Week 1 Flashcards
Define accounting
Accounting is an information system that:
Identifies, Records and Communicates the economic events of an organisation to interested users.
Role of accounting
- Accounting provides the financial information required for making decisions with regards to money and business issues.
- Accounting is a means of communication
- Accounting is a means of measuring business activity
Who uses accounting data?
Internal users:
• Managers who plan, organise and run the business
e.g., marketing managers, production supervisors, chief financial officers, other employees.
External users:
• Investors to make decisions to buy hold or sell shares.
• Creditors to evaluate risks of giving credit and lending money.
e.g., suppliers, bankers
• Government and regulatory bodies.
e.g., Australian Tax Office (ATO), Australian Securities and Investments Commission (ASIC)
What is the difference between bookkeeping and accounting?
- Bookkeeping usually involves only the recording of economic events (transactions), which is only one part of the accounting process.
- Accounting involves the entire process of ‘identifying, recording and communicating’ economic events…PLUS it involves the use of considerable judgment.
Basic accounting process
Identify
Record
communicate
analyse
There are 5 elements of financial statements:
Assets Liabilities Owners equity revenue Expenses
Define an asset
•Resources controlled by a business which are a result of past transactions or events and Have the capacity to provide future economic benefit
- used in carrying out such activities as production, consumption and exchange
- usually physical in nature, such as land, buildings, supplies to be used, and inventory that the business expects to sell to its customers
➢ Sometimes intangible, like trademarks
Define liabilities
• Present obligations claimed against assets which are
A result of past transactions or events and Lead to an economic sacrifices
➢ examples include outstanding accounts payable, bank loans, wages payable, etc.
Define owners equity + formula
• Represents the ownership claim to total assets. Owner’s Equity is increased by Capital (Investments by the owner[s]) Revenue
Owner’s Equity is decreased by Drawings Expenses
Assets – Liabilities = Owners Equity
explain increases in owners equity
• Capital
Are the assets the owner puts in the business.
• Revenues
– Gross increases in owner’s equity from business activities entered into for the purpose of earning income.
– May result from sale of merchandise, services, rental of property, or lending money.
– Usually result in an increase in an asset.
Explain decreases in owners equity
• Drawings
Are withdrawals of cash or other assets by the owner for personal use.
• Expenses
Decreases in owner’s equity that result from operating the business.
Cost of assets consumed or services used in the process of earning revenue.
e.g., utility expense, rent expense, supplies expense and tax expense
Define recognition
Recognition is the process of incorporating items in the statement of financial position (balance sheet) if it meets the definition of an element.
In addition to meeting the definition criteria of an element, an item must meet recognition criteria:
- Probability (benefit will be received or sacrifice made)
- Reliable measurement
The Basic Accounting Equation:
Assets = Liabilities + Owners Equity
• The accounting equation represents the relationship between assets, liabilities and owner’s equity.
Define a transaction
is a record of an economic event of an entity may be internal or external affects two or more components of the basic accounting equation.
entities/businesses have many transactions every day
define transaction analysis
Transaction analysis is the process of identifying the specific effects of transactions and events on the accounting equation.
*Not all activities represent business transactions
