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
