Flashcards · 4AC1 · Topic 1

The accounting environment flashcards

22 cards on Topic 1, subtopics 1.1 to 1.4. Pick a subtopic or study them all.

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Public sector and private sector organisations: Public sector: owned by national or local government; main aim is to provide a service; funded mainly by taxes. Private sector: owned by individuals or groups; usually aims to make a profit.
Sole trader compared with partnership: Sole trader: one owner who keeps all the profit and decides quickly. Partnership: two or more owners who share profit in an agreed ratio, pool more capital and skills, but decide more slowly.
Unlimited liability: The owner’s personal assets, such as a home, can be used to pay the business’s debts if it cannot pay them. It applies to sole traders and ordinary partnerships.
Stakeholder: A person or group with an interest in the business, such as the owner, managers, employees, lenders, suppliers, customers, the tax authority and the community.
Which figures do a lender and a supplier look at, and why?: Lender (bank): profit, assets and existing debts, to judge whether a loan can be repaid. Supplier: liquid assets against amounts owed, to judge whether it will be paid on time.

Name the six accounting concepts in the 4AC1 specification: Consistency, prudence, accruals, materiality, money measurement and business entity.
Consistency and prudence: Consistency: use the same method period after period, so years can be compared. Prudence: do not overstate profit or assets; recognise likely losses early.
Accruals concept: Record income and expenses when they are earned or incurred, not when cash moves, so profit matches the period.
Materiality and money measurement: Materiality: only items big enough to affect decisions need separate treatment (a stapler is an expense). Money measurement: record only what can be measured in money (staff skill and reputation are left out).
Business entity concept: The business is treated as separate from its owner, so the owner’s personal spending from the business is drawings, not an expense.
Rent of $3,600 is paid on 1 August for 12 months; the year ends on 31 December. Expense and prepayment?: $300 a month. Expense for the year: 5 months = $1,500. Prepayment: 7 months = $2,100 (accruals concept).

Benefits of accounting software: Speed (one entry posts to every linked account); accuracy (the program does the arithmetic and posts both sides); reports on demand; easy searching and storage. It still processes whatever is typed in.
Benefits of spreadsheets in accounting: Formulas recalculate totals and ratios when inputs change; what-if testing; reusable templates; charts of trends.
Name the three data security issues: Data loss (records destroyed or unreadable), access (who can open or change records) and confidentiality (keeping information private).
Hardware methods of protecting accounting data: Backups on external drives kept off-site, a fireproof safe, an uninterruptible power supply, locked rooms or cabinets, keycards or fingerprint scanners.
Software methods of protecting accounting data: Passwords and user access levels, encryption, antivirus and firewall kept updated, scheduled automatic backups, an audit trail of who changed what.
Access compared with confidentiality: Access is about who gets into the records. Confidentiality is about what happens to the information: a person with proper access can still breach confidentiality by passing it on.

Integrity and objectivity: Integrity: being honest and straightforward. Objectivity: judgement free from bias, conflicts of interest and pressure.
Professional competence and due care: Keeping knowledge up to date and working carefully, applying the rules properly rather than guessing.
Confidentiality and professional behaviour: Confidentiality: not disclosing or misusing information learned through work. Professional behaviour: obeying the law and protecting the profession’s reputation.
A bookkeeper is told to leave out a $9,000 supplier invoice so profit looks higher. Which principle, and what should she do?: Integrity: the figures would mislead (profit would rise from $36,400 to $45,400). She should record the invoice and explain why.
Public interest: The wellbeing of the wider community, including lenders, investors, suppliers, employees and tax authorities who rely on accounts. It is not the same as the employer’s interest.