S1L2 Intro To Financial Accounting Flashcards
What is Accounting?
The process of identifying, measuring and communicating financial information about a business entity
What does Matching mean?
To calculate financial performance in a period, all income due MUST be matched with all expenses incurred (different to paid) to generate that income.
Incurred definition
Owning the item but not paid for it yet
Gross profit formula
Gross profit = total income due - total cost of goods sold
Net profit formula
Net profit = Gross profit - total expenses
What is an Income Statement (profit and loss account)?
A financial statement which shows financial performance over a period of time. It outlines the income for the period and the expenses incurred in the period.
Purpose of the Income Statement?
To show the amount of profit (where income > expenses) and loss (where income < expenses)
E.g. title convention for the Income Statement
“For the year ending 31 December 2024” (or “period”)
What is the Separate Entity Concept?
The business is classified as a separate entity to the owner for accounting purposes.
- the activities of the business should be kept separate from the owner’s activities
What is the purpose of the Separate Entity Concept?
- understand how the business is operating in its own rights
- the government - HMRC
- customers may want to know the financial health of the business
- finance providers - banks, venture capitalists
What is a Balance Sheet (statement of financial position?)
A financial statement which shows financial position at a specific point of time.
E.g. title convention for the Balance Sheet
Balance sheet AS AT 30 November 2024
What is an Asset?
Resources owned/controlled by the business to give future economic benefit
Examples of Assets:
- Cash in bank
- Stock
- Machinery
What is a Liability?
What the business owes
