Accounting Theory

Accounting Theory

1. Terms

   • Period Reporting
   • Monetary Measurement
     • All transactions made by a business is reported in common units
   • Historical Cost
     • Assets are recorded at the amount of cash which a company has paid to aqiure them
   • Accounting Entity
     • All transactions made by the business are to be kept separate from the owners personal transactions
   • Going Concern
   • Accrual Basis
     • All transactions made by the business will be reported in the period which they relate to

2. Purpose of Accounting

   • To communicate financial information so users can make informed decisions

3. Ownership Types

   • Sole Proprietor
     • A single owner who owns and runs their own business
       • Is NOT a single legal enity from the business therefore has unlimitied liability.
         • However for accounting purposes, they are separate from the business
     • Advantages
       • The owner keeps ALL the profits to himself after being taxed
       • Complete freedom in decision making, as they're their own boss
       • Not much legal formalities to comply with so is faster and more convenient to set up.
     • Disadvantage
       • Unlimitied, result in owner's personal assets being sold in order to pay back the debts of the business if gets into difficulty
       • Limited access to finance, as all the finances basicaly come from the owner, thus is harder to expand beyond the owner's limitied means
       • If owner gets sick/dies business may seize to operate
       • Not many people to discuss matters with
     • Source of Fiance
       • Owner's own capital
       • Personal loan from family or bank

4. Types of Accountants

   • Cost Accountant
     • Calculates and controls the costs of producing goods and services
   • Managements Accountant
     • Provides financial information within business's operations.
       • Internal Budgets
   • Accounting Technician
     • Helps to record, process and prepare accounts and statements
   • Taxation Accountant
     • Prepares tax returns and provides taxation advice
   • Financial Accountant
     • Prepares, analyses and interprets financial reports
   • Auditor
     • Checking financial statements to ensure they are accurate and true and fair of the entity's financial results

5. Financial Statements

   • Income Statement
     • To calculate profit/loss of the year by showing income and expenses
   • Statement of Accounting Policies
     • To outline the concepts and assumptions used in preparing the Financial States and how Financial elements have been followed
   • Balance Sheet
     • To show the financial position of an entity at a particular point in time, by showing Assets less Liabilities and Equity
   • Statement of Cash Flow
     • To show the movements of cash receipts and payments. And also the changes in bank balance
   • Limitations to Statements
     • Estimates (depreciation and some intangible assets), non-monetary things like location, customer base or market share, economic situation are not included. Financial Statements use Historical Cost, which may not end up being relevant to the end user or may not accurately releft the business .

6. Financial Elements

   • Income
     • Increase in Asset, Increase in Profit, Increase in Equity, No owners contribution
       • Asset is about cash
       • Profit and Equity is about
   • Expense
     • Decrease in Assets, Decrease in Profit, Decrease in Equity, Not Drawings
       • Asset is about cash
       • Profit and Equity is about
   • Asset
     • PPF (past transaction, Present obilgation, future economic benefit)
   • Liabilities
     • PPF (past transaction, Present obligation, future sarficic)
   • Equity
     • Residual value of Assets minus Liabilities