Flashcards · 0452 · Topic 1

The fundamentals of accounting flashcards

12 cards on Topic 1, subtopics 1.1 to 1.2. Pick a subtopic or study them all.

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Book-keeping compared with accounting: Book-keeping records transactions (what happened). Accounting uses those records to summarise, analyse and communicate what they mean, and to advise.
Profit (or loss) for a period: Income earned in the period minus the expenses of earning it. A negative result is a loss. It is shown in the statement of profit or loss.
Give three purposes of measuring profit: Any three: judge whether the business is succeeding; decide how much the owner can take as drawings; compare with earlier periods, plans or similar businesses; give lenders and tax authorities a recognised measure; support decisions such as pricing or expansion.
Accounting information for monitoring progress and for decision-making: Monitoring: comparing results with a past period or a target. Decision-making: choosing between options using the facts. The information supports a decision; it does not make it, and it cannot show things not measured in money.
Profit falls from $9,000 to $6,750. What is the percentage change?: Change ÷ original × 100 = 2,250 ÷ 9,000 × 100 = a fall of 25.0%. Always divide by the original figure, not the new one.

The accounting equation: Assets = Liabilities + Owner’s equity so Owner’s equity = Assets − Liabilities.
Asset, liability and owner’s equity: Asset: a resource the business owns (premises, inventory, trade receivables, bank, cash). Liability: an amount owed to outsiders (trade payables, loan, bank overdraft). Owner’s equity: the owner’s claim, assets − liabilities.
What makes owner’s equity rise, and what makes it fall?: Rises: capital introduced, profit. Falls: a loss, drawings. No other transaction changes owner’s equity.
Assets are $27,800 and owner’s equity is $18,300. Find liabilities.: Liabilities = Assets − Owner’s equity = 27,800 − 18,300 = $9,500.
A machine costing $7,400 is bought on credit. Effect on assets, liabilities and owner’s equity?: Assets up $7,400, liabilities up $7,400, owner’s equity no change.
Goods that cost $650 are sold on credit for $940. Effect on assets and owner’s equity?: Both rise by the profit: 940 − 650 = $290. Liabilities do not change.
Finding profit from the change in owner’s equity: Profit = closing equity − opening equity − capital introduced + drawings. Example: 38,650 − 31,200 − 2,500 + 7,200 = $12,150.