Accounting Principles Overview

Podcast

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is meant by 'faithful representation' in financial reporting?

Faithful representation means that the information presented is complete, free from error, and neutral.

How does comparability benefit users of financial statements?

Comparability allows users to identify and understand similarities and differences among items.

Explain the principle of verifiability in financial information.

Verifiability ensures that independent observers can reach a consensus about the information presented.

What is the significance of timeliness in financial reporting?

Timeliness refers to providing information to decision-makers in a timeframe that allows for decision influence. Signup and view all the answers

Define the accrual basis of accounting.

Accrual basis recognizes revenue when measurable and verifiable, and expenses when incurred. Signup and view all the answers

What does the going concern assumption imply for financial reporting?

The going concern assumption implies that the entity is expected to continue its operations into the foreseeable future. Signup and view all the answers

What distinguishes current assets from non-current assets?

Current assets are expected to be converted to cash within the next 12 months. Signup and view all the answers

How is owner's equity defined in the context of a business entity?

Owner's equity is the residual interest in the assets of the entity after deducting its liabilities. Signup and view all the answers

what is revenue?

an increase in assets which leads to an increase in owners equity other then those relating to owners contributions Signup and view all the answers

what is an expense?

an decrease in assets which leads to a decrease in owners equity, other then those relating to owners contribution Signup and view all the answers

period assumption

Prepared for a particular period of time to obtain comparable results Signup and view all the answers

understandability

Information should be comprehensible. It should be presented clearly and concisely Signup and view all the answers

current liability

a present obligation of the entity to transfer an economic resource (as a result of past events) that is reasonably expected to be settled within 12 months (when the employees are paid) Signup and view all the answers

Study Notes

Relevance

Information capable of influencing decisions made by users.

Faithful Representation

Information must be complete, accurate, and unbiased.

Comparability

Enables users to identify similarities and differences between items.

Verifiability

Independent observers can reach consensus on the information. Retention of source documents ensures this.

Timeliness

Information must be available in time to influence decisions.

Understandability

Information should be easily comprehensible. Clear and concise presentation is needed.

Period Assumption

Financial information should be prepared for a specific time period to provide comparable results.

Entity Assumption

Business transactions should be recorded separately from the owner's personal transactions. Separate records and reports should also be kept.

Accrual Basis

Revenue is recognized when economic benefits are received, regardless of when cash is received. Expenses are recognized when incurred, not necessarily when cash is paid.

Going Concern

Financial statements are prepared assuming the entity will continue operating in the future.

Revenue

An increase in assets (e.g., cash, bank balances), other than owner contributions, leading to an increase in owner's equity.

Current Asset

A resource controlled by an entity, expected to convert into cash within 12 months (e.g., accounts receivable).

Expense

Decreases in assets (e.g., cash, bank balances) and decreases in owner's equity (except for owner distributions).

Owners Equity

The residual interest in the assets of an entity after deducting its liabilities.

Current Liability

A present obligation of the entity to transfer an economic resource within 12 months.

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

Test your knowledge of key accounting concepts including relevance, faithful representation, comparability, and more. This quiz covers fundamental principles that guide financial reporting and decision-making. Perfect for students and professionals looking to refresh their understanding.