Check List for Level 1 Accounting Concepts exam
Which concepts do
I need to learn?
What are the key points I should
include in my answer
How do I to get to my goal?
did I miss a key point
what do I need to learn
Nature of accounting:
- purpose of
- owner’s name
accounting
- financial decision making
- business name
- Users of
- Owner
accounting
- Bank
(information)
- IRD (Government)
- Uses of
- Link to the needs of the user
accounting
- Eg Owner = profit
(information)
improving/declining
- Bank = can loan be repaid
- IRD = is right GST / tax being paid
- Specialised
- Link to the specialised area
areas of
- See Appendix 1 for quick summary
accounting
of each
- Include the context of the business
- Features of
- Link to entity
entities (sole
- See Appendix 2 for key features
proprietors and - Include context of the entity
clubs)
Purpose of financial statements
- Income statement
- Refer to main purpose
- Statement of
- Refer to the items in the financial
financial position
statement
- Cash budget
Include context of the business
- Statement of
accounting policies - See Appendix 3
Concepts used in the preparation of financial statements (see separate handout)
- Capital and
- Asset v expense
revenue
- Position statement v income
expenditure
statement
- One-off v regular payments
- Used over/kept more than one
year v used up in one year
- Depreciation
- Allocation of cost
- Useful life
- Recognise use
- Accounting
- Business finances/financial
Entity
elements
- Owner’s personal
finances/financial elements
- Separation for accounting purposes
- Monetary
- What: Use of dollars to measure
measurement
financial elements
- How: Use of same NZ$ currency
- Why
- Going concern
- Period
reporting
- Accrual basis
- Historical cost
- What – business does as a going
concern
- How – continue into foreseeable
future
- Why – no need or reason to close
- What (is it)
- How (applied to the financial
statement)
- Why – link to decision making
- What is the adjustment
- How reported in income statement
- How reported in position
statement
- Why reported in each statement
- What – name item
- How – refer to original cost
- Why – transaction amount is
reliable/recorded on a document
Financial elements
- Assets
- Liabilities
- Equity
- Incomes
Past with what
Present with what and how
Future with what, how and why
Past with what
Present with what and how
Future with what, how and why
Business assets less business
liabilities
- What the income is
- What/who is providing the income
- How and why increase in asset
(bank)
- How and why increase in equity
(more profit)
- Not owner contribution
- Expenses
- What the expense is
- What/who is being paid
- How and why decrease in asset
(bank)
- How and why decrease in equity
(more profit)
- Not owner contribution
Accounting equation
- A (+Ex) = L + E (+R) - Name specific financial element
item
- Provide specific dollar amount
- State increase or decrease
correctly
Appendix 1 – specialised areas of accounting summary
Auditor checks financial statements provide a true and fair view of financial performance and financial position
Financial accountant/chartered accountant provides financial advice to the business owner to assist with business
decisions
Financial accountant/chartered accountant – provides financial advice to the business owner to assist him/her to
make good financial decisions for his/her business
Cost accountant involved in determining costs of production or other output of the business
Management accountant involved in the overall management of the business particularly the financial management
through the preparation of budgets
Accounting technician involved in day-to-day operations of accounting systems so they operate efficiently and
provide essential financial data and information for decision making
Tax accountant involved in providing tax advice such as on GST, PAYE tax, business taxation requirements
Appendix 2 – Features of entities summary - key points but answer must be in context
Entity
Features
Sole Proprietor
Community organisation/club
Incorporated club
Ownership
One owner who makes all the
decisions and keeps all the profit
Liability of
owners
Unlimited liability – owner is
personally liable to pay business debts
if the business can’t pay those debts
Advantages
Owner is own boss, can make all the
decisions, keeps all the profit
Members are owners
Incorporated organisations need at least 15
members
Members have unlimited liability if the
club/organisation is unincorporated
Incorporated organisations
Members have limited liability meaning
members are only required to pay their
subscription in full. Members are not
personally liable to pay the debts of the
incorporated club/organisation if the
incorporated club/organisation can’t pay
them – members only have to pay their
subscription; all other personal assets are
protected from being used to pay club debts.
Unincorporated – only advantage is for very
small clubs which don’t own assets or need
to own assets such as local garden club
Incorporated – advantage for members is
limited liability; advantage for the
club/organisation is that it is a separate legal
entity so it can own assets and borrow
money in its own right
Disadvantages
Limited access to capital – only the
owners funds
Unlimited liability as personal assets
can be used to pay business debts if
the business is in financial difficulty
and can’t pay its debts because the
business is not a separate legal entity
Appendix 3 Purpose of financial statements summary
Income
statement
Statement of
financial position
Cash budget
Accounting
policies
Main purpose
To determine profit for the year
To help make decisions about
improving profit through increasing
income and/or decreasing expenses
To report assets, liabilities and equity
on balance day (a point in time)
To help make decisions about the
financial position – is the business
financially stable/equity more than
liabilities
To help make decisions about cash
flow in the future such as can the
business afford new equipment/does
the business need to borrow money
To set out the policies used to
measure the financial elements
reported in the financial statements
so users can make good decisions
knowing how for example assets have
been measured
Items to write about
Incomes
Expenses
Profit
Current assets
Current liabilities
Non-current assets
Non-current liabilities
Equity
Estimated receipts
Estimated payments
Estimated bank balance
Measurement of assets at historical cost
Accrual accounting used to determine profit
and report assets and liabilities
Method of depreciation
Going concern assumption