BS15

HideShow resource information
  • Created by: kaadaviss
  • Created on: 01-06-15 14:46

Accounting concepts

Going concern - The assumption that the business is going to continue trading into the foreseeable future.

Accruals (matching) concept - The practice of placing costs incurred and revenues generated by a business in the finiancial periods in which goods and services were used and products were sold. This is not necessarily when payments were actually made.

Consistency - The application of a uniform approach to accounting policies when presenting accounts.

Prudence - An approach that accounts for loses as soon as they are anticipated, that is immediately, but accounts for profits only when they are realised.

Materiality - Assesses the impact of individual items on the presentation of accounts. Items with a low monetary value are not recorded seperately.

1 of 15

Accounting concepts continued

Realisation - The concept that recognises that revenue and profits have only been earned when the actual ownership of goods has been exchanged, and cash or credit payment agreements are in place.

Duality - Covers the principle that every business transaction has two effects, and gives rise to both a debit and a credit entry in the accounting system.

Business entity concept - Considers the accounts of the business and its owner(s) to be two totally seperate legal entities. In other words, the assets and liabilities of the owner are kept seperate from those of the business itself.

Money measurement - Refers to the underlying principle that finiancial accounting is only concerned with recording items that have a definite measurable monetary value.

2 of 15

Recording transactions & the financial accounting1

Purchase orders - Documents used to initiate or confirm the placing of an order for goods or services from a supplier.

Delivery notes - Documents issued by suppliers to customers for signature confirming the delivery of goods made. They are dispatched with the goods.

Goods recieved notes - Internal documents used by the reciever of goods to confirm what has been recieved by the business. These can be matched against the original purchase order.

Invoices - Documents sent from the seller to the buyer that detail the payment required for goods or services exchanged.

Remittance advise slips - Sent by customers to suppliers advising them or payments made.

3 of 15

Recording transactions & the financial accounting1

Debit notes - Documents sent to customers to notify them that the original invoice is undercharged. These are sometimes used by customers when returning goods to suppliers.

Credit notes - Issued by supplies when customers have returned goods, to act as a discount against any payments still outstanding or to be set off against the cutsomer's next puchase. 

Statements of accounts - Documents that summarise all transactions between a buyer and a seller over a given period of time (usually onne month).

Cheques - Blank forms issued by a bank that when completed act as instructions to the bank that the holder of an account wants to transfer a stated sum of money to a named person or business.

4 of 15

Recording transactions & the financial accounting2

Purchases journals (purchases day book) - Contain a chronological list of all credit purchases. These are compiled from invoices recieved from creditors (suppliers).

Purchases returns journals (purchases returns day book) - Contain a chronological list of all purchases subsequently returned to suppliers (returns outwards). These are compiled from credit notes recieved.

Sales journals (sales day book) - Contain a chhronological list of all credit sales. These are compiled from invoices issued by the company to debtors.

Sales returns journals (sales returns day book) - Contain a chronological list of all sales subsequently returned to the company by customers (returns inwards). These are compiled from credit notes issued by the company.

Journal (journal proper) - Used to record entries such as the purchase or sale of fixes assets or the correction or errors

5 of 15

Recording transactions & the financial accounting2

Purchase ledgers - Part of the double-entry system. These contain the individual personal accounts of a business's credit suppliers (creditors). The main entries in the purchases ledger are posted from the purchases journals and the cashback.

Sales ledgers - Part of the double-entry system. These contain the individual personal accounts of a business's credit customers (debtors). The main entries in the sales ledger are posted from the sales journals and the cashbook.

General ledgers - Part of the double-entry system. This ledger contains all the impersonal (nominal or real) accounts of the business, such as fixed assets, expenses, sales and purchases accounts.

Cashbook - A book of original entry and a part of the double-entry system. This contains details of every transaction that takes place using the company's bank account or cash funds. 

6 of 15

The trial balance and errors

Trial balance - A summary of all the balances from the individual accounts in the ledgers. It acts as a arithmetical check on the accuracy of the double-entry boookkeeping system, ensuring that accounting entries are error-free prior to the compilation of the final accounts. 

Commission - Occurs when one or both double entries are made in the correct classification of account but entered under the wrong name.

