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Description
Flashcards by Charlotte Marko , updated more than 1 year ago
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Created by Charlotte Marko
over 6 years ago
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| Question | Answer |
| Accounting Definition is... | The process of identifying, measuring, recording and communicating economic transactions and events of a business operation |
| The Accounting Process Explained Steps are... | -Identifying take into consideration all transactions that affect business entity -Measuring Quantifying in monetary terms -Recording Analysing, recording, classifying and summarising transactions -Communication Preparing accounting reports, analysing and interpreting |
| 6 Types of Organisations are... | -Sole Proprietor -Partnership -Company -Trust -Cooperative -Not-for-profit (associations or government) |
| Integrating GAAP Order of application | Corporations Act -> Accounting standards and interpretations -> Conceptual framework concepts and principles |
| 4 Sections of Conceptual Framework are... | -Objective of general purpose financial reporting -The reporting entity -Qualitative Characteristics -Definition of elements of financial statements |
| Objective of General Purpose Financial Reporting is to... | -Provide financial information about reporting entity that is useful to existing and potential equity investors, lenders and other creditors in making decisions about providing resources to entity. (OB2) -IASB's Preliminary Conceptual Framework |
| Objective of General Purpose Financial Reporting - Stewardship and Accountability Objectives | - For entities with a separation of ownership from control, reports can support stewardship/ accountability function. -Managers use reports to show owners they are fulfilling their stewardship -Shareholders use reports to check on managers and hold accountable |
| Objective of General Purpose Financial Reporting- Decision-usefulness Objective | -Objective is to provide information to users that is useful for making and evaluating decisions about allocation of scarce resources (perspective of Australian CF SAC 2) |
| Objective of General Purpose Financial Reporting -3 Activities External Users are Interested in | Financing Activities -Borrowing from banks -Selling shares to investors Investing Activities -Acquisition or sale of resources needed to operate business e.g. purchase or sale of property, plant or equipment Operating Activities -Results from operational activities undertaken to earn income Revenues less expenses = Profit/loss |
| The Reporting Entity is... | An entity in which it is reasonable to expect the existence of users who depend on general purpose financial reports to enable them to make economic decisions (SAC !) |
| The Reporting Entity Indicators are... | -If the entity is managed by individuals who are not owners of the entity -If the entity is politically or economically important -If the entity is considered large in sales, assets, borrowings, customers and employees |
| The Reporting Entity in the Proposed Improved Conceptual Framework ED/2010/2 | -'a reporting entity is a circumscribed area of economic activity whose financial information has the potential to be useful to existing and potential equity investors, lenders and other creditors who cannot directly obtain the information they need in making decisions about providing recourses to the entity.' |
| The Reporting Entity in the Proposed Improved Conceptual Framework - Features Necessary to Identify a Reporting Entity | - Conducts, conducted or will conduct economic activities; - The economic activities can be distinguished from other entities and the economic environment; -Financial Information will be useful about making decisions about providing resources to the entity |
| Integrating GAAP Definition | Generally Accepted Accounting Principles -a set of rules and practices having substantial authoritative support, that are recognised as a general guidance for financial reporting purposes -Statutory rules (standards) and interpretations -Concepts and principles developed over time |
| Qualitative Characteristics and Restraint on Financial Reporting -Fundamental Characteristics | -Relevance: .Provides a basis for predictions and confirms or corrects previous expectations -Faithful Representation: .Complete, neutral and free from material error .Depicts the economic substance .Unbiased .Judgements and estimates reflect best available information |
| Qualitative Characteristics and Restraint on Financial Reporting -Enhancing Characteristics | Comparability - between different companies - between different years of same company Verifiability - Faithful representation - Independent observer consensus Timeliness - Capable of influencing decisions Understandability - Able to be understood by proficient users |
