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Role of Accounting

UNIT 3 CH 1

QuestionAnswer
purpose of accounting: to provide financial info to assist decision making (to business owners regarding the activities of their firm help make right + more informed decisions -> improve chance of success)
5 factors influencing success of firm: consumer tastes and demand_____ level of competition _____ quality of staff/employees _____ economic climate _____ management skills of owner
What is accounting? the collection and recording of financial data, and the reporting, analysis and interpretation of financial info
Uses of Accounting info: debtors + other customers, creditors + other suppliers + banks + other financial institutions + employees + prospective owners + ATO
financial data: raw facts and figures upon which financial info is based
financial info: financial data that has been sorted, classified and summarised into a more useable and understandable form
transaction: an exchange of g/s with another party
source documents: paper or electronic docs that provide both the evidence that a transaction has occurred and the details of the transaction itself
recording: sorting, classifying + summarising data contained in the source docs so that it is more useable
reporting: the preparation of financial statements that communicate financial info to the owner
advice the provision to the owners of a range of options appropriate to their aims/objectives, together with recommendations as to the suitability of those aims/objectives
source docs e.g. receipts (cash received), chq butts (cash paid) , invoices (credit sales + purchases), memos ( transactions within the firm itself)
records e.g. journals ( cash paid/ received, stock purchases on credit) ledgers + stock cards
ledgers: record the effect of each transaction on the items in the firm's acc reports
stock cards: record all the movements of stock in/out of the business
reports e.g. cash flow statement, income statement, balance sheet
accounting principles: the generally accepted rules governing the way accounting info is generated
entity: the business is assumed to be separate from the owner and other businesses, and its records should be kept on this basis
agreed value: the accepted value of a non-cash asset at the time of its contribution by the owner
going concern: the life of the business is assumed to be continuous, and its records are kept on that basis ____ allows us to record transactions that have an effect on the future e.g. credit
reporting period: the life of the business must be divided into equal periods of time to allow reports to be prepared; these acc reports should reflect the reporting period in which a transaction occurs
accrual acc: calculating profit by comparing revs earned against exp incurred in a particular reporting period
historical cost: the recording of a transaction at its original cost or value, as this value is verifiable by reference to the source doc ___ free from bias and subjectivity
conservatism: losses should be recorded when probably but gains should only be recorded when certain, so that assets and revenues are not overstated and liabilities and expenses are not understated
consistency: acc methods should be applied in a consistent manner to ensure that reports are comparable between periods ____ so business performance can be compared over time so that changes are reflective of business performance and not acc procedures
monetary unit: all items must be recorded and reported in a common unit of measurement; that is, AUD *in the currency of the country of location where the reports are being prepared
qualitative characteristics: the quality of the info in acc reports
relevance: acc reports should include all info that is useful for decision-making ___ E.g. Use new value of NCA entity, reporting period
reliability: acc reports should contain info that is accurate and free from bias or error ___ historical cost + source docs
comparability: acc reports should be able to be compared over time
understandability: acc reports should be presented in a manner that makes it easy for them to be understood by the user --> graphs, tables, charts + simple language free from acc jargon
asset: a resource controlled by the entity, as a result of past events, from which future economic benefits are expected to flow to the entity
liability: a present obligation of the entity, as a result of past events, the settlement of which is expected to result in an outflow of economic benefits from the entity
owners equity: the residual interest in the assets of the entity after the deduction of liabilities
revenue: an inflow of economic benefits (or saving in outflows) in the form of an increase in assets (or decrease in liabilities) as a result of business operations that increases owner's equity *not cap contr.
expense: an out flow or consumption of economic benefits (or reduction in inflows) in the form of decrease in assets (or increase in liabilities) that reduces owner's equity, except for drawings by the owner
accrual accounting: calculating profit by comparing revenues earned against expenses incurred in a particular reporting period
benefit of accrual accounting: accurate profit and rev/exp amounts reflected for each period
double entry accounting records both effects on accounting eq.
benefits of double entry accounting: provdes a double-check that the acc eq. balances ___ provides preparation of Trial Balance ____ makes this easier to prepare reports
stuff included in source doc: date ___ ABN and name of seller ___ state it is a tax invoice ___ description of g/s provided ___ amount of GST
source docs are part of acc process where? input stage ____ reliability - source docs ensure that transactions can be traced and verified. ensuring that acc reports contain info that is free from subjectivity and bias.
tax invoice? source doc used to verify credit transaction
memo source doc used to verify internal transactions
statement of accounts a summary of the transactions a firm has had with a particular debtor/creditor over a certain period of time
Explain why a NCA can be valued at its “agreed value” and not it’s purchase price: IF NCA contributed by owner, no cash changed hands, no 'purchase price'. the NCA is valued at 'agree value'. Their estimated value at the time they were contributed becomes new HC in records of business. Price paid by owner = irrelevant to firm operations
why not include owners assets to business records? personal assets of owner not included, not being used by firm to earn revenue, not useful for decision making ____ info only relevant to business so that reports are reflective of business performance
why do drawings have to be stated? if owner uses business funds for personal purposes it must be recorded as drawings
reporting period why must life of business be separated? life of business = continuous so it is necessary to divide life into reporting periods so that profit can be determined also taxation requirements
EXPLAIN: A non-current asset: e.g. Mop bought to last for 4 years is listed in Balance sheet as an expense: yes it fits NCA definition and expected to be useful for 4 years ___ However, depreciation expense may be too small to affect decision making____Appropriate to record the amount as an expense.
Explain why a receipt from a debtor does not increase profit. conversion of asset - debtors -> bank ___ does not fit definition of revenue. recording a receipt from debtor would be double - counting the revenue; the revenue was already recorded when it was earned at the point of sale -when g was provided to customer
cash control: - all cash transactions should be verified by a pre-numbered doc - chq butt, cash receipt - USE CHEQUE: security, traceability, verifiability
other cash control methods: payments not made to till use petty cash system___ takings banked daily (not same time of day) ___ accurate and up to date cash records must be kept,
internal control mechanisms physical and preventative safe guards, careful hiring practices, effective employee training
physical safe guards: safes, fences, padlocks, lockable cash drawers
preventative safeguards: dissuading misuse or theft of assets through the threat of apprehension: alarms, security cameras, warning signs
careful hiring practices: effective screening of potential employees
effective employee training: protects firms assets: staff and equipment
Created by: 96.0