AAT Level 2

Question 1

Goods and services can be sold either for immediate payment or for payment at a later date.

What are the two payment types known as?

Answer 1

Cash Sales

Cash sales can involve immediate payment by notes and coins, credit card or debit card.

Credit Sales

For payment at a later date.

Question 2

What is the definition of a Partnership?

Answer 2

An organization owned by two or more people working together to make a profit.

Question 3

What is the benefit of a Partnership?

Answer 3

As there are more owners than just a sole trader, there is a greater availability of finance for the company.

Question 4

What is the definition of a company?

Answer 4

A company Is an entity in it’s own right, recognized in law, which may own assets and incur liabilities in it’s own name.

The accounting of a company must meet certain minimum obligations imposed by legislation via company law and other regulations.

Question 5

Define Management Accounts

Answer 5

Prepared on a monthly basis.

Provides timely financial and statistical information to Business Managers.

Aids managers to run the business more effectively.

Informs day-to-day and short-term decisions.

Question 6

Define Financial Accounts

Answer 6

Prepared annually.

Mainly for the benefit of people outside the management of the business like owners, shareholders, HMRC, banks etc.

They are the final product of the accounting system of a business.

Question 7

What is the objective of financial accounting?

Answer 7

To provide financial information about a business.

Question 8

What are the two principal financial statements?

Answer 8

The Statement of Profit and Loss

The Statement Of Financial Position

Question 9

What is the objective of a Statement of Profit and Loss?

Answer 9

INCOME AND EXPENSES

To provide a summary of the business’s transactions (income and expenses) for a given period.

Question 10

What is the objective of a Statement of Financial Position?

NB Formerly called a Balance Sheet

Answer 10

ASSETS AND LIABILITIES

To provide a statement of the assets and liabilities of a business at a given date (the end of the period covered by the Statement of Profit and Loss)

Question 11

What are the first two entries on a Statement of Profit and Loss?

Define them too.

Answer 11

Sales Revenue

(Income generated from the trading activities of the business)

Less

Cost of Sales

(Cost of buying or producing goods for resale)

Question 12

How is Gross Profit defined?

Answer 12

The profit remaining after the Cost of Sales have been deducted from the Sales Revenue.

Question 13

What is Sundry Income?

Answer 13

Other types of income not generated by the primary trading activities of the business.

Question 14

What are Expenses defined as?

Answer 14

The day to day running costs of the business.

Question 15

What is Net Profit or Loss defined as?

Answer 15

The profit or loss remaining after expenses have been deducted.

Question 16

What is Capital Expenditure defined as?

Answer 16

The purchase of or improvement of a non-current asset.

PURCHASE
IMPROVE
NON-CURRENT ASSET

Question 17

Which three basic principles are Double Entry Bookkeeping based upon?

Answer 17

The Dual Effect Principle

The Separate Entity Principle

The Accounting Equation

Question 18

What is the Dual Effect Principle?

Answer 18

The Dual Effect Principle states that EVERY TRANSACTION HAS TWO FINANCIAL EFFECTS.

Question 19

Define ‘Purchases’

Answer 19

The goods or services a business buys in order to make the goods or provide the services it sells.

Question 20

Describe the Purchase Ledger

Answer 20

it is the group of individual credit Supplier accounts or Trade Payable accounts.

Is a subsidiary ledger as it is not part of the double entry process.

Entries into individual supplier accounts are memorandum posting, that are repeats of the actual double entry postings that occur in the PLCA.

Records activity of credit transactions only.

Question 21

What is the Purchase Ledger Control Account?

Answer 21

The purchases ledger control account is the individual ledger account that records the TOTAL OWED by the business to all credit suppliers.

This figure will feature as a LIABILITY on the balance sheet.

Question 22

What type of account is Accounts Payable and where dies it appear in the financial accounts?

Answer 22

Accounts Payable (or Trade Payable) is a LIABILITY because it is money the business OWES to its creditors.

It represents costs incurred which have not been paid yet.

It is listed under Current Liabilities on the BALANCE SHEET.

Question 23

What is the Statement of Financial position?

Answer 23

The balance sheet is also known as the Statement of Financial Position and it reports a company’s assets, liabilities, and Capital at particular a moment in time.

It is presented as part of the Annual Accounts.

It also reflects the accounting equation:

Assets = Liabilities + Capital

Question 24

What are a company’s Annual Accounts?

Answer 24

Your company’s annual accounts - called ‘statutory accounts’ - are prepared from the company’s financial records at the end of your company’s financial year.

You must always send copies of the statutory accounts to:

• all shareholders
• people who can go to the company’s general meetings
• Companies House
• HM Revenue and Customs (HMRC) as part of your Company Tax Return

Statutory accounts must include:

• a ‘balance sheet’, which shows the value of everything the company owns, owes and is owed on the last day of the financial year

• a ‘profit and loss account’, which shows the company’s sales, running costs and the profit or loss it has made over the financial year
notes about the accounts

• a director’s report (unless you’re a ‘micro-entity’)

You might have to include an auditor’s report - this depends on the size of your company.

The balance sheet must have the name of a director printed on it and must be signed by a director.

Question 25

What Are Management Accounts? (Version 1)

Answer 25

The clue here is in the name:

These reports are produced to allow the managers in a business to make decisions based on the financial position of the company.

They detail specific data that is useful for the management’s current needs. Such as showing dips in specific sales or rises in certain types of expenses.

Management reports are exclusively used for internal decision making and are rarely given to shareholders, unless specifically requested or the company is struggling in certain financial areas.

Many corporations opt to create management account reports quarterly, monthly, or even weekly as methods of tight financial control.

Key Features of Management Accounts:

There is no set format or data requirements for a management account. A management account report can look and include whatever you decide.

Management accounts do not need to be completed to official time frames or deadlines, only those stipulated by the business.

These reports are not mandatory. In fact, you may never actually produce one.

A true reflection of where the business is at financially, management accounts help plan for the future, allowing you to adjust the direction your business is taking based on specific successes and failures. They are an invaluable resource when it comes to making choices about strategy and direct

Question 26

What are Management Accounts? (Version 2)

Answer 26

In most organisations, the board or senior management requires the management accountant or chief accountant to produce a monthly profit and loss account/income statement.

This allows the organisation to gauge its performance against set budgets (which are mostly prepared before the start of each financial year) and expected forecasts (mostly updated at each month end).

A monthly management accounting reporting pack not only includes the monthly income statement, but also a range of other useful reports.

In a nutshell, through a certain set of activities and for a given period (usually a month), we determine:

• the revenues generated by the business
• the costs incurred in the production of such revenues (commonly known as ‘cost of goods/services sold’)
• the costs incurred to provide support to such revenue generation and goods/services production. This cost is sometimes referred to as the central overheads’ costs, the support functions’ costs or the service centre costs.

Question 27

ALICE

Answer 27

Increase in:

Asset - Debit
Liability - Credit
Income - Credit
Capital - Credit
Expense - Debit

Decease in:

Asset - Credit  
Liability - Debit   
Income - Debit  
Capital - Debit
Expense - Expense

Question 28

Define Capital, as part of the accounting equation.

Answer 28

The value of the business

and

The amount invested in the business by the owner

The business’s assets minus its liabilities are equal to the value of the business

Assets - Liabilities = Capital

Question 29

Debits and Credits

Answer 29

Debit
Expenses
Assets
Drawings

Credit
Liabilities
Income
Capital