Accounting IA2 Gloassary

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Questions and Answers

Which of the following is a qualitative characteristic of financial information?

Materiality (correct)

Matching Principle

Non-current assets

Over-provision for Doubtful Debts

What does the term "liability" refer to in the context of a business?

The total amount of money the business has earned

The amount of money a business owes to external parties (correct)

The value of the business's assets

The amount of money a business owes to its employees

What is the principle of matching revenue with expenses?

Matching the amount of revenue earned with the amount of profit generated.

Ensuring that all expenses are recorded in the same accounting period as the revenue they helped generate. (correct)

Matching the amount of revenue earned with the amount of liabilities incurred.

Matching the amount of revenue earned with the amount of assets purchased.

What is the definition of "owner's equity"?

The difference between the business's assets and liabilities. (D) Signup and view all the answers

What does the term "prepaid expenses" refer to?

Expenses that have been paid in advance for future use. (C) Signup and view all the answers

What is the purpose of a provision for doubtful debts?

To estimate the amount of money that is unlikely to be collected from customers. (D) Signup and view all the answers

Which of the following is an example of an over-provision for doubtful debts?

The provision for doubtful debts is too high, resulting in an overestimation of bad debts. (C) Signup and view all the answers

What is the key difference between current assets and non-current assets?

Current assets are expected to be converted into cash within one year, while non-current assets are not. (D) Signup and view all the answers

What is the primary purpose of revenue?

To represent the inflow of resources to the business from its operations. (A) Signup and view all the answers

What does the accounting period concept state?

A business's financial performance should be measured over specific periods of time. (A) Signup and view all the answers

Which of the following is NOT a limitation of financial reports?

Financial reports are always accurate and reliable because they are based on objective data. (B) Signup and view all the answers

What is the purpose of a stocktake?

To determine the quantity of inventory available for sale. (D) Signup and view all the answers

Which of the following is an example of an accrued expense?

Salaries owed to employees but not yet paid. (C) Signup and view all the answers

What is the difference between GST collected and GST credits received?

GST collected is the GST collected on sales, while GST credits received are the GST paid on purchases. (C) Signup and view all the answers

What is the purpose of the going concern principle?

To ensure that a business is able to operate in the future. (C) Signup and view all the answers

What is the formula for calculating the current ratio?

Current assets / Current liabilities (A) Signup and view all the answers

Which of the following is NOT an example of an asset?

Salaries owed to employees (D) Signup and view all the answers

What is the purpose of a balance day adjustment?

To update the accounting records to reflect the actual value of assets. (D) Signup and view all the answers

What is the difference between a bad debt and a doubtful debt?

A doubtful debt is an estimate of debts we expect to be bad, while a bad debt is a debt that has been written off as uncollectible. (C) Signup and view all the answers

What is the purpose of depreciation expense?

To allocate the cost of an asset over its useful life. (D) Signup and view all the answers

Study Notes

Financial Statement Reporting Glossary

Accounting period: A 12-month period, typically from July 1 to June 30 in Australia.
Accounting entity concept: Separates the business owner from the business for accounting purposes.
Accounting period concept: Divides the business's life into arbitrary time periods for accounting.
Accrued expenses: Expenses incurred in a period but not yet paid.
Accrued revenue: Revenue earned in a period but not yet received.
Assets: Items a business owns or controls.
Bad debts: Accounts receivable that cannot pay their debts.
Bad debts recovered: When a previously written-off bad debt is paid.
Balance Day Adjustments: Entries made at the end of an accounting period to match revenues and expenses accurately to determine profit and to account for previously unrecorded assets/liabilities.
Comparative financial statements: Compare current financial statements with previous periods.
Current Ratio: The liquidity ratio (current assets/current liabilities), used to assess a company's ability to pay its short-term debts. A current ratio greater than 2:1 is generally considered favourable.
Depreciation: The allocation of an asset's cost over its useful life. Used typically for physical assets.
Doubtful debts: Estimates of debts expected to be bad from past sales; used because of the matching principle.
Expenses: Resource outflows from business operations.
Going concern principle: Assumes a business will continue operating indefinitely.
Gross profit ratio: Gross profit / net sales x 100; Measures how much gross profit is generated for each dollar of sales.
GST credits received: GST paid on expenses and asset acquisition.
GST collected: GST collected from sales of inventory, assets, and services, payable to the Australian Tax Office (ATO).
GST clearing: A ledger account to calculate GST owed to/by the ATO at the end of the accounting period.
Historical cost principle: All assets are initially recorded at the cash price paid at acquisition.

Additional Concepts (Page 2)

Inventory adjustment: Ensures inventory count equals accounting records, handling shortages/surpluses.
Liabilities: Amounts owed to external parties.
Limitations of financial reports: Accounting reports rely on concepts and principles; may have limitations in accuracy and reliability.
Matching principle: Matches revenues in one period to expenses incurred in earning those revenues.
Materiality: Importance of an item relative to a particular entity; only material costs are included in the cost price of an asset.
Monetary principle: All transactions are recorded in a common monetary unit.
Net profit ratio: Calculated as net profit / net sales, measures profitability per dollar of sales.
Non-current assets: Assets used in business operations longer than one accounting period.
Over-provision for doubtful debts: Opening balance of provision for doubtful debts is higher than bad debts during the period.
Owner's Equity: The difference between a business's assets and liabilities representing owner investment.
Prepaid expenses: Cash payments recorded as assets until their benefit is used.
Provision for doubtful debts: Estimates of debts unlikely to be paid in the next period; helps with the matching principle.
Qualitative characteristics of financial information: Characteristics like relevance, reliability, comparability, and understandability for financial reports.
Quick ratio: Indicates a company's ability to meet immediate debts using quick assets (cash, near cash, receivables) / current liabilities. A ratio > 1:1 is favorable.
Revenue: Inflows of resources from business operations.
Return on owner's equity: A measure of profitability related to owner investment. =(net profit / avg owner's equity) * 100
Return on total assets: Measure of profitability relative to total assets, a measure of how well a company uses its assets to generate profit. =(net profit/ avg total assets)*100

Additional Concepts (Page 3)

Statement of Financial Position: Shows a company's assets, liabilities, and owner's equity at a specific time.
Statement of Profit or Loss: Summarizes a company's revenues and expenses over a period, resulting in profit or loss.
Turnover of accounts receivable Effectiveness of collections, evaluates if accounts receivable are too high. Calculated as (Net Credit Sales) / (Average Accounts Receivable)
Turnover of inventory: Measures how quickly inventory is sold, indicating inventory liquidity = (Cost of Goods Sold) / (Average Inventory)
Under-provision for doubtful debts: Opening balance of provision for doubtful debts is lower than bad debts written-off during the period.
Unearned revenue: Revenue received in advance for future services.
Write-off debt: When a debt is marked as no longer collectible.

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Test your knowledge of key financial reporting terms in this glossary. The quiz covers concepts such as accounting periods, accrued expenses, and bad debts. Perfect for students of accounting or anyone interested in financial literacy.