week 2

Question 1

what are accounting concepts

Answer 1

the basic assumptions that underly the accounts

Question 2

what are accounting standards

Answer 2

technical rules which give guidance on how specific transactions should be accounted for
must be followed to ensure financial statements give a true and fair view of the entity’s activities

Question 3

what are accounting policies

Answer 3

detailed methods of measurement and valuation adopted by specific entities
disclosed in the notes of financial statements

Question 4

what is the going concern concept

Answer 4

assumption the business will continue operating for the foreseeable future

Question 5

what is net realisable value

Answer 5

what the business could get for assets today if they were sold

Question 6

what is accruals concept

Answer 6

income, expenses, assets and liabilities are recognised when the transaction takes place, it doesn’t matter if cash is given/recieved

Question 7

what is the matching concept

Answer 7

all expenses incurred in an accounting period must be matched with the revenue earned in that period

Question 8

why are accounting profits accrual based

Answer 8

give a more realistic view of the company’s performance and financial position than cash based profits

Question 9

what is historical cost

Answer 9

record the items at the original cost when the transaction took place

Question 10

what is money measurement concept

Answer 10

only items which can be measured in monetary terms are included in the accounts

Question 11

what is the entity concept

Answer 11

business can be seperated from the owner

Question 12

what is the time period concept

Answer 12

life of business can be split into different time periods so information can be recorded

Question 13

what is the IASB conceptual framework

Answer 13

provides broad guiding principles to assist with the development of new accounting standards and treatments to reduce variation in accounting rules across countries

Question 14

what is the purpose of the conceptual framework

Answer 14

to help national standard setters develop new standards
to help preparers of financial statements with areas where there aren’t any standards
to help auditors to assess whether a set of financial statements meets accounting rules

Question 15

what are the fundamental qualitative characteristics of the conceptual framework

Answer 15

relevance - if info can influence user decision making
usually has predictive or confirmatory value
faithful representation - info represents a phenomenon faithfully
complete, neutral and free from error

Question 16

what is predictive value

Answer 16

can be used to make predictions or forecast future outcomes

Question 17

what is confirmatory value

Answer 17

can provide feedback about previous decisions

Question 18

what is materiality

Answer 18

linked to relevance, material info is info which if omitted or misstated could effect a users decision

Question 19

what is prudence

Answer 19

exercise of caution when making judgements under conditions of uncertainty

Question 20

what are the enhancing qualitative characteristics of the conceptual framework

Answer 20

comparability - enables users to identify and understand similarities and differences among items, aided by consistency and accounting standards
verifiability - info should be capable of verification by observers, can be direct or indirect
timeliness - providing info in sufficient time to influence decisions
understandability - assisted when info is characterised and presented clearly and concisely

Question 21

what are the constraints on qualitative characteristics

Answer 21

cost - benefits of reporting info should be less than costs of reporting it
qualitative characteristics may conflict such as relevance and understandability

Question 22

what is a sole trader

Answer 22

one individual who owns and runs a business
business not seen as legally separate (unincorporated)
individual responsible for debts
creditors can claim personal assets in bankruptcy

Question 23

what is a partnership

Answer 23

business run and owned by two or more individuals
can be incorporated or unincorporated
unincorporated - partners responsible for debts and creditors can claim personal assets
incorporated - partnership is a separate legal entity, partners have limited liabilities and creditors get access to business assets

Question 24

what is a company

Answer 24

separate legal entity
own their own assets and can take action on their own behalf
owners called shareholders, limited liability for company debt
could be public or private limited company (PLC or Ltd)

Question 25

what are non-current assets

Answer 25

assets which will be used for more than one year, from the date of financial statements

Question 26

what are current assets

Answer 26

assets expected to turn into cash within the year

Question 27

what are non-current liabilities

Answer 27

the entity is not required to pay the liability within one year

Question 28

what are current liabilities

Answer 28

amounts owed by the company due in less than one year

Question 29

what is equity

Answer 29

represents the owners share in the business
consists of share capital, retained profits and other reserves

Question 30

what is capital

Answer 30

equity for sole traders
consists of the owners share and profits less drawings

Question 31

what is the duality concept

Answer 31

every transaction has two aspects, basis for double entry bookkeeping
every transaction affects two items in the financial statements