Omission - Occurs when both double entries for a transaction have been completely left out from the books of account, that is there is no entry at all for the transaction.

Principle - Occurs when one or both of the double entries are made in the wrong classification of account.

Compensating - Where two or more opposing errors act to cancel each other out.

7 of 15

The trial balance and errors continued

Original entry - Where the couble entry for a transaction has been made on the correct accounts but using an incorrect figure..

Reversal - Where the correct double entry has been made on the correct accounts but the account to be debited has been credited by mistake and, similarly, the account that should have a credit entry has been debited. In other words, the entries have been made on the wrong sides of the accounts.

8 of 15

Profit and loss accounts & balance sheets: part 1

Profitability - A measure of a business's ability to generate more revenue from its activities than it actually costs to undertake those activities. Profitability is usually measured in the profit and loss account.

Profit and loss account - A statement that shows a firm's revenue generated over a trading period and the relevent costs (expenses) incurred in earning that revenue.

Revenue - The total value of income made from selling goods and services over a given period of time.

Expenses - The costs that are incurred by a business in its day-to-day running. These are items that are bought by the business to be used (not to be resold), such as stationery and employees' labour.

Profit - The difference that arises when a firm's revenue is greater than its total expenses.

9 of 15

Profit and loss accounts & balance sheets: part 1

Gross profit - The difference between the revenue generated by sales and the cost of the products which have been sold. It measures the profit made on buying and selling activies.

Net profit -The actual amount left after all other costs associated with running the business are taken into account, including expenses such as marketing costs and electricity.

Loss -Occurs when revenue is less than the total cost of providing goods and services and the associated expenses.

Liquidity -An assessment of a business's ability to be able to pay its short-term debts. It is a measure of whether the business has enough cash available to pay bills and invoices as they come due for payment. It is assessed from the balance sheet.

10 of 15

Profit and loss accounts & balance sheets: part 1

Balance sheet - A statement that shows a business's assets and liabilities on a particular day. In effect, it shows what a business owns and how it is financed.

Assets -The resources owned by a business that have a monetary value.

Liabilities -Debts owed by a business to other parties. Liabilities are sources of finance, and provide the means by which some of the company's assets have been bought.

Capital (share capital) - The money invested by the owners into the business. This is used by the business to purchase assets and help finance operations. It is called share capital as company owners invest money by buying shares. Shareholders are paid dividends out of a business's profits.

11 of 15

Profit and loss accounts & balance sheets: part 1

Shareholders' funds - Made up of reserves that have been accumulated by the business over the years it has been operating. Prudent owners will keep some of the profits their business makes each year in the company. This retained profit belongs to the shareholders, but is reinvested to help the business grow and become stronger.

12 of 15

Profit and loss accounts & balance sheets: part 2

Limited liability - Provides protection for the owners of a company (normally the shareholders). It means that the financial risk taken by an owner is limited to the amount they have invested in the company. Their personal private assets cannot be seized should the company go into liquidation owing millions of pounds.

Unlimited liability -The owners have full responsibility for all debts or losses incurred by their business. In the event of the business having to close, the owners may be forced to use their personal private assets to cover any outstanding debts.

Surplus -The term used by a not-for-proft organisation to describe any excess of income over expenditure.

Debentures - A form of loan stock (long-term liability) issued by companies as a means of raising finance. The company pays a fixed rate of interest to the debenture holder for an agreed period of time.

13 of 15

Profit and loss accounts & balance sheets: part 2

Share capital - The money invested by the owners into the business in return for a shareholding.

Dividends - The rewards paid to shareholders out of a company's profits. These are made in proportion to their shareholding, and are usually paid annually.

14 of 15

Accruals and prepayments

Accruals - Amounts owned by a business for services it has used during an accounting period but not yet paid for. They represent those expenses that remain unpaid at the year end when the financial accounts are being prepared.

Prepayments -Represent amounts paid by the business during the accounting period under consideration, for services or expenses that have not been used yet. That is, they have been paid for in advance and will actually be used in the next financial period.

15 of 15

Comments

No comments have yet been made

Similar Applied Business resources:

See all Applied Business resources »See all Collins resources »