| Qualitative Characteristics and Restraint on Financial Reporting -Constraint on Financial Reporting | Cost versus Benefit -Costs of preparing financial reports should not exceed the benefits to be derived from the reports |
| Definition, Recognition and Measurement of Elements in Financial Reports -Elements | -Assets -Liabilities -Equity -Income -Expenses Conceptual Framework defines elements and set out criteria for recognition |
| Definition, Recognition and Measurement of Elements in Financial Reports -Assets Definition | A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity |
| Definition, Recognition and Measurement of Elements in Financial Reports -Assets Recognition | a) It is probable that the future economic benefits will flow to the entity -Refers to degree of uncertainty -Use all evidence to assess probability -If improbable that benefits will flow to entity beyond current period, it is recorded as expense b)The asset has a cost or value that can be measured with reliability - eg. purchase price - Could also be estimated value, ex. provision for warranties |
| Definition, Recognition and Measurement of Elements in Financial Reports Liabilities - Definition | 'A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits' (para. 49(b)) |
| Definition, Recognition and Measurement of Elements in Financial Reports Liabilities - Recognition | a)It is probable that an outflow of resources embodying result from the settlement of a present obligation: -Not dependant upon occurrence of certain events outside the entity's control b)The amount at which the settlement will take place can be measured reliably |
| Definition, Recognition and Measurement of Elements in Financial Reports Contingent Liabilities | Liabilities that do not satisfy recognition criteria are classified as Contingent Liabilities -ex. unresolved lawsuits, potential liability from a tax audit in progress Contingent liabilities are not recognised in financial statements, but must be disclosed in notes to financial statements if considered to be material |
| Definition, Recognition and Measurement of Elements in Financial Reports Equity - Definition | 'the residual interest in the assets of the entity after deducting all it's liabilities' (para. 49(c)) -Can't be independently defined (residual) -Equity = Assets - Liabilities Affected by gains/losses, owner's activities (capital investments, drawings, dividends) |
| Definition, Recognition and Measurement of Elements in Financial Reports Income - Definition | 'Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases of equity, other than those relating to contributions from equity participants'(para. 70(a)) -linked to definition of assets and liabilities |
| Definition, Recognition and Measurement of Elements in Financial Reports Revenue and Gains - Definition | Revenue - increases in economic benefits arising in the course of ordinary activities ex. sales revenue, rent, dividends Gains -Other increases in economic benefits that do not arise from ordinary course of business ex. gains from sale of non-current asstes |
| Definition, Recognition and Measurement of Elements in Financial Reports Income - Recognition | 'An increase in future economic benefits related to an increase in an asset or a decrease of a liability has arisen that can be measured reliably -Occurs simultaneously with recognition of increases in assets or decreases in liabilities -Common practice: recognise revenue when it is earned |
| Definition, Recognition and Measurement of Elements in Financial Reports Income - Recognition (Revenue on sale of goods) - 5 | a)Entity has transferred to the buyer the significant risks and rewards of ownership of goods b)entity retains neither continuing managerial involvement nor effective control over goods sold c)Can be measured reliably d)Probable that economic benefits of revenue will flow to entity; and e)The associated costs can be measured reliably |
| Definition, Recognition and Measurement of Elements in Financial Reports Income - Recognition (Revenue for Provision of Services) - 4 | a)Amount can be measured reliably b)It is probable economic benefits associated with transaction will flow to entity c)The stage of completion of transaction at the reporting date can be measured reliably; and d)The costs incurred for transactions and costs to complete transaction can be measured reliably |
| Definition, Recognition and Measurement of Elements in Financial Reports Expenses - Definition | 'Decreases in economic benefits during the accounting period in the form of outflows or depletions of assets r incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants' -Linked to definition of assets and liabilities |
| Definition, Recognition and Measurement of Elements in Financial Reports Expenses include... | Expenses -Decreases in economic benefits that arise in the ordinary activities of entity e.g. cost of sales, salaries Losses -Expenses that do not neccessarily arise in the ordinary course of business e.g. loss from natural disasters |
