An introduction to the role of the accountant in business (AS Level) flashcards

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

Financial accounting vs management accounting

Financial: records completed transactions and reports to external users; historic, governed by law and standards, in a set format. Management: forward-looking information for internal decision-makers, in whatever form and as often as needed.

The accounting equation, and why capital sits with liabilities

Assets = capital + liabilities. Under the business entity concept the business is separate from its owner, so capital is treated as owed back to the owner.

DEAD CLIC

Debit Expenses, Assets, Drawings; Credit Liabilities, Income, Capital.

Both effects of accrued income and of prepaid (received in advance) income

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

What does depreciation do, and what two things is it not?

It allocates the cost of a non-current asset over its useful life, matching cost with the revenue it helps generate. It is not a fund to replace the asset and not a measure of the fall in market value.

Effect of treating capital expenditure as revenue expenditure

Profit is understated and non-current assets are understated. The reverse overstates both. Delivery, installation and legal fees are capital.

Why might a high current ratio be a bad sign?

It may indicate excess inventory, slow-collecting receivables, or idle cash that should be invested.

Money measurement: what consequence should you state?

Staff quality, brand reputation and management skill do not appear in the accounts, a real limitation of financial statements as a picture of a business.

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

Accruals drives accruals, prepayments, depreciation and provisions. Prudence resolves judgement calls: choose the treatment that does not overstate profit.