Topic 2 - The Elements of Accounting Flashcards
What are the 3 range of resources that we rely on in Accounting?
- Accounting assumptions, concepts and principles
- The Conceptual Framework
- Accounting Standards
What are the 6 key assumptions, concepts and principles that guide us in the preparation of financial statements?
- Monetary principle
- Accounting entity concept
- Accounting period concept
- Going concern assumption
- Historical cost principle
- Full disclosure principle
What are the 2 categories of qualitative characteristics that provide guidance in the Conceptual Framework model?
- Fundamental → divided into 2 more categories: Relevance (information has to be helpful to decision making) and Faithful Representation (information should be presented in a complete, neutral and error-free way)
- Enhancing → Understandability, Comparability, Timeliness and Verifiability
What are the 5 accounting elements?
- Assets
- Liabilities
- Equity
- Income
- Expense
Define Asset?
‘a present economic resource controlled by the entity as a result of past events… an economic resource is a right that has the potential to produce economic benefits’
Define Liabilities?
‘a present obligation of the entity to transfer an economic resource as a result of past events’.
Define Equity?
‘The residual (leftover) interest in the assets of the entity after deducting all its liabilities’
Define Income?
‘Increases in assets, or decreases in liabilities, that result in increases in equity, other than those relating to contributions from holders of equity claims’
Define Expense?
‘decreases in assets, or increases in liabilities, that result in decreases in equity, other than those relating to distribution to holders of equity claims’
What are the 2 criteria an item should meet if it is to be recordeddd in the system and provide users with useful information?
- Relevant
- Faithfully represented
When is an item considered to be recognised?
An item is recognised (and therefore included in the financial statements) if it meets both the definiton and recognition criteria.
When is an item considered to be disclosed?
An item is disclosed if it meets the definition but NOT the recognition criteria. Disclosure relates to inclusion as a note to the financial statements.
What are the 4 reports prepared as a package for general purpose financial statements?
- Income statement
- Statement of changes in equity
- Balance sheet
- Statement of cash flows
Which 2 financial statements capture all 5 elements of accounting?
- Income Statement
- Balance Sheet
Which 2 financial statements capture the flow-on effetcs of the 5 elements of accounting?
- Statement of Changes in Equity
- Statement of Cash Flows
What’s the difference between a current and non-current asset?
Current assets is the one that you think will be consumed and used up within a year, and a non-current is anything beyond a year.
Define Retained Earnings?
refers to the accumulated profit that has not been distributed as dividends to owners.
What is the basic accounting equation that links assets, liabailties and equity?
Assets = Liabilities + Equity
What does the Statement of Profit or Loss report?
reports on the success or failure of the entity’s operations by reporting its revenues and expenses.
What does the Statement of Financial Position (Balance Sheet) report?
reports the entity’s resources and claims to those resources. There are 2 types of claims: liabilities and equity.
What does the the Statement of Cash Flow show?
hows the amount of cash provided or used by operating activities, investing activities and financing activities.
What is the operating cycle?
is the average time taken to acquire goods and services and convert them to cash in producing revenues.
What is an auditor?
An auditor is an accountant who conducts an independent examination of the accounting data presented by an entity.
