poa theory sec 3

role as accountants

act as stewards of businesses by setting up the accounting information system to provide information for decision making by stakeholders holders.

what is accounting

accounting provides accounting information for stakeholders to make informed decisions regarding the management of resources and performances of businesses.

what are the professional ethics accounts must adhere to

integrity and objectivity

what happens if accountants don’t adhere to the professional ethics

they may provide information that may mislead users to making poor decisions

accounting entity theory

states that activities of a business are separate from the actions of the owner.All transactions are recorded from the point of view of the business.

going concern theory

states that business is assumed to have indefinite economic life unless there is credible evidence that it may close down .

objectivity theory

states that accounting information recorded must be supported by reliable and verifiable evidence so that financial statements will be free from opinions and biases.

historical cost theory

states that transactions should be recorded at original cost

prudence theory

states that the accounting treatment chosen should be the one that least overstate assets and profits and least understates liabilities and losses.

cash transactions

made when transaction is made or received immediately after the purchase/sale

credit transactions

made when payment is made or received at a later date or after the sale/purchase

what are receipts used for

cash purchases,cash sales,payment money to credit supplier

what is invoice used for

credit transactions and credit sales

what is credit note used for

return of goods and previous overcharge

what is debit note used for

previous overcharge

what is payment voucher used for

payment to credit suppliers

what is bank statement used for

payment by cheque,receipt of cheque, interest income or expense

basic accounting equation

assets=liabilities+equity

expanded accounting equation

assets=liabilities+capital+income-expense-drawings

accounting information order

source documents—journal—ledger—trail balance—financial statements

def of source doc

is an original record of a transaction which provides details of it

purposes of source document

it provides proof that the transaction have occured and provides information for accurate recording of the transactions

theories relevant to source doc

objectivity and historical cost theory

trading business

a business that buys goods from suppliers and sells them to customers

service business

a business that provides services to its customers

format for trading business financial statements

sales revenue

less:sales returns

net sales revenue

less:cost of sales

gross profit

(space)

other income

(space)

less:other expenses

profit of the year/loss for the year

format for service business financial statements

(service) fee revenue

(space)

other income

(space)

less:other expenses

(space)

profit for the year/loss for the year

format for financial position

assets

non-current assets

(space)

current assets

(space)

total assets

(space)

equity and liabilities

owner’s equity

capital

(space)

non-current liabilities

(space)

current liabilities

total equity and liabilities

purposes of trail balance

to check for arithmetic accuracy in recording and to facilitate the preparation of financial statements

limitation of trail balance

A balanced trail balance is not an absolute proof of accuracy.This is because some errors are not shown/revealed by a trail balance

purpose of internal controls

to safeguard assets of business and to ensure business transactions are recorded accurately

why pick internal controls over cash and

cash is highly portable which increases the chances of it being stolen thus,businesses shd implement internal controls to reduce possibility of theft and likehood of error to ensure cash is well-protected and accurately reported

forms of internal controls over cash

authorisation, custody of cash and segregation of duties

what is segregation of duties

separate handling and cash recording duties among different employees

what custody of cash

securing cash and cheques in a locked storage which has limited access if cash for authorised personnel through a combination of passwords and codes

what is authorisation

proper approvals from authorised personnel for all payments which requires at least 2 people to review,approve all payments

what is the purpose of preparing bank reconciliation

to check the cash at bank balance in the business records against the bank’s records and identifying items that caused the differences between the respective ending balances

reasons for bank reconciliation

it acts as deterrence against fraud and identifies any errors in the CAB account/BS

financial position formula

assets-equity+liabilities

valuation rule for inventory

inventory should be valued at cost or net realisable value whichever is lower

what is the theory that is applicable to valuation of inventory

prudence theory

formula to find impairment loss on inventory

cost of inventory-net realisable value

definition of assets

resources a business owns which is expected to provide future benefits

definition of liabilities

obligations owned by a business to others that are expected to be settled in the future

definition of equity

refers to the claim by the owners on the net assets of a business

which is an asset

options

which is a liability

options

which is an equity

options

which is an expense

options