Accounting Principles Flashcards
What is a Director’s Report?
• A report produced by directors outlining the financial state of the company.
• It is submitted as part of the end of year Statutory
Accounts
• Must be completed by…
o All Private limited companies,
o Companies with Turnover more than £10.2mil, £5.1million on balance sheet or more, 50 employees or more
• Includes…
o name of each director
o summary of trading, future prospects
What are the main company Financial Statements?
- Balance Sheet
- Profit and Loss (P&L) Statement / Income Statement
- Statement of Changes in Equity
- Cashflow Forecast
What is a Balance Sheet statement?
- A balance sheet reports a company’s assets, liabilities, and shareholder equity at a specific point in time.
- It is called a ‘balance sheet’ as the sum of the assets listed in one section must equal the sum of liabilities and the shareholder equity.
- Shows what a company is worth
- To be provided to HMRC and Companies House once a year
What is a Profit and Loss Statement?
- A financial statement that summarises the revenues, costs and expenses incurred during a specific period, usually a quarter or fiscal year.
- Gives an indication of how profitable a company is
- Needs to be submitted to HMRC each year
What is a Cashflow Statement?
- Cash flow shows the actual receipts and expenditure and includes VAT.
- Reviewing cash flow can identify potential shortfalls in cash balance i.e. where you may not have enough cash in the business to pay suppliers etc.
What is included as part of annual submitted Statutory Accounts?
- a profit and loss account
- a balance sheet
- notes about the accounts
- a Directors’ report
- an auditors’ report (unless the company qualifies for exemption)
- name and signature of company director
What are the two main types of expenditure?
- Capital Expenditure – money spent on acquiring or maintaining fixed assets. E.g. Land, buildings (if bought), equipment like computers, plant and machinery, vehicles.
- Operational Expenditure – day to day costs which are required to operate. E.g. building rent and utility bills, wages, printing costs.
What is the difference between Expensing and Capitalising?
Operational expenditure is captured on the P and L statement. This is deducted from revenue to establish profit. Capital expenditure is accounted on the balance sheet as an asset, with only depreciation showing up on the income statement.
By capitalising costs and removing them from the income statement can show a company to be more profitable which would be more attractive to investors.
What is the Construction Industry Scheme (CIS)?
- The Construction Industry Scheme (CIS) is a scheme created by HMRC for tax from contractors and subcontractors - designed to minimize tax evasion.
- Contractors deduct tax from payments to subcontractors.
What are Retained Earnings?
• Profit which is kept within the business to support further growth and not transferred out to owners or investors.
What are Dividends?
• a portion of a company’s profit which is returned to the investors or owners.
What is an asset?
• A resource with economic value
Current Asset
• Short term economic resources that are expected to be turned into cash within 1 year
• Includes cash, cash equivalents, accounts receivable, inventory and various pre-paid expenses
Fixed asset
• Plant, equipment and buildings
• Depreciation can be included as an adjustment for ageing a fixed asset
• Straight line method assumes asset loses its value in proportion to its useful life
• Accelerated method assumes the assets loses its value faster in the first few years of use
What are some examples of assets?
- Fee income from clients
- Plant equipment owned
- Rent income
- Intangible asset like Patents / Copyrights
What is a Liability?
• Debts and potential debts of the company
What is a Liquid Asset?
• An asset that can be converted into cash in a short time with little to no loss in its value.
