Module 4: Accounting Flashcards
What is accounting?
Accounting provides important information about a firm to business owners and managers. There are two main specialist areas in accounting, financial accounting and management accounting.
What is financial accounting?
Financial accounting is concerned with the supply of financial information to the external users (eg. potential investors). An example is recording how much money belongs to the owners and how much profit it makes over a year.
What is management accounting?
Management accounting is concerned with the supply of financial information to the internal users (eg. managers). An example is recording how much raw material and how much labour are used in production.
Who are the users of accounting information, and why?
owners: to know how money is used, debt, whether the business is profitable etc.
propective investors/partners: to know the financial condition of the business and whether it is profitable as to make a decision to invest or not.
banks/suppliers: to know the financial condition and whether the business can repay the amounts owned to them.
the government: to calculate the profits tax the business needs to pay
What is the accounting equation?
resources in the business = resources: who supplied them
Assets=liabilities+capital
What are assets, liabilities, and capital?
Assets refer to the resources in the business. It consists of property of all kinds, including buildings, machinery, stock of goods, cash etc.
Liabilities consist of loans from the bank and money owing to suppliers etc.
Capital consists of the momey and assets introduced by the owners and their retained profits.
What are accounts payable and accounts receivable?
A person to whom money is owed for goods or services is known as a creditor, or an account payable.
A person who owes money to a business for goods or services supplied to him is known as a debtor, or an account receivable.
What is double-entry bookkeeping?
Double-entry bookkeeping is a system by which transactions are entered twice, once on the debit(left) side of a T-account and once on the credit(right) side of another T-account.
Where is the entry written when the assets, capital, and liabilities increase or decrease respectively?
Debit(left) side: increase in assets, decrease in capital or liabilities
Credit(right) side: decrease in assets, increase in capital or liabilities
