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Summary - Accskills 1
1 The accounting equation and the statement of financial position
What is accounting?The process of identifying, measuring, and communicating economic information to permit informed judgements and decisions by users of that information.
Which seven key ingredients were required before a formal system could be developed?
- Private property
With which principles must an accountant comply according to the IFAC code?
- Professional competence and due care
- Professional behaviour
With what is accounting concerned with?
- Recording data
- Classifying and summarising data
- Communicating what has been learnt from the data
What is bookkeeping?Bookkeeping is the process of recording data relating to accounting transactions in the accounting books.
What is capital?The funds invested in the business by the owner plus any profits retained for use in the business less any profits paid out of the business to the owner.
What are assets?The actual resources in a business
What are liabilities?Amount owed to people other than the owner
What is the accounting equation?Capital = Assets - Liabilities
What is the statement of financial position?It shows the financial position of an organisation at a point in time, thus it presents a snapshot. It comprises those accounts with balances not included in the income statement.
What is a creditor?A person to whom money is owed.
Where is the creditor shown in the statement of financial position?In the accounts payable.
What is a debtor?A person who owes the business money.
Where is the debtor shown in the statement of financial position?In the account receivable.
2 The double entry for assets, liabilities and capital inventory
What is double entry bookkeeping?Ensuring that only those items that were affected by the transaction are shown as having changed.
What is an account?A place where all the information referring to a particular asset or liability, or to capital, is recorded.
What is the debit side?Left hand side
What is the credit side?The right hand side.
What is a T-account?Account with a t-shape.
What are the double entry rules for bookkeeping?Assets increase -> DebitAssets decrease -> CreditLiabilities increase -> CreditLiabilities decrease -> DebitCapital increase -> CreditCapital decrease -> debit
What do you need to include when making an entry for a transaction?- The date of each transaction- Cross-reference title of the other account- Appropriate column headings
How are accounts payable and accounts receivable treated in the accounting books?There is a separate account maintained for each creditor and debtor.
What is the rule of benefit?Identify the accounts affected by a transaction. Debit the account for which there has been an increase in benefit; credit the account which there has been a reduction in benefit.
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What is the reducing balance method?
A fixed percentage for depreciation is deducted from the cost in the first year. In the second year and later years the same percentage is taken of the reduced balance (i.e. cost less deprecation already charged).
n = number of years
s = the net residual value
c = the cost of the asset
r = the rate of deprecation to be applied
What is the units of output method?
This method establishes the total expected units of output expected form the asset. Depreciation, based on cost less salvage value, is then calculated for the period by taking that period's units of output as a proportion of the total expected output over the life of the asset.
(Cost - salvage value) * (period's production / total expected production)
What is the sum of the years' digits method?
This provides for higher deprecation to be charged early in the life of an asset with lower depreciation in later years.
From purchase the asset will last for 3 years
From purchase the asset will last for 2 years
From purchase the asset will last for 1 years
Total 3+2+1 = 6 --> sum of the digits
3/6 * amount
2/6 * amount
1/6 * amount
What is the machine hour method?
The deprecation provision is based on the number of hours that the machine was operated during the period compared with the total expected running hours during the machine's like with the business.
What is the depletion unit method?
This is used with non-current assets such as a quarry from which raw materials are dug out to be sold to the building industry.
(cost of asset / expected total contents in units) * Number of units taken in period
What is the revaluation method?
1. Find it cost
2. Estimate it years of use to the business
3. Calculate and provide depreciation
4. Make the adjustments when the asset is disposed of
5. Calculate profit or loss on disposal
What are other methods of calculating depreciation?
1. The revaluation method
2. Depletion unit method
3. Machine hour method
4. Sum of the year's digits method
5. Units of output method
How are depreciation provisions for assets bought or sold during an accounting period calculated?
1. Ignore the dates during the accounting period that the assets were bought or sold, and simply calculate a full period's depreciation on the assets in use at the end of the period.
2. Provide for depreciation on the basis of 'one month's ownership = one month's provision for depreciation'.
[On the exam, when dates are given, method 2 should be used. Otherwise method 1.]
What do the advocates of the reducing balance method say?
In the early years there is a higher charge for depreciation + a lower charge for repairs and upkeep. This will tend to be close to the sum of;
In the later years there is a lower charge for depreciation and a higher charge for repairs and upkeep.
What is the straight line method?
The number of years of use is estimated. The cost is then divided by the number of years. This gives the depreciation charge for each year.
(cost - estimated disposal value) / number of expected years of use