2 - Introduction to final accounts Flashcards
what is a statement of profit or loss
gives a summary of trading activities over a period of time (usually 12 months)
shows earnings a business has received (income) and costs a business has incurred (expenses)
examples of income and expenses
INCOME
- revenue/sales
- interest received on savings
- rental income
EXPENSES
- cost of sales
- interest charges
- gas/electricity/stationary and rent costs
what is opening/closing inventory, purchases, cost of sales calculation, gross profit, discounts received, overheads
opening inventory = goods purchased in last period but unsold
purchases = goods business has bought to sell in this period
closing inventory = goods business has bought in this period but not yet sold
cost of sales = opening inventory + purchases - closing inventory
gross profit = profit from business’ trading activity
discounts received = prompt payment discounts the business has received from suppliers
overheads = expenses
what is a statement of financial position
a snapshot of the business at one point in time
shows what a business owns (assets) and what it owes (liabilities)
describe the assets section of a statement of financial position
contains:
non-current assets = assets the business holds for more than a year
current assets = assets the business holds for less than a year
describe the capital section of a statement of financial position
made up of contributions from investors + retained profit made minus drawings
describe the liabilities section of a statement of financial position
made up of current liabilities = amounts business owes which must be paid in 1yr
what are non current liabilities
amounts owed by business to be paid in more than one year, eg bank loans
what is the opening balance
for existing businesses, ‘opening balance’ is at the start of the year.
= money accumulated over previous years and owed to the owner
how does the capital section on a sole traders statement of financial position work
- ‘opening balance’
- any capital that owner contributes to business will increase amount due to owner
- during Current FY, capital owed to owner will increase by any profit generated by business or decrease from loss
what are drawings
money or goods taken out of the business by the owner (sole traders)
not regarded as a business expense so are deducted from capital section of statement of financial position
uk terms vs international terms of financial final accounts
UK vs INTERNATIONAL
profit/loss account = statement of profit and loss
balance sheet = statement of financial position
fixed assets = non-current assets
stocks = inventories
trade debtors = trade receivables
trade creditors = trade payables
accounting equation and rearranged
assets = capital + liabilities
assets - liabilities = capital
assets - capital = liabilities
what is revenue expenditure
ongoing expenses to operate daily activities
eg, bills aka rent, electricity
how much a business spends on these determine profit levels
what is capital expenditure
purchases of items used in business on continuing basis
eg, purchase/improvement of machines, vehicles/office equipment
shown in financial position as non-current assets
