Accounting adjustments (Final accounts and adjustments) Flashcards
What is the general formula to determine profit in the profit and loss account?
Profit = Income - Expenses
What is income?
Money brought in before considering expenses
What are expenses?
Money spent on things where the benefit is used up quickly (e.g. marketing, wages)
Explain how you know if a business has made a profit
If income exceeds expenses
Explain how you know if a business has made a loss
If expenses exceed income
What does the profit and loss account show?
Income and expenses
What doesn’t the profit and loss account show?
Assets and liabilities
What is an asset?
Things that a business owns that are worth money - e.g. machinery, debts owed to the business
What are liabilities?
They show where the business owes money
True or False:
When the business has made a profit, it has that profit available in cash
False
What is a business’ turnover made up of?
Bills that have been sent out and may not be paid until the end of the year
What are the 3 reasons that a business may not have their profit readily available in cash?
- The turnover is made up of bills that have been sent out and may not be paid by the end of the year
- Assets are worth money in the form of something else, so money will have been spent on those assets
- Many business attribute spare cash left in a bank account for upcoming bills as an expense
What is a balance sheet?
A list of assets and liabilities of the business ON THE LAST DAY OF THE ACCOUNTING PERIOD
How do you calculate the net worth of a business?
Net worth = assets - liabilities
A balance sheet is divided into 2 sections, what are these sections?
- Employment of capital or assets
- Capital employed or financed by
What does the “employment of capital or assets” section of the balance sheet show?
The worth of the business TO THIRD PARTIES
What does the “capital employed or financed by” section of the balance sheet show?
The worth of the business TO THE PROPRIETOR
OR
how much the proprietor of the business would get if the business was wound up
True or False:
The separate amounts of the “employment of capital or assets” and “Capital employed or financed by” sections of the balance sheet should be the same
True - the balance sheet should balance, net assets = capital
What are the 2 categories of assets of a business?
- Fixed assets
- Current assets
What are fixed assets?
Assets that are not bought with the intention of reselling but still provide a long term benefit to the business
What is an example of a fixed asset?
Machinery
Premises
Computers
Stationary
What are current assets?
These are short term assets
What is an example of a short term asset?
Cash
Debtors
How are assets listed on the balance sheet?
In decreasing order of permanence (or increasing order of liquidity)
True or False:
When listing assets in the balance sheet, current assets are listed before fixed assets
False - other way round
What are the 2 forms of liability that a company may owe?
Current liabilities
Long-term liabilities
What are current liabilities?
Liabilities that are repayable in 12 months or less from the date of the balance sheet
What are long-term liabilities?
Liabilities that are repayable in more than 12 months from the date of the balance sheet
What is the formula for a company’s net current assets?
Net current assets = current assets - current liabilities
What is the significance of a negative net current assets figure?
It means that the business does not have enough available liquid assets (or current assets) to meet its liabilities within the next 12 months
What is the formula for a company’s net assets?
Net assets = (Total fixed assets + Total current assets) - (Total current liabilities + Total long-term liabilities)
OR
Total assets - Total liabilities
What should the net assets total be equivalent to?
The amount owing to the proprietor as capital at the end of the year
Why should the net assets be equal to the amount owing the proprietor as capital at the end of the year?
The net assets figure shows how much the proprietor would get if the business were wound up, as they would get what is left after liabilities have been paid to creditors.
What are accruals?
Outstanding expenses - bills that the business has received but not yet paid
How do accruals effect the profit and loss account and the balance sheet?
Profit and loss account - Increase expenses in the current accounting year
Balance sheet - Increase current liabilities
How should an accrual be labelled on a balance sheet?
As a current liability
How should a profit and loss account be adjusted when dealing with accruals and why?
By increasing the expenses figure as the expense was incurred during the current accounting year, even though it may not be paid until the next year
How do payments in advance effect the profit and loss account and the balance sheet?
Profits and loss account - Reduces expenses in the current accounting year
Balance sheet - Increases current assets in a figure labelled prepayments
Draw up a rough appropriation account with the following info;
Wendy contributes capital of £5000 and Peter contributes £2000. The net profit for the year is £21,700. There is interest on capital at 10% pa, a salary for Peter at £1000 pa and the remaining profits to be divided 3:1
Page 49 of account for solicitors book for answer
