Financial accounting definitions Accounting Summarises numerical data relating to past events and presents this data as information to managers and other interested parties as a basis for decision making and control purposes. ISAB International accounting standards board Assets Things the business owns or is owed Liabilities Things the business owes Equity How the business is financed Capital Amount of money you invest into the business Book-keeping Basic recording of business transactions in financial terms Debit entry The account which has gained value or records an asset or expense Credit entry The account which gives value, or records a liability, or an income item Fixed assets Items purchased by a business for use on a semi-permanent basis Drawings Owner takes money out of the business for personal use - sole traders Debtors/trade receivable Owes the business money due to buying stock on credit Creditors/trade payables Business owes money due to them purchasing stock from suppliers on credit Prudence concept Consistency concept Going concern Is a boundary rule that assumes that the entry will continue in operational existence for the concept foreseeable future Ethical concept that is based on the principle that revenue and profits are not anticipated, but are included in the income statement only when realised in the form of either cash or assets Ethical rule that is based on the principle that there is uniformity of accounting treatment of like items within each accountancy period and from one period to the next
Accruals concept Business entity Refers to the fact that final account record and report on the activities of one particular business. They do not include the personal asset and liabilities of those who play a part in owning or running the business. Materiality Some items are of such low value that it is not worth recording them separately. They are all grouped together e.g. sundry expenses. Money measurement Dual aspect concept Prepayment Payment in advance of the accounting period to which they relate Accrual Is an amount due in an accounting period which is unpaid at the end of that period Depreciation Depreciation is the estimate of the amount or reduction in value of a fixed asset over an estimated time period Straight line depreciation Reducing balance depreciation Calculation of annual depreciation charge on the reducing balance basis Known bad debt/bad debt written off Known bad debt that you will never get back Is a recording and measurement rule that is based on the principles that revenues and costs are recognised as they are earned or incurred, are matched with one another, and are dealt with in the income statement of that period in which they relate, irrespective of the period of receipt or payment. All items are expressed in the common denominator of money Each business transaction is recorded by means of two opposing accounting entries Allocates an equal amount of depreciation to each year of non-current assets useful life
Bad debt A debt owing to a business which it considers will never be paid Provision