Chapter 2 Financial Statements For Decision Making Glossary

Front 1

Accouting entity assumption

Back 1

If the transactions of an entity are to be recorded, classified, and summarised into financial statements, the accountant must be able to identify clearly the boundaries of the entity being accounted for.

Front 2

Accounting equation

Back 2

Assets = Liabilities + Equity

Front 3

Accounts payable

Back 3

Amounts owed to suppliers for goods or services purchased on credit.

Front 4

Accounts receivable

Back 4

Although income often is measured by the cash received, it may be measured by the receipt of other assets, such as promises by customers to pay in the future or the receipt of property from a customer.

Front 5

Accrual basis

Back 5

The effects of all transactions and events are recognised in accounting records when they occur, and not when the cash is received or paid. Hence, financial statements report not only on cash transactions but also on obligations to pay cash in the future and on resources that represent receivables of cash in future.

Front 6

Assets

Back 6

Resources controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.

Front 7

Balance sheet (statement of financial position)

Back 7

The financial position of an entity or division at a specific point in time is reported.

Front 8

Company (or corporation)

Back 8

A separate legal entity formed under the Corporations Act 2001.

Front 9

Comparability

Back 9

The quality of information that enables users to identify similarities in and differences between two sets of economic data.

Front 10

Consistency

Back 10

Use of the same accounting policies and procedures, either from period to period within an entity or in a single period across entities.

Front 11

Creditors

Back 11

The debts owed by an entity to outside parties.

Front 12

Debtors

Back 12

Although income often is measured by cash received, it may be measured by the receipt of other assets, such as promises by customers to pay in the future or the receipt of property from a customer.

Front 13

Double-entry accounting

Back 13

Every transaction affected at least two components of the equation.

Front 14

Drawings

Back 14

Withdrawing certain amount from the business for personal use.

Front 15

Economic substance

Back 15

The accountant examines transactions and events in order to report on their economic reality as opposed to their legal form.

Front 16

Effectiveness

Back 16

How well an entity attains its goals (e.g. the number of services provided to customers compared with the number planned).

Front 17

Efficiency

Back 17

Maintaining a satisfactory relationship between an entity's resource inputs and its outputs of products or services (e.g. the number of labour hours required to process a loan application or to produce a product).

Front 18

Equity

Back 18

The owner's claim to (or the residual interest in) the assets of the entity after deducting all its liabilities.

Front 19

Expenses

Back 19

Decreases in equity.

Front 20

Faithful representation

Back 20

The user is assured that the information presented is complete, without bias or undue error, and neutral.

Front 21

Financial performance

Back 21

The ability to operate its assets efficiently and effectively in the conduct of its activities, whether for profit or not for profit.

Front 22

Financial position

Back 22

The economic resources controlled by an entity, its financial structure, its capacity to adapt to changes in its environment, and its liquidity and solvency.

Front 23

Financing activities

Back 23

Those which relate to the raising of funds for an entity to carry out its operating and investing activities.

Front 24

Going concern assumption

Back 24

Financial reports are prepared normally on the assumption that the existing entity will continue to operate in the future.

Front 25

Income

Back 25

An increase in the wealth of the owner(s).

Front 26

Income statement

Back 26

The results of financial performance for a specific time period such as a month, half-year or year.

Front 27

Investing activities

Back 27

Those associated with the acquisition and disposal of long-term resources used in the entity's production, selling or administrative tasks.

Front 28

Liabilities

Back 28

Present obligations of an entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

Front 29

Limited liability

Back 29

The liability of a shareholder to contribute to the assets of the company is limited to the amount unpaid on the shares held in the company.

Front 30

Loss

Back 30

A decrease in equity.

Front 31

Management by exception

Back 31

Since management time is a scarce resource, the main concern should be for any performance that deviates significantly from the plan.

Front 32

Management functions

Back 32

See figure 2.1 page 36.

Front 33

Materiality

Back 33

The extent to which information can be omitted, misstated or grouped with other information without misleading the statement users when they are making their economic decisions.

Front 34

Net assets

Back 34

Equity

Front 35

Operating activities

Back 35

Those associated with the provision of goods or services.

Front 36

Operating statement

Back 36

The results of financial performance for a specific time period such as a month, half-year or year are reported.

Front 37

Organisation

Back 37

A group of people who share common goals with a well-defined division of labour.

Front 38

Partnership

Back 38

A business owed by two or more people acting as partners.

Front 39

Period assumption

Back 39

Division of the life of the entity into equal time intervals.

Front 40

Profit

Back 40

A net increase in equity.

Front 41

Profit or loss statement

Back 41

The results of financial performance for a specific time period such as a month, half-year or year.

Front 42

Relevance

Back 42

The information can influence the economic decisions made by users.

Front 43

Shareholders

Back 43

Owners of the company.

Front 44

Single proprietorship (Sole trader)

Back 44

A business entity owned by one person.

Front 45

Statement of cash flows

Back 45

Report on the cash flows in and out of the entity is prepared.

Front 46

Timeliness

Back 46

Users have a desirable access to timely information for their decision making.

Front 47

Understandability

Back 47

The quality of information that enables users who have a reasonable knowledge of business and economic activities and financial accounting, and who study the information with reasonable diligence, to comprehend its meaning.

Front 48

Verifiability

Back 48

Different knowledgeable and independent observers being able to reach consensus, although not necessarily complete agreement, that a particular portrayal of information is a faithful representation.