Key Terms Ch 1

Flashcards covering Chapter 1 key terms for CGI IFA Level 4 Accounting, including financial statement definitions, qualitative characteristics, expenditures, and income types.

Financial statements

A set of documents produced by a business to show financial performance and position of the business, including a trading profit and loss account and a balance sheet. The most common way of communicating external information.

Relevance

Characteristics exhibited by financial information when it can make a difference to the decisions that made by its users.

Faithful representation

Financial information that represents economic phenomena in a complete, neutral and error-free state.

Comparability

A characteristic that enables users to identify and understand similarities in, and differences among items within the financial statements of a reporting entity and from one entity to another.

Verifiability

A characteristic that enables different knowledgeable and independent observers to reach a consensus on whether a particular presentation of an economic phenomena has been faithfully represented.

Timeliness

The requirement for information to be up-to-date in order to influence users' decision-making, as older information becomes less useful.

Understandability

Information when it is presented, classified and characterised in a clear and concise manner?

Revenue expenditure

Expenditure that is necessary for the day-to-day operations of the business, with examples including rent paid, wages of employees and maintenance of the assets of the business.

Capital expenditure

Expenditure that is likely to provide a benefit to the organisation for more than one accounting period/financial year and increases the earning capacity of the business, including the purchase and improvement of fixed assets.

Revenue income

Income derived from the provision of goods and services falling within the ordinary activities of the business, after the deduction of returns, trade discounts and value added tax.

Capital income

The proceeds from the sale of capital items and non-trading activities.

Accounting

The measurement, processing and communication of financial information about economic entities such as businesses and corporations.

Sole Trader

Sole person. Unlimited liability. The money (goods/assets) paid into the business by the owner is referred to as capital

Partnership

Tow or more people form a business. Unlimited liability. Money paid into thr business by each partner is credited to their capital account

Company

Separate legal entity. Owned by shareholders. Managed by the directors. The capital of the company is divided into shares. Shareholder's liability is limited and any unpaid amount in respect of their shareholding

Sole trader

Sole person. Sole profit. Unlimited liability. Sole responsibility. Money paid into business - capital

Partnership

Two or more people form a business. Share profit. Unlimited liability shared. Money paid into business - capital account

Company

Separate legal personality. Owned by shareholders. Managed by directors. Capital of the company - divided into shares. Shareholder's liability is limited and any unpaid amount in respect of their shares

Two sample proformas

Profit and Loss Account and Balance Sheet

Profit and Loss Account

Shows performance of business over period of time

What does profit and loss account includes?

Includes all earned income less all incurred expenses

Another name for profit and loss account

Income statement

Balance Sheet

Shows position or value of business at a specific point in time

Another name for Balance Sheet

Statement of financial position