Accounting Principles Flashcards
Where could you obtain information on a companies financial status?
Credit checks using Experian.
Do all businesses have to be audited?
This is dependant on the business type. Some small to medium and LLP businesses can benefit from relaxation of the requirement to provide full, audited accounts to companies house.
What is a balance statement
Balance Sheet is the financial statement of a company which includes assets, liabilities, equity capital, total debt, etc. at a point in time.
What is a profit and loss statement
The term profit and loss (P&L) statement refers to a financial statement that summarises the revenues, costs, and expenses incurred during a specified period, usually a quarter or fiscal year.
What is the difference between a balance sheet and profit and loss account?
Balance sheet is a snapshot in time, a profit and loss account is a summary of transactions over a given period.
What would a balance sheet tell you about a company?
- how solvent the business is (it’s assets and liabilities)
- how liquid it’s assets are
- how the business is financed
- how much capital is being used
What would a profit and loss account tell you about a company
Whether the business has made a profit or loss at the end of a period.
The companies turnover to asses how a project value compares to their turnover.
How does revenue expenditure differ from capital expenditure in business accounts?
CapEx - expenditure on assets employed in the business
RevEx - expenditure on repair and maintenance, salaries etc - that is expensed immediately.
How is VAT dealt with in company accounts?
A separate summary of VAT (VAT account) must be kept. No set format but must enable a VAT officer to access and assess them easily when inspected.
Explain the principles behind capital allowances?
Capital allowances are akin to a tax deductible expense and are available in respect of qualifying capital expenditure incurred on the provision of certain assets in use for the purposes of a trade or rental business. They effectively allow a taxpayer to write off the cost of an asset over a period of time
What procedures will a business implement to help maintain a positive cash flow
Keep the cash flowing
There are a number of things a business can do to ensure positive cash flow. Depending on the type of business you run, it may be worthwhile to offer incentives to clients for prompt payment. Whether it’s the entire amount or just a portion of it, receiving payments quickly not only improves cash flow but also cuts out the frustration of waiting for the money to come in.
Watch your expenses
Naturally, staff will incur expenses in the course of their job. From travel to hospitality-related expenses, these can quickly add up and cause issues when the time comes to reimburse them. To make sure you are not caught off guard by expense claims at the end of the month, keep track of them at all times and be prepared to cut down on them if necessary.
Use technology to stay on top
Staying on top of your business’ cash flow requires an accounting software that’s specifically designed to track cash flow. Software that offers real-time cash flow data and is customizable to show what’s important to your business will help with budgeting and managing cash flow.
Keeping an accurate account of what is coming in and going out, as well as the expected or projected cash flow, allows you to know how healthy your business is. It also helps you identify how much is available to spend so that you don’t veer into negative territory.
The role of the auditor
The auditor’s objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes the auditor’s opinion.
In accordance with the ISAs the auditor;
- identifies and assesses the risks of material misstatement of the entity’s.
- obtains an understanding of the internal control relevant to the audit in order to design audit procedures.
- evaluates the appropriateness of accounting policies, estimates and disclosures used by the directors.
- evaluates the overall presentation, structure and content of the financial statements.
What are Cash flow statements
A cash flow statement (CFS) is a financial statement that summarises the amount of cash and cash equivalents entering and leaving a company.
The generally accepted accounting principles
The Generally Accepted Accounting Principles (GAAP) are a set of rules, guidelines and principles companies of all sizes and across industries in the U.S. adhere to. In the U.S., it has been established by the Financial Accounting Standards Board (FASB) and the American Institute of Certified Public Accountants (AICPA).
- Principle of Regularity
The principle states that the accountant has complied to the GAAP rules and regulations. - Principle of Consistency
The accountants should enter all items in exactly the same way that it has been fixed. By applying similar standards in the reporting process, accountants can avoid errors or discrepancies.
If the standards are changed or updates, the accountants are expected to fully disclose and explain the reasons behind the changes.
- Principle of Sincerity
As per this principle, the accountant should provide the correct depiction of the financial situation of a business. - Principle of Permanence of Method
The focus of this principle is that there should be a consistency in the procedures used in financial reporting. - Principle of Non-Compensation
The full details of the financial information should be disclosed including negatives and positives. This should be done without the expectation of debt compensation by an asset or revenue by an expense. - Principle of Prudence
The financial data representation should be done “as it is” and not based on any speculation. - Principle of Continuity
The principle assumes that the business will continue its operations in the future. - Principle of Periodicity
The accounting entries are distributed across the suitable time periods. - Principle of Full Disclosure
While creating the financial reports, the accountants must strive for full disclosure. - Principle of Utmost Good Faith
This principle states presupposes that the parties remain honest in transactions.
How international accounting standards differ from the national generally accepted accounting principles
It is the aim of IASC to finally have the same accounting principles across the globe to let people have a fair analysis and comparison of performance of different companies.
(1) GAAP refers to General Accepted Accounting Principles; IAS refers to International Accounting Standards.
(2) Both GAAP and IAS are accounting principles that are used to record, summarize and analyze financial results of companies.
(3) GAPP is specific to a country; IAS is an internationally accepted standard.
(4) IAS is an initiative of International Accounting Standards Committee (IASC).
(5) GAAP differ from country to country, but most countries try to incorporate changes adopted by IASC in their GAAP.
(6) IAS was introduced to have uniformity in the accounting principles across the world and thereby to have a fair analysis and comparison of performance of different companies.
