The Purpose of Accounting & The Accounting Equation (Cambridge (CIE) IGCSE Accounting): Flashcards
Exam code: 0452 & 0985
1/240Still learning
Know0
Define book-keeping.
Was this flashcard helpful?
Cards in this collection (24)
Define book-keeping.
Book-keeping is the process of keeping detailed records of a business's financial transactions. It is carried out by book-keepers, who record every transaction the business makes, no matter how small.
Where does a book-keeper get the information needed to record a business's transactions?
A book-keeper works from the business's business documents. These include bank statements, receipts, invoices and cheques.
Define accounting.
Accounting is the use of the records kept by book-keepers to prepare a business's financial statements. It is carried out by accountants, who are responsible for managing, updating, correcting and reporting the business's accounts.
What do accountants provide to a business's owners and managers, and what do the owners and managers use it for?
Accountants provide financial information, drawn from the book-keeper's records. Owners and managers use it to monitor the progress of the business and to make decisions about how to improve profit or reduce a loss.
Complete the sentence naming the system book-keepers use:
Book-keepers record a business's transactions using a system called
.The completed sentence is:
Book-keepers record a business's transactions using a system called double entry book-keeping.
Book-keeping and accounting are carried out at different points in the financial cycle. How often is each one carried out?
Book-keeping is carried out day-to-day, as transactions happen. Accounting uses those records to provide information at regular intervals, such as at the end of a financial year.
True or False?
A business owner can carry out the book-keeping for their own business.
True.
Book-keeping is a role, not a separate person, so an owner can do it themselves. Many small business owners keep their own records, and then pass them to an accountant.
Define a statement of profit or loss.
A statement of profit or loss is a financial statement that measures the profit or loss a business has made over a period of time. The profit or loss is the difference between the business's total income and its total expenses.
What is gross profit, and how is it calculated?
Gross profit is the profit a business makes from its trading activities. It is calculated as revenue − cost of sales, and appears in the statements of profit or loss of trading and manufacturing businesses.
Complete the two statements about profit and loss:
A business makes a profit when its income is
than its expenses, and a loss when its income is than its expenses.The completed statements are:
A business makes a profit when its income is higher than its expenses, and a loss when its income is lower than its expenses.
Give two reasons why a business owner needs a statement of profit or loss.
A statement of profit or loss shows the owner:
how the business has performed over a period of time, usually a year
whether the business is profitable, so the owner can see whether they are making money on their investment
whether changes need to be made, if a loss has been made
Define assets.
Assets are the things a business owns, such as premises, inventory, motor vehicles and money in the bank. They also include amounts owed to the business by others, which are called trade receivables.
What is the difference between a current item and a non-current item in a statement of financial position?
The dividing line is one year. Current assets and liabilities are expected to be turned into cash or paid off within a year, while non-current ones are held or repaid over a longer period.
Define liabilities.
Liabilities are the amounts a business owes to other people or businesses, such as bank loans and a bank overdraft. Amounts owed to credit suppliers are called trade payables.
What is working capital, and how is it calculated?
Working capital is the money a business would have left if it turned all of its current assets into cash and paid off all of its current liabilities. It is calculated as current assets − current liabilities, and is the capital available for day-to-day trading.
Define capital, also known as owner's equity.
Capital is any resource the owner provides to start the business or to keep it going, usually money but sometimes other assets such as buildings or vehicles. The business technically owes these resources back to the owner.
True or False?
A business's capital can only change when the owner puts money in or takes it out.
False.
Capital also changes with the business's results: a profit increases capital and a loss decreases it. Capital introduced by the owner, and drawings taken out for personal use, are only two of the ways capital moves.
Complete the accounting equation:
Assets =
+ The completed equation is:
Assets = Liabilities + Capital
In which financial statement is the accounting equation set out?
The accounting equation is set out in the statement of financial position. Every change a business makes to its assets, liabilities or capital changes that statement.
Complete the two rearrangements of the accounting equation:
Capital = Assets −
Liabilities = Assets −
The completed rearrangements are:
Capital = Assets − Liabilities
Liabilities = Assets − Capital
A business has total assets of $38 000 and total liabilities of $9500. What is its capital?
The business's capital is $28 500, since $38 000 − $9500 = $28 500.
True or False?
Every transaction changes the total value of a business's assets.
False.
A transaction can swap one asset for another and leave the total unchanged. When a credit customer settles their account by cheque, the money in the bank rises and the amount owed by that customer falls by the same amount.
Why does the accounting equation still balance after every transaction?
Every transaction causes at least two changes that cancel each other out. Both sides may increase by the same amount, both may decrease by the same amount, or the changes may happen within one side so that the totals stay the same.
A business pays one of its trade payables by cheque. What is the effect on its assets and on its liabilities?
Assets decrease, because the money in the bank falls. Liabilities decrease by the same amount, because the business now owes less to that supplier.
Sign up to unlock flashcards
or