SAC 1 Flashcards
List the Accounting Principles
“CHER@MCG”
- Consistency
- Historical Cost
- Entity
- Reporting Period
- Monetary Unit
- Conservatism
- Going Concern
List the Qualitative Characteristics
“Red Rooster’s Ugly Chicken”
- Relevance - Reliability
- Understandability
- Comparability
Define Consistency
Accounting methods should be applied in a consistent manner over time so that valid comparisons of reports can be made between periods.
Define Historical Cost
All items should be recorded at their original purchase price as this can be verified by source documents.
Define Entity
The owner, business and other businesses are treated as separate entities and accounting records should be kept on this basis.
Define Reporting Period
The life of the business is split into arbitrary periods of time to allow for report preparation and profit determination.
Define Monetary Unit
All items are to be recorded in common unit of measurement, this being the currency of the country in which reports are to be prepared.
Define Conservatism
Gains should only be recognised when certain while losses should be recognised as soon as they are probable, ensuring that assets and profit are not overstated and liabilities are not understated.
Define Going Concern
The life of the business is assumed to be continuous.
Define Relevance and Materiality.
Only information that assists with decision making of the business should be included in reports.
The materiality of an item is determined on the basis that if its omission will impact on decision making, it is a relevant item to be reported. Items of immaterial value can be excluded from reports as decision making will be unaffected.
Define Reliability
The information contained in reports must be free from bias and error so that it is accurate and supported by verifiable evidence (source documents).
Define Understandability
Reports must be presented in an easily understood manner, so that users of accounting who have little or no accounting knowledge can still comprehend the information provided.
Define Comparability
Reports of the business should be comparable over time, through the use of consistent accounting methods.
What is an asset?
A resource controlled by the entity, as a result of past events, which is expected to provide an inflow of economic benefits within the next 12 months (current) / after 12 months (non-current).
What is a Liability?
A present obligation, as a result of past events, which is expected to result in an outflow of economic benefits within the next 12 months (current) / after 12 months (non-current).
What is Owner’s Equity?
The residual value in the assets of the entity after deducting all its liabilities, representing the owner’s claim to the business.
Define Equity
Claims on the assets of the business comprising of internal (owner’s equity) and external (liabilities).
What is revenue?
An inflow (or savings in outflow) of economic benefit in the form of an increase in assets (or decrease in liabilities) which results in an increase in owner’s equity. Exclusions include capital contribution.
What is an expense?
An outflow (or reduction in inflow) of economic benefit in the form of a decrease in assets (or increase in liabilities) which results in a decrease in owner’s equity. Exclusions include drawings.
What is a “balance sheet’ and what are its uses?
An accounting report that details the financial position of a business by showing its assets, liabilities and owner’s equity at a particular point in time.
- Show’s firm’s financial position (liquidity)
- Aids decision-making about the firm’s liquidity
- Shows the composition of equities and the financial structure of the business
Why is the balance sheet recorded “as at”?
The Balance Sheet is prepared ‘as at’ a particular point in time because businesses encounter a number of transactions every day and each one of these alters the accounting equation in some way. As such, the balance sheet is only ever accurate at the time it was made.
With reference to one qualitative characteristic, why are assets and liabilities classified?
In order for reports to be presented in an easy manner so that users with little accounting knowledge can comprehend the information included (understandability), items in the Balance Sheet are classified as either current or non-current.