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KQ: Why do managers, investors, creditors and others need information about a business' operations?
What does Generally Accepted Accounting Practices provide?
Guidelines and rules that a business must follow when preparing financial statements.
What are 5 basic concepts and terms that help identify the activities that a business' accounting process records.
- 1) Entity Concept.
- 2) Transactions.
- 3) Source Documents.
- 4) Monetary unit concept.
- 5) Historical cost concept.
Explain the entity concept?
States that an entity is considered to be separate from its owners and from any other business.
Each business is an entity and has its own accounting system and records.
A business transaction is an exchange of property or service with another entity.
Do business transactions need to be recorded?
Yes, each transaction a business engages in must be recorded, based on information from source documents.
Transactions are recorded in financial terms.
Explain source documents?
- Source documents are records used as evidence that a transaction has occurred.
- They maybe paper or electronic.
List some common examples of source documents?
- - Sales receipt.
- - Invoice or bill from a supplier.
- - Printout from an EFT machine.
- - Log of kilometres driven in a business' delivery truck.
- - Invoice or bill sent to/from a customer/supplier.
- - Payroll time-sheet.
- - Cheque stub/butt.
Explain monetary unit concept?
States that the source documents for transactions show the value of the exchange in terms of money.
Monetary unit depends on the national currency of the county in which the business operates.
Explain historical cost concept?
States that a business records its transaction based on the amount exchanged at the time of the transaction.
- (e.g year 1, land acquired for $100,000)
- year 2 land value increases to $130,000
- Business shows land at acquisition cost $100,000)
Tie in the 5 basic concepts and terms of accounting into an example?
- The accountant or owner uses the entity concept to separate the activities of the business from the owner's activities which are not related to the business.
- Transactions are identified by analysing source documents.
- Transactions are entered into the business' accounting records using monetary units based on historical cost.
(After financial information about a business' activities is recorded, the accounting process communicates this information in the business' balance sheet, income statement and cash flow statement)
Using financial information decisions can be made using the process of identify and measure, record, report, analyse and interpret, and retain.
What are the 3 components of the accounting equation (or 3 sections of a balance sheet)?
- 1) Assets.
- 2) Liabilities.
- 3) Owner's equity.