| Definition, Recognition and Measurement of Elements in Financial Reports Expenses - Recognition | -When 'a decrease in future economic benefits related to a decrease in an asset or an increase of a liability has arisen that can be measured reliably' |
| Definition, Recognition and Measurement of Elements in Financial Reports Expenses - Recognition - Matching Principle is... | Matching Principle: When resulting directly or jointly from the same transaction sa revenues, expenses should be recognised on the basis of a direct association with revenues |
| Measurement of the Elements of Financial Reports Definition is... | 'The process of determining the monetary amounts at which the elements of the financial statements are to be recognised and carried in the statement of financial position and income statement' |
| Measurement of the Elements of Financial Reporting 4 Measurement bases are... | -Historical Cost -Current Cost -Realisable (settlement) Value -Present Value |
| Measurement of the Elements of Financial Reporting 4 Measurement bases Historical Cost means... | Assets are recorded amount paid or consideration given at time of acquisition Liabilities recorded at amounts expected to be paid to satisfy the Liability in the normal course of business |
| Measurement of the Elements of Financial Reporting 4 Measurement bases Current Cost means... | Assets are carried at the amount that would have to be paid if the same asset was acquired currently Liabilities are carried at the undiscounted amount that would be required to settle the obligation currently |
| Measurement of the Elements of Financial Reporting 4 Measurement bases Realisable (Settlement) Value means... | Assets are carried at the amount that could currently be obtained by selling the asset in an orderly disposal Liabilities are carried at settlement value |
| Measurement of the Elements of Financial Reporting 4 Measurement bases Present Value means... | Assets are carried at the present discounted value of future net cash inflows that is expected to be generated in the normal course of business Liabilities are carried at present discounted value of the future net cash outflows required to settle liabilities in the normal course of business |
| Integrating GAAP Interrelationships between aspects of GAAP Name 3... | - Reporting enities required to prepare reports that are useful for decision making, usefulness dependant on information's qualitative characteristics -Accounting period concept, revenue and expense recognition criteria are interrelated -Definition of assets, liabilities, equity, income and expenses linked. |
| Future Developments in Financial Reporting -Sustainability Reporting dimensions | -Social Dimension - focuses on impact of business activities on individuals and communities -Environmental Dimension - focuses on impact of activities on environment -Disclosures are currently voluntary but are increasing pressures on companies to measure, report and reduce environmental impact |
| Future Developments in Financial Reporting -XBRL | Extensive Business Reporting Language -To make analysis and reporting of financial information more consistant and reliable -Achieved by developing vocabularly that can affect format of financia information throughout complete life cycle of information |
| Conceptual Framework Defines 4 Elements of Financial Statements | -Statement of Profit or Loss -Statement of Changes in Equity -Statement of Financial Position -Statement of Cash Flows |
| Statement of Profit or Loss (P&L) | Purpose is to repot entity's success or failure over a period of time -lists entity's income (revenues and gains) -lists entity's expenses -Income less expenses = Profit (loss) |
| Statement of Changes in Equity | Reports total comprehensive income for the period and other changes in equity such as adjustments to retained earnings for: -changes in accounting standards -changes in accounting policies -correction of errors -gains recognised directly in equity accounts Also reports details of transactions with the owners of company RETAINED EARNINGS refers to accumulated profit that has not been distributed to shareholders |
| Statement of Financial Position | Reports assets and claims to those assets (liabilities and equity) at a specific point in time -based on accounting equation Assets = Liabilities + Equity -Assets must balance to claims on assets |
| Statement of Cash Flows | Main purpose is to provide financial information about cash receipts and cash payments of an entity for a specific time period -Informs users about what is happening to entity's most important resource (CASH) |
| Interrelationships between financial statements | -Statement of financial position linked to P&L and changes in equity by the ending retained earnings balance - Cash flows is linked to financial position by the ending cash balance |
| Classified Statement of Financial Position | Grouping similar assets and liabilities together -Most entities use current and non-current categories -Classified to improve user's understanding |
