ACCOUNTING PRINCIPLES Flashcards
What is the purpose and nature of accounting?
It is a legal requirement set by the Companies Act 2006
Profit and loss, balance sheet, directors & auditors reports are submitted to Companies House
There are Management Accounts & Company Accounts
Businesses are able to make informed decisions based on better understanding
What is the difference between management and financial accounts
Management accounts are for internal use
Financial accounts are company accounts required by UK law
What are the key financial statements that companies provide
Profit & Loss account
Balance Sheets
Cashflow Statements
What is a profit and loss account
It shows the income and expenditure of a company and the resulting profit OR loss
It is Sales - Cost of goods - Less running costs
What is a balance sheet
It shows assets vs liabilities at a point in time
It is fixed assets + current assets - current and long term liabilities
What is a Cashflow Statement
Summary of anticipated ingoings and outgoings in a period
It measures the short term ability of a firm to pay off its bills
What are capital allowances
Tax relief on business expenses
It is a form of Tax Relief for certain capital expenditure which Accounts for the depreciative value over a number of years
It applies to plant, machinery, sustainable & renewable energy and remedial works
What are sinking funds
Funds set aside for future expense or long term debt
What is insolvency
When a companies liabilities exceed assets, and the debt can’t be paid
What are liquidity ratios
They measure how liquid a company is i.e how quickly they can turn assets into cash
What are profitability ratios
They measure the performance of a company in generating profits
What are gearing ratios
They measure financial structure of a company
High geared companies rely mainly on borrowing
What are creditors
Businesses owed money by an entity they have lended credit to
What are debtors
Businesses that owe money to another entity
What is a financial statement
Forecast of income and expenditure, to identify potential shortfalls and surpluses
