All Units combined

This set of flashcards covers key concepts, principles, and processes in accounting as discussed in the provided lecture notes.

What is accounting?

Accounting is the systematic process of identifying, measuring, recording, classifying, summarizing, and communicating financial information about an economic entity. Its key purpose is to provide relevant and reliable financial data to various users for making informed economic decisions.

What are the objectives of accounting?

The primary objectives of accounting are:

1. Maintaining Systematic Records: Ensuring all financial transactions are recorded in an organized manner.

2. Ascertaining Profit or Loss: Calculating the net income or loss for a specific period through an Income Statement.

3. Ascertaining Financial Position: Presenting a snapshot of assets, liabilities, and owner's equity at a specific point in time via a Balance Sheet.

4. Providing Information to Users: Supplying financial data to internal (management) and external (investors, creditors) stakeholders for decision-making.

What does GAAP stand for?

GAAP stands for Generally Accepted Accounting Principles. These are a set of common rules, standards, and procedures that companies use to compile their financial statements, ensuring consistency and transparency in financial reporting.

What is the Business Entity Concept?

The Business Entity Concept states that a business is treated as a separate and distinct entity from its owner(s). This means the personal financial affairs of the owner are kept separate from the business's financial records.

What is the Money Measurement Concept?

The Money Measurement Concept dictates that only transactions and events that can be expressed in monetary terms are recorded in the accounting books. This allows for quantification and comparison of financial data.

What is the Going Concern Concept?

The Going Concern Concept assumes that a business will continue to operate for an indefinite period in the foreseeable future, rather than being liquidated. This assumption guides how assets are valued and liabilities are classified.

What does the Accounting Period Concept entail?

The Accounting Period Concept divides the continuous life of a business into specific, shorter time intervals (e.g., quarters, annually). This enables regular assessment of financial performance and position.

What is the Cost Concept in accounting?

The Cost Concept (or Historical Cost Principle) states that assets should be recorded in the accounting records at their original acquisition cost. This principle emphasizes objectivity and verifiability of financial data.

What is the Dual Aspect Concept?

The Dual Aspect Concept is the foundation of double-entry bookkeeping, asserting that every financial transaction has two equal and opposite effects. For every debit, there must be a corresponding credit, ensuring the accounting equation remains balanced.

When is revenue recognized according to accounting principles?

According to the Revenue Recognition Principle, revenue is recognized and recorded when it is earned, typically when goods or services have been delivered or performed, regardless of when the cash is actually received.

What is the Matching Concept?

The Matching Concept requires that expenses incurred to generate revenue must be recognized and recorded in the same accounting period as the revenue they helped produce. This ensures an accurate measure of net profit or loss.

Who are the internal users of accounting information?

Internal users are individuals or groups within the organization who use accounting information for operational and strategic decisions. They primarily include:

• Management: For planning, controlling, and decision-making.

• Employees: To assess job security, compensation prospects, and company stability.

Who are the external users of accounting information?

External users are individuals or groups outside the organization who rely on accounting information for various purposes. They include:

• Investors: To evaluate investment opportunities and assess risk.

• Lenders/Creditors: To assess creditworthiness before extending loans or credit.

• Government: For taxation purposes and regulatory compliance.

• Customers: To gauge the long-term viability of a supplier.

What is the Accounting Equation?

The Accounting Equation is the fundamental principle representing the relationship between a company's assets, liabilities, and owner's equity. It is stated as: \text{Assets} = \text{Liabilities} + \text{Owner's Equity}. This equation must always remain in balance.

What is the purpose of an Income Statement?

The Income Statement (also known as the Profit & Loss Statement) summarizes a company's revenues, expenses, gains, and losses over a specific period. Its main purpose is to determine the net profit or net loss, thereby showing the company's financial performance.

What is the formula for calculating net profit/loss?

The basic formula for calculating net profit or net loss is:

\text{Revenue} - \text{Expenses} = \text{Net Profit/Loss}

What is the purpose of a Balance Sheet?

The Balance Sheet is a financial statement that provides a snapshot of a company's financial position at a specific point in time. It details what the company owns (Assets), what it owes (Liabilities), and the owner's investment (Owner's Equity), always adhering to the accounting equation.

What is the key characteristic of financial reporting?

The key characteristics of high-quality financial reporting are:

• Relevance: Information should be capable of influencing users' economic decisions.

• Faithful Representation: Information should accurately depict what it aims to represent, being complete, neutral, and free from material error.

What is an Accounting Information System (AIS)?

An Accounting Information System (AIS) is a system that collects, records, stores, and processes financial and accounting data. Its purpose is to produce financial reports and provide timely information for both internal decision-makers and external reporting.

What is the purpose of cost accounting?

Cost accounting is a branch of accounting focused on recording, analyzing, and reporting a company's costs related to producing goods or services. Its purposes include:

• Ascertaining Cost: Determining the cost of products, services, or activities.

• Cost Control: Identifying ways to manage and reduce expenditures.

• Decision-Making: Providing data for pricing, product mix, and production choices.

• Profitability Analysis: Evaluating the profitability of specific items or projects.

What is the distinction between Direct Costs and Indirect Costs?

The distinction relates to whether a cost can be easily traced to a specific object:

• Direct Costs: Costs directly and conveniently traceable to a specific cost object, such as direct materials or direct labor for a product.

• Indirect Costs: Costs that cannot be easily or economically traced to a specific cost object, often shared across multiple objects, and generally referred to as Overheads (e.g., factory rent).

What is Marginal Costing?

Marginal Costing, or Variable Costing, is an inventory costing method where only variable manufacturing costs (direct materials, direct labor, variable overhead) are treated as product costs. Fixed manufacturing overheads are treated as period costs and expensed when incurred, aiding internal decision-making.

What is Absorption Costing?

Absorption Costing, or Full Costing, is an inventory costing method where all manufacturing costs, both fixed and variable, are treated as product costs. Fixed manufacturing overheads are allocated to each unit produced, and this method is generally required for external financial reporting.

What is a standard costing system?

A standard costing system is a control technique that involves setting predetermined (standard) costs for production inputs (materials, labor, overhead) and then comparing them with actual costs incurred. This helps analyze variances, identify inefficiencies, and evaluate performance.

What does Management Accounting focus on?

Management Accounting focuses on providing financial and non-financial information specifically to internal managers. This information is used for planning, controlling, and making operational and strategic decisions within the organization, without being bound by external reporting standards like GAAP.

What is Budgetary Control?

Budgetary Control is a process of using budgets to plan, monitor, and control business operations. It involves establishing budgets, continuously comparing actual results with these budgeted figures, analyzing any variances, and taking corrective actions to ensure organizational goals are met.

What is the difference between Fixed and Flexible Budgets?

The main difference lies in their adaptability to activity levels:

• Fixed Budget (Static Budget): Prepared for a single, predetermined level of activity and remains unchanged, regardless of the actual activity volume.

• Flexible Budget: Adjusts and reflects expected costs and revenues for different levels of activity, making it more useful for performance evaluation when actual output differs from planned output.