An introduction to the role of the accountant in business flashcards

Topic 1: An introduction to the role of the accountant in business

Financial accounting vs management accounting

Financial: records past transactions and produces statements for external users, governed by law and accounting standards. Management: forward-looking information for internal decision-makers, as detailed and frequent as needed, with no external format rules.

The accountant's role in accounting information systems

Developing and overseeing systems that give reliable and relevant information for both financial and management purposes, including overseeing the work of bookkeepers and ledger clerks.

The accounting equation and the DEAD CLIC rule

Assets = capital + liabilities. DEAD CLIC: Debit Expenses, Assets, Drawings; Credit Liabilities, Income, Capital.

What do lenders and suppliers look for in the accounts?

Lenders: liquidity and gearing (can it repay?). Suppliers: creditworthiness before granting credit.

Why does a lender care about liquidity and not just profit?

A profitable business can still fail if it cannot pay its debts as they fall due, so the ability to generate cash matters for repayment.

Give a conflict between users of accounts

Shareholders may want dividends paid out now, while lenders prefer profit retained to strengthen the statement of financial position and the chance of repayment.

Both effects of an accrued expense and of a prepaid expense

Accrued expense: reduces profit; current liability. Prepaid expense: increases profit; current asset.

The five ethical principles accountants are expected to show

Integrity, objectivity, professional competence, confidentiality and professional behaviour.

Which concept drives year-end adjustments, and which resolves judgement calls?

Accruals (matching) drives every year-end adjustment. Prudence resolves judgement calls: choose the treatment that does not overstate profit.