Accounting Principles

Question 1

What is VAT?

Answer 1

VAT stands for Value Added Tax.

It is a consumption based tax and is applied when value is added at each point of the supply chain.

Question 2

When must a company pay VAT?

Answer 2

A company must be VAT registered when they turn over more than £90,000.00 a year. They can also choose to register if their turnover is less than this.

Question 3

What are your responsibilities in you are a VAT registered company?

Answer 3

My responsibilities would include:
- Include VAT on invoices selling goods and services at the correct rate.
- Keep a record of the VAT i pay when purchasing goods or services for my business.
- Account for any VAT I pay on goods I import into the UK.
- Complete a VAT return every 3 months.
- Pay any VAT I owe to HRMC.

Note: The VAT I will pay is the difference between any VAT you’ve paid to other businesses, and the VAT you’ve charged your customers.

If you’ve charged more VAT than you’ve paid, you must pay the difference to HMRC.

Question 4

What is corporation tax?

Answer 4

Corporation tax is a tax paid by all companies who operate in the UK. It is calculated on the annual profit a business makes. As of 2024, corporation tax is set at 25%. You pay 19% if your profit is less than £50,000.00, and 25% if its over £250,000.00. Between these figures you pay the main rate (25%), reduced by a marginal relief.

Question 5

What are company accounts?

Answer 5

Company accounts are a requirement by law, they demonstrate a companies financial standing through a profit and loss account, balance sheets and ensure cashflow through a cashflow forecast. They are produced once a year, are audited, and are published to HMRC and companies house.

Question 6

What is a balance sheet?

Answer 6

A balance sheet is a snapshot of a company’s financial position at any given point in time. It report’s on a company’s assets, liabilities and ownership equity.

Question 7

What is a P&L Account?

Answer 7

A profit and loss account shows a company’s revenue and expenditure over a given period, typically monthly and then consolidated at the end of the financial year to determine if a company has made a profit or loss.

Question 8

What is a cashflow forecast?

Answer 8

A cashflow forecast details how much money a company expects to receive and pay out over a given period.

Question 9

Why would you carry out cashflow forecasting?

Answer 9

1. To understand impact of future plans.
2. Keep track of overdue payments.
3. Plan for times when there are cash gaps.
4. Manage any surplus cash.
5. Track spending.

Question 10

What is the role of an auditor?

Answer 10

A auditor is required to check a company’s compliance, as well and the validity and reliability of a company’s financial information.

Question 11

What is an escrow account?

Answer 11

An escrow account is a ringfenced back account owned by a third party on behalf of two other company’s. This can usually be a project bank account.

Question 12

What is a project bank account?

Answer 12

A project bank account is a ringfenced bank account. The bank account ensures contractor’s, subcontractor’s and suppliers are paid on contractually agreed dates. There is usually a mechanism that needs to be in place for money to be released, a payment certificate for example.

Question 13

What is overhead?

Answer 13

Overhead is the indirect costs or fixed expenses of running a business, for example:
1. Rent/Leasing office space
2. Utility bills
3. Staff salaries (accounting for example)
4. Insurance
5. Equipment
6. Marketing

Question 14

What is turnover?

Answer 14

Turnover is your total income (gross revenue), you make over a set period.

Question 15

What is a management account?

Answer 15

Management accounts are prepared for internal use or for a lender to evaluate if I can repay a loan. They are not audited, but are used to aid budget forecasting and business decisions.

Question 16

How would you plan to manage your own business?

Answer 16

To manage my business financially, I would complete the following:
1. Profit and Loss Accounts
2. Cashflow forecast
3. Balance Sheets
4. Complete tax requirements; VAT and Corporation tax
5. Appoint an auditor
6. Make sure I have a profitable business

Question 17

How would you carry out credit control within your business?

Answer 17

1. Invoice in a timely manner
2. Set payment terms in my T&C’s
3. Avoid bad debtors
4. Chase outstanding invoices
5. Observe payment terms
6. Carry out cashflow and P&L accounts

Question 18

What is an Asset?

Answer 18

As asset is something a company owns.

Question 19

What is a fixed asset?

Answer 19

A fixed asset is something a company owns and will be purchased for long term use; e.g. land or vehicles.

Question 20

What is a current asset?

Answer 20

A current asset is something a company owns and will likely be converted to cash within a year.

Question 21

What is a liability?

Answer 21

A liability is a loan or a debt?

Question 22

Who is a creditor?

Answer 22

A creditor is someone who a company owes money to.

Question 23

Who is a debtor?

Answer 23

A debtor is someone who owes a company money.

Question 24

What is the difference between management and financial accounts?

Answer 24

Management accounts are presented internally whereas financial accounts are meant for external stakeholders.

