week 2 Flashcards
what are accounting concepts
the basic assumptions that underly the accounts
what are accounting standards
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
what are accounting policies
detailed methods of measurement and valuation adopted by specific entities
disclosed in the notes of financial statements
what is the going concern concept
assumption the business will continue operating for the foreseeable future
what is net realisable value
what the business could get for assets today if they were sold
what is accruals concept
income, expenses, assets and liabilities are recognised when the transaction takes place, it doesn’t matter if cash is given/recieved
what is the matching concept
all expenses incurred in an accounting period must be matched with the revenue earned in that period
why are accounting profits accrual based
give a more realistic view of the company’s performance and financial position than cash based profits
what is historical cost
record the items at the original cost when the transaction took place
what is money measurement concept
only items which can be measured in monetary terms are included in the accounts
what is the entity concept
business can be seperated from the owner
what is the time period concept
life of business can be split into different time periods so information can be recorded
what is the IASB conceptual framework
provides broad guiding principles to assist with the development of new accounting standards and treatments to reduce variation in accounting rules across countries
what is the purpose of the conceptual framework
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
what are the fundamental qualitative characteristics of the conceptual framework
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
what is predictive value
can be used to make predictions or forecast future outcomes
what is confirmatory value
can provide feedback about previous decisions
what is materiality
linked to relevance, material info is info which if omitted or misstated could effect a users decision
what is prudence
exercise of caution when making judgements under conditions of uncertainty
what are the enhancing qualitative characteristics of the conceptual framework
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
what are the constraints on qualitative characteristics
cost - benefits of reporting info should be less than costs of reporting it
qualitative characteristics may conflict such as relevance and understandability
what is a sole trader
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
what is a partnership
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
what is a company
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)
what are non-current assets
assets which will be used for more than one year, from the date of financial statements
what are current assets
assets expected to turn into cash within the year
what are non-current liabilities
the entity is not required to pay the liability within one year
what are current liabilities
amounts owed by the company due in less than one year
what is equity
represents the owners share in the business
consists of share capital, retained profits and other reserves
what is capital
equity for sole traders
consists of the owners share and profits less drawings
what is the duality concept
every transaction has two aspects, basis for double entry bookkeeping
every transaction affects two items in the financial statements
