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Accounting For Business > Who Needs Accounting > Flashcards

Who Needs Accounting Flashcards

1
Q

Accounting is the process of

A
  • identifying, measuring and communicating financial information about an entity to permit informed judgments and decisions by users of the information
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2
Q

Entity

A
  • An identifiable organisation for which accounting information is needed
  • a legal/economic unit which exists independently of its owners
  1. Sole trader
  2. Partnership
  3. Limited liability company
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3
Q

Conceptual framework for accounting

A

A statement of principles which provides generally accepted guidance for the development of new reporting practices and for challenging and evaluating the existing practises

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4
Q

When is a conceptual framework particularly important

A

When practises are being developed for reporting to those who are not part of the day to day running of the business.
Called external reporting or financial reporting

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5
Q

Management accounting (internal reporting)

A

Reporting accounting information within a business, for management use only
They have developed spracial techniques and manage the business of a day to day basis

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6
Q

Sole trader

A
  • an individual who enters into business alone, either selling goods or providing a service
  • if cash is not available, the sole trader may borrow from a bank to start the business
  • sole traders business may be very much intertwined with their personal life
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7
Q

Accounting in a sole trader

A
  • for accounting purposes, the business is regarded as a separate economic entity, of which the sole trader is the owner who takes the risk of the bad times and benefit of good times
  • accounting information will be needed by:
  • government (form of HM revenue and customers) for tax collecting purposes
  • bank for purposes of lending money to the business
  • person intending to buy the business when existing owner retires
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8
Q

Partnership

A
  • two or more persons in a business together with aim of making profit
  • sole trader may expand into partnership
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9
Q

Risks and benefits in a partnership

A

Permits a pooling if skills
May allow one person with ideas to work with another who has the money to provide the resources needed to turn the ideas into a profit

BUT

One partner may be required to meet all the obligations of the partnership if the other partner does not have sufficient personal property, possessions and cash. (Joint and several liability)

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10
Q

Accounting in partnership

A
  • seen as separate economic entity
  • partners wishing to be sure that they are receiving a fair share of partnership profits
  • HM revenue and customs
  • banks who provide finance
  • other persons who may be invited to join partnership
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11
Q

Limited liability company

A
  • company where the liability of the owners is limited to the amount of capital they have agreed to contribute
  • if the business failed the owners would only lose money put into the business and personal wealth would be safe
  • private limited company (Ltd)
  • public limited company (plc)
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12
Q

Private limited company (Ltd)

A

Prohibited by law from offering its shares to the public (appropriate to a family controlled business)
Owned by shareholders

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13
Q

Public limited company (plc)

A

Permitted to offer its shares to the public. In return it has to satisfy more onerous regulations.
Owned by shareholders

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14
Q

Dividend

A

Amount paid to a shareholder, usually in form of cash as a reward for investment in the company.
The amount of dividend paid is proportionate to the number of shares held

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15
Q

Users of accounting information

A
  • management
  • owners as investors
  • employees
  • lenders
  • suppliers and other trade creditors
  • customers
  • governments and their agencies
  • public interest
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16
Q

Stakeholders

A

All those who might have a legitimate interest in receiving financial information about a business because they have a ‘stake’ in it

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17
Q

Assets

A

Resources available to the business

Controlled by entity
Result of past events
Future economic benefits expected to flow to entity
Land/ buildings owned, workforce employed, major ad campaign undertaken

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18
Q

Liabilities

A

Obligations of the entity

From past events
Expected to result in outflow from entity

Bank borrowing by the business 
Sales tax (VAT) payable by a business
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19
Q

Ownership interest / equity interest

A

The owners of a business have a claim to the resources of the business after all other obligations have been satisfied

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20
Q

Statement of financial position/ balance sheet

A

Simple equation at point in time

Assets and liabilities reported

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21
Q

The accounting equation

A

ASSETS minus LIABILITIES equals OWNERSHIP INTEREST

Also (assets equal liabilities plus ownership interest)

