POA chapter 1 :)

What is trading business?

business buys goods from suppliers and sells goods to customers

What is service business?

A business that provides services to customers for a fee

Value(s) an accountant has

Integrity and objective

Actions an ethic will NOT do

1. Prepare accounting records that contain false information

2. Accept a gift or professional treatment

3. Get involved in the selection of a vendor when his immediate family members could benefit financially from the transaction

4. Prepare false information due to the threat of dismissal

Role of accounting

It is to establish an information system that provides accounting information for stakeholders to make informed decisions regarding management of resources and performance of business

Meaning of Integrity

Straightforward and honest in all the professional relationships

Meaning of objectivity

Someone who will not let bias, conflict of interest or the undue influence of others override his or her professional judgment

*Definition of Accounting Entity theory and when is it applied

Definition: For accounting purposes, the owner and the business are to be regarded as two separate entities. All business transactions are to be recorded from business point of view

Applied when: Recording capital and drawings

Definition of Accounting Period theory

The life of a business is divided into regular time intervals

Definition of Accrual Basis of Accounting theory and when is it applied

Definition: Income earned and expenses incurred, should be recorded in the account period, regardless of whether cash is paid or received

Applied when: Making adjustments for expenses payable/prepaid expenses/income receivables/income received in advance

*Definition of Consistency theory and when is it applied

Definition: Once an accounting method is chosen, this method should be applied to all future accounting period to enable meaningful comparison

Applied when: You should not change your depreciation method every year

Definition of Going Concern theory

A business is assumed to have an indefinite economic life unless there is credible evidence that it may close down OR a business is assumed to continue to operate for the foreseeable future

Definition of Historical Cost theory

Transactions should be recorded at their original cost

*Definition of Matching theory and when is it applied

Definition: Expenses incurred must be matched against income earned in the same period to calculate profit for the period

Applied when: When making adjustments for expenses payable/prepaid expenses/income receivables/income received in advance, when recording depreciation, When recording impairment loss on trade receivables, When preparing Statement of financial performance

*Definition of Materiality theory and when is it applied

Definition: Relevant information should be reported in the financial statements if it is likely to make a difference to the decision-making process

Applied when: When recording small value expenditure that can be used for more than one year as revenue expenditure

Definition of Mometary theory

Only business transactions that can be measured in monetary terms are recorded

*Definition of Objectivity theory and when is it applied

Definition: Accounting information recorded in the business must be supported by reliable and verifiable evidence (source documents) so that financial statements will be free from biases and opinions

Applied when: When using source documents

*Definition of Prudence theory and when is it applied

Definition: A business must report and adjust for foreseeable losses. This will ensure that profits and assets are not overstated and that losses and liabilities are not understated

Applied when: When estimating allowance for impairment of trade receivables (impairment loss on trade receivables), When adjusting inventory from cost to net realisable value (impairment loss on inventory), When recording NCA as net book value in statement of financial position

*Definition of Revenue Recognition theory and when is it applied

Definition: Revenue is earned when goods have been delivered or services have been provided

Applied when: When recording sales revenue or service fee revenue