financial statements
Preparing debtors and creditors schedule.
Accounting software that can be used:
Peach tree accounting
QuickBooks
Pay Pak
Pastel Accounting
Accpac
Round table Accounting
Advantages of using computer in accounting
It provides accuracy
Reliability
It provides effectiveness and efficiency
Disadvantages of using computer in accounting
Some systems may be difficult and complex to understand
If the information is not back-up properly information can be lost
Systems can be hacked.
5 Ethical Principles in Accounting
Integrity
Objectivity and Independence
Confidential
Professional competence and due care
Professional Behaviour
What is the Integrity principle
Accountants should be honest with financial information.
What is the Objectivity and Independence ethical principle
they must remain free from conflict of interest and other questionable business relationships when conducting accounting services they should not be biased.
What is the Confidential ethical principle
private information should not be disclosed.
What is the Professional competence and due care ethical
principle
they should continue to maintain their professional knowledge and skills
What is the Professional Behaviour ethical principle
they should comply with relevant laws and regulations.
Cash Flow Statements show what
shows the source of cash and helps you monitor incoming and outgoing money.
What the 2 classification of accounts
Personal and impersonal accounts
What personal accounts
These are accounts that deal with firms and people- debtors and creditors
What are impersonal accounts
Real accounts- are those that deal with the possessions of a business, for example, machinery and fixtures
Nominal accounts- are those in which expenses and income are recorded for example wages, purchases, sales and electricity