22
Q

When to recognise an asset in balance sheet

A
  • certainty of future benefit
23
Q

Net assets

A

Assets minus liabilities

24
Q

Current asset

A

An asset that is expected to be converted into cash within the trading cycle

25
Q

Non current asset / fixed asset

A

Long term nature

26
Q

Revenue

A

Increase in the ownership interest arising from the operations of the business
Caused by increase in an asset

27
Q

Expense

A

Reduction in ownership interest

28
Q

The difference between revenue and expenses

A

Profit

29
Q

Profit

A

Revenue minus expenses

30
Q

Change in ownership interest subdivision of basic accounting equation

A

Change in ownership interest equals capital contributed/withdrawn by the ownership plus profit (revenue minus expenses)

31
Q

End of accounting period equation

A

Assets - liabilities at the end of the period

Ownership interest at the start of the period + capital contributed/ withdrawn in the period + revenue of the period - expenses of the period

32
Q

Structure of statement of financial position

A 
Non current/ fixed assets
Plus 
Current assets 
Minus 
Current liabilities 
Minus 
Non current liabilities
Equals 
Capital at start of year 
Plus/minus 
Capital contributed or withdrawn 
Plus 
Profit of the period
33
Q

Liquidity

A

Extent to which a business has access to cash or items which can readily be exchanged for cash

34
Q

Statement of cash flow basic

A

Cash flow/change in cash assets equals cash inflows to the enterprise minus cash outflows from the enterprise

35
Q

Operating activities

A

Actions of buying and selling goods or manufacturing goods for resale or providing a service to customers

36
Q

Investing activities

A

Actions of buying and selling non-current assets for long-term purposes

37
Q

Financing activities

A

Actions of raising and repaying the long-term finance of the business

38
Q

Structure of statement of cash flows

A 
Operating activities:
Cash inflows 
Minus 
Cash outflows 
Plus 
Investing activities: 
Cash inflows
Minus 
Cash outflows
Plus 
Financing activities 
Cash inflows 
Minus 
Cash outflows 
Equals 
Change in cash assets
39
Q

Change in ownership interest subdivision of basic accounting equation

A

Change in ownership interest equals capital contributed/withdrawn by the ownership plus profit (revenue minus expenses)

40
Q

End of accounting period equation

A

Assets - liabilities at the end of the period

Ownership interest at the start of the period + capital contributed/ withdrawn in the period + revenue of the period - expenses of the period

41
Q

Structure of statement of financial position

A 
Non current/ fixed assets
Plus 
Current assets 
Minus 
Current liabilities 
Minus 
Non current liabilities
Equals 
Capital at start of year 
Plus/minus 
Capital contributed or withdrawn 
Plus 
Profit of the period
42
Q

Liquidity

A

Extent to which a business has access to cash or items which can readily be exchanged for cash

43
Q

Statement of cash flow basic

A

Cash flow/change in cash assets equals cash inflows to the enterprise minus cash outflows from the enterprise

44
Q

Operating activities

A

Actions of buying and selling goods or manufacturing goods for resale or providing a service to customers

45
Q

Investing activities

A

Actions of buying and selling non-current assets for long-term purposes

46
Q

Financing activities

A

Actions of raising and repaying the long-term finance of the business

47
Q

Structure of statement of cash flows

A 
Operating activities:
Cash inflows 
Minus 
Cash outflows 
Plus 
Investing activities: 
Cash inflows
Minus 
Cash outflows
Plus 
Financing activities 
Cash inflows 
Minus 
Cash outflows 
Equals 
Change in cash assets
48
Q

Four principal qualitative characteristics of financial statement

A
  • understandability
  • relevance
  • reliability
  • comparability
49
Q

What are the accounting measurement principals most widely known in the UK and found within companies Act 2006

A
  • going concern
  • accruals
  • consistency
  • prudence
50
Q

Prudence in accounting

A

Means exercising a degree of caution when reporting assets, liabilities and profits

51
Q

What does the IAS Regulation require

A

All listed groups of companies to prepare financial statements using the system of the IASB system

Companies that do not follow the IASB system must comply with UK company law

Accounting For Business (6 decks)

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