| Classified Statement of Financial Position Current vs. Non-Current Assets | Current assets - Cash, assets held for purpose of being traded, or expected to be converted to cash or used in business within one year Non-current - Assets not expected to be sold or consumed within one year |
| Classified Statement of Financial Position Current vs. Non-Current Liabilities | Current liabilities - obligations to be paid within the coming year or the entity's operating cycle Non-current liabilities - Obligations that are not classified as current |
| The Financial Reporting Environment -Institutions and Groups Regulating and Monitoring Financial Reporting (AU) | -Australian Securities and Investments Commission -Financial Reporting Council -Australian Accounting Standards Board -Urgent Issues Group -Australian Securities Exchange -Professional Accounting Bodies NZ - External Reporting Board |
| Concepts and Principles Underlying Accounting | -Monetary principle -Accounting entity concept -Accounting period concept -Going concern principle -Cost principle -Full disclosure principle |
| Accounting Period Concept | The life of a business entity can be divided into artificial periods -useful reports covering those periods can be prepared for the entity |
| Monetary Principle | Items included in the accounting records must be able to be expressed in monetary terms (e.g. $) |
| Accounting Entity Concept | Every entity can be separately identified and accounted for -Owner's transactions are separate from entity's transactions |
| Going Concern Principle | Business will remain in operation for the foreseeable future |
| Cost Principle | All assets are initially recorded in the accounts at their purchase price or cost -To provide useful information, sometimes entities need to deviate from cost principle (e.g. revaluation of non-current assets) |
| Full Disclosure Principle | All circumstances and events that could make a difference to decision-making process should be disclosed in the financial statements |
| Transaction Analysis | Process of identifying the specific effects of transaction and events on the accounting equation |
| The Accounting Equation | Assets = Liabilities + Liabilities -Equation must always balance |
| Debits and Credits Side and Abbreviation | Total debits must equal total credits Debit - left side abbreviated as Dr. Credit - Right side abbreviated as Cr. |
| Debit and Credit Procedures Assets | Increase of asset is Debit Decrease is Credit |
| Debit and Credit Procedures Liabilities | Increase of liability is Credit Decrease of liability is Debit |
| Debit and Credit Procedures Equity - Share Capital, Retained Earnings, Dividends | Share Capital - Increase Credit, Decrease Debit Retained Earnings - Increase Credit, Decrease Debit Dividends - Increase Debit, Decrease Credit |
| Debit and Credit Procedures Revenue and Expenses | Revenues - Increase Credit, Decrease Debit Expenses - Increase Debit, Decrease Credit |
| An account is... | An individual accounting record of increases and decreases in a specific asset, liability or equity item |
| DEAD CLICK | Debit Expenses Assets Drawings Credit Liabilities Income Capital |
| Steps in Recording Process | 1. Analyse each transaction in terms of it's effects on accounts 2. Enter transaction info in a journal 3.Transfer (POST) journal info to appropriate accounts in ledger |
| Chart of Accounts | Lists all entity's ledger numbers and names Like together sections of ledger are grouped and in order that they appear in the financial statements |
| The General Ledger | Contains all asset, liability and equity accounts |
| Transferring Journal Entries to Ledger Accounts (Posting) - Steps | 1. Enter date in account to be debited 2. Enter name of ledger account to be credited 3. Enter amount to be debited 4 Tick account no. in general journal to show entry is posted 5. Repeat steps 1-4 for the credit side |
| The Trial Balance Definition and steps... | A list of all the accounts and their balances at a given time listed in order as they appear in general ledger - Proves mathematical equality of debits and credits 1. List account numbers, titles and balances 2. Total debit and credit columns 3. Verify equality of debit and credit columns |
| Limitations of a Trial Balance | Errors not detected in a trial balance; -A transaction is not journalised - A correct journal entry is not posted -A journal entry is posted twice -Incorrect accounts used in journalising or posting -Offsetting errors made in recording the amount of a transaction |
| Steps to Balancing Ledger Accounts | 1. Add both sides up and see which side is larger 2. Put a total for both sides equal to the larger side 3. Insert a balance on smaller side to make total correct - carried down (c/d) or carried forward (c/fwd) balance 4. Insert same balance on the opposite side of the account, but below the total. This is the brought forward (b/fwd) or brought down (b/d) balance |
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