Accounting Exam

Period assumption

Reports are prepared for a particular period of time to compare results and determine profit.

Accrual Basis assumption

Revenue is recognised in the period it is earned and expenses are recognised when incurred or consumed so profit can be calculated.

Going Concern assumption

Financial reports prepared on the assumption the existing entity will continue to operate into the future.

Accounting Entity assumption

Records of the business are kept completely separate of those of the owner of the business.

Timeliness

Having information available to decision-makers in time to be able to influence their decisions.

Understandability

Financial information is comprehensible to users with reasonable knowledge of business and economic activities.

Relevance

Financial reports should include financial information capable of making a difference to the decisions made by users.

Faithful Representation

Information reported represents real world economic events or benefits and is complete, free from error or bias.

Comparability

Information in the financial reports helps users to find and understand similarities in and differences among items.

Verifiability

Financial information should ensure that different observers or reports reach the same conclusion and that an event is faithfully represented, this is maintained by the retention of source documents.

Assets

As asset is a present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce future economic benefits.

Liabilities

A liability is a present obligation of the entity to transfer an economic resource as a result of past events.

Owners Equity

The residual interest in the assets of the entity after deducting all liabilities.

Revenues

Increases in assets (or decreases in liabilities) that results in increases of owners equity other than contributions.

Expenses

Decreases in assets (or increase in liabilities) that result in a decrease of owners equity other than drawings.

Cash Receipt

Source document used to verify cash received.

Credit Card Receipt

A printed or digital record of transactions made using a credit card

Electronic Funds Transfer (EFT)

An instant electronic transfer of cash from customers account to business’ bank at time of the sale.

Sales Invoice

Source document used to verify a credit sale.

Purchase Invoice

Source document used to verify credit purchase.

Credit Note

Document that provides evidence of a reduction of what is owed to a particular supplier by one of its customers.

Debt Ratio Formula

Total liabilities/Total assets x100%

Working Capital Ratio Formula

Current assets/current liabilities=x

x:1

Net Profit Margin Formula

Net profit/net sales(revenue) x100%

Cash Flow Cover Formula

Net cash flows from operating/average current liabilities

Sales Journal

An accounting record that summarises all transactions involving sale/performing of services on credit.

Purchases Journal

An accounting record that summarises all transactions involving the purchase of materials or supplies on credit

Cash Receipts Journal

A record which includes all cash received by the business during a period.

Cash Payments Journal

A record which includes all cash paid by the business during a period.

Physical Safeguards

Prevent unauthorised people from accessing an asset through barriers e.g. padlocks, fences, locked rooms.

Preventative Safeguards

Dissuading misuse or theft of assets through threat of apprehension e.g. alarms, security cameras.

Authentication Methods

Limit access to physical assets or virtual assets including data e.g. smart cards, security tokens.

Separation of Duties

No employee has complete control over a particular type of asset.

Rotation of Duties

Tasks are not always performed by the same employee.

Careful Hiring Practices

Effective screening and assessment of potential employees to ensure trusty candidates are hired e.g. background check.

Effective Employee Training

Ensuring staff are skilled in the use and management of assets they supervise e.g. professional training.

Cash Flow Statement

An accounting report that reports all cash flows during a period, classified as operating, investing and financing activities.

Operating Activities

Day to Day cash inflows and outflows.

Investing Activities

Non-current assets.

Financing Activities

Loans, capital contributions and drawings.

Income Statement

An accounting report that details the revenue earned and expenses incurred during a period.

Balance Sheet

Provides a snapshot of what a business owes and owns through current and non-current assets and liabilities, also owners equity.