1 - Intro to Accountancy Flashcards
Define financial statements
Financial records of an organisation. Primarily comprise a profit and loss account and a balance sheet
What is the purpose of an accounting system?
- business is operating at a profit (long term sustainability)
- business can meet its liabilities as they fall due (short term sustainability)
Who may wish to use a business’ accounts?
- owners of the business - how is their investment performing, further investment decisions? INTERNAL
- management - day to day running of business profitable and efficient? INTERNAL
- employees - going to be remunerated and job security? INTERNAL
- creditors - can business pay what’s owed and on time? EXTERNAL
- HMRC - how much tax should be paid? EXTERNAL
- Banks - safe to lend money, afford interest? EXTERNAL
- customers - want the co. around for warranties etc EXTERNAL
What is the cash basis of accounting and which business are eligible to use it?
Income is accounted for when actually received and allowable expenses are deducted when cash paid. Businesses can use cash basis if unincorporated (sole traders or partnerships) with income no more than £150,000. LLPs and partnerships where one or more of the partners is a company can’t use the cash basis
What are the four main forms of a business?
- Sole Trader - unlimited liability (personal and business affairs not distinguished)
- Partnerships - unlimited liability (groups of STs). In Scotland, partnerships considered a separate legal entity.,
- Company - separate legal entity, limited liability
- LLPs - limited liability
How do the different business forms affect business treatment?
All consider business only, i.e. not the personal for ST/p’ships
Define assets, including examples
Something owned by the business and used on an ongoing basis to help generate profit, i.e. premises, vehicles, stock, debtors and cash
Define liabilities, including examples
Amount that is owed by the business to people outside the business, i.e. overdrafts, loans and trade creditors
Define capital
Sum that is owed by the business to the owner/proprieter
Define fixed assets, including examples
Assets used within the business on a long term basis and are used to help the business trade, i.e. land and buildings, plant and machinery, fixtures and fittings, motor vehicles
Define current assets, including examples
More volatile that FAs, increase or decrease daily, can be easily converted into cash. Three major examples:
1. Stock of goods for resale
2. Debtors - people who owe the business money (normally from sales being made to customers on credit)
3. Bank and cash balances (petty cash)
Show current assets from least to most liquid
Define creditors
Someone who is owed an amount by the business. Split between amounts due within one year and amounts due more than one year from the balance sheet date. Deduct creditors due within a year from current assets.
Define proprietors funds
Capital at start of trading period plus profits (or minus losses) made during AP, less any amounts withdrawn by the owner, as drawings. This total shows how business was able to afford net assets, should equal top half of the balance sheet. Also represent amount owed by the business back to owners
What does the profit and loss account show?
Summarises all the income and expenditure arisen during the trading period
Gross vs Net Profit
Gross profit - sales deduct cost of sales (opening stock + purchases - closing stock). Is the direct profit made from trading activities in the period
Net profit - gross profit, deduct day to day running expenses (i.e. rent, heat, electric, wages, bank charges, insurance, asset depreciation, repairs and maintenance, bad debts (not necessarily tax allowable)) to give net profit - the profit figure for period at the bottom of the balance sheet.
