Topic 2: Accounting Principles, Financial Statements Flashcards
What is the definition of the Going Concern Assumption?
The assumption that the company will continue in operation for the forseeable future. This means the value of assets in the financial reports will be recorded at the historical or acquisition cost rather than at liquidation values.
What is the definition of the Accrual Basis Assumption?
Transactions are recognised when they take place and not necessarily when the payments are received.
What is the definition of the Accounting Period Assumption?
The life of a business is divided into intervals of time known as accounting periods to enable the connection of results from one period to the next in order to make decisions and improve performance.
What is the definition of the Accounting Entity Assumption?
The assumption that the records of all business activities of the entity are kept completely separate from those of the owner of the entity.
What is the definition of the Monetary Assumption?
The assumption that only those items that can be expressed in dollar terms are included in the accounting records.
What is the definition of the Historical Cost?
Requires all Balance Sheet assets to be valued at their original cost.
What is the definition of Materiality?
Requires all significant items to be reported in financial reports.
What is the Purpose of preparing a Trial Balance?
Helps to check that the debits and credits in the general ledger are equal and makes it easier to prepare a balance sheet and income statement.
Type of errors that WILL show up in a Trial Balance
- A debit or credit entry was omitted
- A transposing error occurred
- An amount was recorded incorrectly
- The debit and credit sides of the trial balance were totally incorrect
Types of errors the will NOT show up in a Trial Balance
- The incorrect amount was entered into both accounts
- The transaction was recorded more than once
- A transaction was left out
- The transaction was recorded in the wrong account
What is the purpose of an income statement?
Shows income earned, expenses and the resultant profit/loss over a particular period of time. Provides information about the performance of a business and enables the owner to determine what changes can be made to improve.
What is the purpose of a balance sheet?
It provides information about an entity’s assets, liabilities and the owner’s equity at a point in time. It provides information about the company’s financial position and stability that investors can use to evaluate the company’s viability.
