Topic 1 - Introduction / Revision Flashcards
What are debits and credits?
They are descriptors for the two sides of an account.
Which sides of a T-account are debits and credits placed on?
Debit
Left-hand side
Credit
Right-hand side
What is the Accounting Equation?
Assets = Liabilities + Owners Equity
How do you balance the accounting equation?
By balancing your journal entries.
Asset Accounts:
______ on the DR side and ______ on the CR side
Liability Accounts:
______ on the DR side and ______ on the CR side
Owners Equity Accounts:
______ on the DR side and ______ on the CR side
Asset Accounts:
increase on the DR side and decrease on the CR side
Liability Accounts:
decrease on the DR side and increase on the CR side
Owners Equity Accounts:
decrease on the DR side and increase on the CR side
If an asset account increases (DR to asset) how can we make the journal entry balance AND make sure that the accounting equation balances as well?
Decrease another asset account (CR)
Increase a liability account (CR)
Increase an owners equity account (CR)
What are the 7 components that journal entries must ALWAYS have?
- A running reference number
- Date of the transaction
- A CLEAR indication of DR and CR
- Correct account names
- Amounts (with DR and CR amounts being in balance)
- Short description
- An empty line between journal entries
How would you correct this journal entry?
How are revenue / expense accounts a part of owners equity?
Revenues increase owners equity
– Revenue accounts increase on the CR side
Expenses decrease owners equity
– Expense accounts increase on the DR side
Define ‘journal’ and ‘ledger’.
Journal
chronological list of journal entries
Ledger
a ‘book’ that contains all accounts of an entity
When posting information from a journal to a ledger you MUST always include what?
A reference in the ledger AND the journal entry.
When transferring information from a journal to a ledger, use the DR/CR signs to work out on which side of a ledger account particular transactions/events are recorded and
- ___________________
- ___________________
When transferring information from a journal to a ledger, use the DR/CR signs to work out on which side of a ledger account particular transactions/events are recorded and
- Add contra account numbers to ledger postings
- Use posting reference in the journal to indicate that information has been posted to the ledger
Which accounts have opening balances?
Only balance sheet accounts.
Normal opening balances appear on which side?
Normal opening balances appear on the side on which an account increases
- DR side for assets
- CR side for liabilities & owners equity
Closing balances are normally recorded on which side?
On the side where the opening balance has not been recorded.
What are closing balances equal to?
Closing balances are equal to the amount necessary to balance the DR and CR sides of the account.
What are net assets equal to?
assets - liabilities
What effect would a cash purchase of supplies have on total assets?
It would have no effect.
Debit is a term representing:
the left side of an account
Prepaid expenses are classified in the balance sheet as:
assets
The entries which set the balances of the temporary accounts to zero are called what?
Closing entries.
The IASBs / AASBs conceptual framework provides information regarding what?
- ?
- ?
- ?
- The scope and objectives of financial reporting
- The qualitative characteristics that financial information should possess
- The elements of financial reporting
Why is the Conceptual Framework useful?
The development of accounting regulations which are internally consistent requires an agreement on:
- ?
- ?
- ?
- The objectives and general purpose of financial reporting
- The qualitative characteristics required of the provided information (i.e. what should good information look like)
- The definitions of basic financial accounting elements
How is the Conceptual Framework used in practice?
- ?
- ? :
- ?
- ?
- Not all possible transactions or events are covered by accounting standards
- If a transaction / event is not covered in the accounting standards, the accountant must develop a solution that complies with:
- the “true and fair view” requirements
- the AASBs conceptual framework
What are the qualitative characteristics of financial information in the Conceptual Framework regarding Relevance?
Information should:
- have the potential to impact the decisions that users of financial statements make, by having a:
predictive and/or
confirmatory value.
What are the qualitative characteristics of financial information in the Conceptual Framework regarding Faithful Representation?
Information should be:
complete - all information necessary to understand the reported reality
neutral - without bias
free from error - prepared systematically without omissions
What are the qualitative characteristics of financial information in the Conceptual Framework regarding Enhancing Quality Characteristics (which improve quality)?
- ?
- ?
- ?
- ?
V-cut
- Verifiability
- Comparability
- Understandability
- Timeliness
What is one approach used to calculate profits?
By using the Asset / Liability approach:
Starting point:
Definition of assets and liabilities.
All other definitions rely on these two “base definitions”.
Which five elements does that conceptual framework define?
- Assets
- Liabilities
- Expenses
- Income
- Equity
The definitions of 3-5 depend partly on the definitions of Assets and Liabilities.
