Week 1 and 2 Flashcards
What is accounting?
Recording, classifying, Analysing, and summarizing, Reporting
What are the objectives of accounting? (4)
-Ascertain profits - proper records enable accurate calculation of profits.
-Ascertain value of assets and liabilities.
-Provide financial information about a business to the users.
-Maintain proper financial control of the business.
What are the fields of accounting? (2)
-Managerial and cost accounting
-Financial Accounting
What does managerial accounting involve? (3)
- information for decision-making for the day-to-day running of the business.
- information to help managers make future decisions
- performance evaluations, forecasts, and projections
What does financial accounting involve?
- developing information for
external decision makers such as:
i. shareholders,
ii. Government and its agencies
iii. Suppliers, customers, and other interested parties.
What are the main features of financial accounting information? (3)
-Is usually given at annual intervals and is summarized unlike in management accounting.
-There is a legal obligation to produce financial accounting information.
-The information is usually historical in nature as it is a review of the past performance.
what are the limitations of financial accounting information? (5)
-Financial statement information is usually in quantitative terms. Nonquantified information is ignored.
-It is historical whereas many users prefer forecasts to assist in decision making.
-Preparation of financial statements involves judgment and can be subjective. This may be unreliable.
-Financial statements are historical and ignore current values.
-The monetary unit keeps on changing its value but this is not reflected in the
financial statements.
Who are the users of financial information? (8)
Internal users;
- Managers and other employees
External users:
- Shareholders – existing and potential
- Government and its agencies
- Suppliers and other trade creditors
- Customers
-Competitors
- Financial analysts and stock brokers
- The public
What do financial statements do?
They provide information about the financial activities and position of a firm.
what are the Important financial statements? (3)
-Balance Sheet
-Income Statement or Profit and Loss Account
-Cash Flow Statement
What does a balance sheet do?
A balance sheet indicates the financial position of a firm at a specific point in time. It contains information about the firm’s assets, liabilities and equity.
What’s the formula for assets?
Assets = Owners’ Equity + Liabilities
What are assets?
Assets are economic resources or properties owned by the firm.
What are the types of assets? (2)
-Non-current assets (Fixed Assets)
-Current assets
What are non-current assets?
These are long-term assets.
What are the types of non-current assets? (2)
-Tangible non-current assets are physical assets like land, buildings, plants, and machinery. These are recorded at acquisition costs and are depreciated.
-Intangible non-current assets are the firm’s rights and claims, such as goodwill, patents, copyrights, etc.
What are current assets?
-These are those that can be converted into cash within a year in the normal course of business. They include:
-Cash and bank balances
-Accounts receivable
-Inventory
-Prepayments
What are liabilities?
A liability is a firm’s obligation to pay cash or provide goods or services in the future. Two types of liabilities are
What are the types of liabilities? (2)
-Current liabilities
-Long-term liabilities
What are current liabilities?
-Current liabilities are payable within a year in the normal course of business. They include:
-Accounts payable (creditors)
-Outstanding expenses
-Advance payments from customers
What are long-term liabilities?
-Long-term liabilities are payable for a period exceeding one year. They include:
-Borrowings from banks and other
financial institutions etc.
-Debentures/bonds
What are Shareholders’ Funds or Equity?
Shareholders’ funds or equity is the sum of share capital plus reserves. Also called net worth.
What is share capital?
Share capital is the owners’ contribution divided into shares. A share is a certificate acknowledging the amount of capital contributed by the shareholder.
What are reserves?
Reserves, surplus, or retained earnings are undistributed profits.
What information does an income statement provide? (3)
-revenues,
-expenses
-resulting profit or loss.
What is revenue?
Revenue is the amount received or receivable within the accounting period from the sale of the firm’s goods or services.
Where does operating revenue come from?
Operating revenue - arises from main operations of the firm
Where does non-operating revenue come from?
non-operating revenue -arises from other activities.
What are the types of revenue? (2)
-Operating revenue
-Non-operating revenue
What is an expense?
Expense is the amount paid or payable within the accounting period for generating revenue.
What are the types of expenditure?
Revenue expenditure which appears in the Income Statement, e.g. salaries and wages, rent, fuel, etc.
Capital expenditure which appears in the balance sheet as assets.
What’s the formula for gross profit?
Gross profit = sales – cost of goods sold
What’s the formula for net profit?
Net profit = Gross profit – operating expenses
What are operating expenses?
Operating expenses = all other expenses except COGS and taxation.
Define generally accepted accounting principles.
-These are rules or assumptions that are used to prepare the financial statements.
They help the accounts to be objective and therefore be helpful to the different users with their various needs.
Name 8 accounting principles (11).
-Going concern concept
-Consistency concept
-Matching concept
-Prudence concept
-Business entity concept
-Objectivity principle
-Historical Cost concept
-Realization or Revenue Recognition Principle
-Materiality concept
-Substance over Form concept
-Duality concept
What does the going Concern concept do?
This allows the financial statements to be prepared on the assumption that the business will continue with its operations into the foreseeable future.
What does the consistency concept do?
This allows similar items to be treated in the same manner within the same accounting period and in subsequent periods.
What does the Matching/Accruals concept do?
Revenue should be matched with the expenses incurred so as to earn that revenue in the same accounting period.
**Note that under accrual accounting, profits, losses, costs, and expenses are recognized as they are earned or incurred, rather than when cash is received or paid
What does the Prudence concept do?
This concept prevents profits or revenues from being anticipated except where there is a high degree of certainty. Provision is made for all costs and losses whether the amount is known for certain or is only the best estimate.
What does the Business entity concept do?
This implies that the affairs of the business are treated as being quite separate from the non-business activities of its owner (s). The items and transactions recorded in the books of accounts of a business are therefore restricted to those of the business only.
What does the Objectivity principle say?
financial information should be supported by independent and unbiased evidence. This ensures that the financial reports are reliable and contain verifiable information.
What does the Historical Cost principle say?
Cost is usually the basis for the valuation of assets. This means the assets are shown at cost price and the current market value of the assets is ignored.
What does the Realization or Revenue recognition principle say?
This states that revenue should be recognized when earned. For realization to take place, the following should be observed :
-Goods or services must have passed to
the buyer
-The buyer has accepted liability to pay
for the goods/services
-The monetary value of the goods or
services have been established
**Note that It is not the time when the order is received or the customer pays for the goods that the revenue is recognized but when the goods have been delivered and accepted by the buyer.
What are the requirements for the realization or revenue recognition principle? (3)
-Goods or services must have been passed to the buyer
-The buyer has accepted liability to pay
for the goods/services
-The monetary value of the goods or services has been established
**Note that It is not the time when the order is received or the customer pays for the goods that the revenue is recognized but when the goods have been delivered and accepted by the buyer.
What does the Materiality principle say?
Financial statements should disclose all items that are material enough to affect decisions - only those items that are of interest to the users of financial statements should appear.
What does the Substance over Form principle say?
Transactions and other events should be accounted for and presented in accordance with their substance and financial reality and not merely with their legal form. E.g. An asset bought on hire purchase is recorded in the books (financial reality) even though all the installments are not yet paid for.
What does the Dual Aspect concept say?
There are two aspects of accounting. One is represented by the assets of the business while the other by the claims or liabilities against the assets. These two aspects must always equal each other. Double entry refers to the dual aspect.
What is the dual aspect concept represented by?
It is represented by the accounting equation which is also referred to as the balance sheet equation. It is shown as:
Assets = Liabilities + Owners Equity (or Capital)
A = L + C
What is capital, or owners equity?
The funds invested by the owners of a business.
