Principles of Accounting cheat sheet

Key terms

Owners/investors

Need to know profitability and the return on their investment, to decide whether to hold, buy more, or sell.

Management

Needs detailed, timely information to plan, control operations, and make day-to-day and strategic decisions.

Employees

Need information on the business's stability and profitability, bearing on job security and pay.

Lenders and creditors

Need to assess whether the business can meet its obligations, the core question behind the credit analysis this whole CCP qualification builds toward.

Suppliers

Need to know whether the business is a good credit risk before extending trade credit (CCP Credit Management, in the chapter on trade credit).

Customers

Need assurance of the business's ongoing ability to supply goods or services, particularly where they depend on it long-term.

Government and KRA

Need financial information to assess tax liability and monitor compliance with regulation.

The public

May be affected by a business's activities, employment, environment, local economic impact, and so has an interest in its financial position.

IFRS (International Financial Reporting Standards)

The current set of accounting standards issued by the IASB, governing how transactions and events are recognised, measured and disclosed in financial statements of for-profit entities.

IASs (International Accounting Standards)

The predecessor standards to IFRS; many remain in force today (still numbered IAS) alongside the newer IFRS-numbered standards, both issued under the same IASB framework.

IPSAS (International Public Sector Accounting Standards)

The equivalent standards for public sector entities, covered further in the chapter on public sector accounting.

Purpose

Standards exist so that financial statements prepared by different entities are comparable, consistent and reliable, letting the users above trust and compare the numbers rather than each entity choosing its own rules.

Assets

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

Liabilities

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

Equity

The residual interest in the entity's assets after deducting all its liabilities, the owners' stake.

Income

Increases in economic benefits during the period, in the form of inflows or enhancements of assets or decreases of liabilities, that increase equity.

Expenses

Decreases in economic benefits during the period, in the form of outflows or depletions of assets or increases of liabilities, that decrease equity.

Relevance

Information is capable of making a difference to the decisions users make.

Faithful representation

Information is complete, neutral and free from error, genuinely depicting what it purports to represent.

Comparability

Information can be compared with other periods and other entities.

Verifiability

Different knowledgeable, independent observers could reach consensus that the information faithfully represents what it claims.

Timeliness

Information is available to decision-makers in time to influence their decisions.

Understandability

Information is presented clearly enough for users with a reasonable knowledge of business to comprehend it.

Going concern

Financial statements are prepared on the assumption the business will continue operating for the foreseeable future, not that it is about to be liquidated.

Accrual

Transactions are recorded when they occur, not necessarily when cash is received or paid.

Consistency

The same accounting methods are applied period to period, so results are genuinely comparable.

Prudence

Caution is exercised so that assets and income are not overstated, and liabilities and expenses are not understated.

Materiality

Only information significant enough to influence a user's decision needs to be separately disclosed.

Business entity

The business is accounted for as separate and distinct from its owner(s), even where they are legally the same person (a sole trader, CCP Credit Management, under types of borrower).

Money measurement

Only transactions and events that can be expressed in monetary terms are recorded.

Historical cost

Assets are generally recorded at their original cost, not a fluctuating current market value.

Matching

Expenses are recognised in the same period as the income they helped generate.

Dual aspect

Every transaction has two effects on the accounting equation, the foundation of double entry book-keeping (both covered in the next chapter).

ICPAK (Institute of Certified Public Accountants of Kenya)

Kenya's professional accountancy body, which also advises kasneb on examination standards (the background to CCP Credit Management).

IASB (International Accounting Standards Board)

The independent body that develops and issues IFRS and IAS.

IAESB (International Accounting Education Standards Board)

Sets standards for the professional education and development of accountants globally.

IPSASB (International Public Sector Accounting Standards Board)

Develops IPSAS, the public sector accounting standards covered in the closing chapter.