1. Into Flashcards
What are financial statements?
Financial record of an organisation. They primarily comprise of a profit and loss account and a balance sheet
What is accounting?
The techniques involved in recording the transactions of the business on a regular basis as to provide summary information on financial aspects
What is bookkeeping?
The process of recording financial transactions
What should the system of accounting be able to determine?
Whether:
-the business is operating at a profit
-the business can meet its liabilities as they fall due
What questions should the accounting system be able to determine?
-how well the business is doing i.e. profitability
-what does the business own? i.e. assets
-how much does the business owe? i.e. liabilities to third parties
Give examples of organisations or individuals who may wish to use financial statements
-Owners of business (how investment is performing)
-Management (whether business is operating profitably and efficiently)
-Employees (remuneration/job security)
-Creditors (whether business can pay money owed in time)
-HMRC (tax that should be paid)
-Banks (safe to lend money?)
What is the relevance of an accounting system from a tax point of view?
-records/financial statements of businesses are the starting point for calculating the amount of tax that needs to be paid. Tax legislations dictate ‘adjustments to profits’ need to be made. net profit/loss are prepared following accounting standards
Accruals or cash basis in tax?
Accounting standards require that accounts are prepared on an accruals basis (same as tax requirements). BUT, in tax, eligible businesses are allowed to use a cash basis for tax purposes. This is so income is accounted for when actually received and allowable expenses are deducted when the cash is paid.
What businesses are eligible to use the cash basis?
-if they are unincorporated (sole trader or partnership) with income no more than a specific threshold (£150,000)
-LLPs are ineligible to use cash basis, as are partnerships where one or more of the partners is a company
-Assume accruals basis applies unless stated otherwise
What are 4 main forms of business mediums?
-Sole trader
-Partnership
-Company
-Limited Liability Partnerships
What is a Sole Trader?
Unlimited liability; business and personal affairs not separate. Thus, if inadequate funds in business, creditors can require payment out of trader’s non-business property (e.g. house)
What is a Partnership?
Two or more persons associated for the purpose of business/profession. Unlimited liability, just as sole traders. However, in Scotland, partnerships are regarded as a separate legal entity, similar to a company.
What is a company?
A distinct legal ‘person’ created for the purposes of limited liability; separates business from personal affairs of the individuals who own the business.
What are Limited Liability Partnerships (LLPs)?
Have some legal characteristics of a company and some of a partnership. Like a company, an LLP will have same legal personality as a body corporate. The liability of members to contribute to the LLP’s debts is limited to LLP’s assets. The LLP is governed internally by an agreement between members which will perform the function of a partnership agreement.
What is the accounting treatment for the four main business mediums?
Whatever the form of business, the individual business, for accounting purposes, regardless of form, is regarded as an entity is its own right. In a company and LLP, this is easy to achieve: the entity has separate legal personality.
BUT, for sole traders and partnerships, the business element must keep separate records as distinct from the trader’s/partner’s personal affairs as much as possible. This is because the profit made by the business is and any resulting increase in its assets is under its control so its financial statements should represent a statement of the affairs of that business.
