1: Introduction Flashcards
What are the two elements of accounting?
Recording: transactions must be recorded as they occur in order to provide up-to-date information for management
Summarising: the transactions for a period are summarised in order to provide information about the company to interested parties
Who are ‘interested parties’, who could want information about a company?
Shareholders
Suppliers
Stakeholders
Government
Banks
HMRC
Etc!
What is a full set of financial statements made up of?
- Statement of Financial Position
- Statement of Profit and Loss
- Statement of Changes in Equity
- Statement of Cash Flows
- Notes to the Financial Statements
What does the statement of Profit & Loss reflect?
Reflects the performance of a business over a period of time
What does the statement of financial position reflect?
Reflects the position of a business at a point in time
What are the three different types of business entities?
Sole Trader
Partnership
Company
Describe a sole trader business entity (3 points)
The simplest form of business
Owned and managed by one person (although there can be any number of employees)
Fully and personally liable for any losses that the business might make
Describe a partnership (3 points)
A business owned jointly by a number of partners
Each partner is jointly and severally liable for any losses that the business might make
Partnerships can also be Limited Liability Partnerships (LLPs)
Describe companies (4 points)
Owned by shareholders (there can be any number of shareholders)
Shareholders elect directors to run the business
Almost always have limited liability - shareholders will not be personally liable for any losses the company incurs. Their liability is limited to the nominal value of the shares that they own
The company is a completely separate legal entity to the shareholders
Give 3 kinds of non-for-profit entities that will also need to prepare financial statements etc…
Charities
Clubs and societies
Government (or public sector) organisations
Which standard is created to regulate financial statements?
IAS1 - Presentation of Financial Statements
Give a very basic definition of assets and liabilities?
Assets are items that the business owns (or controls)
Liabilities are items that the business owes
What is the purpose of the financial position?
To show the total value of the net assets (assets - liabilities) of the business at the end of each accounting period
(normally at the end of a 12-month period of account set by the business)
Breakdown the order of a SFP
Assets
Non-current
Current
Total Assets
Equity/Capital
Non-current Liabilities
Current Liabilities
List some non-current assets (5)
Land and Buildings
Plant and machinery
Motorvehicles
Other equipment
Goodwill
List some current assets
Inventory
Trade Receivables
Cash and Cash Equivalents
Prepayments
Accrued Income
What types of Capital should go in the Capital section of the ‘SFP’ (5)
Ordinary Share Capital
Preference Share Capital
Share Premium
Other Reserved
Retained Earnings
What are some non-current liabilities (2)
Long term loans
Mortgages (if lasting over a year)
What are some current liabilities (7)
Trade payables
Deferred Income
Accruals
Short term borrowings
Provisions
Tax payable
Overdrafts
What is the purpose of a SPL?
To show the amount of profit or loss that the business has made during the accounting period
Breakdown the order of a SPL
Revenue (or Sales)
Cost of Sales
Opening Inventory
Purchases
Closing Inventory
Gross Profit
Other Operating Income
Administrative Expenses
Operating Profit
Investment/finance on income/loans
Profit before Tax
Taxation
Net Profit or loss for the period
What is capital expenditure, and where is it stored?
Expenditure incurred to either:
- acquire long-term assets
- to improve or enhance the earning capacity of long-term assets
Stored in the SFP
What is revenue expenditure and where is it stored
Spending for trade purposes, either directly or indirectly, or to maintain the existing earning capacity of long term assets
Stored in the SPL
Two examples of very subjective practice in accounting?
Valuation of buildings
Whether expenditure is revenue or capital
