Accounting AS Level Flashcards
accounting concepts (11)
- business entity (only business related transactions are to be recorded, not private)
- prudence (not overstating assets or profits)
- money measurement (only monetary terms should be used)
- historic cost (transactions are to be recorded at their cost to the business)
- realisation (transactions are only realised when the profit is earned)
- duality (every transaction will affect 2 items in the business)
- consistency (transactions of similar nature are recorded in the same way)
- materiality (not wasting time on trivial transactions)
- accruals/matching (expenses are recorded alongside revenues)
- going concern (assumes business will continue)
- substance over form (practical view is preferred over legal
pros & cons of sole trader (3)
pros:
- keep all profits
- make all decisions
- easy to set up
cons:
- unlimited liability
- more workload
- lack of continuity
pros & cons of partnership (3)
pros:
- shared responsibility & risk
- more capital
- easy to set up
cons:
- unlimited liability
- conflict
- profit sharing
pros & cons of limited company (3)
pros:
- limited liability
- easier to raise capital
- continuity
cons:
- complex set up
- risk of conflict
- longer decision making
purpose of a trial balance
ensures total debits equal total credits, helping detect errors, prepare financial statements, and verify accounting accuracy before finalizing reports.
advantages and disadvantages of maintaining full accounting records (2)
pros:
- better decision making
- improved credibility for loan
cons:
- time consuming & costly
- not needed for some
advantages and disadvantages of introducing a computerised accounting system (2)
pros:
- increased accuracy & speed
- better organization
cons:
- costs + training
- data security
ways to ensure data security in computerised accounting system (3)
- back up data regularly
- passwords
- limited access
treatment of capital and revenue income and capital and revenue expenditure
capital:
income: increase in capital
expenditure: increase in NCA
revenue:
income: increase revenue
expenditure: increase in expense
factors that cause the value of non-current assets to depreciate (2)
- wear & tear
- obsolescence
Purpose of Accounting for Depreciation of Non-Current Assets (2)
- satisfy prudence concept (reflects real expenses & asset value)
- satisfy matching concept (Depreciation spreads the cost of an asset over its useful life, ensuring expenses are matched to the revenue generated in each period.)
appropriate method of depreciation
straight line: assets that lose value consistently (buildings & furniture)
reducing balance: assets that lose value quickly in early years (vehicles & computers)
effect of depreciation on statement of profit or loss and statement of
financial position
statement of profit or loss: expense
statement of financial position: reduces NBV
The Need to Reconcile and Verify Ledger Accounts Using Internal and External Documentation
- ensures accuracy
- improved decision making
- compliance with accounting standards
benefits and limitations of reconciliation and verification procedures
pros:
- improves accuracy
- better decision making
cons:
- time consuming & complex
- human errors
errors which do not affect the trial balance (6)
– omission (not recorded at all)
– commission (wrong account/name)
– principle (wrong account of different class)
– original entry (wrong amount)
– reversal (wrong side dr or cr)
– compensating (2 errors that offset each other)
benefits and limitations of a trial balance (2)
benefits:
- detects some errors (arithmetic)
- simplifies preparation of financial statements
limitations:
- doesnt detect all errors
- doesnt show profitability or liquidity (financial health)
benefits and limitations of preparing a bank reconciliation statement (2)
benefits:
- detects error & fraud
- helps identify timing differences between the business and the bank
limitations:
- time consuming
- human error
benefits and limitations of control accounts (2)
benefits:
- detects errors & fraud
- makes it easier to check balances (saves time)
limitations:
- cant detect all errors (If source documents contain errors, control accounts will also be incorrect)
- Could Lead to Over-Reliance (miss errors within individual accounts)
why partners may maintain separate capital accounts and current accounts (2)
- To record the profit/loss allocated to each partner and to record his/her withdrawals of profits
- To record the amount of capital contributed and withdrawn by each partner
no partnership agreement (5)
- equal capital contribution
- equal share profit ratio
- no interest on capital or drawings
- interest on loan 5%
- no salaries
advantages and disadvantages to partners of maintaining a partnership agreement
pros:
- avoids conflict
- legal protection
cons:
- lack of flexibility
- legal costs
advantages & disadvantages of issuing shares vs debentures (2)
shares:
- no interest payments
- no fixed liabilities to pay (less risky)
- dilution of ownership
- dividends are expected by shareholders
debentures:
- no dilution of ownership
- Fixed Interest Payments (Predictable Cost)
- interest payments
- may require collateral
advantages & disadvantages of bonus issue vs rights of issue (2)
bonus issue:
- rewards existing shareholders
- no cash outflow
- no cash raised
- Not suitable for companies with weak financials (bcs doesnt help cash flow)
rights issue
- raises cash
- Gives existing shareholders priority (Avoids dilution from new investors)
- dilution risk if not all shareholders purchase
- drop in share price due to discount
capital vs revenue reserves
capital reserves (share premium and revaluation reserve)
- raised from capital profits
- for funding long term growth
revenue reserves (retained earnings and general reserve)
- raised from revenue profits
- for funding operations
profitability ratios (6) + how to improve (2)
GP% = GP/REV
Mark up = GP/CPS
Profit% = PROFIT/REV
ROCE = profit from operations/capital employed
expenses-revenue ratio
operating expense-revenue ratio
(reduce expense, increase revenues)
liquidity ratios (2) + how to improve (2)
current = CA/CL
acid test = CA - INV / CL
(improve credit control, delay payments)
efficiency ratios (4) + how to improve (2)
NCA turnover = revenue/NBV NCA
T/rec turnover = t/rec / credit sales x 365
t/pay turnover = t/pay / credit purchases x 365
Inventory turnover = avg inv/cos x 365
OR COS/avg inv (times)
(JIT & increase efficiency)
semi-variable costs vs stepped costs + examples
semi-variable: portion remains constant (fixed), while the rest varies with activity levels
- electricity
stepped: costs that remain fixed up to a certain activity level
- Factory Supervisor Wages
unit costing vs job vs batch
unit ; total cost/total units produced
job: total job cost = DM DL OH
(each job is unique and has different resource requirements)
batch: DM DL OH/units in batch
causes of over & under absorption of overheads
over:
- lower production
under:
- more production
the uses and limitations of absorption costing (2)
uses:
- allocates all costs
- helps in pricing decisions and long term decision making
limitations:
- not suitable for short term decision making
- complex + leads to overpricing
contribution & CS ratio
SP - VC
contribution/sales
profit
contribution - FC
be(units) & be (sales)
unit: FC/cont per unit
sales: FC/CS ratio or SP x BE units
units to sell & required sales
units: required profit + FC/cont per unit
sales: required profit + FC/ CS ratio
MOS quantity & MOS%
quantity: actual - BE sales
MOS%: MOS (units)/actual sales
use and limitations of break-even analysis (2)
pros:
- helps in pricing decisions bcs finds BEP
- helps in decision making on whether or not a product is profitable
cons:
- Assumes Costs Are Constant
- limited to one product
uses and limitations of marginal costing (2)
pros:
- differentiates VC & FC
- Effective in Key Business Decisions – Used for make-or-buy decisions, adding/dropping product lines, and optimizing production capacity
cons:
- ignores fixed costs
- not suitable for long term
advantages and limitations of cost–volume–profit analysis (2)
pros:
- helps in pricing decisions
- Identifies how changes in fixed and variable costs affect overall profitability
cons:
- ignores external factors
- assumes costs remain constant
