Accountancy chapter 1

Accountancy chapter 1

1. Purpose of accounting

   • An information and measurement system that aims to identify, record, and communicate relevant, reliable, and comparable information about business activities

2. Generally accepted accounting principles

   • 4 principles
     • Revenue recognition principle
     • Measurement/Cost principle
     • Full disclosure principle
     • Matching/expense recognition principle
   • 4 assumptions
     • Time period
     • Going-concern
     • Business entity
     • Monetary unit

3. Uses of accounting

   • Internal uses: managerial accounting
     • Managers in controlling, monitoring and planning
   • External uses: financial accounting
     • Lenders for measuring risk and return of loans
     • Shareholders for assessing the return and risk of shares
     • Directors for overseeing management
     • Employees for judging employment opportunities

4. IASB conceptual framework

   • Fundamental qualitative characteristics
     • Relevance
       • Capable of making a difference in the decision made by users
     • Faithful representation
       • Depiction would be neutral, complete, free from error
   • Enhancing qualitative characteristics
     • Comparability
     • Verifiability
     • Timeliness
     • Understandability

5. 4 types of financial statements

   • Income statement/statement of profit or loss
   • Statement of changes in equity
   • Statement of financial position (balance sheet)
   • Statement of cash flows

6. Why ethics are crucial

   • Goal of accounting is to provide useful information for decision making - for information to be useful, it must be trusted

7. Define the accounting equation

   • Assets = Liabilities + Equity
     • Assets (resources owned by the company) = Liabilities (creditors claim on assets) + Equity (owners claim on assets)
       • Assets = Liabilities + (Share capital - Dividends + Revenues - Expenses)
       • Assets = Liabilities + (Share capital + Retained earnings)

8. 3 major activities of organisations

   • Financing
     • Means used to pay for resources such as land, buildings, and machines
   • Investing
     • Buying and selling of resources used in acquiring and selling products and services
   • Operating activities
     • Activities that are necessary for carrying out the organisations plans

9. Importance of accounting

   • Assess opportunities, products, investments, and social and community responsibilities