LA 1 Flashcards
Luca Pacioli
Published the first full description of the double-entry system
Double-entry System
An accounting system in which there was a debit and a credit entry for each transaction
Debitum
Latin for ‘he owes you’
Promeritum
Latin for ‘he trusts you’
Definition of Accounting
A continuous scientific process;
That not only involves the
bookkeeping of transactions;
But also involves the reporting on
the economic activities of an
entity;
Through financial statements to
the users thereof.
Aim of Accounting
To provide financial information about the economic activities of an entity;
to current and future
interested parties;
to enable them to make informed decisions about the entity.
Entity
An economic unit that functions separately from other units;
financial information is recorded separately from other units
Financial Statement
A communication medium through which the entity’s financial information is communicated to various users who make economic decisions
External Users of Financial Statements
Providers of funds
Investors
Creditors
Customers
Employees and Union
Government
The public
Internal Users of Financial Statements
Management
Operational departments
Financial Accounting
Financial information is communicated to interested parties by means of financial statements - for external users
Management Accounting
Financial information is provided to the management and employees of the entity - for internal users
Duality Concept
The total funds applied must be equal to the total funds generated
employment of funds = generated funds
The accounting equation
Assets = Liabilities + Equity
Going Concern Concept
The assumption that a business will continue to operate in the foreseeable future;
and not be forced to close or liquidate its operations
Accrual Concept
Transactions must be recorded in the financial year it occurs and not when the cash is received or paid
Expense incurred not yet paid
Qualitative Characteristics
Relevance & Faithful Representation
Relevance
The principle is that financial information should make a difference in
decision-making. It must be timely, accurate, and useful for users of
financial statements.
Timeliness
Information is available to decision-makers in time to influence their decisions. The longer it takes to make information available, the less useful it becomes.
Faithful Representation
Financial statements should represent the substance of transactions and events
Information needs to be complete, neutral and free from error
Completeness
Providing all information that a user needs to
understand what is described.
Free From Error
No errors/omissions in the description, selection and application of processes used to produce information. Free from error ≠ perfect.
Neutral
Free from bias
- manipulation to get a
favourable/unfavourable response.
Two shortfalls in using money as the measure of economic activities
- Only facts which are measurable in terms of money are taken into account,
- The instability of the value of money,
