Topic 1 - Introduction, double entry and trial balance Flashcards
What is accounting?
Accounting is the process of identifying, measuring and recording (book keeping), classifying and summarising financial information, and communicating this information to users, to help them make informed judgements and economic decisions.
What is the objective of accounting?
To provide the necessary information so that businesses can keep a financial check on the things they do and make informed decisions for the future.
What are stakeholders?
All parties interested in looking at a firm’s financial information.
What are examples of stakeholders? (10)
- Managers
- Government (Income Tax Office, VAT)
- Investors
- Suppliers
- Customers
- Employees (Trade Unions)
- Competitors
- Investment analysts
- Banks/Lenders
- Media/Community groups
What is the financial position of a company measured by?
- Assets
- Liabilities
- Capital/Equity
What are assets?
The resources owned by a business (possessions/property).
What are liabilities?
Money owed to others for assets bought. Business obligations to third parties.
What is capital/equity?
The amount in £’s of resources supplied to the business by the owner.
What is the accounting equation that relates these 3 terms?
Capital (Equity) = Assets - Liabilities
What does an account show?
The details of various transactions relating to a specific asset, liability or the capital/equity.
What are the advantages of double entry?
- Useful and convenient system of keeping financial records
- Complete record of each transaction
- Control of the business
- Checks the arithmetical accuracy of clerical work
- Helps in the preparation of the Financial Statements
What is inventory (stock)?
Goods which the company buys with the intention of resale and which the business normally deals (trades).
What are purchases?
The purchase of those goods that the business buys with he prime intention of resale.
What are sales?
The sale of those goods which the business normally deals and were bought with the prime intention of resale.
What are trade receivables?
A customer who owes money to us because we sold inventory to them on credit.
What are trade payables?
A supplier to whom we owe money because we bought inventory from them on credit.
What are operating expenses?
Costs incurred in the everyday operational running of a business.
What are some examples of operating expenses?
- Electricity
- Rent payable
- Stationery
- Employee wages
- Motor expenses
What is operating income?
Revenues from the everyday operations of the firm.
What are drawings?
When the business owner takes money, goods or other assets out of the business for private use.
What is balacing?
A procedure carried out at month end to calculate the balance of each account.
What is a trial balance?
A list (in the form of debits and credits) of the balances of all accounts kept.
What are the reasons for producing a Trial Balance? Explain them.
- Check Accuracy: The Trial Balance checks the arithmetical accuracy of a business’ bookkeeping.
- Identify Important Accounting Information: The Trial Balance identifies totals for key accounting data (e.g. bank, sales revenue, ordinary goods purchased, trade receivables and payables).
- Prepare Financial Statements: The Trial Balance is the link between the bookkeeping process and the Financial Statements (i.e. it is used to produce the Income Statement and the Statement of Financial Position).