Question 25

Why would a company produce company accounts?

Answer 25

1. It is a requirement by law.
2. Demonstrates a company’s financial standing (helps with borrowing funds).
3. To ensure cashflow and profitability is carefully managed.

Question 26

Please explain the principle of tax depreciation?

Answer 26

Tax depreciation is the depreciation expense claimed by a tax payer to compensate the loss of a tangible asset. For example; vehicles, plant and equipment.

Question 27

Name 3 different accounting ratio’s?

Answer 27

1. Liquidity Ratio - the organisations ability to turn assets into cash in order to pay debts.
2. Gearing Ratio - measures the proportion of borrowed funds against it’s equity.
3. Profitability Ratio - used to assess a business’s ability to generate earning’s relative to it’s revenue.

Question 28

What is the accounting equation?

Answer 28

Assets = Liabilities + Equity

Question 29

Can you explain the difference between ‘gross’ and ‘net’ in accounting terms?

Answer 29

Gross is the total income a company makes, and net refers to the income after deductions and adjustments.

Question 30

What is expenditure?

Answer 30

Expenditure is a payment made with cash or credit to purchase goods or services?

Question 31

What is CAPEX (Capital Expenditure)

Answer 31

CAPEX is money spent on acquiring or improving an asset such as equipment or property.

Question 32

What is OPEX (revenue expenditure)

Answer 32

OPEX are costs in the day to day running of a business, servicing plant for example.

Question 33

Why are CAPEX and OPEX split in company accounts?

Answer 33

They are split because they they have different tax obligations, for examples CAPEX can benefit from capital allowances.

Question 34

What are capital allowances.

Answer 34

Capital allowances allows a taxpayer to get tax relief on their tangible capital expenditure by allowing it to be deducted against their annual taxable income.

Question 35

What is insolvency?

Answer 35

Insolvency is the inability for a company to pay off debts or creditors as they fall due. Insolvency is a generic term to describe bankruptcy, liquidation or administration.

Question 36

What is a CCJ?

Answer 36

A CCJ is a county court judgement when the creditor has gone to the court and provided evidence of an unpaid debt , the court has ruled the payment is due.

Question 37

What are the main ways to check if a company is insolvent?

Answer 37

You could check:
1. The London Gazette for companies going into liquidation.
2. Check companies balance sheet on last set of company accounts.
3. As a company we use creditsafe

Question 37

What is liquidation?

Answer 37

Formal process which closes a limited company. All assets will be sold to pay off creditors or shareholders before the company is struck off from the register.

Question 38

What is the difference between liquidation and administration?

Answer 38

Liquidation shut downs a company where administration is when an administrator is appointed to take over the running of the company on behalf of the creditors.

Question 39

What is bankruptcy?

Answer 39

Bankruptcy is a way an individual can write off any debts they cannot pay, assets are shared among the creditors and allows an individual to make a fresh start.

Question 40

Why would you not recommend a contractor with a low credit rating?

Answer 40

1. Risk of contractor falling insolvent.
2. Risk the contractor will not perform satisfactorily.

Question 41

How could you determine the financial standing of a company?

Answer 41

As a company we utilise credit safe to credit check company’s.

Question 42

What are the signs of a contractor falling insolvent?

Answer 42

1. Slowing down of works
2. Less personnel on site
3. No or less material deliveries
4. Overinflated applications
5. Change in management
6. Complaints from subcontractors

Question 43

Under what circumstances may you encounter insolvency?

Answer 43

1. Contractor or subcontractor on a project falls insolvent.
2. Your services may be required by a client who has dealt with insolvency on a previous project.
3. Your services may be required by a liquidator or administrator to value work.

Question 44

What steps would you take if a contractor fell insolvent?

Answer 44

1. Inform all parties and secure site.
2. Inform the bank
3. Carry out a valuation of work carried out to date and any defects
4. Schedule all plant and materials on site
5. Stop payments to contractor until legal advice is sought
6. Monitor loss and expense incurred by the employer
7. Appoint another contractor to complete the works

Question 45

What is Domestic Reverse Charge?

Answer 45

Introduce from the 1st March 2021, VAT reverse charge requires contractors to pay subcontractor’s and supplier’s VAT for them and is to reduce VAT fraud.

Question 46

What effect will DRC have on the construction industry?

Answer 46

This will effect cashflow lower down the chain as subcontractors will pay VAT to suppliers but not be paid VAT and will be due a VAT refund but will have to wait until the end of every quarter. This can be changed to monthly but requires good record keeping and will incur additional costs from their accountant.

Question 47

What is the CIS scheme?

Answer 47

A scheme in construction payments where tax on labour is deducted at the source.
Companies are either gross or net status;
1. Gross - tax is not deducted
2. Net - tax deducted at source