Accounting Revision Notes - Flashcards

A set of QUESTION_AND_ANSWER flashcards covering key terms, concepts, and procedures from the provided accounting revision notes.

What is a trading business?

A business that buys from suppliers and sells goods to customers.

What is a service business?

A business that provides services to its customers.

What is accounting?

An information system that provides accounting information for stakeholders to make informed decisions regarding the management of resources and performance of businesses.

What does stewardship mean in accounting?

The responsible management of the resources of the business on behalf of the owner.

What is a cash transaction?

A transaction where payment is made at the same time or immediately during a cash sale or purchase.

What is a credit transaction?

A transaction where payment is delayed or postponed during a credit sale or purchase.

Define revenue.

Amount earned through the main activities of a business.

Define expenses.

Costs incurred in the operation of a business to earn income in the same accounting period.

What is a current asset?

Resources a business owns or controls that are expected to provide future benefits within one financial year.

What are current liabilities?

Obligations owed by a business to others that are expected to be settled within one financial year.

What is equity in a business?

Claim by the owners on the net assets of a business.

What is accumulated depreciation?

Total depreciation to date.

What is depreciation?

Allocation of the cost of a non-current asset over its estimated useful life.

What is the allowance for impairment of trade receivables?

Estimation of the debts that are likely to be uncollectible.

What is retained earnings?

Accumulation of profits and losses that have not been distributed to shareholders since operation.

What are dividends?

Distribution of profits to its shareholders.

What is a trial balance?

A listing of all the ledger account ending balances as at a particular date.

What is capital expenditure?

Costs to buy and bring the non-current asset (NCA) to its intended use or to enhance the NCA.

What is revenue expenditure?

Costs to operate, repair and maintain the NCA in working condition.

Define trade receivable.

Amount due from customers for sale of goods on credit.

Define trade payable.

Amount due to suppliers for purchase of goods on credit.

What does FIFO stand for and mean?

First In First Out; goods that are purchased first are deemed to be sold first.

State the basic accounting equation.

Assets = Liabilities + Equity.

State the expanded accounting equation.

Assets = Liabilities + Capital + Income − Expenses − Drawings (i.e., assets equal liabilities plus owner’s equity including income and changes from drawings and expenses).

What is the accounting cycle?

The process flow from source documents to financial statements.

Name the role of Accountants.

1) Set up an accounting information system and become stewards of the business. 2) Adapt, solve problems, think critically and provide accounting and non-accounting information for decision making. 3) Provide timely, relevant and credible information based on accounting theories.

Define integrity in professional ethics.

Straightforward and honest in all professional relationships.

Define objectivity in professional ethics.

Not letting bias, conflicts of interest, or undue influence override professional judgment.

What is an asset?

Resources controlled by a business from which future economic benefits are expected.

What are liabilities?

Obligations of the business to outsiders that will result in outflows of resources.

What is capital in accounting terms?

Owner’s equity or contributions that fund the business.

What are drawings?

Owner withdrawals from the business reducing owner’s equity.

What is income?

Earnings arising from the main activities of the business.

What are expenses?

Costs incurred in the operation of the business to earn revenue.

Name two internal stakeholders and a decision they make.

Internal: Owners/shareholders – decide whether to continue investing or sell based on risks and returns.

Name another internal stakeholder and a decision they make.

Internal: Managers – decide on ways to improve business performance.

Name another internal stakeholder and a decision they make.

Internal: Employees – decide whether to continue working for the business.

Name two external stakeholders and a decision they make.

External: Lenders – decide whether to grant loans based on profitability and repayment ability.

Name another external stakeholder and a decision they make.

External: Suppliers – decide whether to sell on credit based on the business’s ability to pay.

Name another external stakeholder and a decision they make.

External: Customers – decide whether to buy based on the business’s ability to provide goods/services.

Name another external stakeholder and a decision they make.

External: Government – ensure compliance with tax regulations and determine the amount of tax to collect.

Name another external stakeholder and a decision they make.

External: Competitors – assess how they compare to the business and how to improve performance.

What non-accounting factors influence the choice of legal form of business?

Owner/owners’ expertise, nature of business, capital commitment, risk, level of control, lifespan, transferability of ownership.

Which accounting information considerations influence what goods to buy?

Cost of inventory, storage cost, gross profit margin, rate of inventory turnover, days in inventory.

What are factors affecting credit worthiness of customers?

Trade receivables balance, credit terms, repayment history, economic outlook, industry outlook, customer reputation.

What supplier considerations influence choosing where to buy from?

Cost of inventory, credit terms, cash discount, delivery charges, quality, warranty, after-sales service, reputation.

What is a key decision factor when buying or renting a non-current asset (NCA)?

Current financial situation and cost of ownership vs renting.

What factors should be considered when deciding which NCA to buy?

Price, installation cost, maintenance cost, related repair cost, purpose, features, warranty.

Name two common depreciation methods.

Straight line depreciation and reducing balance depreciation.

What does FIFO mean in inventory management?

First In First Out – the oldest inventory is assumed to be sold first.

What is the valuation basis for inventories?

Lower of cost and net realisable value (NRV).

What journal entry records impairment of inventory?

Dr Impairment loss on inventory; Cr Inventory.

How are insurance claims related to inventory impairment treated?

Insurance claims reduce impairment loss on inventory; record as Dr Cash/Insurance Receivable and Cr Impairment loss on inventory.

What do AFIOTR and ILOTR stand for?

AFIOTR = Allowance for impairment of trade receivables; ILOTR = Impairment loss on trade receivables.

How is a bad debt written off?

Dr Cash at bank; Cr Trade receivables (when cash is received). The balance may be written off using AFIOTR if applicable.

Differentiate capital expenditure from revenue expenditure for NCAs.

Capital expenditure buys or enhances an NCA with benefits >1 year; revenue expenditure covers operate/maintain costs within 1 year.

Why do we depreciate non-current assets?

To allocate cost as an expense over the asset’s useful life and to reflect wear, usage, and obsolescence.

What are the prudence and matching theories in relation to assets?

Prudence: value assets conservatively (lower of cost or NRV, recognize losses). Matching: expenses must be matched with revenues in the same period.

What is materiality in accounting?

If an amount is not material to decision-making, it can be classified as an expense; relevance depends on size in relation to the business.

What is consistency in accounting for NCAs?

Use the same depreciation method and rate unless there is a change in usage pattern to enable meaningful comparisons.

Name two advantages and two disadvantages of a sole proprietor.

Advantages: easy to set up and full control. Disadvantages: unlimited liability and difficulties in obtaining finance.

What is the purpose of a bank reconciliation?

To compare the business’s cash records with the bank statement to identify timing differences, deter fraud, and check errors.

List a few steps to prepare a bank reconciliation.

Check beginning CAB vs bank statement; identify and adjust for business/accountant errors; compare CAB and BS; prepare adjusted CAB.

What does the trial balance facilitate in financial reporting?

Preparation of financial statements and ensuring arithmetic accuracy in recording.

What is the difference between a revenue and an expense in the closing entries?

Revenue is closed to Income Summary as a credit; Expenses are closed as debits to Income Summary.

How is profit transferred at year-end for a sole proprietor?

Profit is transferred from Income Summary to Capital (debit Income Summary; credit Capital).