Week 1 - The Accounting Environment Flashcards
Define Accounting
Accounting is an information system that identifies, records and communicates the economic events of an entity to interested users.
What is the purpose of Accounting?
The purpose of accounting is to aid people in making choices about the allocation of scarce resources, whether internal or external to an entity.
What are the three steps in the accounting process?
Identification
Recording
Communication
What is the difference between bookkeepers and accountants?
Bookkeepers only record the economic events (which is only one part of the accounting process. They do not communicate their findings
Define Internal Users of Accounting Data
Internal users of accounting information are managers who plan, organise and run a business.
Examples of Internal Users of Accounting Data
Marketing managers, production supervisors and chief financial officers.
Define External Users of Accounting Data
Investors to make decisions to buy, hold or sell shares
Creditors, to evaluate risks of giving credit and lending money
Government and regulatory bodies
Define Management Accounting
Management accounting provides economic and financial information for managers and other internal users.
Define Financial Accounting
Financial accounting is providing economic and financial information to external users such as creditors.
Who governs accountants?
Accountants are self-governed and self-regulated
What is accounting regulation formed by?
Accounting Regulation is formed by legislation (set by the government) and accounting standards (FRC, AASB, IASB)
What is conceptual framework?
Set out the concepts that underlie the preparation and presentation of financial standards for external users.
What does conceptual framework provide?
The framework is not an AAS (Australian Accounting Standards) standard but does provide information about the formulation of the AAS.
The framework assists the AASB in the development of future standards.
Explain Integrated Reporting
Concise reports about future prospects, in the context of its external environments.
They are required for financial stability
Explain Global Reporting Initiative
Voluntary organisation that has established requirements wen reporting on environmental and social aspects.
Define Assets
Assets are the resources owned or controlled the entity and are the result of past transactions or events. Assets provide future economic benefit.
Examples of Assets
Cash at bank, inventory, accounts receivable, prepayments (pre-paid rent)
Define Liabilities
Liabilities are claims of those to whom money is owed and result in future economic sacrifice. Liabilities are owed to an external party
Examples of Liabilities
Accounts payable, loans, mortgages etc.
Define Owner’s Equity
Represent’s the owner’s claim on the (net) assets of the entity. It is the residual interest in the assets of the entity, after deducting all its liabilities.
What are Capital Contributions?
An owners personal money that has been placed into the business
What are drawings
Money taken out of a business for personal use
Define Revenue
The value of transaction with the customers/clients of a business and the amounts earned from the sale or good of service
When are revenues incurred?
Revenues are incurred when there is a net increase in assets
OR
Revenues are incurred when there is a net decrease in liabilities as a result of a business activity.
Examples of Revenue
sales revenue, fee income from providing services
Define Expenses
Costs incurred in running the business in order to earn good income. Expenses include the value of goods/assets are being consumed and the value of services “used up”.
When are expenses incurred?
Expenses are incurred when there is a net decrease in assets
OR
Expenses are incurred when there is a net increase in liabilities as a result of a business activity
Examples of Expenses
costs of goods sold, rent, interest, utilities
What is the Accounting Equation?
ACCOUNTING EQUATION: ASSETS = LIABILITIES + OWNER’S EQUITY
Define Proprietorship
A business that is owned by one person is generally a sole proprietorship. The owner is often the manager/operator of the business.
Define Partnership
A business owned by two or more persons associated as partners is a partnership.
Define Company
A business organised as a separate legal entity under the corporations of the law and having ownerships divided into transferable shares, is a company.
Explain the Identification Process
Identifying events that are considered evidence of economic activity and are relevant to a particular business.
Explain the Recording Step in the Process
Economic events are recorded to provide a financial history of the financial activities. Recording in a chronological diary ensuring events are recorded in an orderly and systematic manner.
Explain the Communication Step in the Process
The information is then communicated through the preparation and distribution of accounting reports.
How does accounting provide relevant data to internal users?
They provide them with internal reports.
